A management control system integrates accounting tools to set goals, measure performance, and evaluate results to ensure managers and employees work to achieve organizational objectives; it establishes responsibility centers, develops financial and non-financial performance measures, and provides feedback to adjust to changes. The document outlines the key components of an effective management control system, including specifying goals and objectives, measuring controllable costs and uncontrollable costs, using both financial and non-financial metrics, and periodically reviewing the system.

1. Management Control System

2. Management Control System
• A management control system is a logical
integration of management accounting tools to
gather and report data and to evaluate performance
Purposes of a management control system
• clearly communicate the organization’s goals
• ensure that every manager and employee
understands the specific actions required of him/her
to achieve organizational goals
• communicate the results of actions across the
organization
• ensure that the management control system adjusts
to changes in the environment

3. Management Control System Steps
1. Begin by specifying the organization's goals, subgoals and objectives
– Goals are what the organization hopes to achieve in the
long run
– Subgoals or key success factors are more specific and
provide more focus to guide daily actions
– Objectives are specific benchmarks which management
would like to see achieved
– Important to keep all three in balance to avoid
concentrating solely on short-run achievements at the
expense of long run goals
2. Establish responsibility centers
3. Develop performance measures
4. Measure and report on financial performance
5. Measure and report on non-financial performance

4. The Management Control
System
Set Goals,
Measures,
Targets
Plan Feedback
and and Evaluate,
Execute Learning Reward
Monitor,
Report

5. Setting Goals, Objectives and
Performance Measures
Top management develops organization-wide goals, measures
and targets. They also identify the critical processes.
Top management and critical process managers develop
critical success factors and performance measures.
They also specify objectives
Critical process managers and lower-level managers
develop performance measures for objectives.

6. Forms of Organizational Structure
President Staff
Functional
VP VP VP VP
Marketing Production Human Resources Finance
Divisional Matrix
President Staff President Functional VPs
Mkt. Prod. H.R. Fin.
A
Divisional
VP VP VP VPs B
Division A Division B Division C C

7. Responsibility Centres
• Set of activities assigned to a manager or a group of managers/employees
• Based on principle of responsibility accounting which holds that managers
should be evaluated on the activities which they can influence or control
Cost Centre
• Area for which cost data is accumulated such as an assembly department
Expense Centre
• Area dominated by discretionary expenses such as legal or accounting
Revenue Centre
• Area primarily responsible for generating sales such as a sales office
Profit Centre
• Area responsible for controlling costs and generating revenues
Investment Centre
• Area responsible for income (revenues - expenses) in relation to its invested capital

8. Developing Measures of Performance
Good performance measures will
1. Relate to the goals of the organization
2. Balance long-run and short-run concerns
3. Reflect the management of key decisions and
activities
4. Be affected by actions of managers and employees
5. Be readily understood by managers and employees
6. Be used in evaluating and rewarding employees
7. Be reasonably objective and easily measured
8. Be used consistently and regularly

9. Controllability and Measuring
Financial Performance
Controllable Cost
• Cost which is directly influenced by the manager of a responsibility
centre during a particular time period
• Absolute or total control is not required in order for a cost to be
classified as controllable
• Key is to look for the manager or managers who are in the best
position to explain the results achieved
Uncontrollable Cost
• Any cost that cannot be affected by management of a responsibility
centre within a given time span
Measuring Financial Performance
• Principle of responsibility accounting holds that it is fair to evaluate
managers only on the costs under their control
• Uncontrollable costs should be ignored in evaluating the manager
because nothing he or she does will affect these costs

10. Contribution Income Statement for
Measuring Performance
Whole Branch Branch
Company A B
Net sales revenue $4,000 $1,500 $2,500
Variable costs 3,260 1,200 2,060
Controllable Direct Contribution margin 740 300 440
Costs Costs
Fixed costs controllable by manager 260 100 160
Contribution controllable by manager 480 200 280
Fixed costs controllable by others 200 90 110
Uncontrollable
Contribution by segment 280 $110 $170
Costs
Indirect Unallocated costs 100
Costs Income before income taxes $180
• Evaluate manager on "contribution controllable by segment manager" (all
controllable costs)
• Evaluate segment on its "contribution by segment" (all direct costs)

11. Nonfinancial Performance
Control of Quality
Measures
• Quality requires meeting customers' requirements and maintaining this
level throughout the production and sales process
• Four categories 1. prevention 2. appraisal
3. internal failure 4. external failure
• Total quality management (TQM) focuses on all areas of business
Control of Cycle Time
• Cycle time is the time taken to complete a product or service
• Summary measure of effectiveness and efficiency and an important cost
driver
Control of Productivity
• Relationship of outputs to inputs for material, labour and equipment
• Multiple productivity measures may include
– Labour cost as a % of sales dollars
– Sales per employee
– Machinery & equipment investments per employee
– Total labour cost per hour

12. Balanced Scorecard
• Performance reporting approach which links
organizational strategy to actions of managers
and employees
• Combines financial and operating measures
• Links performance to rewards
Financial
Strength
• Recognizes diversity in organizational goals
Customer Organizational
Satisfaction Learning
Business Process
Improvement

13. The Future of Management Control Systems
• A changing environment requires changes in the management control
system
Organizational
Four key Goals
factors must
be monitored Organizational Responsibility
at all times Structure Centres
Performance
Measurement
Important factors to keep in mind:
• Individuals will generally behave in their own self-interest
• Design systems so that individuals pursuing their own self-interest will also achieve
the organization's objectives
• Best benchmark for evaluating current performance is expected or budgeted
performance
• Nonfinancial performance is just as important as financial performance
• Periodically review the success of the management control system
• Learn from your and your competitors' mistakes