1. Fundamentals of Management Control Systems Chapter 12 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Alignment of Managerial and Organizational Interests L.O. 1 Explain the role of a management control system. A management control system is designed to help managers make decisions that will increase the organization’s performance. 12 - 2

3. Decentralized Organizations L.O. 2 Identify the advantages and disadvantages of decentralization. Decentralization is the delegation to subordinates of authority to make decisions in the organization’s name. 12 - 3

4. Advantages of Decentralization LO2 Better use of local knowledge Faster response Wiser use of top management’s time Reduction of problems to more manageable size Training, evaluation, and motivation of local managers 12 - 4

5. Disadvantages of Decentralization LO2 Dysfunctional decision making: Local managers can make decisions in their interest, which can differ from those of the organization. Duplication of administration: Local managers make the same types of decisions made at headquarters. 12 - 5

6. Management Control System L.O. 3 Describe and explain the basic framework for management control systems. It is a system designed to influence subordinates to act in the organization’s interest. Principals (owners) use this system to influence agents’ (managers’) behavior. 12 - 6

7. Elements of a Management Control System LO3 Delegated decision authority Performance evaluation and measurement systems Compensation and reward systems 12 - 7

8. Responsibility Accounting L.O. 4 Explain the relation between organization structure and responsibility centers. Responsibility accounting reports revenues and costs at the level within the organization having the related responsibility. Responsibility Cost centers Revenue centers Profit centers Investment centers 12 - 8

9. Evaluating Performance L.O. 5 Understand how managers evaluate performance. Controllability concept: Managers should be held responsible for costs or profits over which they have decision-making authority. Relative performance evaluation (RPE): Compares divisional performance with that of peer group divisions 12 - 9

10. Corporate Cost Allocation L.O. 6 Analyze the effect of dual- versus single-rate allocation systems. Global Electronics Latin America Division Income for the Year ($000) Revenue (Percentage of corporate revenue) Direct division costs Allocated corporate overhead* Operating profit $70,000 16% 51,800 4,800 $13,400 $70,000 14% 51,800 3,500 $14,700 *Global Electronics allocates corporate overhead based on relative revenue. Corporate overhead was $25 million. ActualTarget 12 - 10

11. Corporate Cost Allocation LO6 Global Electronics Latin America Division Income for the Year ($000) Revenue Direct division costs $70,000 51,800 $70,000 51,800 ActualTarget My revenue and costs were on target. 12 - 11

12. Corporate Cost Allocation LO6 Global Electronics Latin America Division Income for the Year ($000) Revenue (Percentage of corporate revenue) Corporate revenue $ 70,000 16% $437,500 a $ 70,000 14% $500,000 b ActualTarget a $70,000 ÷ 16% b $70,000 ÷ 14% I'm not responsible for corporate revenue. 12 - 12

13. Corporate Cost Allocation LO6 Global Electronics Latin America Division Income for the Year ($000) Allocated corporate overhead (Percentage of corporate revenue) Corporate costs $ 4,800 16% $30,000 a $ 3,500 14% $25,000 b ActualTarget a $4,800 ÷ 16% b $3,500 ÷ 14% I'm not responsible for corporate costs. 12 - 13

14. Corporate Cost Allocation LO6 Dual rate method: This is a cost allocation method that separatesa common cost into fixed and variable components and then allocates each component using a different allocation base. 12 - 14

15. Performance Evaluation Systems Incentives L.O. 7 Understand the potential link between incentives and illegal or unethical behavior. Fundamental questions regarding a performance measurement system: Does the measure reflect the results of those actions that improve the organization’s performance? What actions might managers be taking that improve reported performance but are actually detrimental to organizational performance? 12 - 15

16. Internal Controls L.O. 8 Understand how internal controls can help protect assets. Internal control is a process designed to provide reasonable assurance that an organization will achieve its objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations 12 - 16

17. End of Chapter 12 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin