©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Introduction to Management Accounting

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Management Control Systems And Responsibility Accounting Introduction to Management Accounting Chapter 9

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Management Control Systems This is a logical integration of techniques for gathering and using information. Planning and control Motivating Evaluating Learning Objective 1

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler The Management Control System A: Set goals, targetsA: targets C:Measure,Monitor,reportC:Measure,Monitor,report B:PlanandexecuteB:PlanandexecuteD:Evaluate,rewardD:Evaluate,reward FeedbackandlearningFeedbackandlearning

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Setting Goals, Objectives, and Performance Measures Top management develops organization-wide goals, measures, and targets. They also identify the critical processes needed to achieve the goals. Top management and critical process managers develop key success factors and performance measures. They also identify specific objectives. Critical process managers and lower-level managers develop specific performance measures for each objective.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Organizational Goals Goals provide a long-term framework around which an organization will form its comprehensive plan for positioning itself in the market.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Key Success Factors Key success factors are characteristics that managers must achieve in order to drive the organization toward its goals.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Identifying Responsibility Centers System designers apply responsibility accounting to identify what part of the organization has responsibility for each action. A responsibility center is a set of activities assigned to a manager, a group of managers, or other employees. Learning Objective 2

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Identifying Responsibility Centers Cost centers Profit centers Investment centers

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Developing Performance Measures Effective performance measures will… 1.Reflect key actions and activities that relate to organization’s goals 2.Be affected by actions of managers and employees 3.Be readily understood by employees 4.Balance long-term and short-term concerns 5.Be reasonably objective and easily measured 6.Be used consistently and regularly Learning Objective 3

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Nonfinancial Measures of Performance These measures include average speed of answer, abandon rate, and application processing time. AT&T Universal Card Services uses 18 performance measures for its customer inquiries process.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Nonfinancial Measures of Performance Financial measures are often lagging indicators that arrive too late. Often the effects of poor nonfinancial performance do not show up in the financial measures until considerable ground has been lost.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Monitoring and Reporting Results At all points in the planning and control process, it is vital that effective communication exists among all levels of management and employees. Feedback and learning are at the center of the management control system.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler A Successful Organization and Measures of Achievement ORGANIZATIONAL LEARNING Training time, Turnover, Staff satisfaction score BUSINESS PROCESS IMPROVEMENT Cycle time, Defects, Activity costs CUSTOMER SATISFACTION Market share, Survey scores, Complaints FINANCIALSTRENGTH Product profitability EBIT

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Goal Congruence, Managerial Effort, and Motivation Managerial effort must accompany goal congruence. Goal congruence is achieved when employees, working in their own perceived best interests, make decisions that help meet the overall goals of the organization. Learning Objective 4

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Goal Congruence, Managerial Effort, and Motivation Managerial effort is exertion toward a goal or objective. Supervising Planning Thinking

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Goal Congruence, Managerial Effort, and Motivation Motivation is a drive toward some selected goal. It creates effort. action toward that goal.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Controllability and Measurement of Financial Performance Management control system Controllable costs Uncontrollable costs Controllable events Uncontrollable events

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Controllability and Measurement of Financial Performance Controllable costs include all costs that a manager’s decision and actions can influence. An uncontrollable cost is any cost that cannot be affected by the management of a responsibility center within a given time span.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Contribution Margin Managers may quickly calculate any expected changes in income by multiplying increases in dollar sales by the contribution margin ratio. The contribution margin is especially helpful for predicting the impact on income of short-run changes in activity volume.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Segments Segments are responsibility centers for which a company develops separate measures of revenues and costs. Learning Objective 5 Retail Grocery Company West Division East Division MeatsMeatsProduceProduceGroceriesGroceries Meat Store 2 Meat Store 1

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Retail Grocery Company Net sales$1,500$2,500$4,000 Variable costs 1,200 2,060 3,260 Contribution margin$ 300$ 440$ 740 Controllable costs Segment margin$ 200$ 280$ 480 Allocated costs Income$ 110$ 170$ 280 Unallocated costs 100 Income before taxes$ 180 EastDivisionWestDivisionTotal

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler The Balanced Scorecard A balanced scorecard is a performance measurement and reporting system that strikes a balance between financial and operating measures. It links performance to rewards. It gives explicit recognition to the diversity of organizational goals. Learning Objective 6

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler The Balanced Scorecard What are key performance indicators? They are measures that drive the organization to achieve its goals.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler The Balanced Scorecard The scorecard measures an organization’s performance from four key perspectives: Financial Internalprocesses Customers Employee growth and learning

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Quality Control Quality control is the effort to ensure that products and services perform to customer requirements. Annual award for being #1 in total customerservice.Congratulations! Learning Objective 7

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Cost of Quality Report Prevention Internal failure Appraisal External failure

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Cost of Quality Report Prevention costs are the costs incurred to prevent the production of defective products or delivery of substandard services. Appraisal costs are the costs incurred to identify defective products or services.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Cost of Quality Report Internal failure costs are the costs of defective components and final products or services that are scrapped or reworked. External failure costs are the costs caused by delivery of defective products or services to customers, such as field repairs, returns, and warranty expenses.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Quality-Control Chart The quality-control chart is a statistical plot of measures of various product dimensions or attributes. This plot helps detect process deviations before the process generates defects.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Quality-Control Chart /123/193/264/24/94/164/234/305/75/14 Week of Percentage of Defects Goal = 0.6% Actual

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Six Sigma It is a continuous process improvement effort designed to reduce costs by improving quality. It has broadened into a general process to define and measure a process, analyze it, and improve it to minimize errors.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Control of Cycle Time Cycle time, or throughput time, is the time taken to complete a product or service, or any of the components of a product or service. The longer a product or service is in process, the more costs it consumes.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Control of Productivity Productivity is a measure of outputs divided by inputs. Productivity measures vary widely according to the type of resource with which management is concerned. Outputs Inputs Productivity =

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Control of Productivity How should outputs and inputs be measured? Labor-intensive organizations are concerned with increasing the productivity of labor, so labor- based measures are appropriate.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Measures of Productivity Equipment Expected machine hours for good output Actual machine hours Materials Weight of output Weight of input  Labor Standard direct labor hours allowed for good output Actual direct labor hour used ResourcePossibleoutputs(numerator)Possibleinputs(denominator)

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Service, Government, and Nonprofit Organizations Most service, government, and nonprofit organizations have more difficulty implementing management control systems. Learning Objective 8 Outputs of service and nonprofit organizations are more difficult to measure than are the cars or computers that are produced by manufacturers.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Future of Management Control Systems A changing environment often means that organizations must set different goals or or key success factors. Different goals create different actions and related targets.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler End of Chapter 9 The End