1. Management Control Systems

2. Agenda Cost Accounting Systems
Visualize how an organization maps resources into products
Management Control Systems
Delegation of Authority
Performance Measures
Reward Systems
Takeaway

3. Management Control Systems
Why can’t top management make all the decisions on how to map Resources to Products?
Lack of time
Lack of local knowledge
How should we assign decision authority to various employees?
How can we ensure that employees act in the best interests of the firm?
How should we measure and reward employee performance?
Management Control Systems
Use accounting systems to “control” employee behavior

4. Decision Rights
In a decentralized organization, top management must decide whether to make certain decisions or delegate these to subordinates
Production
Hiring
Marketing
Strategic
Investment (financing)
Note: A divisional manager with the above responsibilities is more likely to have information necessary to make the division’s budget

5. Performance Measures
The performance measurement system must then be consistent with the assignment of decision rights
If employees are given certain decision rights, an effective control system must include measures of performance that reflect the results of these decisions
If employees are compensated on the basis of certain measures, they must have the authority to make decisions that affect these measures
All performance measures have some shortcomings

6. Reward Systems The reward system links pay to performance
If too little weight is placed on the performance measure, it does not provide enough incentive
If too much weight is placed on the performance measure, it places too much risk on the employee
All reward systems have some shortcomings

7. Takeaway: Overview of Internal Accounting Systems
Business environment
Technology
Markets
Regulation
Business Model
Visualize the Physical Map
Resources  Products
Employee Control system
Decision rights
Performance measures
Reward systems
Our focus
People’s Incentives & actions
Firm value creation