Responsibility Centers Chapters 3 4 Management Control Systems

Responsibility Centers Chapters 3 & 4, Management Control Systems, 12 th Ed. , Anthony and Govindarajan

Strategy (From Previous Lecture) v Corporate v To maximize use of resources v Business v To Strategy compete in selected markets

Goals and Strategy (From Chapter 1) v Strategy Formulation v Goals v How to attain v Strategy Implementation (Execution) v Objectives v Management Control Systems

Where Are We Going? ? ? Develop a Strategy v Develop Goals (to support the strategy) v Develop Objectives (to achieve the goals) v Refine Organizational Structure (in support of the objectives) v Develop Evaluation Items (in support of achieving the objectives) v Assign Responsibility Centers (within the organizational structure) v

Responsibility Center v An organizational unit with a manager responsible for its activities v Usually refers to a unit within the organization v Exists to accomplish an objective

Inputs & Outputs v Optimum relationship between inputs and outputs v Within management control system, must be measurable v Unit measurements v Hours of labor, quantities of materials, etc. v Monetary v Costs, measurements revenues

Efficiency & Effectiveness v Not mutually exclusive v Two criteria used to judge responsibility centers v Efficiency: v Ratio of outputs to inputs v Higher is better! v Effectiveness: v Relationship of output to predetermined objectives v Again, higher is better!

Types of Responsibility Centers v Revenue centers v Expense centers (cost centers) v Profit centers v Investment centers [Chapter 6]

Revenue Center v Output, and only output, is measured v Measurement is normally in monetary terms v Typically, sales/marketing v Cannot set price v Have no control over costs

Expense (Cost) Center v Inputs, and only inputs, are measured v Measurement is normally in monetary terms v Two types v Engineered v Optimal expense centers relationship between inputs and outputs v Discretionary v Optimal expense centers relationship cannot be established between inputs and outputs

Conflicts & Goal Congruence v Managers v May seek excellence at high costs v Many v May of revenue and expense centers $$$ for slight improvement in output seek output rather than quality v Increase v Need of lesser quality products special budgetary controls v Must consider goal congruence

Profit Center v Both inputs and outputs are measured v Measurement is in monetary terms v Inputs are related to outputs

Profit Center v Two conditions must be met to create a profit center v Relevant information must be available v Effectiveness of managers decisions must be measurable

Business Units v Full autonomy – normally not feasible v Goal congruence – risk of loss increases v Capital Budgeting – normally limited

Selection of Measurement Items v If manager can influence an item, it could/should be used as a measurement of performance v Total control is not necessary v Degree of control is relevant

Remember Two Things v Not all units within an organization need to be the same! v Profit centers do not have to make a profit!