Lecture Fundamentals of cost accounting (4th edition): Chapter 12 - Lanen, Anderson, Maher

(BQ) In the previous chapters we considered how information could be developed to help managers make decisions. In this chapter we will discuss the fundamentals of management control systems. After studying this chapter you should be able to: Explain the role of a management control system, identify the advantages and disadvantages of decentralization, describe and explain the basic framework for management control systems.
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Lecture Fundamentals of cost accounting (4th edition): Chapter 12 - Lanen, Anderson, Maher© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in anymanner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. FundamentalsofManagement ControlSystems Chapter 12 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPAMcGrawHill/Irwin Copyright©2014byTheMcGrawHillCompanies,Inc.Allrightsreserved. LearningObjectivesLO 12-1 Explain the role of a management control system.LO 12-2 Identify the advantages and disadvantages of decentralization.LO 12-3 Describe and explain the basic framework for management control systems.LO 12-4 Explain the relation between organization structure and responsibility centers.LO 12-5 Understand how managers evaluate performance.LO 12-6 Analyze the effect of dual- versus single-rate allocation systems.LO 12-7 Understand the potential link between incentives and illegal or unethical behavior.LO 12-8 Understand how internal controls can help protect assets. 123AlignmentofManagerialandOrganizationalInterests LO 12-1 Explaintheroleofamanagementcontrolsystem.A management control system is designed to helpmanagers make decisions that will increase theorganization’s performance. The purpose of themanagement control system is to align more closely theinterests of the manager and the interests of theorganization. 124DecentralizedOrganizationsLO 12-2 Identifytheadvantagesanddisadvantagesofdecentralization. Decentralization is the delegation of decision-making authority to subordinates in the organization’s name. When authority is decentralized, a superior, whom we call a principal, delegates duties to a subordinate, whom we call an agent . We find principal-agent relationships in many settings. 125 LO12-1 DecentralizedOrganizations Some organizations are very centralized; few decisions are delegated. The military is a good example of centralized authority. At the other extreme are highly decentralized companies in which decisions are delegated to divisional and departmental managers. In many conglomerates, operating decisions are made in the field; corporate headquarters is, in effect, a holding company. Good decisions require good information. In large organizations, especially those that are geographically dispersed, much of the information needed to make the decision is local; that is, it is specific to the local conditions. Supporting some local variations can capitalize on local knowledge and allow franchisees to earn more than would otherwise be possible. Local knowledge is knowledge about these local conditions. 126 LO12-1 AdvantagesofDecentralization Some of these advantages follow: • Better use of local knowledge . As companies grow, more and more local knowledge needs to be processed in order to manage the business. • Faster response . Local managers can react to a changing environment more quickly than top management can. With centralized decision making, delays occur while information is transmitted to decision makers. • Wiser use of top management’s time . Just as local managers have better information about local conditions, top managers have better knowledge about strategic issues and industry trends. • Reduction of problems to manageable size . The complexity of problems that humans can solve has limits. Even with the aid of computers, some problems are too complex to be solved by central management. • Training, evaluation, and motivation of local managers . Decentralization allows managers to receive on-the-job training in decision making. Top management can observe the outcome of local managers’ decisions and evaluate their potential for advancement. ...