In this week’s lecture, we learned the ‘responsibility center’ concept in cost management.? With the understanding that the responsibility accounting concept may have multiple implicati
In this week's lecture, we learned the "responsibility center" concept in cost management. With the understanding that the responsibility accounting concept may have multiple implications on how the department operates, please discuss what is your take on classifying the merchandising department? what are the implication of such classification?
Chapter 12 Fundamentals of Management Control System
ACCT 802
Strategic Management Accounting
Dr. Tien Lee, Ph.D., PMP, CISA, CISSP [email protected] | (415)644-TIEN
San Francisco State University Lam Family College of Business
Ownership vs Management
In Business, Owners may not be the Best Managers.
Owners are often charismatic, but may lack discipline in business management or operations.
Owners may lack the necessary business specializations that are needed to operate its business.
Agency Theory
The study of ownership vs control from the perspective of Principal and Agent.
Agency Contract
A relationship is formed between the principal and the agent.
The relationship is called the “agency contract” or “agency agreement”
a legal contract creating a fiduciary relationship whereby the principal agrees that the actions of the agent binds the principal to later agreements made by the agent.
Rational Decisions
Rational decision – resources are used to maximize benefit.
Both parties are rational decision makers and expect efficient exchange. By Maximizing, both parties are rationally expecting least amount of input for maximum amount of output
Fiduciary Duty & Performance
The fiduciary duty is charged by the principal to the agent to perform agreed tasks.
However, the principal relies on the report / financial statement to see how the agent’s duty is discharged.
Agency Problem
From the Agent’s perspective…
Agency Problems
Shirking; aversion to work.
Agents' effort are not always observable.
Information Asymmetry
Adverse Selection from incomplete information
Moral Hazard
Horizon problem
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Agency Cost
The principal’s dilemma…
Agency Costs
Monitoring of Agent’s effort
Monitoring costs
Compensation costs
Incentive / bonus costs
Reporting costs
Residual loss
Opportunity costs
Misaligned goals (i.e., Harley Davidson)
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Ownership, Management & Control
Control, in the sense of business, implies the ability to dictate course of actions.
Ownership does not immediately implies control:
How do owners exert control over firms course of actions?
Management, although in the position of control, cannot dictate the course of business…
How do management ensure control over firm’s operations?
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Management & Control
The main elements of a management control system:
Delegated decision authority
Centralized or Decentralized? How is power distributed and how are decisions made?
Performance evaluation and measurement systems.
Such that efforts are effectively measured and documented.
Compensation and reward systems.
Such that efforts are efficiently rewarded.
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Decentralized Control
Decentralization is the delegation of decision-making authority to subordinates in the organization’s name.
Local condition and Local knowledge
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.
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Advantage of Decentralization
Better use of local knowledge
Faster response
Wiser use of top management’s time
Reduction of problems to manageable size
Training, evaluation, and motivation of local managers
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Responsibility Accounting System
A system that measures the plans (by budgets) and actions (by actual results) of each responsibility center.
Managers are held accountable for whatever is under their control.
Responsibility Center
A part, segment, or subunit of an organization (e.g., departments, divisions, business units) whose manager is accountable for a specified set of activities.
Nature of a Responsibility Center
Headed by a responsible manager.
Exists to accomplish specific corporate objectives.
Uses inputs to produce outputs (services & products).
Relationship between Inputs and Outputs
Responsible for obtaining an optimal relationship between inputs and outputs.
Inputs measurable in monetary terms.
Outputs may or may not be measurable.
Types of Responsibility Centers
Revenue center
Expense center
Engineered expense center
Discretionary expense center
Profits center
Investment center
Revenue Center
Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue.
Revenue Center
| Types of Responsibility Centers | Traditional Evaluation Methods |
| 1) Revenue Centers Includes marketing functions only with very little costs relative to the revenue produced. | Sales: Sales Variances Sale price variances Sales volume variances |
Expense (cost) Center
Manager of a cost center is responsible for controllable costs incurred in the department, but is not responsible for revenue, profit or investment in that center. A cost center is a responsibility center in which inputs, but not outputs are measured in monetary value.
Outputs are not measured in monetary terms.
Inputs are measured in monetary terms.
Engineered Expense Center
Outputs measured in physical units.
Inputs measured in monetary terms.
An optimal relationship between inputs and outputs can be established.
Performance measures:
Financial measures
Non-financial measures
Discretionary Expense Center
Inputs measured in monetary terms.
Outputs cannot be measured.
Relationship between inputs and outputs is unclear.
Performance measures:
Financial measures
Non-financial measures
Profit Center
Profits are the excess of revenue over the total expenses.
Therefore, the manager of a profit center is held accountable for the revenues, costs, and profits of the center. A profit center is a responsibility center in which inputs are measured in terms of expenses and outputs are measured in terms of revenues.
Profit Center
Inputs measured in monetary terms.
Outputs measured in monetary terms.
Optimal decisions and tradeoffs between inputs and outputs.
Performance measures:
Financial measures
Non-financial measures
Profit Center
The profit manager’s goal is to earn profits
Three strategic issues cause firms to choose profit SBUs rather than cost or revenue SBUs:
Profit SBUs provide the incentive for the desired coordination among marketing, production, and support functions
Profit SBUs motivate managers to consider their product as market able to outside customers
Profit SBUs motivate managers to develop new ways to earn a profit from their products and services
Investment center
The manger of investment center is held accountable for the division's profit and the invested capital used by the center to generate its profits.
Investment centers consider not only costs and revenues but also the assets used in the division.
Performance of an investment center are measured in terms of assets turnover and return on the capital employed.
Investment center
Special type of profits center.
Inputs measured in monetary terms.
Outputs measured in monetary terms.
Optimal tradeoffs between inputs and outputs, as well as investment decisions.
Performance measures:
Financial measures
Non-financial measures
Discussion
Starbucks Coffee and Responsibility Center:
Starbucks Stores
Starbucks Bean Farmer Program
Starbucks Roasting Division
Starbucks Merchandising Division
Starbucks Canadian Division
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