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    Management Control System - Revenue & Expense Center

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    Citra Dewi Wulansari
    This document discusses management control systems and responsibility centers. It defines management control as ensuring resources are used efficiently and effectively to accomplish organizational goals. Responsibility centers are organizational units headed by managers responsible for activities and objectives. There are four main types of responsibility centers: engineered expense centers where the optimal input-output relationship can be established; discretionary expense centers where this relationship cannot be established; revenue centers responsible for revenue but not expenses; and profit centers responsible for both revenue and expenses. The document outlines budgeting, financial control, and performance measurement considerations for different responsibility center types.

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    Management Control System - Revenue & Expense Center

    Uploaded by

    Citra Dewi Wulansari
    371 views23 pages
    This document discusses management control systems and responsibility centers. It defines management control as ensuring resources are used efficiently and effectively to accomplish organizational goals. Responsibility centers are organizational units headed by managers responsible for activities and objectives. There are four main types of responsibility centers: engineered expense centers where the optimal input-output relationship can be established; discretionary expense centers where this relationship cannot be established; revenue centers responsible for revenue but not expenses; and profit centers responsible for both revenue and expenses. The document outlines budgeting, financial control, and performance measurement considerations for different responsibility center types.

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    Management Control System - Revenue & Expense Center Citra Dewi Wulansari - UGM Jakarta

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    This document discusses management control systems and responsibility centers. It defines management control as ensuring resources are used efficiently and effectively to accomplish organizational goals. Responsibility centers are organizational units headed by managers responsible for activities and objectives. There are four main types of responsibility centers: engineered expense centers where the optimal input-output relationship can be established; discretionary expense centers where this relationship cannot be established; revenue centers responsible for revenue but not expenses; and profit centers responsible for both revenue and expenses. The document outlines budgeting, financial control, and performance measurement considerations for different responsibility center types.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    371 views23 pages

    Management Control System - Revenue & Expense Center

    Uploaded by

    Citra Dewi Wulansari
    This document discusses management control systems and responsibility centers. It defines management control as ensuring resources are used efficiently and effectively to accomplish organizational goals. Responsibility centers are organizational units headed by managers responsible for activities and objectives. There are four main types of responsibility centers: engineered expense centers where the optimal input-output relationship can be established; discretionary expense centers where this relationship cannot be established; revenue centers responsible for revenue but not expenses; and profit centers responsible for both revenue and expenses. The document outlines budgeting, financial control, and performance measurement considerations for different responsibility center types.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 23

    MANAGEMENT CONTROL

    SYSTEM

    CITRA DEWI WULANSARI


    14/374248/PEK/19683
    REGULER 36
    Ch.4 Responsibility Center & Revenue Expenses

    Concept of MCS
    2

    Management Control :
    is the process by which managers assure that the resources obtained
    are used efficiently and effectively in the accomplishment of
    organizational goals : Anthony

    Efficiency : doing the things right ie. Relationship between input and
    output

    I/P

    efficiency

    O/P

    Effectiveness : doing the right things ie. Relationship between output


    and objectives

    O/P

    effectiveness

    OBJECTIVES

    System is a prescribed way or a systematic way of carrying out a set


    of activities which are usually repetitive in nature

    Responsibility Centers - Basic


    3

    Responsibility Centers (RC) constitute the


    structure of a control system and the
    assignment of responsibility to
    organizational units must reflect the
    organizations strategy.

    RC is an organization unit that is headed


    by a manager who is responsible for its
    activities

    RC exists to accomplish some purpose


    that are called as its objectives

    Responsibility Centers Core


    operation

    RC receives inputs. Using capital and assets it


    converts this input in an output, that can be
    either tangible (goods) or intangible
    (services)
    Inputs
    Resources used
    Measured by cost

    Outputs
    Work

    Goods or services

    Management is responsible for ensuring the


    optimum relationship between inputs and
    outputs

    Responsibility Centers
    Measuring inputs and outputs
    5

    Cost is a monetary measure of the


    amount of resources used by a RC

    It is much easier to measure the cost of


    input than to calculate the value of
    outputs. For example, a college can easily
    measure how many students have passed
    but it is difficult to measure how much
    education each of them acquired

    Responsibility Centers Measuring inputs


    and outputs Efficiency and Effectiveness
    6

    Efficiency and effectiveness are the 2 performance


    measurement criteria for RC

    Efficiency is a ratio of input to output (doing things right)

    Effectiveness is determined by the relationship between a


    RCs output and its objectives (doing right things)

    These 2 es are not mutually exclusive; each RC has to be


    efficient and effective as well

    Profit as a measure of performance measures both efficiency


    and effectiveness because profit is the major objective
    (effectiveness) and it is also the difference between output
    and input (efficiency)

    Responsibility Centers - Types


    Optimal relationship
    Can be established
    Inputs
    (monetary value)

    Work

    Output
    s
    (physical)

    Example Manufacturing Function

    Above is the relationship between input and output in case of


    An ENGINEERED EXPENSE CENTER

    Characteristics : - 1. Input can be measured in monetary terms


    2. Output can be measured in physical terms
    3. Optimum relationship between amount of input
    for one unit of output can be established

    Responsibility Centers - Types


    Optimal relationship
    cant be established
    Inputs
    (monetary value)

    Work

    Output
    s
    (physical)

    Example R & D Function

    Above is the relationship between input and output in case of


    An DISCRETIONARY EXPENSE CENTER
    1. Reflects managements decisions regarding certain policies
    2. Weather to match or exceed the marketing efforts of competitor
    3. To find the appropriate amounts to spend for R&D
    8

    Responsibility Centers - Types


    Inputs not related to
    outputs
    Inputs
    (monetary value
    only for costs
    directly incurred)

    Work

    Output
    s
    (monetary value)

    Example Marketing Function

    Above is the relationship between input and output in case of


    a REVENUE CENTER
    1. Mostly are sales unit that do not have authority to set selling pr
    2. Focus on target revenue only
    3. Market demands is hard to predict
    9

    Responsibility Centers - Types


    Inputs are related to
    outputs
    Inputs
    (monetary value)

    Work

    Output
    s
    (monetary value)

    Example
    BU

    10

    Above is the relationship between input and output in case of


    a PROFIT CENTER, the role of profit :
    1. Profit as an objectives is an important measure of
    effectiveness
    2. Profit is the difference between revenue (output) and
    expense (input)
    Who3.may
    be profit
    effective
    but notboth
    efficient,
    with the frugal
    Thus,
    measures
    effectiveness
    and efficiency
    manager, who uses less input but produces less than the
    optimum output ?

    Responsibility Centers - Types


    Profits are related to
    capital employed
    Inputs
    (monetary value)

    Capital

    Output
    s
    (monetary value)

    employed
    Example
    BU
    Above is the relationship between input and output in case of
    an INVESTMENT CENTER :
    - Chapter 7 Measuring & Controlling Asset Employed

    11

    Responsibility centers
    Engineered & Discretionary expense center
    12

    Point

    Engineered EC

    Discretionary EC

    Nature of expenditure

    Engineered costs are those for


    which standards can be easily
    established

    Discretionary costs are those for


    which standards cant be easily
    established

    I/p - o/p relationship

    Optimal relationship can be


    established

    Optimal relationship cant be


    established

    Application

    Manufacturing function

    Service function

    Budget preparation

    Budget represents unit cost of


    performing task efficiently

    Budget determined by the


    magnitude of the job to be done

    Budgetary control

    Difference between budget and


    actual is a measure of efficiency
    (since input and output optimum
    relationship can be established)
    Being within budget is
    important

    Difference between budget &


    actual is not a measure of
    efficiency (since input and
    output optimum relationship
    cant be established)
    Doing the task is more
    important (doesnt mean that
    budget is not to be adhered;
    emphasis differs)

    Financial control

    During performance

    More at planning stage

    Responsibility centers
    Profit center & Revenue center
    13

    Profit Center

    Revenue Center

    Meaning

    A responsibility center that is


    responsible for both revenues
    and expenses is profit center.

    A responsibility center that is


    responsible for revenues but not
    for the expenses is revenue
    center.

    I/p - o/p relationship

    Optimal relationship is
    established between value of
    output (revenue) and value of
    input (expense)

    Optimal relationship cant be


    established between value of
    output (revenue) and value of
    input (expense)

    Application

    Business units

    Marketing offices

    Goal

    Maximizing profit by controlling


    both revenue and expenses

    Maximizing revenue

    Responsibility Centers
    General control characteristics of Discretionary ECs
    14

    Budget preparation based on the magnitude of the task to be


    done. Tasks divided into 2 :
    Continuing
    Special

    Incremental Budgeting

    Zero Based Review

    Cost variability not in short run

    Type of Financial control planning important

    Measurement of performance Doing the planned work is


    important

    Budgetary control
    Incremental Budgeting

    Incremental budgeting is budgeting based


    on slight changes from the preceding
    period's budgeted results or actual results.

    This is a common approach in businesses


    where management does not intend to
    spend a great deal of time formulating
    budgets, or where it does not perceive any
    great need to conduct a thorough reevaluation of the business.

    Budgetary control
    Incremental Budgeting

    Drawbacks in incremental budgeting method :


    1.

    The current levels expenditure is accepted and


    not reexamined during the budget preparation
    process.

    2.

    Managers typically want to increase the resource


    level, thus tend to request additional budget.

    3.

    Overhead cost are sometimes drastically reduced


    without any adverse consequences.

    Budgetary control
    Zero based review
    17

    In contrast to incremental budgeting, Zero Based Review


    starts the budget from the scratch (de novo)

    Managers are required to justify the items with proper bases

    Thus ZBR is an intensive review of the budgetary allocations

    Certain basic questions are asked like should the activity


    under review be performed at all? What should the quality
    level be?

    It is a good way of doing budgeting and can eliminate a lot of


    waste. However it demands some time and energy.

    Budgetary control
    Variable cost

    Variable costsare costs that change in proportion


    to the good or service that a business produces.

    Discretionary expense centers, managers tend to


    approve changes that correspond to anticipated
    changes in sales volume.

    Uneconomical to adjust the work force for short-run


    fluctuations.

    Example : allowing additional personal when volume is


    expected to increase and layoff when volume is decrease.

    Budgetary control
    Financial control

    The objective is to become cost


    competitive by setting a standard and
    measuring the actual cost.

    Allowing the manager to participate in


    the planning of discretionary expense
    budgeting.

    Financial control is primarily exercised at


    the planning stage before the cost are
    incurred.

    Budgetary control
    Measurement of Performance

    Spending amount that is on budget is


    satisfactory, spending more may will cause for
    concern, spending less may indicate the planned
    work is poorly done.

    Total control over discretionary expense centers


    is achieved primarily through nonfinancial
    performance measure.

    The best indication for quality service is the


    satisfaction and opinion of the user.

    Responsibility Centers
    Administrative & Support Centers Control problems & Budget preparation
    21

    2 important reasons for control problems

    Difficulty in measuring output


    Lack of goal congruence

    Budget preparation

    Section covering costs of being in business


    Discretionary activities
    Justification for proposed increases in budget

    Responsibility Centers
    22

    R&D centers control problems, budget preparation &


    performance measurement

    Budget preparation

    One should understand R & D continuum


    Basic research applied research development
    production engineering testing
    No scientific way of determining R & D budget
    Some companies use % of revenue for R&D budget
    For basic research, budget can be a lump-sum
    amount
    For testing, number of testing can be a budget base

    Performance measurement
    Monthly/quarterly reports on budgeted and
    actual expense
    2 types of financial reports one reporting
    total R&D expense, the other reporting it
    separately for each RC
    Effectiveness of research is informed though

    Responsibility Centers
    Marketing Centers activities and related controls
    23

    Logistic Activities

    These RCs are similar to expense centers in


    manufacturing plants and can be safely called as
    engineered expense centers

    Marketing activities control problems

    Measuring output is easy, evaluating effectiveness is


    difficult because of influence of other factors on
    sales
    Marketing expenses are often budgeted at % of sales
    not because sales volume cause marketing expenses
    but because it gives larger affordability
    Order-getting costs are that way discretionary and
    controls cannot be easily standardized

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