Download Responsibility Centre

Management Control System Structure
The Structure of the MCS
Defining the MCS structure means:
• defining the elementary units of the MCS, i.e. the company subsystems of which the performance must be evaluated in autonomy
respect to the overall performance
• defining the specific information that must be measured relating to
each elementary unit
 each elementary unit can be considered a
“Responsibility Centre” with a dedicated manager which is
responsible for the activities of the unit
 a “Responsibility Centre Accounting System” is so
defined
What is a Responsibility Centre
•
A Responsibility Centre is a business segment of the company,
where the manager is responsible for a specific set of activities and
the related economic-financial variables (costs, revenues,
investments) and non- financial measures
•
In a responsibility centre:
1. inputs are used (resources as materials, labour, overheads,
commercial and administrative resources);
2. service or production activities are carried out (Research and
Development, Production, Logistic, Sales and Administration);
3. outputs are achieved (tangible products or services)
Definition of the responsibility centres
• The responsibility centres can be defined in different ways by the
organisations. In general a company can divide the responsibilities
according to:
1. company functions (line functions, such as production or sales,
or staff units such as finance, administration, research and
development, etc..)
2. products and services (Business Units or Divisions)
3. geographic areas (Business Units or Divisions)
• The sub-division of responsibilities reflects normally the
Organisational Structure of the company
The responsibility levels
•
•
the responsibility centres belong to different levels of the Organisation
Structure of the company (also within the functions, sub-units can
exist - departments and offices - ex. within the function “Logistic”, can
be defined the sub-unit “Transport” assigned to a specific manager)
consequently, three basic MCS dimensions can be identified:
1. A VERTICAL dimension
2. A HORIZONTAL dimension
3. A TRANSVERSAL dimension (PROCESS/PROJECT dimension); different
units belonging to different levels and to different functions can carry
out an activity (ex. new product development process)
1. Vertical dimension
•
It includes the set of organisation levels for which a specific
evaluation is required:
– Corporate level (overall company)
– Business Unit level (product/market segment)
– Operation level (function, department, office)
1. Vertical dimension
Understanding the vertical dimension means:
• asking which MCS requirements are relevant at different
organisational levels;
• consequently, asking which indicators and specific measures
(economic, financial, non-financial) are relevant at different levels
1. Vertical dimension: the relative
importance of the requirements
Corporate
Completeness
Long term orientation
Timeliness
Measurability
Identif. Spec responsibility
Business Unit
Operation
A review of the requirement satisfaction
by different measures
ACCOUNTING TECHNIQUES
FINANCIAL
TECHNIQUES
NON FINANCIAL
TECHNIQUES
BALANCE SHEET
(RATIO
ANALYSIS)
COST ACCOUNTING
MEASURABILITY
High
High
Low
High
IDENTIFICATION
OF SPECIFIC
RESPONSIBILITIES
Good only at top
level (corporate
and business
level)
Good also at
operative level
Good only at top
level (corporate and
business level)
Good also at
operative level
COMPLETENESS
Medium (no risk
and time value
consideration)
Low
High
Depending on the
selected set of
indicators
LONG TERM
ORIENTATION
Low
Low
High
It depends (high if
indicators are
selected according
to critical success
factors)
TIMELINESS
Low
Low
Low
High (only physical
transactions)
1. Vertical dimension: the techniques
used at different organisational level
Financial
indicators
Economic
indicators
Non financial
indicators
Corporate
Main measures
ROE
Few measures,
relating to the key
competitive factors
Business
Occasional
Main
measures
(ROI, etc.)
Few measures,
relating to the key
competitive factors
Costs and
revenues
Main measures
(quality,
productivity, time,
etc.)
Operation
Ferrari – benchmarking project
•
Define a benchmarking project for the Ferrari
company, to be used by the top manager (Luca
Cordero di Montezemolo);
•
The aim and scope of benchmarking can be
synthesised as follows:
– to verify how Ferrari is positioned among the
most prestigious car producers in the world
– to envisage its future
Ferrari – benchmarking project
• Given the aim of benchmarking:
1.choose the organisations against which the
comparison should be made
2.define the method of comparison (aware /
unaware)
3.select the specific performance and/or processes
upon which the comparison should be made and
the techniques and specific indicators to be used
4.devise appropriate data correction methods
(where necessary)
Ferrari Case: Vertical structure
• Consider also “vertical dimension” in your
benchmarking project:
– taking into account which are the most important
requirements at each level (corporate, business
unit, operation) and which are the advantages and
limits of each techniques (economic, financial, non
financial) with respect to different requirements
–  illustrate how different techniques and
specific indicators are used at different
organizational levels
Ferrari – benchmarking project rules and
evaluation
• Work-group composition: 5-6 people
• Work-group delivery: end of May
• Work-group evaluation: 0-2 scores to be added to the
written examination score
2. Horizontal dimension
• It identifies the specific responsibilities associated to each unit
belonging to a certain level
• Different types of responsibility centres can be distinguished:
–
–
–
–
–
Cost Centres at the operation level
Expense Centres (discretion cost centres) at the operation level
Revenue Centres at the operation level
Profit Centres usually at business level
Investment Centres at corporate level
The responsibility levels: vertical and
horizontal dimension
Headquarter
Investment Centres
Division
Europe
Product A
Production
Marketing
………...
Dep.2
Dep.3
Department 1
(ex.
Packaging)
Division
USA
Product B
-
-
Profit Centres
Cost Centres,
Revenue Centres
Expense Centres
2. Horizontal structure at the operation
level
Cost centres
• output level not defined in autonomy
• responsibility on the input employed to achieve the output, that is a responsibility on
costs (price and employment of the input)
• production department is the classic example of cost centre
• traditionally this responsibility is evaluated through the variance between standard
costs and actual costs
• the traditional approach, however, doesn’t allow to take into consideration the
performances that the production cost centres are able to control. On one hand, the
employment of the input is only partially controllable by the cost centres due to the
fact it depends also on the “quality” of the input (Purchase offices) and on the product
design (Design offices). On the other hand, the production decisions have an impact
on other variables such as the production quality, the delivery time, the post-sales
service requirement, variables linked to the company revenues
• a first solution is to enlarge the set of performance dimensions for which the cost
centre is responsible, considering also non-financial measures (delivery time, quality of
products, etc.)
• a second solution is the definition of task forces composed by different units
(Production, Purchases, Design, etc.) which responsibilities are interdependent in order
to improve the collaboration between the units
2. Horizontal structure at the operation
level
Expense centres
• output that is difficult to be measured in monetary terms
• no strong and clear relation exists between resources used (inputs) and results
achieved (outputs)
• examples of discretionary expense centres are general and administrative
(G&A) departments (controller, industrial relations, human resources,
accounting, legal), research and development (R&D) departments, and some
marketing activities such as advertising, promotion and warehousing. All these
activities are defined as “supporting activities”
• traditionally, the unique type of control for these units has been the definition
of a maximum year level of expenses
• non financial measures (ex. quality, time, productivity, flexibility) and also
economic measures (costs) can be introduced according to the type of activity
(ex. productivity indicators can be introduced for the more repetitive activities,
such as the administrative activities), in order to evaluate the quantity/quality
of output of the centre
2. Horizontal structure at the operation level
Revenue centres
• responsibility on the sales of goods/services (price and volume of good sold)
• traditionally the performances are measured through the variance between
the expected revenues and the actual revenues
• commercial units are the classic examples of revenue centres
• the traditional approach, however, doesn’t allow to take into consideration the
set of performance that the revenue centres are able to control. On one hand,
the prices can be defined by central offices and the volume can be linked to
product features and not only to the sale enforce. On the other hand, the
commercial units doesn’t have the responsibility on other controllable
activities, such as the customer assistance, which have an relevant impact on
sales volume
• a first solution is to enlarge the set of performance dimensions for which the
revenue centre is responsible, considering also non-financial measures (ex.
customer assistance)
• a second solution is the definition of task forces composed by different units
(Sales, Production, Purchases, etc.) which responsibilities are interdependent
in order to improve the collaboration between the units
2. Horizontal structure at the business level
Profit centres
• responsibility both on the costs and revenues
• traditionally, the performance is evaluated through the variances between the
standard and the actual costs, the expected revenues and the actual revenues
(the expected profit and the actual profit) building partial profit/loss
statements for each centre
• A profit centre is free to:
– Select the source for procurement
– Choose the acquisition prices
– Select the customer
– Decide the selling price
• business units and divisions are the classic examples, but sometimes also
departments can be defined as profit centres (i.e. maintenance department
that sells its services to other units)
2. Horizontal dimension at the corporate level
Investment centre
• responsibility on costs, revenues and investments
• this responsibility is evaluated considering the assets (invested capital)
through the return on investments measures (ROI, ROS, etc.)
• usually, it is applied to the corporate level or to the business units with a
strong autonomy
2. Horizontal dimension at business level
•
•
Business units are independent units which have the responsibility on
one product/market
To evaluate the economic performance of BU it is necessary to
evaluate:
1. The partial Profit/Loss statements for Business Unit:
•  Advanced Direct Costing schema to evidence the contribution
of each unit (i.e. product line) to the overall company net
operating income; only fixed “specific” costs are assigned to each
business unit in order to avoid any arbitrary allocation of common
costs
•  “Controllable” costs to evaluate business unit manager (II
Controllable Contribution Margin)
2. The possible internal trade (goods/services) among business units
•  it is necessary to analyse and evaluate the internal trade
among units (i.e. transfer pricing)
The advanced direct costing schema to
evaluate business unit contribution
BU “A”
BU “B”
BU “C”
TOTAL
Revenues
X
X
X
X
Variable costs (i.e.
direct material;
direct labor; energy)
X
X
X
X
I Contribution
Margin
X
X
X
X
Fixed Specific costs
(i.e. amortization)
X
X
X
X
II Contribution
Margin
X
X
X
X
Fixed Common costs
(i.e. amortization,
indirect labor;
general and
administrative costs)
X
Net operating
income
X
The advanced direct costing schema to
evaluate business unit contribution
Examples
• Superpizza
• Officina Veneta
SUPERPIZZA
In 20X0, Mr. Gennaro Esposito, decided to start up his own activity. He started, at first, with the production and sale of
pizzas “take away” and then he added the delivery of pizzas at home in the evening hours. By the way, he realized that a
combination pizza + drink was very appreciated by customers. He decided to apply a unique price for each combination:
6 euro for the combination “take away”; 7 euro for the delivery at home. In the following year, Mr. Esposito decided to
rent a place to offer all the activities, included the service on the table. The combination was the same but offered with a
price equal to 7,5 euro. For this specific activity, it was also necessary to engage a waiter. The “take away” cashier could
be dedicated also to the new activity for a 20% of time. Another person (named “pony”) was specifically dedicated to the
delivery at home and he personally managed the takings. For the deliveries, he used a small van, available for the overall
activities (purchases of materials, etc.). Besides, 5 producers of pizza (“pizzaioli”) were engaged.
In the following table, data concerning the first semester 20X1 are reported.
-Elaborate the Profit/Loss Statement for the first semester 20X1 in order to point into evidence the contribution provided
by different selling combinations to the net operating income for the overall company.
Sales TAKE AWAY
18.000 combinations
Sales DELIVERY AT HOME
7.500 combinations
Sales SERVICE ON THE TABLE
4.500 combinations
Pizzaioli (each one, each month)
1.500 euro
Waiter (each month)
1.500 euro
Cashier (each month)
1.000 euro
Pony (each month)
500 euro
Place rent (each month)
2.200 euro
Small van rent (each month)
300 euro
Power and wood (each month)
1.000 euro
Direct materials for pizzas production
(each semester)
60.000 euro
Costs for sold drinks (each semester)
15.000 euro
OFFICINA VENETA
Officina Veneta (O.Ve.) is a small company that produces components for kitchen production, in
particular structural elements for ovens: ELEMENT 1; ELEMENT 2; ELEMENT 3.
Production is carried out by means of three production lines:
Line 1 is devoted to ELEMENT 1;
Line 2 is devoted to ELEMENT 2;
Line 3 is devoted to ELEMENT 3.
Due to the particular nature of some activities, it has been possible to calculate a direct labor
cost per unit (see Annex 1).
Indirect Workers (for activities supporting production) are the following:
2 workers for warehouse management;
2 workers for maintenance and repairing;
2 administrative employees.
On the basis of other information in Annex 1:
1. Elaborate Profit/Loss Statement to take into evidence the contribution of each product line
to the overall company net operating income.
ANNEX 1:
•
Production/sales in units and selling price per unit:
90.000 units ELEMENT 1; 11 euro per unit; daily production: 360 units
90.000 units ELEMENT 2; 5,5 euro per unit; daily production: 630 units
90.000 units ELEMENT 3; 7,5 per unit; daily production: 840 units
•
Annual average indirect worker cost: 35.000 euro
•
Annual average administrative employee cost: 40.000 euro
•
Direct material per unit:
3,15 euro per ELEMENT 1;
1,62 euro per ELEMENT 2;
2,25 euro per ELEMENT 3.
•
Direct labor cost per unit:
1,16 euro per ELEMENT 1;
0,44 euro per ELEMENT 2;
0,16 euro per ELEMENT 3.
•
•
•
Annual energy cost: 80.500 euro (the energy consumption is considered a variable cost
depending on number of operating days per line)
Annual amortization: 560.000 euro, in part specific for each line (250.000 for ELEMENT 1;
150.000 for ELEMENT 2; 100.000 for ELEMENT 3)
Other general expenses: 35.000 euro
The advanced direct costing schema to
evaluate business unit manager
BU “A”
BU “B”
BU “C”
TOTAL
Revenues
X
X
X
X
Variable costs
X
X
X
X
I Contribution
Margin
X
X
X
X
Fixed Specific
Controllable costs
X
X
X
X
II Controllable
Contribution Margin
X
X
X
X
Fixed Specific Non
Controllable costs
X
X
X
X
II Contribution
Margin
X
X
X
X
Common costs
X
Net operating
income
X
The advanced direct costing schema to
evaluate business unit manager
Example
• JB Trucking
JB TRUCKING
•
Jb Trucking is a transport company which is operating in the North California and in Nevada. In order to
evaluate performances, the company Profit/Loss has been divided for geographic areas. An area, the Truckee
Meadows, is dedicated to sub-areas Reno and Lake Tahoe, in California. The information relating to the
deliveries of January are the following:
number of deliveries
Total Revenues
Direct variable cost for delivery
Specific fixed costs
Reno
50
5000 $
50 $
900 $
Lake Tahoe
40
8000 $
75 $
2800 $
•
•
Direct variable costs include oil and fuel costs and the costs for the car loading.
The specific fixed costs includes the amortisation, the maintenance (provided by Jb Trucking central shop), the
licence costs for the trucks. In particular, the maintenance costs (400$ for Reno; 800$ for Lake Tahoe) are not
controllable by the sub-area managers because maintenance is carried out monthly on the basis of
government rules.
•
The geographic areas, and the sub-areas of delivery, are considered profit centres.
•
Truckee Meadows’ costs of administration and marketing (“common” to sub-areas) are equal to 3.700 euro.
Questions:
1) Elaborate a partial profit/loss statement to evaluate a) the profitability of the sub-areas; b) the performance of
the sub-areas managers.
2) If common costs are allocated on the basis of sub-areas revenues, which is the impact on sub-areas’
profitability? Discuss this type of solution.
Common Corporate Costs allocation to Business
Units
• The allocation of common corporate costs to Business Units has an
impact on their profitability and therefore on their performance
evaluation (examples of corporate costs are general costs, legal costs,
research and development costs)
• In the practice it is possible to have the following alternatives:
– to allocate to the BU all the corporate costs using arbitrary
allocation basis
– to allocate only a share of corporate costs, in particular those costs
which are specific for each business unit (see the Advanced Direct
Costing schema). For example, research costs: only the costs of
applied research specifically “used” by business units. In this case
the corporate level “sells” its services to the business units
Corporate Costs allocation : advantages and
disadvantages
• Complete allocation:
– the business unit performance decreases with the increase of
corporate costs;
– common is the proportional allocation (based on revenues) which
is not consistent with the specific responsibility principle (a BU
which increases its revenues receives a higher share of corporate
costs even if the activity increase does not cause a higher use of
the corporate resources!).
– corporate inefficiency can be unfairly assigned to the business
units
• Partial allocation:
– more consistent with the specific responsibility principle;
– the BU can require a lower corporate service level with
disadvantaged in term of long-period company competitiveness, in
order to avoid the allocation of corporate costs