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Management Control Environment

In: Business and Management

Submitted By nelsonconradho
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Management Control Environment

Theoretical Introduction

An organization consists of responsibility centers. The performance at responsibility center can be measured in terms of Effectiveness and Efficiency of Work.Effectiveness refers to how well the work is done while Efficiency in the engineering sense,is the amount of output per unit of input. Management control involves the planning and control of these centers’ activities so they make the desired contributions toward achieving the organization’s objectives. The management control environment includes the nature of the organization:its rules,guidelines,and procedures;its culture; and its external environment.

Responsibility centers use inputs and assets to produce outputs.Responsibility accounting focuses on planned and actual amounts for responsibility center inputs and outputs. It is to be contrasted with full cost accounting, which focuses on products rather than on responsibility centers.

There are four types of responsibility centers: revenue centers,in which outputs are measured in monetary terms & are often expense centers as well;expense centers,in which inputs are measured in monetary terms; profit centers, in which both inputs and outputs are measured in monetary terms; and investment centers,in which both profits and assets employed are measured and related to each other.Profits and Assets employed interrelates ( not just mere control of assets) in an investment center. In profit centers and investment centers, a transfer price is used to measure products finished to other responsibility centers.In transfer pricing, there is risk of suboptimization( the risk that a decision that will increase a given profit center’s reported income will not increase the total company’s income) Nonmonetary measures are also important in all types of responsibility...

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