Page 55 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes
Figure 4.1: Essence of any Responsibility Centre
for product or division

Inputs Outputs
Responsibility
Centre/Organisation
Resource used Goods or Services
measured by cost

1. Relationship between inputs and outputs: Management is responsible for ensuring the
optimum relationship between inputs and outputs. In some centers, the responsibility is
casual and direct, as in the case of production department.

Example: Inputs of raw materials become part of the finished goods.

Hence, the control focus on using the minimum input necessary to produce the required
output according to the correct specification and quality standards.
In many situations, inputs are not directly related to outputs e.g. advertising expenses
through an input to increase sales revenue but there are so many factors other than
advertising, the relationship between increased advertising and any subsequent increase
in revenue is not always demonstrable and the management’s decision to increase
advertising expenditure is based on judgement rather than data. Similarly, the relationship
between inputs and outputs is even more ambiguous in case of R&D since the money
spent on today’s R&D may not be known for several years and hence the optimum sum
any organization should spent for R&D is undeterminable.
2. Measuring inputs and outputs: In some of the responsibility centers, much of the input
can be stated in physical terms-hours of labour, quarts of oil, reams of paper and kilowatt
hours of electricity. In MCS, these quantitative amounts are translated in monetary terms.
The monetary value of a given input is ordinarily calculated by multiplying a physical
quantity by a price per unit e.g. hours of labour times rate per hour, electricity cost by
kilowatt hours  hourly rate) the resultant monetary sum is called cost, and this is the way
a responsibility centre input is commonly expressed.
Inputs are resources used by the responsibility centre. Patients in a hospital or students in
a school are not inputs. Rather inputs are the resources that the hospital or school uses to
accomplish the objective of treating the patients or educating the students.
It is much easier to measure the cost of inputs than to calculate the value of outputs. Inputs
such as: R&D, human resources training and advertising and sales promotion may not
affect the output of the year in which expenditure is incurred. In such cases, outputs of such
responsibility centres are not measured, the input cost is the measurement criteria.
3. Efficiency: Efficiency measure of performance relates to the establishment of standards
with regard to the amount of inputs used over a specific period of time for a given level of
outputs and measure actual performance against such standards.

Example: Standards of labour and material that are established for a production operation.

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