Management Control Systems

Management Control Systems

Introduction

Basic Concepts

Elements of a control system consists of:1. A detector2. An assessor3. An effector4. A communication networ

Elements of a control system

1. A detector or sensor is a device that measure what is actually happening in the process being controlled.

1. An assessor is a device that determines the significance of what is actually happening by comparing it with some standards or expectations of what should happen.

Elements of a control system3. An effector (feedback) is a device that

alters behavior if the assessor indicates the need to do so.

4. A communications network consist of devices that transmit information between the detector and the assessor and between the assessor and the effector.

Example: You are driving a car Detectors= Your eyes Assessor= Your brain Effector= Your foot Communication network= Your nerves

system

Example Your eyes (detectors) measure actual speed

by observing the speedometer.

Your brain (assessor) compares actual speed with desired speed (standard: the highest speed is 80 km/hour) to detect a deviation from standard.

Example Your brain (assessor) directs your foot

(effector) to ease up the accelerator if actual speed (90 km/hour) is faster than the standard speed (80 km/hour), press down the accelerator if the actual speed (70 km/hour) is slower than standard speed (80 km/hour). And, your nerves (communication network) form the communication system that transmits information from eyes (detectors) to brain (assessor) and brain (assessor) to foot (effector

Concept of Management Control Ensure that Resources are mobilised and deployed

efficiently and effectively. Methods and procedures adopted by management

to provide reasonable assurance that available resources and assets are properly deployed and safe guarded against waste, mismanagement and frauds.

Management control covers the administrative, accounting and financial management areas.

MANAGEMENT CONTROL DEFINED Robert Anthony and Vijay Govindrajan:

Management control is a process by which managers influence other members of the organization to implement the organization strategy.

William Newman: Control one of the basic phases of managing, along with planning, organizing and leading.

Control is an integral and essential art of the management process and all the managerial efforts of an organization.

CHARACTERISTICS OF MANAGEMENT CONTROL Focuses on programs and responsibility centers. Relies on two types of information viz. planned

data and actual data. Aims at assuring that all aspects are in balance

and are operating in close co-ordination. Built around financial structures Follows a definite pattern and time schedule Co-coordinated and integrated to other sub

systems

PROCESS OF MANAGEMENT CONTROL Organizing the process Segmenting the organization Risk assessments: Planning further activities Management control evaluations: Corrective actions Reporting:

FACTORS AFFECTING MANAGEMENT CONTROL Identify the key factors in the business

operations Basis for establishing standards of

performance such as budgets, standard cost Define the information required for

measuring the performance Establishing a reporting system process of measuring may lack objectivity Management control specialists

MANAGEMENT CONTROL SYSTEMS It system refers to a framework by which the

manager controls the actions of his subordinates and the entire operation of an organization.

It facilitates target fixation, collection of information, comparison of actual with targets, identifying and reporting variations and initiating suitable action to ensure attainment of objectives.

NATURE OF MANAGEMENT CONTROLS Focuses on those activities that facilitate

attainment of targets of responsibilities centres.

functions on the basis of two sets of information viz. planned data and actual data.

Management Control System covers all functional aspects of a company’s operation.

It is built around financial variables, although non-monetary variables are also taken in to consideration.

It follows a definite pattern and sequence of activities.

Management Control System is a coordinated and integrated system.

SCOPE OF MANAGEMENT CONTROL SYSTEM Management control system process involves

communications and interactions in the form of memoranda meetings and conversations

In addition it also includes the following Programs/Goals Budgeting Operating and Accounting Reporting and Analysis

ESSENTIALS OF A GOOD MANAGEMENT CONTROL SYSTEM

Effective Planning Involvement of Top Management: Motivation of Employees: Establish proper communication mechanism:

Importance of a well structured control system Control systems in an organization involve the

following activities: i. Planning-decides what the organization should do ii. Coordinating the activities of the organization iii. Communicating information to different levels of

the hierarchical structure iv. Evaluating information and deciding the action to

be taken. v. Influencing people to change their behavior.

Boundaries of Management Control Strategy formulation is the process of

deciding on the goals of the organization and the strategies for attaining these goals.

Management control : is the process by which managers influence other members of organization to implement the organization’s strategies.

Task control is the process of ensuring that specified tasks are carried out effectively and efficiently.

Distinctions between strategy formulation and management control:Characteristics Strategy Formulation Management

ControlSystem design Unsystematic, Strategic

decision may be made any time

Rhythmic, predetermined procedures

Nature of information

Tailored-made to faced problems, more external and predictive, less accurate

Integrated, more internal and historical, more accurate

Communication of information

Simple Difficult

Involved people Top management and staffs

Top management and line managers

Distinctions between strategy formulation and management control:Characteristics Strategy Formulation Management

ControlNumber of involved people

Few people Many people

Mental activity Creative and analytic Administrative and persuasive

Discipline Economics Social psychology

Time horizon Tend to long-term Tend to short-term

End products Goals, strategies Strategy implementation

Distinctions between Management Control and Task ControlCharacteristics Management

ControlTask Control

Focus of activity

The whole of operation

Individual task or transaction

Nature of information

Integrated, many financial data

Tailored-made to individual task, more non-financial data

Involved people Management Supervisor or none

Mental activity Administrative and persuasive

Follow direction or none

End products Strategy implementation

Tasks are carried out effectively and efficiently

Distinctions between Management Control and Task ControlCharacteristics Management

ControlTask Control

Mental activity Administrative and persuasive

Follow direction or none

Discipline Social psychology Economics, physics

Time horizon Weekly, monthly, annually

Daily

Type of cost Discretionary costs Engineered costs

Examples of decisions in planning and control function:

Strategy Formulation

Management Control

Task Control

Enter a new business

Expand a plant Schedule production

Change debt to equity ratio

Issue new debt Manage cash flows

Add direct mail selling

Determine advertising budget

Book TV commercials

Decide magnitude and direction of research

Control of research organization

Run individual research project

Acquire an unrelated business

Introduce new product or brand within product line

Coordinate order entry

Significance of human behaviour pattern in Management control. Perception Attitudes and Beliefs Motivation Goal Congruence Inter-unit Conflict and Cooperation Managerial Styles Force Field Analysis Resistance to Change Entrapment Compromising and Sacrificing Socio-Cultural Influences