mcs lecture1 rjti

8/2/2019 MCS Lecture1 Rjti

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Course Objective

To understand what is Management control System and why it isnecessary

To understand what is strategic planning and task control

To understand the Management Control Environment in anorganisation as exercised by the managers in different responsibility

centers To understand the Management Control process which consists of a

set of recurring activities like planning, budget preparation,execution and performance evaluation

To understand control systems that deviate from the typical pattern

To provide the students with skills in order to contribute to theongoing management control of different organisations, identifyingproblems in the management control systems, and develop andimplement new management control techniques.


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Course Outline

Characteristics of Management control system Strategic planning, management control and operational control Goal congruence Responsibility centers Budgetary control as a tool for management control systems

Transfer pricing along with related numerical problems on ROI,Economic value added, Capital budgeting and ratio analysis as atool to management performance measurement

Management control system in Service sector visa vis inManufacturing system

Financial and non financial performance measures like Balanced

Score Card (Rock Waters model) Long range planning input output relationship Auditing as a control tool covering Financial audit, Internal Audit,

Cost audit and Management Audit Case studies


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Elements of a control system

A detector or sensor a device that measures what isactually happening

An assessorA device that determines the significanceof what is actually happening by comparing it with astandard or expectation of what should happen

An effectora device (often called feedback) thatalters behavior if there is a need to do so

A communications network - devices that transmitinformation between the detector and assessor andbetween assessor and effector


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Management Control process as contrasted withsimpler control process

Management control process is the process by whichmanagers at all levels ensure that the people theysupervise implement their intended strategies

The main differences are

Standards are not preset. They are a result of consciousplanning. Management control involves both planning andcontrol

Management control is not automatic

Management control requires co-ordination among manyindividuals

The connection from perceiving the need for action todetermining the action required to obtain the desired result maynot be clear

Much of management control is self control


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Systems

A system is a prescribed and usually repetitious way ofcarrying out an activity or a set of activities

Systems are characterised by a more or less rhythmic,coordinated and recurring series of steps intended to

accomplish a specified purpose Management control systems are far more complex and

judgmental as most management actions areunsystematic.

Managers encounter situations where rules are notdefined and they must use their judgment to decide whataction must be taken

If all systems ensured correct action for all situations,there would be no need for human mangers


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Boundaries of Management Control

Activity Nature of end product

Strategy formulation Goals strategies and policies

Management Control Implementation of strategies

Task Control Efficient and effectivePerformance of individual tasks


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Differences between Management Control,Strategy Formulation and Task Control

Strategy Formulation Task control Management control

Long run Short run In between

Least systematic Most systematic In between

Uses rough approximationsof the future

Uses current accurate data In between

Planning is more important Control is more important Planning and control are

equally important


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Management Control Activities

Management Control Activities are: Planning what the organisation should do Coordinating the activities of several parts of the organisation Communicating information Evaluating information Deciding what, if any, action should be taken

Influencing people to change their behavior Goal Congruence

Insofar as is feasible, the goals of an organisations individual members shouldbe consistent with the goals of the organisation itself.

Management Control systems should be designed and operated with theprinciple of goal congruence in mind

Management control systems encompass both financial and non

financial performance measures Management control systems aid in developing new strategies and

therefore can be termed as interactive control Management control focuses on strategy execution Management Control is the process by which managers assure that

resources are obtained and used effectively in the accomplishment of

organisations objectives. Robert J Anthony


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Definition of MCS

Joseph Maciariello & Calvin Kirby have defined M.C.S. as follows:

MCS is a set of inter-related communication structures that facilitates theprocessing of information for the purpose of assisting managers incoordinating the parts and attaining the purpose of an organization on acontinuous basis.

They view the entire organization as a control system. Control is seen asa characteristic of a control system; it occurs when the organization isattaining its purpose. Purpose and attainment of purpose are central to thework of control system.

Thus Maciareillo and Kirby include both Control of strategy and Control ofoperations in the definition of M.C.S. A good management controlframework, implemented properly, will enhance organizational adaptability,

accelerate productivity and enhance competitiveness. Purposes of MCS, according to them are

1. Coordination of parts of organization

2. Steering those parts to achieve organizational goals.

3. Bring along unity out of the diverse activities of an organization.


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Characteristics of an effective ManagementControl System

Understandable

Related to decision centres

Reporting deviations quickly Critical activities of the organisation

Flexibility

Nature of activity to which it relates Behavioural implications


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Behavioural factors in Management Controlsystem

Effectivesness of management control systems depends upon

their design and operation

Attitudes of staff and the way they respond to them

Control systems provide an interface between human behaviour and

process of management Tannenbaums general propositions

Control has both practical and symbolic implications

The exercise of control has a positive value for most members of theorgsanisation

The exercise of control helps the member to identify with theorganisational system

Exercise of control can result in both satisfying and frustratingconsequences to individuals

People who exercise control in an organisation may be more willing toaccept control over themselves


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Resistance to Control system

The amount of resistance is determined by both the nature of thecontrol system and the characteristics of the individual involved

According to Lawler, resistance is most likely to be present when

1. The control system measures performance in a new area

2. The control system replaces a system that people have a highinvestment in maintaining

3. The standards are set without participation

4. The results are not fed back to the people whose performance is beingmeasured

5. Results are not fed to higher levels of organisation and are used by thereward system

6. The people who are affected by the system are satisfied with things asthey areand they see themselves committed to the organisation

7. The people who are afected are low in self esteem and authority


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Overcoming resistance to control system

Consultation and participation

Motivation

Groups and informal organisation Organisation structure

Leadership style and system of

management


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Framework for strategy implementation

Management controls are only one of the toolsmanagers use in the implementation of strategies

The others are

Organisational structure specifies roles, reporting relationshipsand division of responsibilities that shape decision making withinan organisation

Human resource management is the selection, training,evaluation, promotion and termination of employees so as todevelop the knowledge and skills required to execute strategy

Culture refers to the common set of beliefs, attitudes and normsthat explicitly or implicitly guide managerial activities


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Diagramatic representation of the Framework forstrategy implementation

Culture

ManagementControl

OrganisationStructure

HumanResource

MgmtStrategy Performance


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Strategy formulation

Strategy formulation is the process of deciding on the goals of theorganisation and the strategies for attaining these goals

Goals are timeless Strategies are big plans. They state in a general way the direction in which

the senior management wants the organisation to move The need for strategy formulation arises in response to a perceived threat or

opportunity Complete responsibility for strategy formulation should never be assigned to

a particular person or organisational unit. Difference between strategy formulation and management control are as

follows: Strategy formulation is the process of deciding the strategies, while management

control is the process of implementing these strategies

Strategic analysis involves judgment and uses rough estimates whereasmanagement control process involves a series of steps that occur in apredictable sequence according to a fixed timetable and with reliable estimates

Analysis of strategy involves few people, whereas management control processinvolves all managers and all their staff at all levels


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Comparison of strategic planning withmanagement control

Characteristics Strategic Planning Management Control

Focus of plans One aspect at a time On whole organisation

Complexities Many variables Less Complex

Degree of stucture Unstructured and irregular Rhythmic, Prescribed procedures

Nature of information Tailor made ,external and predictive, lessaccurate

Integrated, internal and historical, moreaccurate

Communication of information Relatively simple Relatively complicated

Purpose of estimate Show expected result Lead to desired result

Persons primarily involved Staff and top mgmt. Line and top mgmt.

Number of persons involved Small Large

Mental activity Creative; Analytical Administrative; Persuasive

Source discipline Economics Social Psychology

Planning and Control Planning dominant, some control Emphasis on both planning and control

Time horizon Tends to be long Tends to be short

End result Policies and procedures Action within Policies and procedures

Appraisal of job done Extremely difficult Much less difficult


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Operational / Task Control

Task control is the process of assuring that the specified tasks are carriedout effectively and efficiently

Task control is transaction oriented Many tack control activities are scientific. i.e. appropriate action for bring

back an out of control task is predictable Most of information in an organisation is task control information. For ex.

No. of items ordered, no. of hours used to produce, etc. Many activities performed by managers have now been automated and

have become task control activities Distinctions between task control and management control are

Task control activities are scientific whereas management control can never bereduced to a science

In management control managers interact with other managers whereas in task

control interaction is between a manger and non manager or mostly humanbeings are not involved

In management control focus is on organisational units, whereas in task controlfocus is on specific tasks.

Management control is concerned with broadly defined activities wheremanagers decide what is to be done. Task control relates to specified taskswhich require little or no judgment.


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Distiction between management control andoperational control

Characteristics Management Control Operational control

Focus of activity Whole operation Single task or transaction

Judgement Relatively much; Subjectivedecisions

Relatively little; Reliance on rules

Nature of structure Psychological Rational

Nature of information Integrated, Financial data,Approximations acceptable; Futureand historical

Tailor made to operation; Often nonfinancial; precise; often real time

Persons primarily involved Management Supervisor

Mental activity Administrative persuasive Follow directions

Source discipline Social Psychology Economics; Physical sciences

Time horizon Weeks, months, years Day to day

Type of costs Discretionary Engineered


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Examples of Decisions in Planning andcontrol functions

Strategy Formulation Management Control Task Control

Acquire an unrelatedbusiness

Introduce new product orbrand within product line

Coordinate order entry

Enter a new business Expand a plant Schedule production

Add direct mail selling Determine advertisementbudget

Book TV commercials

Change debt equity ratio Issue new debt Manage cash flows

Devise inventory speculationpolicy

Decide inventory levels Reorder an item


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Functions of a controller

A Controller is a person who is responsible for the designing andoperating the management control system

The controller performs the following functions:

Designing and operating information and control systems

Preparing financial statements and financial reports (including tax

returns) for shareholders and other external parties Preparing and analysing performance reports, interpreting these for

senior management, analysing program and budget proposals fromvarious segments and consolidating them into an overall annual budget

Supervising internal audit and internal control procedures to ensurevalidity of information and establishing safeguards against theft and

fraud, and performing operational audits Developing subordinates in the control organisation

Training management in matters relating to the control function


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Goal Congruance

Goal congruence holds that a good management control systemencourages the managers to take actions that are in their bestinterests as well as in the best interest of the overall organisation.

Problems of goal congruence

Measure of performance tends to be an end in itself, more important

than the goal it tends to represent. This occurs because the act ofmeasurement in management changes the event and the observer. It isneither neutral nor objective. People tend to change their behaviour as afunction of the measure chosen to summarize economic performance

Most measures are based on internal achievement rather than onexternal opportunities

Typical performance measures focus on short term operating resultsand ignore longer term effects that are hard to measure. Manytransactions in a period have characteristics and longer termconsequences that are difficult to measure objectively

Accounting and system of control


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Accounting and system of controlDesigning and implementation of Accounting

systems of Control

A good accounting system is the backbone of a management controlsystem as it is the major source of data generation for control purposes.The accounting system should be devised in such a way that it assists inthe formation and implementation of management objectives

According to W.L. Farrare A good accounting system for control is basedon concept of responsibility accounting under which costs and revenues,assets and liabilities are traced to the individual managers / committees whoare responsible for making decisions about the costs in question

Essence of responsibility accounting system is the accumulation of cost andrevenues according to areas of responsibility in order that deviations fromstandard costs and budgets can be identified with the person or groupresponsible.

Controllable and non controllable costs are shown separately

This helps in Measuring performance, identifying shortfalls of individual managers in attaining

departmental goals Identifying managers who need assistance for corrective action Effectively using scarce resources


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Accounting framework for planning andcontrol

Line Management Internal accounting System

Planning Budget

Sources of Documents eg.Invoices Records of action

General and subsidiaryLedger

Classification ofAction

Performance Report Report ofAction

Action

Evaluation