MANAGEMENT CONTROL SYSTEMS

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Class Announcements

Midterm (In class) Friday March 15th Final Exam 7:00pm Friday April 19th Assignment #1 is due on March 22nd in class. Assignment is focused on budgeting and is available online.

Midterm

Friday, March 15, 2013 (in-class) Worth: 30% Coverage: Chpts. 6, 7, 8 , 22 (p. 780-791), 23 (p. 808814) Format:

Short answer questions with multiple parts No multiple choice, journal entries, ethics Answer for only THREE of the four questions; each question is worth 25 points.

Preparation:

Problems On-line Lecture notes On-line Office Hours:

Tuesday (12)1:00-4:00pm Wednesday (13) 10:00am-12:00pm Thursday (14) 11:00am -2:00pm

Class Objectives
1.

2.

3.

Understanding management control systems as a mechanism for management and control Modifying behaviour through the management control system Management control systems in a decentralized organization

Management Control Systems

Management control systems are a means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and other employees. Well-designed management control systems use information both from with the company (e.g., net income) and from outside of the company (i.e., share price) Well-designed management control systems use both qualitative and quantitative 2012 Pearson Prentice Hall. All rights reserved.

Management Control Systems

Consist of formal and informal control systems:

Formal

systems include explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees. Informal systems include shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behavior.

2012 Pearson Prentice Hall. All rights reserved.

Management Control Systems: Effective

To be effective, management control systems should

be closely aligned to the firms strategies and goals. be designed to fit the companys structure and decision-making responsibility of individual managers. motivate managers and their employees

Motivation

is the desire to attain a selected goal (goalcongruence) combined with the resulting pursuit of that goal (effort).

Goal congruence exists when individuals and groups work 2012 Pearson Prentice All rights reserved. goalsmanagers toward achieving theHall. organizations

Management Control Systems: Decentralization

To be effective, management control systems should

be closely aligned to the firms strategies and goals. be designed to fit the companys structure and decisionmaking responsibility of individual managers.

Decentralization is the freedom for managers at lower levels of the organization to make decisions. Autonomy is the degree of freedom to make decisions. The greater the freedom, the greater the autonomy.
2012 Pearson Prentice Hall. All rights reserved.

Management Control Systems: Decentralization vs. Centralization

Total decentralization means minimum constraints and maximum freedom for managers at the lowest levels of an organization to make decisions. Total centralization means maximum constraints and minimum freedom for managers at the lowest levels of an organization to make decisions. Companies structures generally fall somewhere in between these two extremes, as each has benefits and costs. Structure chosen cost vs. benefit analysis.

2012 Pearson Prentice Hall. All rights reserved.

Management Control Systems: Benefits of Decentralization

Creates greater responsiveness to subunits customers, suppliers, and employees Leads to gains from faster decision making Increases motivation of subunit managers Assists management development and learning Sharpens the focus of subunit managers

2012 Pearson Prentice Hall. All rights reserved.

Management Control Systems: Costs of Decentralization

Leads to suboptimal decision making, which arises when a decisions benefit to one subunit is more than offset by the costs or loss of benefits to the organization as a whole.
Also

called incongruent decision making or dysfunctional decision making

Focuses mangers attention on the subunit rather than the company as a whole Results in duplication of output Results in duplication of activities
2012 Pearson Prentice Hall. All rights reserved.

Management Control Systems: Decentralization and Multinational Firms

Multinational firms, companies that operate in multiple countries, are often decentralized because centralized control of a company with subunits around the world is often physically and practically impossible. Decentralization enables managers in different countries to make decisions that exploit their knowledge of local business and political conditions and to deal with uncertainties in their individual environments. Biggest drawback to international decentralization: loss or lack of control.

2012 Pearson Prentice Hall. All rights reserved.