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Rendell Company Management Control System Study Case

Irvine Farhanan, Amanda Talitha Rahmadita, Aldo Pranata


120110120060, 120110120152, 120110120170

Accounting, Faculty Economics and Business, Padjadjaran University


Jalan Dipatiukur no 35, Bandung, Indonesia.
amandatalithar@gmail.com

Abstract

This research is an exploration due to answer the question regarding Rendell


Company Study Case in our Management Control System subject. Our focuses
are to answering the questions given in the book and find the most applicable
solution for the questions stated in the Management Control System Book by
tracing the existing facts provided. It is expected that the findings and solutions
that we made will contribute to the people who has the similar issues.

Keywords: Rendell Company, Management Control System, Internal Control

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I. PREFACE

Background Study

At the end of the 1970s, although the company continued to generate profits,
growth rate decreased rapidly. James Hodgkin became company president in
1984, previously as controller and on 1980 and vice president in 1983. Fred
Bevins, who was an assistant controller before, replaced Hodgkin after Hodgkin
was promoted as the vice president.
Rendell company has seven operating divisions: the smallest has annual sales of
$50 million, while the number of sales per year of the largest as much as $500
million. Each division is responsible for manufacturing and marketing sections in
each production sector. Although the number of parts and components transferred
between divisions, business volume is not large division.
Organizational corporate controller in 1980 has a responsibility, especially
in terms of (1) financial records, (2) internal auditing, and (3) the analysis of the
capital budget request. Personally, as a controller, Hodgkin (1980) took an active

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role in reviewing budget performance reports and studies the divisions and hires
some people to help his analysis. While Bevins continues to move in the same
direction as his promotion as the new controller. In 1985 the corporate
organization was beginning to be well staffed to be able to give careful attention
towards the information submitted by the divisions.
The division controller directly reports to the divisional general manager.
But the controllers are always encouraged to consult prior to the appointment of
the controller division. In addition, he also consulted in relation to the increase in
the salaries of the controller division. The specified corporate controller function
on the recording system in which the divisions are expected to conform to the
general procedures related to budgeting and performance reporting. However, the
implication is clear that the performance of the division of budget reporting is
accountability division general manager, division controller that acts as a staff
assistant in preparing the document.

Internal Analysis of Rendell Company

The relationship between controller and


divisional manager in Rendell has a structure
like the picture shown beside.

To understand more about Rendell


environment, we will analyze the internal
environment of Rendell Company. We only

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analyze the internal system because the case is related to the internal control of
Rendell Company and the case doesn’t include any other external influence. So
below here are the strength and weakness that Rendell have regarding those
Rendell structures of controller and divisional manager.

 Strength

1. With control division reports directly to the division manager, enabling issues to
be quickly resolved and based on the latest information.
2. Critical assessment helps to reduce the over-budgeting and implement a new
control program easier.

 Weakness

1. It is possible for the Division Manager to hide financial information.


2. The Division Controller may not be independent and make the information among
it biased.

Theoretical

Behavior in Economics
Management control systems affect human behavior. Good management
control system in such a way as to influence behavior has a purpose that is
consistent; meaning individual actions undertaken to achieve personal goals will
also help to achieve organizational objectives. Or this could also be called as goal
congruence.
Goal Congruence
Goal congruence indicates that the individual within an organization are not
against the interest of organization even when those individuals have their own
self-interest. In a goal congruence process, the actions people are led to take in

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accordance with their perceived self-interest are also in the best interest of the
organization.
There are two things which influences the goal congruence, informal factors and
formal factors. Both formal and informal factors influence human behavior within
an organization; they affect the degree to which goal congruence could be
achieved.

Informal Factors That Influence Goal Congruence

1. External Factors
External factors are the norms regarding the expected behavior in the community,
where the organization is a part. These norms include attitude, which collectively
often called as EOTS work, which is realized through employee loyalty to the
organization, tenacity, passion and pride owned by employees in performing their
duties.

2. Internal Factors

a. Culture
The most important internal factor is the organization's own culture-the com-mon
beliefs, shared values, norms of behavior and assumptions that are implicitly and
explicitly manifested throughout the organization. Cultural norms are extremely
important since they explain why two organiza-tions with identical formal
management control systems, may vary in terms of actual control. A company's
culture usually exists unchanged for many years.

b. Management Style
Internal factor, which may have the most powerful impact on management
control, is management style. Typically, subordinate attitudes reflect what they
perceive as their superior attitude, and the attitude of the boss in the end rests on
what the attitude of the CEO.

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c. Informal Organization
The lines on the organization chart describing the formal relationships, the
shareholders authorized the authority and responsibilities of any management.
The chart may show, for example, that the production manager of Division A
reports to the general manager of Division A. But in the course of fulfilling his or
her responsibilities, the production manager of Division A actually communicates
with many other people in the organization, as well as with other managers,
support units, the headquarters staff, and people who are simply friends and
acquaintances. In extreme situations, the production manager, with all these other
communica-tion sources available, may not pay adequate attention to messages
received from the general manager; this is especially likely to occur when the
production manager is evaluated on production efficiency rather than on overall
perfor-mance. The realities of the management control process cannot be
understood without recognizing the importance of the relationships that constitute
the in-formal organization.

d. Perception and Communication


In an effort to reach organizational goals, managers must know the goals and
actions to be taken to achieve it. They receive this information through various
channels, both formal (e.g., budgets and other official documents) and informal
(e.g., conver-sations). Despite this range of channels, it is not always clear what
senior man-agement wants done. An organization is a complicated entity, and the
actions that should be taken by anyone part to further the common goals cannot be
stated with absolute clarity even in the best of circumstances.

Formal Factors That Influence Goal Congruence


Rules
We use the word rules as shorthand for all types of formal instructions and
controls, including: standing instructions, job descriptions, standard operat-ing
procedures, manuals, and ethical guidelines.

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Statement of Problem

The problem in this Rendell Company will be stated and questioned in each
question based from the book. Our result of discussion will be explained in the
next step of this paper.

What is the organizational philosophy of Martex with respect to the controller


function? What do you think of it? Should Rendell adopt this philosophy?
To whom should the divisional controllers report in the Rendell Company? Why?
What should be the relationship between the corporate controller and the
divisional controllers? What steps would you take to establish this relationship on
a sound footing?
Would you (authors) recommend any major changes in the basic responsibilities
of either the corporate controller or the divisional controller?

II. Results and Discussions

1. What is the organizational philosophy of Martex with respect to the controller


function? What do you think of it? Should Rendell adopt this philosophy?

In Martex, divisional controllers report directly to


the corporate controller. The divisional
controllers are assigned to each division to
monitor and ensure the accuracy of each
division’s financial reporting. They act as the
corporate “spy”, they are identifying

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organizational slack and making sure that integrity of reporting is intact.
Therefore, in Martex, the divisional controllers are sort of independent entities
from each division; their loyalty is with the corporate controller. This strategy is
very good strategy because each division’s goals are aligned with the company
objectives and the top management could receive unbiased information.

Martex’s philosophy has both negative and positive side:


+: Financial and performance report within a division is more accurate and could
minimize the existence of biased information. This could make the management
controlling system from the top management been easier.
-: Divisional Control staff will be acted like a spy, and we predict that the
manager divisional will not trust and entirely opened to the divisional control staff
and they will be excluded from the form of “team” in this one line of divisional.

By re-identifying the given theoretical about human behavior, our team could
conclude that there is a differences will be made if Rendell take Martex as their
new philosophy. As it has been explained before, the internal factors, which affect
the goal congruence within a company, are culture, management style, informal
organization, perceptions and communication. Rendell Company has a really
good culture such as discipline, time management, compliance, and stuffs. This
could make Rendell has a good level for a goal congruence.

We agree that Rendell should adopt the philosophy of Martex, because by


following this new method and philosophy, top management will receive the more
good quality of information. This philosophy supports the independencies of
divisional controller.
The quality of information given by the divisional in Rendell structure most of
times could be biased information that will affect the top management respond.
Even if this philosophy could make the divisional control staff wont be counted as
a team, this deficiency could be resolved by the next explanation on the other
questions below.

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If we take a look back into the theoretical section, we can see that a company
must has goal congruence within the internal parties inside the company. That is
why we agreed to adopt this new philosophy, because we think, by this new
method and philosophy, corporate controller, general division, and division
controller might reach the perfection of goal congruence. So, the timing and
sources used in Rendell could be as effective as it could be.

2. To whom should the divisional controllers report in Rendell? Why?


Management style in a company reflects the internal condition and might affects
the goal congruence level in a company. That is why management style such as to
whom should the divisional controllers report the information question is being
concerned.
This differences report section could lead to a better communication happened in
Rendell Company. And to make the perceptions of any entities are aligned to be
one to reach the goal congruence itself.

We think that it is better if the division controller report both to the corporate
controller and division manager. They report to corporate controller so the general
information wouldn’t be biased and corporate controller will directly aware of
surrounding issues. More of it, the connection between controller division and
corporate division would be more solid, so even if the divisional controller are
excluded from the divisional that they took, they are still part of team which
involves in corporate controller responsibility.
Reporting to the manager division would build trust relationship between manager
division and division controller, because divisional controller should have an
access to sensitive information in the related division.

3. What should be the relationship between the corporate controller and the
divisional controllers? What steps would you take to establish this relationship on
a sound footing?

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The corporate controller should establish a stronger link with the division
controllers by holding regular meetings just to let the division controllers feel his
presence in the company.

The corporate controller should show his authority to the division controllers by
creating stricter metrics to measure their performance, which will be the basis
whether they should be retained, transferred or replaced. Both corporate controller
and division managers will have to evaluate the performance of the division
controllers: the corporate controller will base it on the overall performance of the
division and their general function, while the division managers will focus on the
outputs of the division controllers based on the specific functions given to them
by the managers.

4. Would you recommend any major changes in the basic responsibilities of either
the corporate controller or the divisional controller?

We agreed that there is no major change in the basic responsibilities needed for
corporate controller or divisional controller. We recommend the shifting of
controller division responsibility to corporate controller and suggest a more solid
relationship between corporate and divisional controller so the presence of
divisional controller will more a bit appreciated.
Rendell Company should think more about the effectiveness by reviewing the
organizational structure and goal congruence. Good management control system
influence behavior in a goal congruent manner, that is, they ensure that individual
actions taken to achieve personal goals also help to achieve the organizational
goals.
In a goal congruence process, the actions people are led to take in accordance
with their perceived self-interest are also in the best interest of the organization.

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(Anthony, Robert N. Govindarajan, Vijay. Management Control Systems Twelfh
Edition 2007, Chapter 3. McGraws-Hill Education)

References:

Anthony, Robert N. Govindarajan, Vijay. Management Control Systems Twelfh

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Edition 2007, Chapter 3. McGraws-Hill Education

Perumusan Masalah Rendell Company, by Universitas International Batam


https://www.scribd.com/doc/245780519/MCS-Case-3-3-Rendell-Company

Describing and illustrating significance of human behavior patterns in


management control system – Management Control System
http://mcs20112010.blogspot.com/2011/04/describe-and-illustrate-significance-
of.html

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