The Concept of Management Control Systems

One of the best ways to understand management control systems or MCS is by examining
the different components that make it. The concept is built on three distinct
elements: management, systems and control.

Management

As you know, management is about organizing people and processes in a manner that helps
the organization achieve specific objectives. The management process wants to ensure
different parts work together to attain these goals.

Management includes guidance and monitoring of these resources as well. You are
essentially managing how other people perform a specific role and use resources, instead of
doing it yourself. As a manager, you are essentially a facilitator – if A needs to be done, you
find B to do it and provide him the strategy and the resources to do it.

Management need to identify and understand the key components of management as well.
The first component is the different functions of management. The definitions can be
different depending on the situation, but generally, five functions are identified as the core
functions of management. These are planning, organizing, staffing, leading, and controlling.

he other key part of management is the resource types it entails. The most common forms of
resourcing include: human resources, financial resources, technological
resources and natural resources. You could use the above functions to allocate, control and
monitor the different forms of resources. In essence, you are combining the functions you
have at hand – planning, staffing and so on – with the resources, such as financial
resources. The clearest example is having the function of staffing and using the human
resource funding to hire in new staff.

The definition of management in the context of MCS is important because of how

organizations can be viewed. Think of an organization as a system. Now the role of
management is therefore facilitating the production of beneficial outcomes from the system.
If you want the system, i.e. the organization, to produce a result A, you use management to
gather the resources, i.e. the human and other resources, to guarantee A gets done. You
are essentially the engine, which gathers the other parts together to move the car forward.

Systems

Systems are “a set of detailed methods, procedures and routines created to carry out a
specific activity, perform a duty, or solve a problem” or you could view them as “ an
organized, purposeful structure that consists of interrelated and interdependent elements”.

The key to systems, especially in the case of MSCs, is the structure of which they are
formed and often perform. Every system comes with input, output and feedback mechanism.
The system is able to maintain itself even when the surroundings are changing and it has a
specific set of boundaries within which is operates. The picture here illustrates the idea of a
system in a business context perfectly.

You have an input, the business system and the output. You also have the feedback
mechanism. The business system would be the strategy the business uses to create a
specific output. If the output is to provide cheap shoes, the business strategy is
manufacturing of the shoes with the specific elements this entails.

The input, therefore, is the resources (materials, labor, equipment) you need to achieve the
output. So, you take the resources, you implement them with your chosen strategy and you
get the results. The results then provide feedback to inputs on the performance of the
system. Perhaps you didn’t receive as many shoes as you wanted and so, you can increase
input. For example, buy more materials, hire more people and so on.

The objective of the system is to achieve a pre-determined result each time it is executed.

In a business environment, the sale process can be viewed as an example of the process.
The organization has a set of policies and processes in place to guarantee the sale effort
would always lead to a same result (i.e. the sale). As mentioned in the above section,
management would be one of the methods used to guarantee the result occurs in the
system each time.

In the case of the example above, your pre-determined result might be to have 1,000 good
quality shoes with an individual shoe costing $50 to make. The feedback might show you
that occasionally the cost of shoes rises to $70 and you know you need to tweak the input or
the processes you use, as you’ve deviated from the wanted results.

Control

As stated above, control is one of the functions of management. In this context, it refers to
the process of analysis and corrective action. When controlling, you are essentially
monitoring whether you are receiving an expected result of a process (or during it) or if the
outcome deviates from the expectation.

If there is a deviation, you take corrective action to ensure the expected results occur.
Previously, the concept of control was mainly focused on correction after an error had
occurred. In the example of the shoe production, you would notice there was a deviation
when you count the shoes and instead of getting 1,000, you’ve made 999.
But with the rise of modern technology, control can be used to foreseeing an error. This has
changed the function and made it increasingly important part of the management process.
For example, your shoe production facility might have monitoring systems that help you
realize the shoes are not being finalized as quickly as they should in order to make 1,000
pairs. You are essentially able to see that you would encounter a problem; instead of just
realizing a problem has occurred.

If you consider the process in the forms of steps, control in relation to management would
look like this:

1. Setting a goal and establishing desired objectives.– “I want to create 1,000 pairs of
shoes in a month.”
2. Measuring the achievements of goals and objectives.– “I’ve made 999 pairs of shoes
in a month.”
3. Comparing the achieved goals and objectives with the original goals and
objectives. – “I wanted 1,000 and I got 999. I wanted to do it in a month and I’ve
spent a month.”
4. Analyzing variances and reporting on them. Determining the underlying causes for
the variations.– “I’m one pair of shoes short, but I’ve met the deadline. I did not have
enough materials on day two and I got behind in my goals.”
5. Taking corrective action to eliminate the variations.– “I’ve recalculated the
requirements for fabrics and I’ve ordered enough for next month.”
6. Following up and repeating the process.– “I’ve now created the right amount of shoes
every month.”

Definition of Management Control Systems

Horngreen, Datar and Foster define management control system “as a means of gathering
and using information to aid and coordinate the process of making planning and control
decisions through- out the organisation and to guide the behaviour of its managers and
employees. The goal of management control system is to improve the collective decisions
within an organisation in an economically feasible way.”

Different managers perform different responsibilities in an organisation and therefore

different kinds of information are needed by them to manage the activities in their respective
areas. Management control system should be able to develop, gather and communicate
information to management at different levels in the organisation. Also, management control
system should aim to provide financial as well as non-financial information as needed by
different managers.

Some examples of financial information are material costs, labour costs, net profit,
investments made etc. Non-financial data are those which are not in monetary terms such as
production units per worker, labour hours, machine hours, time taken to comply with the
customer’s orders, absenteeism. Some information gathered under management control
system may emerge from internal data maintained within the firm.

Some other information required by managers may be gathered from external sources such
as information about competitors’ product. As stated earlier, different types of information are
needed by persons working at different levels in the organisation. For example, top
managers may require internal as well as external financial and non-financial data as their
responsibilities relate to total organisation. However, a production manager would be more
interested in internally generated financial and non-financial data.

The Characteristics of Management Control Systems

As the above showed, MCSs generally describe the design, installation and operation of
different planning and control frameworks within management. But there are two distinct
control systems within the concept. While these are different from each other, they are also
interrelated and sometimes hard to separate from each other.

First, the MCS refers to the structure, either organizational or the relationship of different
components, of the different responsibility structures within the company. It further outlines
the performance measures and how the information moves within and between the different
responsibility structures. For example, in a complex and large organization, such as a
production facility for creating different car parts, the responsibility would be divided into
multiple units. The management would therefore be in charge of different aspects of the
organization, and there would be a number of sub-units. On the other hand, a small
business, like a family bakery, is unlikely to have many responsibility centers. MCSs core
characteristic is the organizing and planning of the relationship between these different
structures and centers of responsibility.

The other core characteristic, on the other hand, is about the processes or set of activities
the organization takes in order to achieve its objectives. This part of the system refers to the
steps the organization, and especially its management, needs to perform in order to set
objectives, allocate resources to achieving these objectives, and to achieve the objective.
The different processes that MCS performs and monitors is essentially looking at these
phases and creating the right ways of going about the processes. This could involve things
like monitoring the budgeting, measuring the performance of subordinates and so on.

Essentially, the first characteristic is about the structure of the MCS and the second
characteristic refers to the processes. To understand it, you can consider it like this:

The system’s design is about the structure of your management control system.

The system’s performance is an indicator of the process of your management control

system.

The other key thing to realize about the characteristics of MCSs is about two separate
natures the system has. MCS essentially has an informal and a formal control system. Let’s
examine them in detail:

a. Formal control system

The organization has clear procedures, rules and guidelines in place to explain the
different managerial requirements. These guide, motivate and direct the
management, as well as the subordinates, to perform their tasks in a manner that
helps achieve the operational goals. They are also used to co-ordinate behaviors of
superiors and subordinates.

An example of a formal system would be the rules and guidelines used by the human
resource department in terms of functions such as hiring and developing staff.
 b. Informal control system

The organization will also have informal and unwritten processes in place for
management control. These are aimed to provide higher motivation amongst the
employees and ensure organizational goals and strategies are appropriately
implemented.
Informal control systems also boost goal congruence.

An example of informal control system would be the good behavior expected from
managers and subordinates, such as loyalty towards the organization and respect of
the organizational culture.

Most of MCSs are actually use accounting and other financial metrics as the key evaluation
metric. This means you have an emphasis on financial measures, such as how many sales
were made or what it cost to hire a new person.

The reason for using these as the basis is rather obvious. Measuring performance with a
real data set, such as a financial metric, is easy and straightforward. The management can
tell a lot about performance by understanding the underlying financial factors of a specific
behavior. If you were to sell 1,000 pairs of shoes, while your other peers sold only 400, the
manager would want to focus on your specific behaviors to boost overall performance.

But there are certain essential non-financial factors at play as well. These can be measured
with surveys and other feedback forms, and they include things such as customer
satisfaction and product quality. The management can learn more, improve planning, and
enhance control with information they receive directly from the customers. What makes them
happy? What has disappointed them in the past?

Knowing, for instance, how customers continuously complain about waiting times will help
the management direct the organization’s resources much better. The other example of
these non-financial functions of MCS would be product quality. This can be an important tool
for managers, as it reveals how well certain development strategies are working. If your
products are constantly breaking down, you can take corrective action and find out where in
the production line the quality is compromised.

Factors Influencing Management Control Systems

Factors influencing the design of Management Control Systems are as follows:

1. Size and Spread of the Enterprise

The size and spread of a large firm is bound to be different compared with that of a
small firm. This would certainly determine the content and nature of the control
system for each organisation.
2. Organisational Structure, Delegation and Decentralisation
Statutes and conventions govern organisational structure, and the extent of
decentralisation and delegation in all enterprises. For example, the management
philosophy of the State Bank of India is bound to be different from that of the State
Trading Corporation. Also, within an enterprise, the degree of decentralisation and
delegation changes from one point of time to another to meet changed environmental
 challenges and the opportunities that these may present. All these influence
management control systems practiced in organisations.
3. Nature of Operations and Divisibility
Nature of operations and their divisibility affect management control systems. For
example, in the oil industry, for instance, sub-units can not be formed on the basis of
products. In many large trading companies, however, divisions can be created on the
basis of products. Again, in the paper industry, the different stages in pulp making
can not be subdivided for the purposes of management control, though pulp making
as a whole can be regarded as a division.
4. Types of Responsibility Centres
Different control systems are needed for the various responsibility centres or sub-
systems within an organisation. Whether the performance of a responsibility centre
should be measured in terms of expenses or profitability or return on investment
depends on the type of responsibility centre. For example, a bank may apply different
performance measures to measure performance of its different branches.
There are transactional differences between branches; some are deposit heavy or
advance heavy, some are with or without safe deposit facilities or foreign exchange
transaction. It is, therefore, not possible to have profit as the sole criteria for
performance evaluation of all branches. Hence, control systems with different criteria
of performance should be used for different sub-units.
5. People and their Perceptions
Perceptions of people in the organisation about the likely effects of the control
system on their work life, job satisfaction, job security, promotion and general well-
being could differ across organisations. These considerations will significantly
influence the nature and content of the management control system needed in the
organisation and must be duly considered while designing management control
systems.
QUESTIONS

1. Horngreen, Datar and Foster define management control system as ....

A. a means of gathering and using information to aid and coordinate the process
of making planning and control decisions through- out the organisation and to
guide the behaviour of its managers and employees.
B. a system which gathers and uses information to evaluate the performance of
different organizational resources like human, physical, financial and also the
organization as a whole in light of the organizational strategies pursued.
C. a set of detailed methods, procedures and routines created to carry out a
specific activity, perform a duty, or solve a problem.
D. an organized, purposeful structure that consists of interrelated and
interdependent elements
2. Which part of this following is factor influencing management control system, except
...
A. Size and spread of the enterprise
B. Organisational structure, delegation and decentralisation
C. People and their perseptions
D. Nature of productions and unity
3. Wich part of this following is an example of a formal system ....
A. Good behavior expecte from managers and subordinates
B. Loyalty towards the organization
C. The rules and guidelines used by human resourse departmen
D. Respect of the organizational culture

Answer

1. A
2. D
3. C

Daftar pustaka

Anastasia. 2018. Management control sytem https://www.cleverism.com/management-control-

system-guide/ (diakses 29 September 2019)

Rohit argawal. Management control system

http://www.yourarticlelibrary.com/accounting/company-accounts/management-control-system-
definition-characteristics-and-factors (diakses 29 september 2019)