CONTENT

Unit 1: Introduction to Management Control System 1

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Unit 2: Strategic Management Framework 14

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Unit 3: Behavioural Considerations 25

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Unit 4: Responsibility Centers 48

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Unit 5: Transfer Pricing 102

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Unit 6: Strategic Planning for Management Control 128

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Unit 7: Budgeting: Tool for Management Control 141

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Unit 8: Management Control through Variance Analysis 165

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Unit 9: Performance Measurement Systems 184

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Unit 10: Interactive Control 200

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Unit 11: Management Compensation 213

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Unit 12: Management Control for Differentiated Strategies 227

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Unit 13: Management Control of Service Organisation 238

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Unit 14: Management Control of MNC's 255

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Neha Tikoo, Lovely Professional University Unit 1: Introduction to Management Control System

Unit 1: Introduction to Management Control System Notes

CONTENTS

Objectives

Introduction

1.1 Meaning of Management Control System

1.2 Nature

1.2.1 Management

1.2.2 Control

1.2.3 System

1.3 Basic Concepts

1.3.1 Important Features of Management Control Systems

1.4 Impact of the Internet on Management Control

1.5 The Domain of Management Control System

1.6 Summary

1.7 Keywords

1.8 Review Questions

1.9 Further Readings

Objectives

After studying this unit, you will be able to:

 Explain the meaning of management control system

 Discuss the basic concepts involved in management control system

 Recognize the nature of management control system

 Identify the process of management control

 Explain the scope of management control system

 Discuss boundaries of management control

Introduction

The importance of the subject matter covered in the courseware has been felt on the collapse of
companies such as Tyco, Global crossing, WorldCom, and Enron because of the lapse in controls.
CEO and top management compensation in these companies were so heavily tied up with stock
options that executives were motivated to manipulate financials to buoy the short-term stock
price. Similarly long-term success of world class companies such as Emerson electric, Lincoln
Electric, New York Times, Worthington Industries, 3 M Corporation, Nucor Corporation, Dell
Computer, Wal-Mart, South West Airlines, Cisco Systems and Analog Devices were not just
because they have developed good strategies, but more importantly, they have designed systems
and processes that energize their employees to execute these strategies effectively.

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Management Control Systems

Notes 1.1 Meaning of Management Control System

A Management Control System (MCS) is a system. A system can be described as a series of steps
or phases consisting of an input phase, a processing phase, and an output phase. A control
system adds measurement, analysis and reporting phases to the system. Accounting methods
are often implemented and evaluated as part of a management control system. To control
financial activities within a company, the area may be broken down into financial and managerial
accounting. Financial accounting generally focuses on internal issues, such as reporting sales
costs, while managerial accounting may focus on methods for determining product costs.

While both areas cover business accounting issues, their methods of application generally differ,
and separate systems implemented by a management control system may aid in ensuring
reports remain accurate and impartial. Managerial accounting is typically responsible for
providing management with information on controlling costs and improving the production
process. Managerial accountants may also provide cost information on new products, make
pricing decisions and monitor actual and budgetary costs.

General financial accounting within management control systems aims to focus on a company’s
internal accounting issues. Financial accounting typically handles  payroll and human resource
issues affecting employees within the company. Accounts in this area may also manage employee
costs and reimbursements under a control system.

Notes An MCS is a set of interrelated communication structures that facilitates the

processing of information for the purpose of assisting managers in co-coordinating the
parts and attaining the purpose of an organization on a continuous basis. All organizations
use control system both formal and informal. A system is an aggregate of machines and
people that work toward a common objective.

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Caution Output is measured, compared against a plan, analyzed if judged significant, and
then reported back to the appropriate earlier phases of the system in the form of positive
or negative reinforcement.

In a management control system, data/information is typically fed back to managers of the

various system phases. Responsible managers will then take appropriate action based on the
data/information provided.

1.2 Nature

The role of the management is to organize, plan, integrate and interrelate organizational activities
to achieve organizational objectives. The achievement of these activities is facilitated by
management control systems. Management control, of course, is a core business function and
exists as a separate, well-established discipline within the management field. Management
Control Systems (MCS) theory is a useful integrative tool for organizing, explaining, and
understanding the jargon and concepts of performance measurement. Management control
systems consist of all organization structures, processes and subsystems designed to elicit behavior
that achieves the strategic objectives of an organization at the highest level of performance with
the least amount of unintended consequences and risk to the organization.

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