Unit 1: Introduction to Management Control System

Notes

Notes A management control system is designed to assist managers in planning and

controlling the activities of the organization. A management control system is the means
by which senior managers ensure that subordinate managers, efficiently and effectively,
strive to attain the company’s objectives.

Every MCS has certain generic components. There must be a reliable performance measurement
system. Realistic standards should be planned and maintained. The standards should be
consistently and regularly compared with performance measurement data. Any variances that
exceed predetermined thresholds should be enthusiastically investigated and reported to the
people who have responsibility and authority to make appropriate and timely adjustments. All
adjustments should be controlled, especially any adjustments that affect predetermined standards
and thresholds. If the management monitors the activities of the business units frequently, then
it is exercising tight control. Limited monitoring of the business units’ activities can be termed
as loose control.

The difference between tight and loose control thus relates to the degree to which the management
monitors the activities of a unit. When there is tight control by the management, there is
extensive involvement of the management in the day-to-day operations of the business unit.
The budget is considered a binding constraint with a strong emphasis on meeting the budgeted
targets. Deviations from the budget are generally not considered acceptable. Loose control is
characterized by limited involvement by the management in day-to-day operations. Under
loose control, the budget is regarded more as a tool for planning and communication than as a
binding commitment.

Did u know? Management control systems involve a number of activities in an organization,

including:

 Planning the future course of action;

 Coordinating and communicating the various activities of the organization to

different departments;

 Evaluating information and deciding the various activities; and finally,

 Influencing people to work in accordance with the goals of the organization.

However, nature of management control system is concerned with three words management,
control and systems.

1.2.1 Management

An organization consists of a group of people who work together to achieve certain common
goals (in a business organization an important goal is to earn a satisfactory profit). In an
organization you have hierarchy of managers, with the Chief Executive Officer (CEO) at the top,
the managers of the business units, departments, sections and other sub units below the CEO.
Depending on the size and complexity of the organization, there may be several layers in the
hierarchy. Except for CEO, each manager is both a superior and a subordinate. Each one supervises
people in his own organization unit and is a subordinate of the manager to whom he reports.

The CEO (or in some organization, a team of senior managers) decides on the overall strategies
that will enable the organization to meet its goals. Subject to the approval of the CEO,
the various business and managers formulate additional strategies for their respective units to

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Management Control Systems

Notes further these goals. The management control process is the process by which managers at all
levels ensure that the members of the organization implement these strategies.

The Management Control Process is more complicated than what has been described in detectors,
assessors, effectors and a communication system. These are as follows:

1. The standard is not preset: Rather it is a result of conscious planning process where
management decides what the organization should be doing and as part of control process
it is also comparison of actual with these plans.

2. Like controlling an automobile, management control is not automatic:Some of the detectors

are mechanical (i.e. routine comparison of actual with standard), but important information
is detected through the managers’ own eyes, ears and other senses (specially the judgment
whether the difference between actual and standard performance is significant to warrant
action). Action taken to change organizations behaviour involves human beings.

3. Unlike controlling an automobile (a function performed by a single individual),

management control requires co-ordination among individuals. An organization consists
of many separate parts and management control must ensure that each part works in a
harmony with the others.

4. The connection from perceiving the need for action and the action required to obtain the
desired result may not be clear. In the function, as an assessor manager may decide that
“costs are too high” but there is no easy or automatic action or a series of action that will
bring costs down to what the standards say.

5. Control in an organization does not come about solely or even primarily as a consequence
of actions. Much control is self control i.e. people act in the way they do, not primarily
because they are given specific instructions by their superiors, rather their own judgment
tells them what action is appropriate.

1.2.2 Control

The control process is similar to control process in an automobile. In an automobile if an

accelerator is pressed it goes faster, when the break pedal is pressed it slows or stops, when the
steering wheel is rotated it changes its direction. With these devices, the driver controls the
speed and direction of the vehicle. If any of these devices does not work, the automobile will be
out of control.

An organization must also be controlled i.e. there must be devices to ensure that it goes where
the leaders want it to go. But control in an organization is much more complicated than controlling
a vehicle.

Every control system has at least four elements:

1. A detector or sensor – a device that measures what is actually happening in the situation
being controlled.

2. An assessor i.e. a device for determining the significance of what is happening i.e.
comparison with some standard or expectation.

3. An effector i.e. a device that alters behaviour if the assessor indicates the need. This device
is often called “feedback.”

4. A communication network, i.e. devices that transmit information between the detector
and the assessor and between the assessor and the effector.

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 Unit 1: Introduction to Management Control System

These four basic elements of any control system are given in Figure 1.1. Notes

Figure 1.1: Elements of a Control Process

Control Device 2. Assessor: Comparison

with standard

1. Detector-Information 3. Effector-Behavior
about what is happening alteration if needed

4. Entity being controlled

Further consider a situation of an automobile driver of a highway where the speed limit is
65 kph. The control system in this case acts as follows:

1. The eyes (sensors) measures actual speed by observing the speedometer

2. The Brain (assessor) compares actual speed with desired speed and upon detecting a
deviation from the standard

3. Directs the foot (effector) to ease up or press down on the accelerator and

4. The nerves from the communication system that transmits information from eyes to brain
and brain to foot.

It would be seen that regulation of a car is a complicated since there can be no certainty as to
what action the brain will direct after receiving and evaluating information from the detector.

Example: Once the driver determines the actual speed exceeding 65 km per hour, some
drivers wanting to stay within the legal limit will ease up on the other while others, for any
number of reasons will not. In this situation, control is not automatic, one would have to know
something about the personality and circumstances of the driver to predict what the actual
speed of the automobile would be at the end point of the process.

1.2.3 System

A system is a prescribed way of carrying out an activity or set of activities, usually the activities
are repeated. Most systems are less precise than computer programs, their instructions do not
cover all eventualities and the user of the system must make judgments when these eventualities
occur. Nevertheless, a system is characterized by more or less rhythmic, recurring, co-ordinated
series of steps that are intended to accomplish a specific purpose.

Self Assessment

Fill in the blanks:

1. A ...........................................is an aggregate of machines and people that work toward a

common objective.

2. In a ............……………., data/information is typically fed back to managers of the various

system phases.

3. A system is an aggregate of ...................... and ......................... that work toward a common

objective.

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