Group 2 Members:

1. Bianca Alinna Tsara Rinaldy (2102113875)

2. Felicia Angelina (2102135216)
3. Nisa Nurlitawaty (2102125029)

CHAPTER 5: CONTROL SYSTEM COST

5.1. Direct Cost

1. The direct costs of a MCS include all the out-of-pocket, monetary costs required to
design and implement the MCS.
E.g.: The costs of paying cash bonuses (arising from incentive compensation for results
control) or the costs of maintaining an internal audit staff (needed to ensure compliance
with action-control prescriptions), those related to the time employees spend in planning
and budgeting activities or preaction reviews, can only be estimated.
2. Many organizations often are unaware of, or do not bother to calculate accurately the size
of, all of these direct costs. But all that is required for our purposes is to acknowledge that
these costs are not trivial and, thus, should be put against the benefits that MCSs have or
are expected to have.

5.2. Indirect Cost

1. Challenging as estimating the direct costs of control may be, they can be dwarfed by
indirect costs of control caused by any of a number of harmful side effects, including:
○ Behavioral displacement,
○ Gamesmanship,
○ Operating delays, and
○ Negative attitudes.
2. Behavioral displacement
Occurs when the MCS produces, and actually encourages, behaviors that are not
consistent with the organization’s objectives.
Behavioral displacement is most common with accountability-type controls
(either results or action accountability), where the specification of the results or actions
desired is incongruent. But some forms of personnel/cultural control can also produce the
problem.
○ Behavioral displacement and results controls
■ Behavioral displacement occurs when an organization defines sets of
results measures that are incongruent with the organization’s “true”
objectives.
○ Behavioral displacement and action controls
■ One form of action control-related displacement is often referred to as
means-ends inversion, meaning that employees pay attention to what they
 do (the means) while losing sight of what they are to accomplish (the
ends).
○ Behavioral displacement and personnel/cultural controls
■ It can arise from recruiting the wrong type of employees or providing
insufficient training, and when personnel/ cultural controls are
implemented in the wrong setting, they will be rendered ineffective and
encourage unintended behaviors.
3. Gamesmanship
We use the term gamesmanship to refer generally to the actions that employees
take to improve their performance indicators without producing any positive effects for
the organization. Gamesmanship is a common harmful side effect faced in situations
where accountability forms of control, either results or actions accountability, are used.
We discuss two major forms of gamesmanship:
a. Creation of slack resources
○ Slack involves the consumption of organizational resources by
employees in excess of what is required to meet organizational
objectives. The propensity to create slack often takes place when
tight results controls are in use; that is, when employees, mostly at
management levels, are evaluated primarily on whether or not they
achieve their budget targets.
b. Data manipulation
○ It comes in two basic forms:
1. Falsification involves reporting erroneous data, meaning
that the data are changed.
2. Data management involves any action undertaken to
change the reported results (such as sales numbers or
profits) while providing no real economic advantage to the
organization and, sometimes, even causing harm.
4. Operating delays
○ Delays are a major reason for the negative connotation associated with the word
bureaucracy
○ Many MCS changes are motivated by a desire to reduce the burdens caused by
these types of controls, which are often seen as killing entrepreneurship
○ Game-playing, or that are undermining the behaviors the controls were designed
to keep in check, such as when managers or employees seek the required
approvals after they spend the money in order to speed up the process; that is,
they are said to act first, apologize later.
5. Negative attitudes
Management controls can also cause negative attitudes, including job tension,
conflict, frustration and resistance. Such attitudes are important not only because they are
 indicators of employee welfare, but also because they are often coincident with other
behaviors that can be harmful, such as gameplaying, lack of effort, absenteeism and
turnover.
● Negative attitudes produced by results controls
Arises from a lack of employee commitment to the performance targets
defined in the results-control system. Most employees are not committed to
targets they consider too difficult, not meaningful, not controllable, or imprudent
(and, of course, illegal or unethical).
● Negative attitudes produced by action controls
Preaction reviews can be particularly frustrating if the employees being
reviewed do not perceive the reviews as serving a useful purpose.

5.3. Adaptation Cost

1. In addition to direct and indirect costs, further costs related to running effective MCSs
may arise from the need to adapt MCSs to the context in which they operate, which is
particularly pertinent when operating multinationally.
2. The cost of adaptation is the total expenditure dedicated to adaptation, the costs of
planning, preparing for, facilitating, and implementing adaptation measures, including
transition costs, and definition benefits as the avoided damage costs or the accrued
benefits following the adoption and implementation of adaptation measures
Adaptation costs are include :
1. National Culture
2. Local Institutions
3. From this we can conclude that there are several differences adaptation costs between the
local and foreign environments :
1. Uncertainty
2. Inflation
3. Talent