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Management Control System

UNIT - I

Unit I

Characteristics of Management Control System

Evolution of control systems in an organization

Relating system to organizational objectives - Strategic Planning,

Management Control and Operational Control - Goal Congruence - Cybernetic

Paradigm of Grissinger

Functions of the Controller

Management Control system(MCS)

MCS is a set of interrelated communication structures that facilitates the processing

of information to assist managers in coordinating the parts and attaining the purpose
of an organization as a continuous basis.

MCS is an interdisciplinary subject as it requires contributions from all branches

concerned with the management in achieving a high level of quality, productivity, and
innovation.

In the absence or deliberate malfunctioning of control systems, causing huge losses

and ultimately bankruptcy. Besides, defective products and services, poor
coordination between sections, departments and subsidiaries also have arise due to
lacunae(gap / silence) in the control systems.

Definitions

According to Simons (1995), Management Control Systems are the formal,

information-based routines and procedures managers use to maintain or alter
patterns in organizational activities

Anthony & Young (1999) showed management control system as a black box. The
term black box is used to describe an operation whose exact nature cannot be
observed.

The term management control was given of its current connotations by Robert N.
Anthony

Robert N. Anthony (2007) defined Management Control as the process by which

managers influence other members of the organization to implement the
organizations strategies.

One of the first authors to define management control systems was Ernest
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Anthony Lowe, Professor of Accounting and Financial Management at the
University of Sheffield, in his 1972 article "On the idea of a management control
system."
Reasons for the need for a planning and control system:
I.

The enterprise has (by definition) organizational objectives, as distinct from

the separable and individual ones of the members constituting the
'managerial coalition';

II.

The managers of the sub-units of the enterprise must necessarily be

ambivalent in view of their own personal goals, as well as have a good deal
of discretion in deciding how they should behave and in formulating their
part of any overall plan to achieve organizational objectives;

III.

Business situations (and people's behaviour) are full of uncertainty,

internally as well as externally to the business enterprise.

IV.

There is a necessity to economize, in human endeavours we are invariably

concerned with an allocation of effort and resources so as to achieve a
given set of objectives...

Purpose of MCS

To assist the management in coordinating the activities of the firm and in steering those
activities towards achievement of the firms overall purposes , goals and objectives

To compare the actual results with the set standards in order to ensure that the work of
each section of the firm is harmoniously accomplished with the works of other sections

To bring about unity of purpose in an organization

To ensure that appropriate strategies are implemented to attain its goals.

To ensure that prompt actions are taken in case of emergency and uncertainty as well

To help the management in decision making

FUNCTIONS OF MCS

To Plan the activities of the firm

To coordinate the activities of the firm

To Communicate the information to various levels of organization structure.

To evaluate information and deciding the course of action.

To influence people to change to change their style of functioning.

CHARACTERISTICS OF MANAGEMENT
CONTROL SYSTEM

1.Management control system focuses on programs and responsibility

centres. A programs is a product, product line, research and development
project or similar activity that the organization undertakes in order to
achieve its goals.
2. The information in a management control system is of two types :
Planned data - programs, budgets and standards.
Actual data - information on what is actually happening, both inside the
organization and in the external environment.
3. Management Control System is a total system in the sense that it embraces
all aspects of a companys operation.
4. The Management Control System is usually built around a financial
structure.
5. The Management Control process tends to be rhythmic; it follows a definite
pattern and time table.
6. Management Control System should be a co-ordinated and integrated.

Evolution of Management Control System in an

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Organisation
Meaning of Evolution Evolution is not an automatic affair, it is a contest for
survival. The move ahead, companies must consciously introduce planned
structures that not only are solutions to correct a crisis.
Five phases of Evolution of Management Control System:
Phase I Creativity
The companys founders are usually, technically or entrepreneurially oriented,
and they disclaim management activities; their physical and mental energies are
absorbed entirely on making and selling a new product.

Communication among employees is frequent and informal.

Long hours of work are rewarded by modest salaries and promise of
ownership benefits.
Control of activities comes from immediate marketplace feedback.

Phase II Direction

Functional organization structure is introduced to separate manufacturing

from marketing activities and job assignments become more specialized
Accounting systems for inventory and purchasing are introduced.
Incentives, budgets and works standards are adopted
Communication becomes more formal and impersonal.
The new manager and his key supervisor take most of the responsibilities for
instituting directing, while lower level supervisors functions as specialist.

Phase III Delegation

Much greater responsibility is given to the managers of plans and market

territories.
Profit centers and bonuses are used to stimulate motivation.
The top executives at headquarters restrain themselves to managing by
exception, based on periodic reports from different units.
Managers often concentrates on making new acquisition, which can be lined
up besides other decentralized units.
Communication from the top is infrequent usually by correspondence,
telephone or brief visits to decentralized units.

Phase IV Co-ordination

Decentralized units are merged into product groups.

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Formal planning procedures are established and intensively reviewed .
No. of staff persons are hired to initiate programs of control and review for line
managers .
Capital expenditure are carefully pruned across the organization .
Each product group is treated as an investment centre based on ROI concept.

Phase V Collaboration

The focus is on solving problems quickly through team action.

Teams are combined across functions for task - group activity.
Staff experts are reduced, reassigned and combined in interdisciplinary teams.
A matrix structure is used in solving appropriate problems.
Previous formal systems are simplified and combined into single multipurpose
systems.
Conferences of key managers are held frequently to focus on major problem
issues.
T&D programs are given to managers in behavioral skills, teamwork and conflict
resolution.
Real - time information systems are integrated into daily decision - making.

MCS & Organizational Objectives

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GOALS are defined as broad statements of what the organization wants to

achieve in the long run on a permanent basis
OBJECTIVE are defined as specific statement of ends, the achievement of which
is contemplated within a specified time.
Many times these terms are also used interchangeably. However, both are
subsumed under the term mission, which is indicative of the strategic intent
and strategic direction of the organization.
Mission is articulated on the basis of the vision of the founders or the chief
executive. Mission is achieved through a properly formulated strategy and action
plan with appropriately in - built mid - course correction system. Mission, vision
and action indicate the interactive relationship between strategy and
management control system.

Goal Congruence

Although systematic, the management control process is by no

means mechanical; it involves interactions among individuals,
which cannot be described as mechanical. Managers have
personal as well as organizational goals. The central control
process is to induce managers to act in pursuit of their personal
in ways that will help attain the organization's goals as well. Goal
congruence means that as far as feasible, the goals of an
organizations individual members should be consistent with
goals of the organization itself. The management control system
should be designed and operated with the principles of goal
congruence in mind.

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Differences - Strategic Planning, Management

Control & Operational control
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Characteristics

Strategic Planning

Management Control

Operational Control

Level

Top management

All level - top to front line

Supervision.

Supervisory

Scope

Total

Overall, consisting of related

subsystem

Operating unit

Long range

Short to intermediate (1 to 5)

Short periods day today,

weekly, monthly

External, towards
developing internal

Internal, adjusting to external factors

Internal only

Basic objectives

Tangible goals, with in framework of

overall objectives

Short - term, tangible to

operating unit

Relatively
unstructured

Fairly highly structured but flexible

Quite rigid pre established

Activity patterns

Irregular

Rhythmic, Regular

Highly repetitive

Character of activity

Creative

Administrative, persuasive

Following directions little

initiatives

Entire organization

All operations, line management

Operating unit

Time frame
Environment
Goals and objectives
Structuring

Focal point

Cybernetic Paradigm Of Grissinger

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This is also referred to as micro control framework, since it helps it helps to

establish control or performance measures for a particular problem area in
specific

situation.

Cybernetics

is

derived

from

the

Greek

work

Kybernatics which means Steersman. Cybernetics has been defined as

the service of communication and control. Cybernetics was coined by
Norbert Weiner and it aims at the study of entire field of control and
communication theory. Cybernetics as a biological phenomenon has been
defined as how systems regulate themselves, explore and learn. The
fundamental concern of cybernetics is with negative feedback and role of
negative feedback mechanism to explain purposive and adoptive behavior.
This aspect of cybernetics has relevance for the financial and economic

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The particular version of the paradigm developed by Grissinger (1979)
(Grissinger, Donald W. Management Theory - A Cybernetic Perspective,
Graduate Management Centre Jan. 86) captures all the elements of the control
process, which may be enumerated as follows:

Set goals and performance

Measure achievement
Compare achievement with goals
Compute the variances as the result of the proceeding comparison
Reporting the variances
Determine the cause of variances
Take action to eliminate the variances

Follow up to ensure that goals are met

The Cybernetic Paradigm of the

Control Process

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Functions of the Controller

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To ensure that data are controlled from all the input centers in time.
To see that data are processed speedily and expeditiously for developing
performance reports
To review reports at successive levels to identify remedial actions
To analyze the reports with a view to identify trends and highlighting the
areas requiring follow up action
To assist in formulating corrective actions

The Financial Executive Institute of United States of America lists the

functions of controller as follows:

Planning for control

Reporting and interpreting
Evaluation and consulting
Tax administration
Government reporting
Protecting of assets through internal control, internal audit
Insurance coverage
Economic appraisal