Chapter 3

Behavior In Organizations

3.1 Goal Congruence: The actions people

are led to take in accordance with their
perceived self-interest are also in the best
interest of the organization.
 Each individual has his personal goals. He
joins an organization to achieve these goals.
The personal goal may just be to get a job that
assures safety and monetary rewards.
 The organization, through its top management,
sets for itself goals that are desired to achieve.
At times there is a conflict between individual
goals and organizational goals.
 Top management wants these organizational
goals to be attained, but other participants have
their own personal goals that they want to
achieve. These personal goals are the satisfaction
of their needs. In other words, participants act in
their own self- interest. Here individuals may grow
bigger than the organization and this may lead to
goal conflict.

 The control system should be designed so as to integrate
the personal goals with organizational goals, and thereby
achieve goal congruence.
 As managers tend to take action according to their
perceived self-interest, the control system should ensure
that these actions are also in the interest of the
organization. Thus, the system should discourage
individuals acting against the interests of the organization,
e.g., a cost reduction should not be achieved at the cost of
quality if the organization has concern for quality products.
In evaluating any management control practice,
the two important questions to ask are:
1.What actions does it motivate people to take
their own self-interest
2. Are these actions in the best interest of the
organization.
3.2 Informal factors that influence goal
congruence

 External factors
– General societal conditions, cultural values and norms,
legal and political situations.
– Work ethic –loyalty to the organization, diligence, spirit, pride
in doing good job.
 Internal Factors
– Culture
– Management style
– Informal organization
– Perception and communication
3.3 Formal Control System

 Rules: rules are shorthand for all types of

formal instructions and controls, including
standing instructions, job descriptions,
standard operating procedures, manuals,
and ethical guidelines. Some specific types
of rules are as follows:
 Physical Controls: security guards, locked
storerooms, vaults, computer passwords,
television surveillance, and other physical
controls may be part of the control structure.
 Manuals: written guidelines for accomplishing
any task.
 System Safeguards: various safeguards are
build into the information processing system
to ensure that the information flowing the
system is accurate, and to prevent or at least
minimizing fraud of every sort.
 Task Control Systems: the process of
ensuring that specific tasks are carried out
efficiently and effectively. Many of these
tasks are controlled by rules.
Formal Control Process

 Strategic planning
 Budgeting
 Responsibility center performance
 Report actual versus plan
 Is performance satisfactory
 Reward or corrective action and revision
3.4 Types of Organizations

 Functional Organization: each manager is

responsible for a specified function such as
production or marketing.
 Business Unit Structure: business unit
managers are responsible for most of the
activities of their particular unit, and the
business unit functions as semi-independent
part of the company.
 Matrix Structure : functional units have dual
responsibility.
Implication for System Design

 For ease of control, companies should

organize into business units whenever
feasible.
 A functional unit may be more efficient if the
organization wants to achieve the benefits of
economies of scale.
 Once management has decided that a given
structure is best, all things considered, then
system designer must take that structure as
given.
3.5 Functions of the Controller

 Controller is the person who is responsible

for designing and operating the management
control system. In many organizations, the
title of this person is chief financial officer
(CFO). The controller usually performs the
following functions:
 Designing and operating information and control
systems
 Preparing financial statements and financial reports
(including tax returns) for shareholders and other
external parties.
 Preparing and analyzing performance reports,
interpreting these reports for managers, and
analyzing program and budget proposals form
various segments of the company and consolidating
them into an overall annual budget.
 Supervising internal audit and accounting
control procedures to ensure the validity of
information.
 Developing personnel in the controller
organization and participating in the
education of management personnel in
matters relating to the controller function.
Chapter 4
Responsibility Centers: Revenue and
Expense Centers

4.1 Meaning of a Responsibility Center: A

responsibility center is an organizational unit
that is headed by a manager who is
responsible for its activities.
 In a sense a company is a collection of
responsibility centers, each of which is
represented by a box on the organization
chart.
 These responsibility centers form a
hierarchy.
 At the lowest level are the centers for
sections, work shifts, and other smaller
organization units.
 Department or business units comprising
several of these smaller units are higher in
the hierarchy.
4.2 Nature of Responsibility Centers

 Object oriented
 Input-outputs relations
 Measuring inputs and outputs
 Efficiency and effectiveness
 Profit measures the effectiveness and
efficiency of responsibility center
 Multiple forms of responsibility centers
4.3 Types of Responsibility Centers

 Revenue Centers : output i.e., revenue is

measured in monetary terms, but no formal
attempt is made to relate input to output.
 Expense Centers: expense centers are
responsibility centers whose inputs are
measured in monetary terms, but whose
outputs are not. Two types of expense
centers: engineered expense center and
discretionary expense center.
 Profit centers: when a responsibility center’s
financial performance is measured in terms
of profit (i.e., by the difference of revenue
and expenses) the center is called a profit
center.
 Investment centers: in an investment center,
profits are measured in relation to the capital
employed in a business unit.
4.4 Engineered Expense centers

 Engineered costs are those for which the

right and proper amount can be estimated
with reasonable reliability. For example, a
company’s factory costs including materials,
labor or overhead costs are engineered
costs.
Characteristics of engineered expense
centers

 Input can be measured in monetary terms

 Output can be measured in physical terms
 The optimum monetary amount of input to
produce one unit of output can be
determined.
Discretionary Expense Centers

 Discretionary expense centers include

administrative and support units (e.g.,
accounting, legal, industrial relations, public
relations, human resources), research and
development operations, and most marketing
activities. The output of these centers cannot
be measured in monetary terms.
General control characteristics of
discretionary expense centers

 Budget preparation
 Incremental budgeting
 Zero-base review
 Cost of variability
 Types of financial control
 Measurement of performance
Types of discretionary expense
centers

 Administrative and support centers

 R&D Centers
 Marketing Centers