CHAPTER 4

Recent developments and

Modern Management tools
used in the Implantation of
Management Controls

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Introduction
 A management control system (MCS) is a system
which gathers and uses information to evaluate the
performance of different organizational resources like
human, physical, financial and also the organization as
a whole in light of the organizational strategies
pursued.
 Management control system influences the behavior of

organizational resources to implement organizational

strategies.
 Management control system might be formal or

informal.

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Introduction….
 Management control systems are tools to aid
management for steering an organization toward its
strategic objectives and competitive advantage.
 Management controls are only one of the tools which

managers use in implementing desired strategies.

However strategies get implemented through
management controls, organizational structure, human
resources management and culture.
 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.

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MCSs: History
 One of the first authors to define
management control systems was Ernest
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."

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Traditional MCSs
 Traditional techniques are those which have been
used by the companies for a long time now. These
include:
1. Personal observation
2. Statistical reports
3. Break-even analysis
4. Budgetary control

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1. Personal Observation
 This is the most traditional method of control.
 Personal observation is one of those
techniques which enables the manager to
collect the information as first-hand
information.

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2. Statistical Reports
 Statistical reports can be defined as an overall analysis
of reports and data which is used in the form of
averages, percentage, ratios, correlation, etc., present
useful information to the managers regarding the
performance of the organization in various areas.
 This type of useful information when presented in the
various forms like charts, graphs, tables, etc

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3. Break-even Analysis
 Breakeven analysis is a technique used by managers
to study the relationship between costs, volume &
profits.
 It determines the overall picture of probable profit &
losses at different levels of activity while analyzing
the overall position.
 The sales volume at which there is no profit, no loss
is known as the breakeven point.
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4. Budgetary Control
 Budgetary control can be defined as such
technique of managerial control in which all
operations which are necessary to be
performed are executed in such a manner so as
to perform and plan in advance in the form of
budgets & actual results are compared with
budgetary standards.
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Modern MCSs
 Modern Management control systems use many
techniques such as
◦ Activity-based costing
◦ Balanced scorecard
◦ Business Process Reengineering(BPR)
◦ JIT
◦ Kaizen (Continuous Improvement)
◦ Total quality management (TQM)
◦ Incentive system

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Activity based Costing (ABC)
 Activity-based costing (ABC) is an accounting
method that identifies the activities that a
firm performs and then assigns indirect costs
to cost objects.
 ABC is recognized as an innovative and

potentially valuable costing methodology;

 ABC emerged in response to competitive

pressures that exposed inaccuracies in cost

accounting.
 ABC emerged as a powerful profit analysis

tool.
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ABC (Contd…)
 ABC is an approach that identifies the
activities that a firm/ organization performs
and then assigns indirect costs to products
via those activities.
 This approach or system recognizes the

relationship between costs, activities and

products, and through this relationship, it
assigns indirect costs to products less
arbitrarily than traditional methods

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ABC (Contd…)
 ABC is believed to be the most innovative tool developed in
last century in the field of cost and management accounting
focusing on product costing and management strategy.
 During the late 1980s, Kaplan & Bruns had defined this term
in their book.
 ABC evolved greatly over more than two decades. Evolving
from early experiments in costing,
 ABC emerged as a tool for profit improvement
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ABC (Contd…)
 By the late nineties ABC was used extensively
in diverse industry and government sectors.
 Today, ABC is the emerging foundation of

performance management.
 ABC is an important source of performance

measures.
 These measures are typically found in the

process dimension of a scorecard where

activity costs provide the focal point for
target setting and scoring of goals around
process performance.
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Issues in ABC
 Some argued that ABC was inconsistent with the
principles of continuous improvement and total
quality management as it lacked customer focus,
was not process oriented, did not enhance
organizational learning, and was top down in
approach (i.e., did not involve employees).
 ABC was inconsistent with the theory of
constraints.

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Balanced Scorecard (BSC)
 Balanced Scorecard (BSC) was first introduced
by Kaplan and Norton in 1992, as a model for
implementing strategy.
 The main thrust of the BSC is that it is
generally inappropriate to try to manage
using financial measures of performance
alone.

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BSC (Contd…)
 Financial measures need to be supplemented
by other non-financial performance measures
and also by a range of leading indicators of
future potential performance.
 The BSC is designed to be a strategic
management tool that enables organisations
to translate strategic goals into relevant
measures of performance.
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BSC (Contd…)
 The balanced scorecard translates an
organization’s mission and strategy into a set of
performance measures that provides the
framework for implementing its strategy.
 The balanced scorecard does not focus solely on
achieving short-run financial objectives.
 It also highlights the nonfinancial objectives that
an organization must achieve to meet and sustain
its financial objectives.
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BSC Perspectives
 The BSC assess performance from four
perspectives, namely the:
1. Financial perspective,
2. Customer perspective,
3. Internal business process perspective and
4. Learning and growth perspective.

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BSC Perspectives (Contd…)
1. Financial – the profits and value created for
shareholders;
2. Customer – the success of the company in
its target market;
3. Internal business processes (innovation,
operation and Post-sale services process) –
the internal operations that create value for
customers;
4. Learning and growth - the people and
system capabilities that support operations.

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Issues in BSC
 Smith (2006) in his online article mentioned
that the main problem with BSC is that it does
not provide practical guidance for
deployment, and some executives view it as a
"quick fix" that can easily be installed in their
organizations.

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Issues in BSC (Contd…)
 It is difficult to design robust information
gathering systems that are not susceptible to
manipulation by the managers whose
performance will be assessed by reference to
the reported results.
 The BSC approach may require some
substantial changes in culture within the
organization. 11-
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 Just – in – Time (JIT)
 Just-in-time (JIT) production is demand-pull
manufacturing system in which each
component in a production line is produced
as soon as, and only when, needed by the
next step in the production line. It is also
called lean production.
 Just-in-time (JIT) purchasing is the purchase

of materials (or goods) so that they are

delivered just as needed for production
 (or sales).

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Business Process Reengineering (BPR)

 Reengineering is the fundamental rethinking and redesign of

business processes to achieve improvements in critical
measures of performance, such as
◦ cost,
◦ quality,
◦ service,
◦ speed, and
◦ customer satisfaction.

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Kaizen Costing
 Process of cost reduction during the
manufacturing phase of an existing product.
 Kaizen means continuous and gradual
development by small betterment activities
rather than large or radical improvement made
through innovation or large investments in
technology.
 The idea is that improvement is the goal and

responsibility from CEO to laborers.

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How are Kaizen Costing Goals Met?

 The continual and relentless reduction of non-

value-added activities and costs, the
elimination of waste, and improvements in
manufacturing cycle time all contribute to the
effort.
 In addition, the improvement suggestions and

kaizen efforts of all employees are taken

seriously and implemented when appropriate.
 The result is a continually more efficient and

cost-effective production process.

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Total Quality Management(TQM)
 TQM is the integration of all functions and
processes within an organization in order to
achieve continuous improvement of the
quality of goods and services.
 The goal is customer satisfaction.

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TQM….
 Total Quality Management (TQM) is a holistic
approach to long-term success that views
continuous improvement in all aspects of an
organization as a process and not as a short-
term goal.
 It aims to radically transform the organization
through progressive changes in the attitudes,
practices, systems and structures.​​

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TQM: Origin
 TQM, in the form of statistical quality control,
was invented by Walter A. Shewhart.
 It was initially implemented at Western Electric
Company, in the form developed by Joseph
Juran who had worked there with the method.
 TQM was demonstrated on a grand scale by
Japanese industry

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TQM…
 In the modern context TQM is thought to
require:
◦ participative management
◦ continuous process improvement; and
◦ the utilization of teams’ work.

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End of CH4

 Thank you for your Attention!!!

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