MANAGEMENT CONTROL SYSTEM A management control system is a logical integration of management accounting tools to gather and report data and to evaluate performance Purposes of a management control system clearly communicate the organization·s goals ensure that every manager and employee understands the specific actions required of him/her to achieve organizational goals communicate the results of actions across the organization ensure that the management control system adjusts to changes in the environment .

Targets Plan and Execute Feedback and Learning Evaluate. Measures. Report .THE MANAGEMENT CONTROL SYSTEM Set Goals. Reward Monitor.

OBJECTIVES AND PERFORMANCE MEASURES Top management develops organization-wide goals.SETTING GOALS. Top management and critical process managers develop critical success factors and performance measures. They also specify objectives Critical process managers and lower-level managers develop performance measures for objectives. . measures and targets. They also identify the critical processes.

H.R. Fin. Divisional VPs A B C President Staff President VP Division A VP Division B VP Division C . Prod.FORMS OF ORGANIZATIONAL STRUCTURE President Staff Functional VP Marketing VP Production VP Human Resources VP Finance Divisional Matrix Functional VPs Mkt.

expenses) in relation to its invested capital .RESPONSIBILITY CENTERS Set of activities assigned to a manager or a group of managers/employees Based on principle of responsibility accounting which holds that managers should be evaluated on the activities which they can influence or control Expense Centre Area dominated by discretionary expenses such as legal or accounting Revenue Centre Area primarily responsible for generating sales such as a sales office Profit Centre Area responsible for controlling costs and generating revenues Investment Centre Area responsible for income (revenues .

Be affected by actions of managers and employees 5. Relate to the goals of the organization 2. Balance long-run and short-run concerns 3. Be used consistently and regularly . Be used in evaluating and rewarding employees 7. Be readily understood by managers and employees 6.DEVELOPING MEASURES OF PERFORMANCE Good performance measures will 1. Reflect the management of key decisions and activities 4. Be reasonably objective and easily measured 8.


BALANCED SCORECARD Performance reporting approach which links organizational strategy to actions of managers and employees Combines financial and operating measures Links performance to rewards Recognizes diversity in organizational goals Financial Strength Customer Satisfaction Business Process Improvement Organizational Learning .

Chapter 1 Nature Of Management Control Systems .

Transmit information .Detector. Assessor-Comparison with Standard 1. Effectors.BASIC CONCEPTS Control CONTROL DEVICE 2.Communication Network .Behavior alteration if needed 4. Information About what is happening 3.

12 . 4. 3. A detector or sensor is a device that measure what is actually happening in the process being controlled. An effector (feedback) is a device that alters behavior if the assessor indicates the need to do so.1. A communications network consist of devices that transmit information between the detector and the assessor and between the assessor and the effector. 2. An assessor is a device that determines the significance of what is actually happening by comparing it with some standards or expectations of what should happen.

EXAMPLE: YOU ARE DRIVING A CAR Detectors= Your eyes Assessor= Your brain Effector= Your foot Communication network= Your nerves system 13 .

Your brain (assessor) compares actual speed with desired speed (standard: the highest speed is 80 km/hour) to detect a deviation from standard. And. Your eyes (detectors) measure actual speed by observing the speedometer. press down the accelerator if the actual speed (70 km/hour) is slower than standard speed (80 km/hour). Your brain (assessor) directs your foot (effector) to ease up the accelerator if actual speed (90 km/hour) is faster than the standard speed (80 km/hour). your nerves (communication network) form the communication system that transmits information from eyes (detectors) to brain (assessor) and brain (assessor) to foot (effector). 14 .

BOUNDARIES OF MANAGEMENT CONTROL Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals. Management control is the process by which managers influence other members of organization to implement the organization·s strategies. 15 . Task control is the process of ensuring that specified tasks are carried out effectively and efficiently.

MANAGEMENT CONTROL ACTIVITIES Planning Coordinating Communicating Evaluating Deciding Influencing .

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