financial control systems - unit 1

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Financial Control

SystemsC - 502


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Objective

To build awareness regarding various

control measures and their application inmanagement decisions.

Suggested Readings:

1. Merchant, Kenneth A, ModernManagement Control Systems, Pearson

2. Allen Bandt R. et al, Cases in ManagementAccounting and Control System, Pearson

3. Russel, Contemporary Aspect of Cost andManagement Accounting, Pearson

4. Horngren, Charles T., Introduction toManagement Accounting, Pearson


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Management

Management is the process oforganising resources and directingactivities for the purpose of achievingorganisational objectives.

Organization consists of a group ofpeople who work together to achievedesired results. Organizationconsists of hierarchy of managerswith a top of - CEO. Each Manageris superior and a subordinate. Theleaders of the organisation arecollectively named as management.


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Control

Control is the regulating, restraining and also aunifying action in an organisation that brings unity outof the diverse activities performed by various unitsand subunits.

It is the system of ensuring that actual state of affairsis in line with the desired state of affairs.

A control system has 4 essential elements:1. Detector or sensor identifies what is actuallyhappening in the process2. Assessor or selector determine the significanceof what is happening by comparing information onwhat is actually happening with what is expected.3. Effector or feedback device that alters behavior ifthe assessor indicates the need for doing so.4. Communication network transmits informationbetween detector, assessor and effector


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Examples of different controlsystems.

Thermostat

It has thermometer inside whichmeasures temperature and acts as a

detector. It continuously reads thetemperature and the assessorcompares the readings with the pre-set standard. As the temperature

drops or rises the effector switchesoff according to the communicationreceived through the network.


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Human body temperature

It is an automatic control device. Humanbody temperature is controlled at 98.6 Fthrough sensory nerves called detectors. If

the body temperature increases ordecreases, the assessor (brain), comparesinformation received from detector with thestandard of 98.6 F, the effectors aremuscles and organs which react eg,

sweating, panting, shivering. Nerves act ascommunication network.

This is self regulatory system.


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Motor Car DriverA motor car driver running his car at thespeed of 55 km per hour. The driverobserves the current speed, from thespeedometer and compares it with thestandard. A careful driver will automaticallypress brake to control the speed. Acareless driver may not bother at all. Aspeedy driver may even accelerate tohigher speed.

Thus the control of a human being is neverautomatic. His decision will depend on hispersonality, attitude and behavior.


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In short, control is

Automatic, like in thermostat

Self regulatory like humanbody temperature.

Discretionary, like motor car

driver.


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Systems

A system is a prescribed way ofcarrying out a set of activities.

It consists of a structure and aprocess.

- Structure outlines the nature of theorganisation and how it is headed byresponsible managers indicatingtheir authority, responsibility and

accountability.- The process indicates the methodsof communication and interaction,which may be formal and informal.


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Management Control

Management Control is the process bywhich managers influence other membersof the Organization to implement theorganizations strategies.

Management Control involves1. Planning

2. Coordinating

3. Communicating

4. Evaluating5. Deciding

6. Influencing people


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MANAGEMENT CONTROLSYSTEMS According to Prof. John Dearden :

MCS is the process by which managers assure thatresources are obtained and used effectively andefficiently in the accomplishment of the organizationgoals.

EFFECTIVEThe maximum output is obtained with the minimum input.

DOING THE RIGHT THINGS

EFFECIENCYThings are being done well. DOING THE THINGS RIGHTEfficiency is necessary to attract, hold and motivate individual.


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MANAGEMENT CONTROLSYSTEMS

According to Prof. Joseph AMaciariello & Calvin J Kirby :

MCS is a set of interrelated

communication structures thatfacilitates the processing of

information for the purpose of assistingmanagers in coordinating the parts

and attaining the purpose of anorganization on a continuous basis.


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MANAGEMENT CONTROLSYSTEMS

This is a logical integration of techniques

for gathering and using information.

Planningand control

Motivating Evaluating


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Management Control Systems

Set goals,measures,

targets

Monitor,report

Evaluate,reward

Planand

execute

Feedbackand

learning


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MCS Management control is the process by which

managers influence other members of theorganization to implement the organizationsstrategies.

Management Control Activities includes:- Planning : what the organization should do- Coordinating the activities of several partsof the organisation- Communicating information- Deciding what, if any, action should be taken

- Influencing people to change their behavior The purpose of management control is to

ensure that strategies are carried out so thatthe organizations objective are attained.


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Effects of MCS on Behavior

MCS involves managers taking steps tohelp ensure that the organization'semployees do what is best for theorganisation.

Controls are necessary to guard against

the possibilities that people will dosomething the organisation does not wantthem to do or fail to do something theyshould.

Unfortunately, individuals are some times

unable or unwilling to act in theorganization's best interest, so managerstake steps to guard against the occurrenceof undesirable behaviors and encouragedesirable behaviors.


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Causes of ManagementControl problems

Lack of Direction

Some people perform poorly becausethey do not know what the organisationwants from them.

Motivational ProblemsIndividuals objectives and organization's

objectives do not naturally coincide;individuals are self-interested.

Personal LimitationDue to lack of requisite intelligence,

training, experience, stamina, or knowledgefor the tasks at hand.


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Good MCS

Good Control means aninformed person can bereasonably confident that no

major, unpleasant surprises willoccur.

It allows for some probability of

failure

Good control v/s Perfect control


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Characteristics of Good MCS

Future oriented no unpleasantsurprises in the future.

Objectives driven things whichthe organisation seeks to attain.

Not always economically driven should be implemented only ifthe expected benefits exceedthe costs.


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Control problem avoidance

Activity Elimination

Managers can avoid the controlproblems associated with aparticular activity by turning overthe potential profits andassociated profits, to a third

party.

Example : General Motors


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Automation

Managers can sometimes use computers,expert systems and other means ofautomation to reduce their organisations

exposure to some control problemsOnce programmed, these are absolutelyconsistent in their treatments oftransactions and they never have anydishonest or disloyal motivations.

In managerial situations, automationprovides only a partial control systemmainly due to cost and feasibility factor


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Centralisation

Extreme form of centralisation, inwhich all the key decisions are made

at the top management levels, arecommon in small businesses whichare run by a strong leader, who isalso the founder.

However, in most organisations, it isnot possible to centralize all criticalactivities, and other control solutionsare necessary.


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financial control systems - unit 1

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