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TOPIC 3TOPIC 3 BUDGETING AND BUDGETING AND

MANAGEMENT CONTROLMANAGEMENT CONTROL(Part 1)(Part 1)

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Lecture outline:

The concept of control and management control.

Types of control How to design an effective MCS Control mechanism

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CONCEPTS OF CONTROLSCONCEPTS OF CONTROLS

ControlControl

- a policy or procedure that facilitates - a policy or procedure that facilitates organization to ensure that its goal and organization to ensure that its goal and objectives are met.objectives are met.

- - by setting a standard, received a feedback by setting a standard, received a feedback on actual performance and take a corrective on actual performance and take a corrective action whenever the actual performance action whenever the actual performance deviates significantly from the planned deviates significantly from the planned performance.performance.

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CONCEPTS OF CONTROLSCONCEPTS OF CONTROLS

Definitions of control There are 2 main themes;

• There is the idea of control as domination

• There is the idea of control which emphasizes the gathering of information to monitor & regulate activities

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Operational controlOperational control The evaluation of operating level employees by mid-The evaluation of operating level employees by mid-

level managerslevel managers Focus : detailed, std performance measuresFocus : detailed, std performance measures Has an MBE approach – i.e varianceHas an MBE approach – i.e variance

Management controlManagement control evaluation by upper level managers of the evaluation by upper level managers of the

performance of mid-level managerperformance of mid-level manager focus : long term, strategic issuesfocus : long term, strategic issues MBO approach. Long term objectives are MBO approach. Long term objectives are

determined and performance is periodically determined and performance is periodically measured against org’s goalsmeasured against org’s goals

LEVEL OF CONTROLSLEVEL OF CONTROLS

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Operations / operational control:Operations / operational control:

-- is the process of providing feedback to is the process of providing feedback to employees and their managers about the employees and their managers about the efficiency of activities being performed.efficiency of activities being performed.

-- it measures and compares short-term it measures and compares short-term performance to short-run targets orperformance to short-run targets or standards.standards.

OPERATIONAL CONTROLOPERATIONAL CONTROL

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The Position of Management Control The Position of Management Control Within an Organization HierarchyWithin an Organization Hierarchy

Strategic Planning

Management Control

Operational Control

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Anthony (1965)Anthony (1965)- - the process by which managers assure the process by which managers assure that resources are obtained and used that resources are obtained and used effectively & efficiently in the effectively & efficiently in the accomplishment of the organization’s accomplishment of the organization’s objectivesobjectives

Lowe (1971)Lowe (1971)- - A system of organization information A system of organization information seeking & gathering, accountabilityseeking & gathering, accountability and and feedback designed to ensure that the feedback designed to ensure that the enterprise adapts to changes in its enterprise adapts to changes in its substantive environment. substantive environment.

MANAGEMENT CONTROLMANAGEMENT CONTROL

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consider 3 aspects of MCconsider 3 aspects of MC Who is interested in evaluating the performance Who is interested in evaluating the performance

of organization?of organization? What is being evaluated?What is being evaluated? When the performance evaluation is done?When the performance evaluation is done?

elements of MC :elements of MC : PlanningPlanning CoordinatingCoordinating CommunicationCommunication EvaluationEvaluation Decision makingDecision making

DESIGNING MCSDESIGNING MCS

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MCS components:MCS components: Formal MCS Formal MCS

• rules, procedures, policies, performance measures, rules, procedures, policies, performance measures, incentive plans; example :incentive plans; example :* mgt accounting system * quality system * mgt accounting system * quality system * info on costs, revenues, income* info on costs, revenues, income* human resource system* human resource system* info on recruitment, training, absenteeism* info on recruitment, training, absenteeism

Informal MCSInformal MCS• aspect such as shared values, loyalties, mutual aspect such as shared values, loyalties, mutual

commitments among member of organization.commitments among member of organization.• slogan that reinforce values and loyalties…slogan that reinforce values and loyalties…

DESIGNING MCSDESIGNING MCS

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To be effective, MCS should:To be effective, MCS should: be closely aligned to organization’s be closely aligned to organization’s

strategies and goalsstrategies and goals be designed to fit organization’s be designed to fit organization’s

structure and decision making structure and decision making responsibility of individual managers.responsibility of individual managers.

motivate managers and employeemotivate managers and employee

- HOW ?- HOW ?

EVALUATING MCSEVALUATING MCS

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KEY DESIGN CRITERIA FOR KEY DESIGN CRITERIA FOR EFFECTIVE MCSEFFECTIVE MCS

The MCS must:The MCS must: permit clear links from planned organization permit clear links from planned organization

purpose to operational activity.purpose to operational activity. be able to assist managers both when be able to assist managers both when

planning purpose & when controlling its planning purpose & when controlling its achievement.achievement.

Enable a manager who so wishes to Enable a manager who so wishes to ascertain exactly what output is expected of ascertain exactly what output is expected of him & by whomhim & by whom

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2 main types of control used :2 main types of control used : Task controlTask control Result controlResult control

Management accountant must be aware Management accountant must be aware of how the balance between the various of how the balance between the various controls can be managed.controls can be managed.

TYPES OF CONTROLTYPES OF CONTROL

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Task control and Result ControlTask control and Result Control Task control: Task control:

- is the process of developing standard is the process of developing standard procedures that employees are told to procedures that employees are told to follow.follow.

Result control:Result control:- is the process of hiring qualified people to is the process of hiring qualified people to

do whatever they think best to help the do whatever they think best to help the organization achieve its objectives, and organization achieve its objectives, and using the control system to evaluate the using the control system to evaluate the resulting performanceresulting performance

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1.1. Culture Culture-- informal social mechanism.informal social mechanism.-- control is achieved through sharedcontrol is achieved through shared and inculcate beliefs. People of the and inculcate beliefs. People of the same profession or culture are same profession or culture are encouraged to pursue the same encouraged to pursue the same objectives and hold same ethics.objectives and hold same ethics.-- will have same goal congruence andwill have same goal congruence and less supervision from the superiors. less supervision from the superiors.-- everybody knew what to do everybody knew what to do without being told consistently.without being told consistently.

CONTROL MECHANISM

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CONTROL MECHANISMCONTROL MECHANISM2.2. Bureaucracy Bureaucracy

-- there is specialization of authoritiesthere is specialization of authorities and hierarchy. and hierarchy.-- formal route of information and formal route of information and flowflow of power. of power.- - a lot of sequential supervision and a lot of sequential supervision and

consequently expense for properconsequently expense for proper controls to be implemented. controls to be implemented.

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CONTROL MECHANISMCONTROL MECHANISM

3.3. Market Market-- control is carried out by way ofcontrol is carried out by way of market mechanism. market mechanism.-- decision making is based on decision making is based on marketmarket price information. price information.-- less supervision compared to less supervision compared to bureaucracy.bureaucracy.