Note Topic 3 (A)

BKAM 3033 TOPIC 3BKAM 3033 TOPIC 3

The concept of control and management control

Types of control

How to design an effective MCS

Control mechanismBKAM 3033 TOPIC 3BKAM 3033 TOPIC 3

Control

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

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

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There is the idea of control as domination (impose our will upon others through power & authority to achieve our goal & objective)

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

(cost mgmt & cost control)

Control focus: - strategy implemented as planned - results produced are those intended


Operational controlThe evaluation of operating level employees by

mid-level managersFocus : detailed, std performance measuresHas an MBE approach – i.e variance

Management controlevaluation by upper level managers of the

performance of mid-level managerfocus : long term, strategic issuesMBO approach. Long term objectives are

determined and performance is periodically measured against org’s goals

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LEVEL OF CONTROLSLEVEL OF CONTROLS


Operations / operational control:

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

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

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OPERATIONAL CONTROLOPERATIONAL CONTROL


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Strategic Planning

Management Control

Operational ControlBKAM 3033 TOPIC 3BKAM 3033 TOPIC 3

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

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

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MANAGEMENT CONTROLMANAGEMENT CONTROL


Merchant (1998): 1. Strategic control-external focus (how firm can compete in the industry)

2.Management control - internal focus (how to influence employee behavior in desireable

/positive ways as to increase probability of objectives be achieved)


Consider 3 aspects of MCWho is interested in evaluating the performance

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

Elements of MC :PlanningCoordinatingCommunicationEvaluationDecision making

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DESIGNING MCSDESIGNING MCS


MCS components: Formal MCS

rules, procedures, policies, performance measures, incentive plans; example :* mgt accounting system

* quality system * info on costs, revenues, income* human resource system* info on recruitment, training, absenteeism

Informal MCS *aspect such as shared values, loyalties, mutual commitments among member of organization. *slogan that reinforce values and loyalties…

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DESIGNING MCSDESIGNING MCS


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

strategies and goalsbe designed to fit organization’s

structure and decision making responsibility of individual managers.

motivate managers and employee - HOW ?

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EVALUATING MCSEVALUATING MCS


The MCS must:permit clear links from planned organization

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

purpose & when controlling its achievement.Enable a manager who so wishes to ascertain

exactly what output is expected of him & by whom


1. Action (or behavioural) controls 2. Personnel and cultural (or clan and social) controls 3. Results (or output controls)

Action (or behavioural) controls Consist of:

• Behavioural constraints• Preaction reviews• Action accountability

Focus should be on prevention rather than detection controls.


Social, personnel and cultural controls:

Social controls involve selection of people who have been socialized into adopting particular norms of behaviour.

Personnel controls build on employees natural tendencies to control themselves (Emphasis is on selection, training and job design).

Cultural controls represent a set of values, social norms and beliefs that are shared by members of an organization and that influence their actions.

In recent years there has been a greater emphasis on cultural controls in the form of employee empowerment.


Results or output controls:• The focus is on reporting information about

the outcomes of work effort.• Results controls involve the following stages:

1. Establishing performance measures that minimize undesirable behaviour.

2. Establishing performance targets.3. Measuring performance.4. Providing rewards or punishments.



• • Results controls resemble a cyberneticResults controls resemble a cybernetic (mechanical(mechanical

control system.control system.• • Cybernetic systems involve feedback controls (actionsCybernetic systems involve feedback controls (actions

after the events) but ideally control should be based oafter the events) but ideally control should be based onn

control actions before the events.control actions before the events.

2 main types of control used :Task controlResult control

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

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TYPES OF CONTROLTYPES OF CONTROL


Task control: - is the process of developing standard procedures

that employees are told to follow.

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

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

- Tie/link reward/punishment to success/failure- To motivate desirable behavior thus measures

must be precise, objective, timely, and understandable


1. Occurs when controls motivate employees to engage in behaviour that is not organizationally desirable (i.e.system leads to a lack of goal congruence).

2. Results controls:

• Encourages individuals to focus only on what is measured, regardless of whether it is organizationally desirable

• Focuses mainly on quantifiable and easily measurable items.

• Subject to data manipulation.

• Can lead to negative attitudes towards the control system.

3. Action controls:

• May discourage creativity

4.Cultural controls:

• Lack of goal congruence where group goals do not coincide with firm goals –resulted in desirable result


Advantages and disadvantages of controls:Personnel/cultural controls

• Few harmful side-effects

• Inexpensive to operate

• Appropriate only in certain circumstances

Action controls

• Direct link between control mechanism and the action.

• Measurement problems do not apply.

• Not feasible where cause-and-effect relationships are not

well understood or easily observable.

• Best suited to stable situations.

Results controls

• Can be applied where knowledge of what actions are

desirable is lacking.

• Focus is on outcomes (individual autonomy is not restricted).

• Subject to limitations described on sheet 16.3.


1. Culture- informal social mechanism.- control is achieved through shared and

inculcate beliefs. People of the same profession or culture are encouraged to pursue the same objectives and hold

same ethics.

- will have same goal congruence and less supervision from the superiors.

- everybody knew what to do without being

told consistently.2222

CONTROL MECHANISM


2. Bureaucracy- there is specialization of authorities

and hierarchy.- formal route of information and flow

of power.- a lot of sequential supervision and consequently expense for proper controls to be implemented.


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


A major role for control systems is to motivate behavior congruent with the desires of the organization since human interests and motivation can vary significantly

MCS – includes MACS and othersMACS – collection of practices such as

budgeting, std costing, periodic performance reporting, balance scorecard – result controls


Embedding the organization’s ethical code of conduct into MCS design

Using a mix of short and long-term qualitative and quantitative performance measures

Empowering employees to be involved in decision making and MCS design

Developing an appropriate incentive system to reward performance


Many managers try to implement new systems without considering the behavioral implications and consequences of a MCS

Negative consequences:Goal congruence may not occurMotivation could be lowEmployees may be encouraged to

engage in dysfunctional behavior Eg: data manipulation, gaming,

budget slack etcBKAM 3033 TOPIC 3BKAM 3033 TOPIC 3

A set of ethical principles is at the center of many boundary systems

MCS should incorporate the principles of an organization’s code of ethical conduct

MCS that incorporates ethical principles can provide decision makers with guidance as they face ethical dilemmas


Managers are often subject to intense pressures from their job circumstances and from other influential organizational members to suspend their ethical judgment in certain situations

These pressures include the following requests:

to tailor information to favor particular individuals or groups

to falsify reports or test resultsfor confidential informationto ignore questionable or unethical practices


Management accountants are guided by the organization’s code of ethical conduct and the ethical standards of their professional associations

Management accountants often play a significant role in MCS design, which should reflect their professional standards


In addition to fostering ethical behavior, a central issue in MCS design is how to motivate appropriate behavior at work

When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation:DirectionIntensityPersistence


Goal congruence - the organization and its employees align their respective goals

The alignment of goals occurs as employees:Perform their jobs well and are helping

to achieve organizational objectives, and

Are attaining their individual goals at the same time


Even if goals are aligned, different types of tasks require different levels of skill, precision, responsibility, initiative, and uncertainty

In most situations, managers try to establish systems that they do not have to personally monitor on a regular basis

These are called diagnostic control systems


If there is a large degree of strategic uncertainty, managers spend much more time monitoring the decisions and actions of their subordinates

These are called interactive control systems

At the core of both systems are two common methods of control: task and results control


Documents

Note Topic 3 (A)