Question

Present a research paper on management control systems for an actual or hypothetical situation under the following headings: 1.Introduction 2. Overview of the topic (use more references) 3. Development 4. Application 5. Conclusion.

Answer 1

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.

Definition: Management control systems are the formal and informal structures put in place by a business that compare the goals and strategy of the organization against the actual outcomes. In other words, it measure how well the functions of a business and the business as a whole perform and meet objectives. This comparison is then reviewed and used to drive managerial decisions.

What does management control system mean?

In a general sense, these systems are put in place so that an organization is sure to be consistently checking on its performance and goal alignment. One of the main benefits of having control systems is communicating goals and objectives to the business and ensuring that managers in the business understand their role in achieving them.

Most businesses that successfully use MCS use both financial and nonfinancial measures. While it makes sense to use financial measures since the data is usually readily available and most businesses are very conscious about dollars and cents, it is important not to discount nonfinancial measures. Nonfinancial measures significantly impact businesses of all types, and must be monitored.

Almost any business can benefit from management control systems, though they do tend to the be most common in large corporations — particularly companies that incorporate many divisions, offices, and locations. A uniform set of standards and rules can keep all departments in line with each other and working towards the same goals, and they also streamline may of the processes. It can be very difficult for executives to get a good grasp of corporate spending, for instance, if every department has a slightly different accounting system. Similarly, it can be hard to know how well certain employees are doing or how different divisions are performing when it comes to generating new products or ideas without a standard means of measuring and reporting success. Control systems are usually intended to add this bit of stability and predictability to a range of different processes across corporate spaces

Overview:

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.^[1]

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 ^[2]

Anthony & Young (1999) showed management control system as a black box. The term black box is used to describe an operation whose exact nature cannot be observed.

In detail, the MCS comprises three constituent elements:

— a series of planning and control activities targeted at pre-defining first and then monitoring the corporate performances;

— a set of technical-accounting instruments, planned in order to process information supporting the decision-making processes and the planning and control ;

— an information system intended to disclose the information, collected and selectively organized, so as to concentrate the information intended for the managers on the decisive factors of the corporate value. Each component represents a sub-system, every one of which is complementary with regards to all the others and whose sole integrated consideration makes it possible to identify the Management Control System.

Objective:

The primary objective of the MCS is to make all the relevant information associated with the planning and control functions available, so as to facilitate the development of these activities. In other words, the system is aimed at meeting the information requirements of management which depend to a large extent on the critical management processes and on determining factors for the value– the so-called value drivers – which in turn are the consequence of the key success factors and the risk factors of the individual business entity.

The key success factors (hereinafter KSFs) are the elements necessary for operating, at each stage of the Business Model, effectively and with results which are better than the competitors. Due to their relevance for the purposes of the corporate performance, therefore, they must be subject to constant monitoring by management.

Development of Management Control System

Developmental capacity: The MCS is by its very nature subject to a continually evolving process. If, in fact, its function is to provide management with useful information for the governance of the company, it must be able to promptly assimilate the need to extend the monitoring to new business risks or new KSFs identified by management, or, in other cases, to change the degree of attention paid to the same or further improve the gaugability of certain phenomena. In the event that, for example, the company extends or alters its activities by means of the creation or acquisition of new Business Units, the MCS must as a consequence be amended in order to guarantee an adequate monitoring of the new activities. The suitability of the MCS to develop itself and maintain its function within an evolving context is linked to the ability of the system and its structures to process information which is different from that which is normally collected and processed, as well as from the availability of adequate sources of information

Management control systems designed in an organisation should fulfill the following characteristics:

(i) Management control systems should be closely aligned to an organisation’s strategies and goals.

(ii) Management control systems should be designed to fit the organisation’s structure and the decision-making responsibility of individual managers.

(iii) Effective management control systems should motivate managers and employees to exert efforts toward attaining organisation goals through a variety of rewards tied to the achievement of those goals.

Factors influencing the design of Management Control Systems are as follows:

(i) Size and Spread of the Enterprise:

The size and spread of a large firm is bound to be different compared with that of a small firm. This would certainly determine the content and nature of the control system for each organisation.

(ii) Organisational Structure, Delegation and Decentralisation:

Statutes and conventions govern organisational structure, and the extent of decentralisation and delegation in all enterprises. For example, the management philosophy of the State Bank of India is bound to be different from that of the State Trading Corporation. Also, within an enterprise, the degree of decentralisation and delegation changes from one point of time to another to meet changed environmental challenges and the opportunities that these may present. All these influence management control systems practiced in organisations.

(iii) Nature of Operations and Divisibility:

Nature of operations and their divisibility affect management control systems. For example, in the oil industry, for instance, sub-units can not be formed on the basis of products. In many large trading companies, however, divisions can be created on the basis of products. Again, in the paper industry, the different stages in pulp making can not be subdivided for the purposes of management control, though pulp making as a whole can be regarded as a division.

(iv) Types of Responsibility Centres:

Different control systems are needed for the various responsibility centres or sub-systems within an organisation. Whether the performance of a responsibility centre should be measured in terms of expenses or profitability or return on investment depends on the type of responsibility centre. For example, a bank may apply different performance measures to measure performance of its different branches.

There are transactional differences between branches; some are deposit heavy or advance heavy, some are with or without safe deposit facilities or foreign exchange transaction. It is, therefore, not possible to have profit as the sole criteria for performance evaluation of all branches. Hence, control systems with different criteria of performance should be used for different sub-units.

(v) People and their Perceptions:

Perceptions of people in the organisation about the likely effects of the control system on their work life, job satisfaction, job security, promotion and general well-being could differ across organisations. These considerations will significantly influence the nature and content of the management control system needed in the organisation and must be duly considered while designing management control systems.

Application of Management Control System

Few areas where Management Control System can be applied are:

Accounting Methods

Some of the most commonly adopted systems involve accounting. Actually controlling the spending activities within a company is a complex endeavor in most cases, and as such the area is often broken down into the related sections of financial and managerial accounting. Financial accounting generally focuses on internal issues, such as reporting sales costs, while managerial accounting may focus on broader things like determining product costs.

While both areas cover business accounting issues, their methods of application generally differ, and separate systems implemented by a management control system may help executives and corporate officers make sure that reports stay accurate and impartial no matter where they’re coming from or who’s writing them. Managerial accounting is typically responsible for providing management with information on controlling costs and improving the production process. Managerial accountants may also provide cost information on new products, make pricing decisions, and monitor actual and spending.

General financial accounting, on the other hand, more commonly focuses on a company's internal accounting issues. This branch is frequently concerned with payroll and human resource issues that impact employees within the company, including how much is being paid in salaries and bonuses. Accounts in this area may also manage employee costs and reimbursements for things like travel and related expenses.

Incentive Programs

Many of the most direct employee benefits and incentives are financial, often in the form of raises and salary bonuses, but not all are. Control systems can help streamline these non-monetary structures, too. Directors often are responsible for coordinating activities with human resources to create employee incentives for work well done and to hire upper-level managers. When they’re driven by set guidelines and best practices, directors can better analyze production progress, provide appropriate job assignments, and more effectively communicate with all company employees. Executives can also be more confident that everyone in all divisions is using roughly the same standards, which ideally should lead to coherence between departments and employees no matter their area of expertise.

Performance Evaluation and Employee Monitoring

Complete and accurate performance evaluations may be one of the most important methods of determining an employee's strengths and retaining the most competitive and efficient employees. Management control systems allow for flexibility and outside factors to affect the evaluation process. For example, if external extenuating circumstances negatively affect sales or productivity, an evaluation may account for this factor and include it as part of the evaluation process.

Conclusion

A wide variety of terms exists, both within an academic sphere and in company practice, for describing the control activities. Among these, the term “management control” probably represents the most well-known and widespread term in the vocabulary of business management and as such is the most conditioned by subjective interpretations. Moreover, the control procedures have changed over the course of the years showing preference from time to time for solutions targeted at solving the contingent operating needs. Understood in a “traditional” sense, for example, the management control emphasises the results of an economicfinancial nature and only partly takes into consideration two problems emerging in business management: the gauging and handling of the decisive factors underlying the competitive advantage (consider, for example, customer satisfaction); the systematic monitoring of the outside environment. The control which we wish to make reference to in this document is therefore also a strategic type of control which evolves with respect to the “traditional” model so as to interpret and manage to its own advantage the environmental changes, prevent the insurgence of risks for the company and direct the conduct of the organization on a consistent basis with respect to the intentional strategy3 . In other terms, the management control becomes strategic control when it calls, systematically and in advance, the attention of management to the strategic consequences of the daily operations. The management control system, thus extended with regards to its boundaries, can therefore be defined as the structured and integrated system of information and processes used by management to support the planning and control activities. This system must permit senior company management to position the company within the timescale and the competitive space so as to grasp any inadequacies which may possibly be detrimental for the economic, equity and financial results of the company.