1. Management Control Systems
Performance Management
Week 8
Management Control Systems
Chapter 16: Management Control Systems
Colin Drury

2. Learning outcomes
Describe the three different types of controls used in organisations.
Describe the cybernetic control system
Distinguish feedback and feed forward controls
Explain the potential harmful side- effects of results controls
Describe responsibility accounting and controllable principles
Determining how challenging the targets should be
Describe the influence of participation in budget setting

3. Planning and Controlling
Management Decision
Management Accounting System
Planning
Budgets
Feedback
Control
Accounting
System
Performance
Evaluation
Performance
Reports

4. Planning and Controlling
What is planning?
Setting
goals
Predicting
results
Deciding how
to attain goals

5. Planning and Controlling
What is control?
Deciding
and
taking
actions
Deciding on
performance
evaluation
and feedback

6. Planning and Controlling
What are budgets?
They are
quantitative
expressions
of a proposed
plan of action.
They aid in the
coordination
and
implementation
of the plan.

7. Planning and Controlling
What are performance reports?
These are reports that
compare actual results
with budgeted amounts.

8. Controls organization’s activities conform to its plans
Management Control Systems
Controls
• The process of ensuring that an
organization’s activities conform to its plans
and its objectives are achieved.
• No control without plans and objectives (
need to assess the achievement)
• They set, specify & predetermine desirable
behaviour and procedures for employees
to follow.

9. Controls directing employees towards achieving the
Management Control Systems
Controls
• Encompasses all methods and procedures
directing employees towards achieving the
organization objectives
• Many mechanisms are used and
Management Accounting Control System
(MACS) is just one aspect
• Necessary to relate the MACS to the whole
control mechanism in an organisation.

10. Controls • Strategic control • Management control systems
• Different level of control:
• Strategic control
External focus
Emphasis on external competition - internal strengths, weaknesses, and limitations( opportunities and threats)
• Management control systems
Internal focus
Collection of control mechanisms
Aim to influence employee behaviours to achieve organizational objectives

11. Different types of controls
Management Control Systems
Different types of controls
• Action or behavioural controls
• Personnel, cultural and social controls
• Results or output controls

12. Different types of controls
Management Control Systems
Different types of controls
(1) Action or behavioural controls
Actions are the focus of control
Superiors watch and guide actions of
subordinates
Cause and effect relationships are clear and
well understood

13. Action or behavioural controls
Management Control Systems
Action or behavioural controls
Forms:
behavioural constraints - prevention,
restriction, ceilings, authority
pre-action review – scrutiny and approval of
action plans of the individuals being
controlled.
action accountability – work rules,
procedures, codes of conduct, budgets,
rewards and punishment

14. Action or behavioural controls
Management Control Systems
Action or behavioural controls
Effective if actions are simple, desirable v
undesirable, cause-and-effect relationship
are clear, production line
Limited if work is complex, uncertain cause-
and-effect relationship
Need action tracking, good v bad actions
Preventing action ideal – avoid costs of
undesirable behaviour
Detection action – useful if applied timely,
early stop to undesirable behaviour

15. (2) Personnel, cultural and social controls
Management Control Systems
(2) Personnel, cultural and social controls
From “clan controls”
fostering strong sense of solidarity &
commitment towards organizational goals
people immerse in the interest of Company.
high degree of discipline (Japanese pilot) by
dedication of individual to interest of the
whole
Approach adopted to social and personnel
controls

16. • Personnel, cultural and social controls
Management Control Systems
• Personnel, cultural and social controls
Social controls
view as form of corporate culture
Promote people who share committed to
same corporate objectives
Personnel controls
Helping employees to institute self-discipline
and self-control through:
Selection & placement
Training
Job design

17. • Personnel, cultural and social controls
Management Control Systems
• Personnel, cultural and social controls
Cultural controls (same as social controls)
values, social norms, beliefs shared by
members, that influence actions
exercise by one over the others action
(procedures)
methods to shape culture:
Codes of conduct - expectation
Group based rewards – collective achievements
Inter-organizational transfers – better
understanding

18. (3) Results or output controls
Management Control Systems
(3) Results or output controls
Collect and report on information on work effort outcome
Establish results – performance measures
that minimise undesirable behaviour
Establish performance targets
Measure performance
Provide reward and punishment
Effects of desirable v undesirable behaviours
on performance

19. • Results or output controls
Management Control Systems
• Results or output controls
Div manager with current ROI of 30% will reject
project with 25% ROI – while project has +ve
NPV & will benefit organization
Pre-set and clear performance target essential
– quantitative target more motivational
Measurements should sufficiently accurate,
objective, bias free, timely
Effective control – individual whose behaviour
being controlled must be able to control and
influence the result

20. Cybernetic control systems
Management Control Systems
Cybernetic control systems
Traditional management control approach
mechanical model – thermostat control system
The process
The room temperature
Continually monitored by a thermostat
Deviation
From desired temperature – identified by thermostat
Corrective action
Start if output not equal to predetermined level
Thermostat cause input to be adjusted (temperature)
Turn on/off when temperature same/not same with
predetermined level.
© 2000 Colin Drury

21. Management Control Systems

22. Cybernetic control systems
Management Control Systems
Cybernetic control systems
Process is controlled if:
Objectives must exist
Output must be measurable
Compared in terms defined by the objectives.
Predictive model exist – non-attainment can be
identified (feed back)
corrective action evaluated

23. Cybernetic control systems
Management Control Systems
Cybernetic control systems
The thermostat control system
Same as result control system
Performance Standards are determined
Performance monitor by measurement systems
Compare standard with actual
Feedback on variance
Action

24. Feedback and feed-forward controls
Management Control Systems
Feedback and feed-forward controls
Feedback controlled
The cybernetic control system
Actual output monitored against desired performance
Corrective action on deviation
Feed-forward control
Control b4 deviation
Monitor base on predicted/expected future output
Take steps to avoid likely errors
Require predictive model (accurate)
Preferable when significant time lag occurs in
corrective action
Budget is an example
MACS consist of both feed forward and feed-backward
controls

25. Harmful side-effects of controls
Management Control Systems
Harmful side-effects of controls
Occurs when controls motivate employees to engage
in behaviour that is not organizationally desirable (system lack of goal congruence).
2. Results controls:
• 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. ( self measured)
• Can lead to negative attitudes towards the control
system. ( used as punitive )
(What you measured is what you get)

26. Harmful side-effects of controls
Management Control Systems
Harmful side-effects of controls
3. Action controls:
• May discourage creativity because divergence
are treated as abnormal.
4. Cultural controls:
• Lack of goal congruence where group goals do
not coincide with firm goals( lead to sub-
optimisation)
© 2000 Colin Drury

27. Management accounting control systems (MACS)
Management Control Systems
Management accounting control systems (MACS)
• Tend to be the predominant controls in most organizations because:
1 Monetary measure provides a means of aggregating results from dissimilar activities.
2. Profitability and liquidity are essential for company survival.
3. Financial measures enable a common decision rule to be applied.
4. Measuring results in financial terms enables managers to be given more autonomy.

28. Responsibility accounting
Management Control Systems
Responsibility accounting
• Responsibility accounting is a fundamental
part of the MACS.
• Four types of responsibility centres:
1. Cost or expense centres (Two types:standard
cost centres and discretionary cost centres).
2. Revenue centres
3. Profit centres
4. Investment centres

29. • Issues that must be addressed by responsibility accounting include:
Management Control Systems
• Issues that must be addressed by responsibility accounting include:
1. Distinguishing between controllable and non-
controllable items (i.e. the controllability
principle).
2. Determining how challenging the targets should
be.
3. Determining how much influence managers
should have in the setting of targets.

30. The controllability principle
Management Control Systems
The controllability principle
• Principle advocates that it is appropriate to charge to a responsibility centre only
those costs that can be influenced by the manager of the responsibility centre.
• Implemented by either eliminating uncontrollables or reporting controllable and uncontrollable items separately.

31. The controllability principle
Management Control Systems
The controllability principle
•Types of uncontrollable factors:
1. Economic and competitive factors (Because managers can respond to some of these changes most MACS do not shield managers completely from them).
2. Acts of nature (Managers normally protected from them).
3. Interdependencies where outcomes are affected by other units within the organization:
• Pooled interdependencies
• Sequential interdependencies
• Reciprocal interdependencies

32. • Adjustments before the measurement period:
Management Control Systems
• Adjustments for the distorting effects of uncontrollable can be made either before or after the measurement period.
• Adjustments before the measurement period:
1. Specify which budget line items are uncontrollable (eliminate or report separately in performance report).
2. Insurance
• Adjustments after the measurement period:
1. Variance analysis
2. Flexible performance standards (e.g.flexible budgeting and ex post budget adjustments)
3. Relative performance evaluations
4. Subjective performance evaluations

33. Guidelines for applying the controllability principle
Management Control Systems
Guidelines for applying the controllability principle
• Price and quantity of service controllable =
Controllable expense
• Quantity controllable but not price = Manager accountable for difference between (actual quantity × budgeted price) and (budgeted quantity × budgeted price)
• Quantity and price not controllable = Non- controllable
expense
• General principle = Hold managers accountable for
performance areas you want them to pay attention to.

34. Determining how challenging the targets should be
Management Control Systems
Determining how challenging the targets should be
• A clearly defined quantitative goal is likely to motivate higher
levels of performance.
• Level of budget difficulty should be related to task uncertainty.
• Targets must be accepted to motivate managers to achieve
higher levels of performance.
• Literature identifies a theoretical relationship between budget
difficulty,aspiration levels and performance (see figure 16.3
- Drury).
• Hypothesized relationships suggest that budget level that
motivates best performance is unlikely to be achieved most
of the time

35. Arguments in favour of setting highly achievable Budgets
Management Control Systems
Arguments in favour of setting highly achievable
Budgets
• Conflict between planning and motivational
purposes.
• Psychological benefits (e.g.achievement and self-
esteem).
• Shields managers from adverse impact of
environmental changes.
• Alleviates harmful side-effects of controls.

36. Determining how much influence managers
Management Control Systems
Determining how much influence managers
should have in setting standards
• Advantages of participation in the setting of
performance standards:
1. Targets more likely to be accepted
2. Reduces the information asymmetry gap
3. Reduces negative attitudes and dysfunctional
behaviour

37. • Empirical studies provide conflicting evidence on
Management Control Systems
• Empirical studies provide conflicting evidence on
the effectiveness of participation.
• Factors influencing the effectiveness of participation:
1. Personality variables:
• Authoritarianism
• Locus of control
2. Work situation
3. Job difficulty
• Limitations on the positive effects of participation:
1. Budgetee has the opportunity to negotiate lower targets.
2. Depends on personality traits and work situation.
3. A top down approach may be preferable where a large number of similar units exist.
© 2000 Colin Drury