Presentation on theme: "Management Control Systems"— Presentation transcript:
1Management Control Systems Performance ManagementWeek 8Management Control SystemsChapter 16: Management Control SystemsColin Drury
2Learning outcomesDescribe the three different types of controls used in organisations.Describe the cybernetic control systemDistinguish feedback and feed forward controlsExplain the potential harmful side- effects of results controlsDescribe responsibility accounting and controllable principlesDetermining how challenging the targets should beDescribe the influence of participation in budget setting
3Planning and Controlling Management DecisionManagement Accounting SystemPlanningBudgetsFeedbackControlAccountingSystemPerformanceEvaluationPerformanceReports
4Planning and Controlling What is planning?SettinggoalsPredictingresultsDeciding howto attain goals
5Planning and Controlling What is control?DecidingandtakingactionsDeciding onperformanceevaluationand feedback
6Planning and Controlling What are budgets?They arequantitativeexpressionsof a proposedplan of action.They aid in thecoordinationandimplementationof the plan.
7Planning and Controlling What are performance reports?These are reports thatcompare actual resultswith budgeted amounts.
8Controls organization’s activities conform to its plans Management Control SystemsControls• The process of ensuring that anorganization’s activities conform to its plansand its objectives are achieved.• No control without plans and objectives (need to assess the achievement)• They set, specify & predetermine desirablebehaviour and procedures for employeesto follow.
9Controls directing employees towards achieving the Management Control SystemsControls• Encompasses all methods and proceduresdirecting employees towards achieving theorganization objectives• Many mechanisms are used andManagement Accounting Control System(MACS) is just one aspect• Necessary to relate the MACS to the wholecontrol mechanism in an organisation.
10Controls • Strategic control • Management control systems • Different level of control:• Strategic controlExternal focusEmphasis on external competition - internal strengths, weaknesses, and limitations( opportunities and threats)• Management control systemsInternal focusCollection of control mechanismsAim to influence employee behaviours to achieve organizational objectives
11Different types of controls Management Control SystemsDifferent types of controls• Action or behavioural controls• Personnel, cultural and social controls• Results or output controls
12Different types of controls Management Control SystemsDifferent types of controls(1) Action or behavioural controlsActions are the focus of controlSuperiors watch and guide actions ofsubordinatesCause and effect relationships are clear andwell understood
13Action or behavioural controls Management Control SystemsAction or behavioural controlsForms:behavioural constraints - prevention,restriction, ceilings, authoritypre-action review – scrutiny and approval ofaction plans of the individuals beingcontrolled.action accountability – work rules,procedures, codes of conduct, budgets,rewards and punishment
14Action or behavioural controls Management Control SystemsAction or behavioural controlsEffective if actions are simple, desirable vundesirable, cause-and-effect relationshipare clear, production lineLimited if work is complex, uncertain cause-and-effect relationshipNeed action tracking, good v bad actionsPreventing action ideal – avoid costs ofundesirable behaviourDetection 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 controlsFrom “clan controls”fostering strong sense of solidarity &commitment towards organizational goalspeople immerse in the interest of Company.high degree of discipline (Japanese pilot) bydedication of individual to interest of thewholeApproach adopted to social and personnelcontrols
16• Personnel, cultural and social controls Management Control Systems• Personnel, cultural and social controlsSocial controlsview as form of corporate culturePromote people who share committed tosame corporate objectivesPersonnel controlsHelping employees to institute self-disciplineand self-control through:Selection & placementTrainingJob design
17• Personnel, cultural and social controls Management Control Systems• Personnel, cultural and social controlsCultural controls (same as social controls)values, social norms, beliefs shared bymembers, that influence actionsexercise by one over the others action(procedures)methods to shape culture:Codes of conduct - expectationGroup based rewards – collective achievementsInter-organizational transfers – betterunderstanding
18(3) Results or output controls Management Control Systems(3) Results or output controlsCollect and report on information on work effort outcomeEstablish results – performance measuresthat minimise undesirable behaviourEstablish performance targetsMeasure performanceProvide reward and punishmentEffects of desirable v undesirable behaviourson performance
19• Results or output controls Management Control Systems• Results or output controlsDiv manager with current ROI of 30% will rejectproject with 25% ROI – while project has +veNPV & will benefit organizationPre-set and clear performance target essential– quantitative target more motivationalMeasurements should sufficiently accurate,objective, bias free, timelyEffective control – individual whose behaviourbeing controlled must be able to control andinfluence the result
22Cybernetic control systems Management Control SystemsCybernetic control systemsProcess is controlled if:Objectives must existOutput must be measurableCompared in terms defined by the objectives.Predictive model exist – non-attainment can beidentified (feed back)corrective action evaluated
23Cybernetic control systems Management Control SystemsCybernetic control systemsThe thermostat control systemSame as result control systemPerformance Standards are determinedPerformance monitor by measurement systemsCompare standard with actualFeedback on varianceAction
24Feedback and feed-forward controls Management Control SystemsFeedback and feed-forward controlsFeedback controlledThe cybernetic control systemActual output monitored against desired performanceCorrective action on deviationFeed-forward controlControl b4 deviationMonitor base on predicted/expected future outputTake steps to avoid likely errorsRequire predictive model (accurate)Preferable when significant time lag occurs incorrective actionBudget is an exampleMACS consist of both feed forward and feed-backwardcontrols
25Harmful side-effects of controls Management Control SystemsHarmful side-effects of controlsOccurs when controls motivate employees to engagein 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 measurableitems.• Subject to data manipulation. ( self measured)• Can lead to negative attitudes towards the controlsystem. ( used as punitive )(What you measured is what you get)
27Management accounting control systems (MACS) Management Control SystemsManagement 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.
28Responsibility accounting Management Control SystemsResponsibility accounting• Responsibility accounting is a fundamentalpart of the MACS.• Four types of responsibility centres:1. Cost or expense centres (Two types:standardcost centres and discretionary cost centres).2. Revenue centres3. Profit centres4. 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 controllabilityprinciple).2. Determining how challenging the targets shouldbe.3. Determining how much influence managersshould have in the setting of targets.
30The controllability principle Management Control SystemsThe controllability principle• Principle advocates that it is appropriate to charge to a responsibility centre onlythose costs that can be influenced by the manager of the responsibility centre.• Implemented by either eliminating uncontrollables or reporting controllable and uncontrollable items separately.
31The controllability principle Management Control SystemsThe 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 analysis2. Flexible performance standards (e.g.flexible budgeting and ex post budget adjustments)3. Relative performance evaluations4. Subjective performance evaluations
33Guidelines for applying the controllability principle Management Control SystemsGuidelines 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- controllableexpense• General principle = Hold managers accountable forperformance areas you want them to pay attention to.
34Determining how challenging the targets should be Management Control SystemsDetermining how challenging the targets should be• A clearly defined quantitative goal is likely to motivate higherlevels of performance.• Level of budget difficulty should be related to task uncertainty.• Targets must be accepted to motivate managers to achievehigher levels of performance.• Literature identifies a theoretical relationship between budgetdifficulty,aspiration levels and performance (see figure 16.3- Drury).• Hypothesized relationships suggest that budget level thatmotivates best performance is unlikely to be achieved mostof the time
35Arguments in favour of setting highly achievable Budgets Management Control SystemsArguments in favour of setting highly achievableBudgets• Conflict between planning and motivationalpurposes.• Psychological benefits (e.g.achievement and self-esteem).• Shields managers from adverse impact ofenvironmental changes.• Alleviates harmful side-effects of controls.
36Determining how much influence managers Management Control SystemsDetermining how much influence managersshould have in setting standards• Advantages of participation in the setting ofperformance standards:1. Targets more likely to be accepted2. Reduces the information asymmetry gap3. Reduces negative attitudes and dysfunctionalbehaviour