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Management Control Systems Chapter 5: Direct & Indirect Control Costs Merchant and Van der Stede: Management Control Systems © Pearson Education Limited.

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Presentation on theme: "Management Control Systems Chapter 5: Direct & Indirect Control Costs Merchant and Van der Stede: Management Control Systems © Pearson Education Limited."— Presentation transcript:

1 Management Control Systems Chapter 5: Direct & Indirect Control Costs Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

2 - 2 - Cost of control... u Benefit of controls –A higher probability that people will both work hard and direct their energies to serve the organization’s interests. u Costs of controls –Direct out-of-pocket costs »Easy to quantify: cost of cash bonuses, internal audit staffs, etc.; »Difficult to quantify: time spend on planning and budgeting activities, on pre-action reviews, etc. –Harmful side-effects –Behavioral displacement –Gamesmanship –Operating delays –Negative attitudes.

3 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Behavioral displacement... u Behavioral displacement occurs when the control system produces / encourages behaviors that are not consistent with the organization’s objectives. u With results controls, it occurs when the results measures are incongruent with the organization’s true objectives; because … »Poor understanding of the desired results: u unwillingness to adapt production schedules to profitable rush orders u sales volumes instead of profits, etc. »Over-quantification: focus solely on quantifiable measures u “Intangibles” are often overlooked. u With action controls, it comes in the form of... »Means-ends inversion u Employees are induced to pay more attention to what they do and lose sight of what they try to accomplish. »Rigid, non-adaptive, bureaucratic behavior

4 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Gamesmanship... u Refers to the actions managers take to improve their performance indicators without producing any positive economic effects. Two main alternatives –Creation of slack resources u Consumption of assets in excess of what is required; u Slack can reduce manager tension and stimulate innovation; u However, it causes inefficient resource allocation; u Depends on information asymmetry, measurement precision, and degree of subordinate participation in setting performance targets. –Data manipulation u Trying to “look good” by fudging the control indicators; u Falsification, i.e., reporting erroneous data; u Data management, i.e., any action to change the reported result: –Through accounting methods (e.g., reserves, write-offs) –Through operating methods (e.g., delaying expenses).

5 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Operating delays... u Mostly associated with action controls, notably, delays caused by: »Pre-action reviews; »Behavioral constraints. »Bureaucratic organizations. u When fast action is important, operational delays can be quite costly.

6 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Negative attitudes... u Job tension, conflict, frustration, resistance, etc. »Are often coincident with many harmful behaviors, such as, gaming, lack of effort, absenteeism, turnover, etc. u Action controls often “annoy” professionals, but also lower-level personnel … »Sometimes difficult to avoid: e.g., it is difficult for people to enjoy following a strict set of procedures for a long period of time... u Results controls... » Lack of employee commitment to the performance targets; u targets are too difficult, not meaningful, not controllable. » Performance evaluations are perceived as being unfair; » The controls are implemented in a people-insensitive, non- supportive way.

7 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Keep a behavioral focus... u There is no one best form of control... –What works best in one company (or area within a company), may not work in another... –e.g., accounting personnel vs. design engineers. u Therefore, it is important to keep the focus on the people involved, because … –It is their responses that will determine the success or failure of the control system ! u The benefits of controls are derived only from their impacts on behaviors !


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