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Management Control Systems

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

2 Cost of control ... Benefit of controls Costs of controls
A higher probability that people will both work hard and direct their energies to serve the organization’s interests. 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 Behavioral displacement ...
Behavioral displacement occurs when the control system produces / encourages behaviors that are not consistent with the organization’s objectives. With results controls, it occurs when the results measures are incongruent with the organization’s true objectives; because … Poor understanding of the desired results: unwillingness to adapt production schedules to profitable rush orders sales volumes instead of profits, etc. Over-quantification: focus solely on quantifiable measures “Intangibles” are often overlooked. With action controls, it comes in the form of ... Means-ends inversion 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 Gamesmanship ... Refers to the actions managers take to improve their performance indicators without producing any positive economic effects. Two main alternatives Creation of slack resources Consumption of assets in excess of what is required; Slack can reduce manager tension and stimulate innovation; However, it causes inefficient resource allocation; Depends on information asymmetry, measurement precision, and degree of subordinate participation in setting performance targets. Data manipulation Trying to “look good” by fudging the control indicators; Falsification, i.e., reporting erroneous data; 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 Operating delays ... Mostly associated with action controls, notably, delays caused by: Pre-action reviews; Behavioral constraints. Bureaucratic organizations. When fast action is important, operational delays can be quite costly.

6 Negative attitudes ... Job tension, conflict, frustration, resistance, etc. Are often coincident with many harmful behaviors, such as, gaming, lack of effort, absenteeism, turnover, etc. 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 ... Results controls ... Lack of employee commitment to the performance targets; 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 Keep a behavioral focus ...
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. 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 ! The benefits of controls are derived only from their impacts on behaviors !

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