BUDGETING AND MANAGEMENT CONTROL

Lecture outline:
The concept of control and management control. Types of control How to design an effective MCS Control mechanism

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CONCEPTS OF CONTROLS
Policy/procedure Standards

Control

Feedback

Corrective action

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CONCEPTS OF CONTROLS
Definitions of control

Dominations

Gathering information

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DEFINITION OF MANAGEMENT CONTROL

the process by which managers assure that resources are obtained and used effectively & efficiently in the accomplishment of the organizations objectives

Anthony (1965)

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DEFINITION OF MANAGEMENT CONTROL

A system of organization information seeking & gathering, accountability and feedback designed to ensure that the enterprise adapts to changes in its substantive environment.

Lowe (1971)

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LEVEL OF CONTROLS
The evaluation of operating level employees by mid-level managers Focus : detailed, std performance measures Has an MBE approach i.e variance Providing feedback to employees and their managers about the efficiency of activities being performed. measures and compares shortterm performance to short-run targets or standards.

Operational control

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LEVEL OF CONTROLS

Management control

Evaluation by upper level managers of the performance of mid-level manager Focus : long term, strategic issues MBO approach. Long term objectives are determined and performance is periodically measured against organisations goals

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The Position of Management Control Within an Organization Hierarchy

Strategic Planning

Management Control

Operational Control
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The cycle of Control

Plan

Execute

Correct

Monitor

Evaluate

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DESIGNING MCS

Consider 3 aspects of MCS

Who is interested in evaluating the performance of organization? What is being evaluated? When the performance evaluation is done?

Elements of MCS

Planning Coordinating Communication Evaluation Decision making

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DESIGNING MCS
Technical considerations : Relevance of the information
Accurate Timely Consistent Flexible

Scope of the system

Must be comprehensive and include all activities across value chain of the organisation.
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DESIGNING MCS
MCS components:
Formal MCS: Rules, procedures, policies,

In-Formal MCS:
Shared values, loyalties,

performance measures, incentive plans. E.g.: MAS, Quality system, HR system, info on recruitment, training, absenteeism, info on revenues, costs and income.

mutual commitments among member of organization. Slogan that reinforce values and loyalties

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EVALUATING MCS
To be effective, MCS should: be closely aligned to organizations strategies and goals be designed to fit organizations structure and decision making responsibility of individual managers. motivate managers and employee - HOW ?
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KEY DESIGN CRITERIA FOR EFFECTIVE MCS

The MCS must: permit clear links from planned organization purpose to operational activity. be able to assist managers both when planning purpose & when controlling its achievement. Enable a manager who so wishes to ascertain exactly what output is expected of him & by whom
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TYPES OF CONTROL
Task Control:
The process of developing standard procedures that employees are told to follow. E.g. Result Control: The process of hiring qualified people to do whatever they think best to help the organization achieve its objectives, and using the control system to evaluate the resulting performance E.g.

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Control Mechanisms

Culture

Bureaucracy

Market

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CONTROL MECHANISM
1. Culture - informal social mechanism. - control is achieved through shared and inculcate beliefs. People of the same profession or culture are encouraged to pursue the same objectives and hold same ethics. - will have same goal congruence and less supervision from the superiors. - everybody knew what to do without being told consistently.
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CONTROL MECHANISM
2. Bureaucracy - there is specialization of authorities and hierarchy. - formal route of information and flow of power. - a lot of sequential supervision and consequently expense for proper controls to be implemented.

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CONTROL MECHANISM
3. Market - control is carried out by way of market mechanism. - decision making is based on market price information. - less supervision compared to bureaucracy.

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Major Behavioral Considerations

Embedding the organizations ethical code of conduct into MCS design Using a mix of short and long-term qualitative and quantitative performance measures Empowering employees to be involved in decision making and MCS design Developing an appropriate incentive system to reward performance
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Impact of MCS on Behavior

Many managers try to implement new systems without considering the behavioral implications and consequences of a MCS Negative consequences: Goal congruence may not occur Motivation could be low Employees may be encouraged to engage in dysfunctional behavior
Eg: data manipulation, gaming, budget slack etc
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Ethical Code of Conduct in MCS Design

A set of ethical principles is at the center of many boundary systems MCS should incorporate the principles of an organizations code of ethical conduct MCS that incorporates ethical principles can provide decision makers with guidance as they face ethical dilemmas

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Pressures Affecting a MCS

Managers are often subject to intense pressures from their job circumstances and from other influential organizational members to suspend their ethical judgment in certain situations These pressures include the following requests:
to tailor information to favor particular individuals or groups to falsify reports or test results for confidential information to ignore questionable or unethical practices

Ethics and Management Accountants

Management accountants are guided by the organizations code of ethical conduct and the ethical standards of their professional associations Management accountants often play a significant role in MCS design, which should reflect their professional standards

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Motivation
In addition to fostering ethical behavior, a central issue in MCS design is how to motivate appropriate behavior at work When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation: Direction Intensity Persistence
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Motivation
In addition to fostering ethical behavior, a central issue in MCS design is how to motivate appropriate behavior at work When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation: Direction Intensity Persistence
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Goal Congruence
Goal congruence - the organization and its employees align their respective goals The alignment of goals occurs as employees: Perform their jobs well and are helping to achieve organizational objectives, and Are attaining their individual goals at the same time
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Diagnostic Control Systems

Even if goals are aligned, different types of tasks require different levels of skill, precision, responsibility, initiative, and uncertainty In most situations, managers try to establish systems that they do not have to personally monitor on a regular basis These are called diagnostic control systems
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Interactive Control Systems

If there is a large degree of strategic uncertainty, managers spend much more time monitoring the decisions and actions of their subordinates These are called interactive control systems At the core of both systems are two common methods of control: task and results control

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