UNIT – III

Management Control System

Definition and Nature of Management Control System:

Management Control System can be defined as “a means of gathering and using information
to aid and coordinate the process of making planning and control decisions through- out the
organisation and to guide the behaviour of its managers and employees. The goal of
management control system is to improve the collective decisions within an organisation in
an economically feasible way.”

Broadly, management control system (MCS) refers to the design, installation and operation of
management planning and control systems.

Different managers perform different responsibilities in an organisation and therefore

different kinds of information are needed by them to manage the activities in their respective
areas. Management control system should be able to develop, gather and communicate
information to management at different levels in the organisation. Also, management control
system should aim to provide financial as well as non-financial information as needed by
different managers. Some examples of financial information are material costs, labour costs,
net profit, investments made etc. Non-financial data are those which are not in monetary
terms such as production units per worker, labour hours, machine hours, time taken to
comply with the customer’s orders, absenteeism. Some information gathered under
management control system may emerge from internal data maintained within the firm. Some
other information required by managers may be gathered from external sources such as
information about competitors’ product.

Management control system includes both formal control system and informal control
system+
. A formal control system requires that an organisation should have clear-cut rules,
procedures, guidelines, plans relating to different managerial aspects. Such things are needed
to guide, direct, motivate the managers and other employees and coordinate their behaviour
to achieve organisational goals. In an organisation, many formal control systems may exist
such as cost accounting system, management accounting system, production engineering
systems, human resource system, quality maintenance system etc. Informal management
control systems are always unwritten and implicit. However, they contribute greatly in the
implementation of business goals and strategies and help the organisation to attain high
degree of motivation and goal congruence. Examples of informal management control
systems are unwritten norms about good behaviour of managers and employees, loyalties,
shared values, organisational culture and ethics, mutual commitments among managers and
employees.

Need / Objectives of Management Control System :

Management Control System is a comprehensive system where a framework is crafted to

control and monitor internal aspects of the business as well as the external behavior
and environment.
The organizations that have adopted a management control system use it for both
nonfinancial and financial measures as both of them leave a direct impact on the business
which needs to be monitored. Here one of the internal factors can include human resources
and the external factor can be industry development, for instance, new regulations for
a product.

An organization adopts the management control system to keep a vigilant eye on

its performance levels. The system helps to communicate the objectives and goals of a
business entity to the managers and ensuring that everyone works towards attaining them as
quickly and effectively as possible.

A major objective of management control is to encourage goal congruence, which means that
as people work to achieve their own goals, they also work to achieve the goals of the
company. People must have incentives to work toward the company’s goals. To accomplish
that objective, managers must assign responsibilities and develop performance evaluation
criteria that motivate employees to work toward the company’s goals. A management control
system is most effective when it establishes evaluation criteria that encourage goal-congruent
behaviour and is implemented through a responsibility accounting system that employees
trust to report their performance.

Characteristics of Management Control Systems:

Management control systems designed in an organisation should fulfil the following

characteristics:

(i) Management control systems should be closely aligned to an organisation’s strategies and
goals.

(ii) Management control systems should be designed to fit the organisation’s structure and the
decision-making responsibility of individual managers.

(iii) Effective management control systems should motivate managers and employees to exert
efforts toward attaining organisation goals through a variety of rewards tied to the
achievement of those goals.

Factors Influencing Management Control Systems:

Major factors influencing the design of Management Control Systems are as follows:

(i) Size and Spread of the Enterprise:

The size and spread of a large firm is bound to be different compared with that of a small
firm. This would certainly determine the content and nature of the control system for each
organisation.

(ii) Organisational Structure, Delegation and Decentralisation:

The extent of decentralization and delegations differs from company to company. Statutes
and conventions govern organisational structure, and the extent of decentralisation and
delegation in all enterprises. For example, the management philosophy of the State Bank of
India is bound to be different from that of the State Trading Corporation. Also, within an
enterprise, the degree of decentralisation and delegation changes from one point of time to
another to meet changed environmental. All these influence management control systems
practiced in organisations.

(iii) Nature of Operations and Divisibility:

The MCS is affected by the nature of operations in terms of divisibility within an
organization. In some companies, the division is as per the products whereas in others it can
be something else. Nature of operations and their divisibility affect management control
systems.

(iv) Types of Responsibility Centres:

Different control systems are needed for the various responsibility centres or sub-systems
within an organisation. Whether the performance of a responsibility centre should be
measured in terms of expenses or profitability or return on investment depends on the type of
responsibility centre. For example, a bank may apply different performance measures to
measure performance of its different branches.
There are transactional differences between branches; some are deposit heavy or advance
heavy, some are with or without safe deposit facilities or foreign exchange transaction. It is,
therefore, not possible to have profit as the sole criteria for performance evaluation of all
branches. Hence, control systems with different criteria of performance should be used for
different sub-units.

(v) People and their Perceptions:

Perceptions of people in the organisation about the likely effects of the control system on
their work life, job satisfaction, job security, promotion and general well-being could differ
across organisations. These considerations will significantly influence the nature and content
of the management control system needed in the organisation and must be duly considered
while designing management control systems.

Functions of Management Control System :

1. Operational Objectives
Management control system outline and document both the long-term and short term goals of
an organization. It could relate to both non-financial and financial performance as well as
social objectives.

2. Operational Policies and Strategies

For achieving operational objectives, management control system outline and document the
policies in place in the organization along with the resources and equipment needed for
implementing proper strategies.

3. Organizational Processes
Tools are necessary to assess the performance of organizational processes. The management
control system helps to gather information and data from numerous sources so that the
management can check what and how it is operating. The system offers a detailed outline of
the policies and strategies.
4. Comparing Performances
The actual essence of the business system is to compare actual performance with the desired
performance of the company. The structures, resources, working, planning, implementing,
documenting and comparing are part of a business and the management control system helps
the company in comparing performances about policies and objectives so that it can take
necessary steps if needed for the growth of the company.

5. Rectifying Deviations
The function of a management control system is to execute an appropriate course of action so
that it can rectify any deviations if found and take corrective measures to bring back the
company on its path of growth and eventual success.

Advantages of a Management Control System :

The MCS is adopted by business entities of all sizes and shapes as it has proved its worth.
Some of the advantages of adopting this system are as follows-

1. The management control system acts as a middleman between the employee and the
manager as it feeds necessary information of the former to the latter.
2. An effective management control system facilitates the gathering of relevant data and
offering the information to management so that operations can continue seamlessly.
3. It communicates the goals of an organization in a precise and clear manner.
4. It ensures that the manager, as well as other employees, understand the particular action
plan to reach company goals.
5. The system helps to generate feedback at every stage and it becomes possible to realign
and make adjustments accordingly.
6. It helps in both forecasting and budgeting.
7. Implementing the system results in better coordination and communication that ultimately
leads to aligning the objectives of a company.