MANAGEMENT CONTROL

SYSTEMS

SANDEEP SAHASRABUDHE
 INTRODUCTION TO CONTROL
FUNCTION

The management process includes:

1. Planning
2. Organizing
3. Staffing
4. Leading
5. Controlling
The control function is concerned with ensuring that planning,
organizing, staffing and leading functions result in the attainment of
organizational objectives.
In other words, control is a tool that helps organizations measure
and compare their actual progress with their established plan.
Supervision is a part of control; it helps identify deviations from the
established standards of performance.
 CONTROL AS A FUNCTION

Control is one of the major functions of the manager at any level

of the enterprise.
It will be readily seen that all the functions of the manager are so
closely inter-related that is difficult in practice to ascertain when
one function ends and another begins.
Planning and controlling are particularly closely related since the
purpose of control is to make sure that plans are accomplished.
Any attempt to control withoout planning would be meaningless
since no one can tell whether his subordinates are doing what he
wishes them to do unless he first knows what his wishes are.
 DEFINITION OF CONTROL
Control is seeing that actual performance is guided towards expected
performance. It is an important function of management and is
related to all other management functions. Control is a comparison
and verification process and with the help of this process, a balance
in the organization activities directed towards predetermined goals
can be achieved and maintained. It helps in taking corrective
measure incase of deviation from the planned course of action.
Once a plan becomes operational, control is necessary to measure
the progress, to uncover deviation from plans and to indicate and
implement corrective action.
The end objective of control, is therefore, to ensure that the people’s
effort in the organization is continuously directed towards the
attainment of pre-determined objectives.
 WHAT IS THE MEANING AND
PURPOSE OF CONTROL?
1. Knowing exactly what work is to be done as to
(a) Quantity
(b) Quality
(c) Time available
2. Knowing what resources are available for doing the work as to
(a) Personnel
(b) Materials
(c) Other facilities
3. Knowing that the work has been done or is being done
(a) with the resources available
(b) within the time available
(c) at a reasonable cost
(d) in accordance with the required standard of quality
4. Knowing immediately of any delays, hold ups or variation as to
(a) what happened
(b) its cause
(c) remedy
5. Knowing what is being done, remove such hindrances as to
(a) who is doing
(b) how is it being done
(c) what is it costing
(d) when will it be completed
6. Knowing about the completed work as to
(a) time finished
(b) quantity
(c) final cost
7. Knowing that the resources are guarded against
(a) in what way
(b) by whom
(c) at what cost
(d) with what provision for periodic inspection
 WHAT ARE THE ELEMENTS
OF CONTROL
There are six elements of control:
(a) Authority
(b) Knowledge
(c) Guidance
(d) Direction
(e) Constraint
(f) Restraint
To be in a position to exercise control, the manager must know
what the situation is, what it should be and how to correct it.
Besides, he must have the authority to take the appropriate
action.
 WHAT ARE THE
CHARACTERISTICS OF
MANAGERIAL CONTROL?
Managerial control has the following characteristics:
1. The control process is cyclical.
2. Control is a function of management; a follow-up action to other
functions of management.
3. Control is a dynamic process.
4. Controlling is often viewed negatively by employees.
5. Control is both, anticipatory and retrospective.
6. Ideally, each person in the business views control as his/her
responsibility. The organizational culture should prevent a person
walking away from a small problem which can be solved.
7. Controlling is related to each of the functions of management.
Controlling builds on planning, organizing and leading.
8. Control by its nature is both restrictive as well as regulative.
However, the modern concept of control is concerned more with
regulation than with restriction as the latter is a very limited form
of activity.
9. The authority to control vests with the higher levels of
management because it is the superior who has delegated
authority to the subordinate to carry out certain activity. Each
higher level of management seeks to ensure that the plans are
adhered to by those over whom they have authority.
10. Controls are a method measuring progress and the present
direction of management thinking is towards the desirability of
self-discipline in this respect.
 IMPORTANCE OF CONTROL
The control function is gaining importance in today’s organizations
due to a number of factors. These factors include:
(a) The need for accountability.
(b) The need to detect environmental changes that significantly
affect organizations.
(c) The growing complexity of present day organizations and the
need to identify operational errors in organizations to avoid
incurring excessive costs.
 BASIC CONTROL PROCESS
When exercising the control function, a manager measures the
performance of an individual, a plan, or a program against certain
pre-determined standards and takes corrective action if there are
any deviations. The process involves the following steps:
1. Determining areas to control: It covers all the areas of business,
namely, policies, procedures, men, money, machines and
equipment, public relations, human relations, research and
development and so on.
2. Establishing standards: Although the temptation may be great,
lowering standards to what has been attained is not a solution to
performance problems. The need to lower standards arises when
they are unattainable due to resource restrictions and factors
external to the business.
3. Measuring performance
4. Comparing performance against standards
5. Recognizing good or positive performance.
6. Taking corrective action when necessary
7. Adjusting standards and measures when necessary.
 REQUIREMENTS OF
EFFECTIVE CONTROL

1. Control should reflect plans, positions and structures

2. They should be understandable.
3. They should be cost-effective
4. Controls should identify only major/important exceptions.
5. Control systems should be flexible
6. Control systems should provide accurate information.
 CHARACTERISTICS OF
EFFECTIVE CONTROL SYSTEMS
Effective control systems have the following characteristics:
1. Control at all levels in the business
2. Acceptability to those who will enforce decisions
3. Flexibility
4. Accuracy
5. Timeliness
6. Cost effectiveness
7. Understanding
8. Balance between objectivity and subjectivity
9. Coordinated with planning, organizing and leading.
 DYSFUNCTIONAL
CONSEQUENCES OF CONTROL
Employee resistance can easily make control efforts dysfunctional.
The following behavior demonstrate means by which the
manager’s control efforts can be frustrated:
1. Game playing
2. Resisting control
3. Providing inaccurate information
4. Following rules to the letter
5. Sabotaging
6. Playing one manager off against another.
 WHAT IS MANAGEMENT
CONTROL

Management control is the process of assuring that resources are

obtained, used effectively and efficiently in the accomplishment of
the organization’s objectives.
The purpose of management control system is to encourage
managers to take actions which are in the best interests of the
company.
 DEFINITION OF
MANAGEMENT CONTROL
Management control can be defined as a systematic effort by
business management to compare performance to predetermined
standards, plans or objectives in order to determine whether
performance is in line with these standards and presumable in order
to take any remedial action required to see that the business and
human and other corporate resources are being used in the most
effective and efficient way possible in acquiring corporate
objectives.
The actual performance is compared with the expected. Depending
upon the evaluation of any variation from standard, some sort of
action is taken.
 MANAGEMENT CONTROL
AND PLANNING
Management control is designed to help a corporation reach its long-
term objectives, hence the exercise begins with corporate planning.
Corporate planning is an intellectual process which requires analysis
of future circumstances, both external (environment) and internal
(company) and the development of an objective, policies, and
programmes within the context of that future.
In order to understand how performance is controlled and control
decisions are made, it is necessary to examine in detail the two major
management control process.
The first is the process followed in solving control problems and in
setting up effective effective controls or a system for effective
control
The second, is the process of controlling the operation and making
 STEPS IN PROBLEM SOLVING/
DECISION MAKING PROCESS

1. Diagnose the situation and review all of the facts in order to find
and define the problem.
2. Examine the problem and review the facts in order to find the key
factors affecting the problem and its solution. This step is
sometimes referred to as ‘premising’.
3. Develop alternative solutions to the problem.
4. Test and evaluate the alternatives to determine the best solution.
5. Construct a clear statement of the solution selected, and convert
the decision into a plan of action.
 FACTORS AFFECTING MANAGERIAL
PHILOSOPHY
Application of the concept of management control requires the
following:
1. Identifying key factors in the business operation which need to be
controlled in order to achieve a given over-all result.
2. Specifying the basis for establishing standards of performance for
each control factor, such as forecasts, budgets, standard costs,
turnover ratios and lead times.
3. Defining the information-accounting and operating data and
statistics that must be accumulated to measure status and
performance.
4. Establishing a reporting structure that identifies performance in
each control area, relate causes and effects, signals, trends, and
identifies results by responsibility under the plan of
organizations.
 MANAGEMENT CONTROL
SYSTEMS

A Management Control Systems (MCS) is a set of inter-related

communication structures that facilitates the processing of
information for the purpose of assisting managers in coordinating the
parts and attaining the purpose of an organization on a continuous
basis. All organizations use control system both formal and informal.
 ELEMENTS OF A CONTROL
SYSTEM
Any control system has four basic elements:
1. A detector or sensor: a device that measures what is actually
happening in the situation being controlled.
2. An assessor: A device for determining the significance of what is
happening; i.e., comparison with some standard or expectation.
3. An effector: A device that alters behavior if the assessor
indicates the need. This device is often called ‘feedback’.
4. A communication network: Devices that transmit information
between the detector and the assessor and between the assessor
and the effector.
 Control Assessor
Device

Detector Effector

Entity
being
controlled

Fig: Elements of control process

 The management control process is more complicated than what
has been described in detectors, assessors, effectors and a
communication system. These are as follows:
1. The standard is not preset.
2. Like controlling an automobile, management control is not
automatic.
3. Management control requires coordination among individuals.
All the separate parts of an organization are required to work in
harmony with each other.
4. The connection from perceiving the need for action and the
action required to obtain the desired result, may not be clear.
5. Control in an organization does not come about solely or even as
a consequence of actions. Much control is ‘self-control’
 SYSTEMS

A system is prescribed way of carrying out activity or activities,

usually the activities are repeated. Most systems are less precise than
computer programs, their instructions do not cover all eventualities
and the user of the system must make judgments when these
eventualities occur. Nevertheless, a system is characterized by more
or less rhythmic, recurring, coordinated series of steps that are
intended to accomplish a specific purpose.
 ACTIVITIES IN
MANAGEMENT CONTROL

Management control involves a variety of activities including:

1. Planning what the organization should do.
2. Coordinating the activities of several parts of the organization.
3. Communicating information.
4. Evaluating information.
5. Deciding what, if any, action should be taken.
6. Influencing people to change their behavior.
 GOAL CONGRUENCE

Managers have personal as well as organizational goals.

Goal congruence means that as far as feasible, the goal of an
organization’s individual members should be consistent with the
goals of the organization itself.
 PURPOSE OF MANAGEMENT
CONTROL SYSTEMS
The purpose of an organization can be analyzed as follows:
1. Mission of the organization, which is directed, first and foremost,
towards meeting needs of customers and society.
2. The term objectives to refer to specific, short-term and
predominantly quantitative pursuits of an organization. We can
term goals to refer to specific long-term pursuits of an
organization.
3. Each part of an organization has a purpose, objectives and goals.
The MCS knots the organization together so that each part, by
exercising autonomy given to it fulfils a purpose that is consistent
with and contributes to the fulfillment of the overall purpose of
the organization.
 Management Control Process
Two aspects involved; namely:
(a) System
(b) Process
System outlines the following:
(c) Authority relationships
(d) Autonomy delegation
(e) Intra-organizational relationships (among sub-units)
(f) Parameters for performance
(g) Rewards and punishments for achievement and non-achievement
(h) Information flow among responsibility centers in the organization
Process involves the managerial processes involved in:
(a) Establishing goals and objectives
(b) Performance appraisal of responsibility centers
(c) Ensuring achievement of targets and budgets by various
organizational sub-units
(d) Follow-up of remedial action plans
(e) Implementation of decisions taken in performance review
meetings
The quality of decisions depends on the feedback and information
provided by the control process.
The effectiveness of the control process depends on the quality of
feedback received and its usage in performance appraisal.
Generally the process of control is as follows:
(a) Review of past performance of various units of the organizations
and targets and specifications for the next year
(b) Periodical review of actual results and its comparison with targets
(c) Identification of areas which require improvement. This also
includes identification of shortfalls and their reasons
(d) Deciding remedial actions
 Designing Management
Controls
There are a few subtleties which must be considered while designing
a control process. These are as follows:
(a) The process of control should be constructive
(b) Standards should be challenging but attainable
(c) Objectives should be expressed in measurable terms
(d) Control should focus on the objectives and key results of an
activity and should be limited in number.
(e) A single person must be assigned the responsibility of achieving
a single objective.
(f) For achieving true control in the current period, projected
performance should be compared with the desired performance.
(g) It is necessary to identify early warning predictors of the
variables that the management seeks to control.
(h) It is better to carry out sampling by direct observation.
(i) An acceptable range of variation for the value of each variable
that has to be controlled.
(j) The severity of the problems should be considered and its causes
should also be reviewed.
 The Control Process Hierarchy

The organization consists of many responsibility centers. This gives

rise to superior-subordinate relationships.
This in turn creates a means-end chain.
The goals of the superior are communicated to the subordinate, who
devises a means to achieve those ends.
These means become ends for the subordinate and facilitate
supervision in the next level.
 The Process
• Superior meets subordinate to review past performance, negotiate
goals, new objectives and targets for key variables for the next
year.
• periodic meetings of superiors and subordinates are conducted to
review performance. In these meetings, areas requiring
improvement are identified.
• In the next review session, the progress on past corrective action is
reviewed, together with current performance to arrive at targets and
actions for the next period.
• Negotiations are made between superior and subordinate regarding
goals and targets.
• All targets should be specific and if possible measurable. They
should be limited in number.
 Formal Control Process and Role Played by
Accounting and Information Handling systems

Responsibility Center Structure

Budgeting

Programming

Operating

Analyzing performance reports

Management Compensation
 Summary of the process
• Determination of standards or norms to be used in measuring
actual results.
• Measurement of actual results vis-à-vis planned results in the
same lines.
• Identification and analysis of the gap between the expected and
actual results.
• Initiating remedial action to correct the shortfall or to provide an
acceptable basis for revising norms.
• Recycling the information relating to the actual performance for
its use in developing future plans.
 Design of the MCS
The MCS is designed by incorporating the following basic steps:-
1. The classification of organization into responsibility centers.
The term responsibility center is used to denote any organization unit
that headed by a responsible manager.
A responsibility center exists to accomplish one or more purposes
known as objectives.
There are four types of responsibility centers:
(a) Revenue centers
(b) Expense centers
(c) Profit centers
(d) Investment centers
2. Fixing up responsibility in accordance with the firm’s
objectives and deciding critical variables/ key factors for each
responsibility centers:
• A critical variable is that aspect of operation at the responsibility
center, which affects the realization of goals and objectives; if it is
carried out ineffectively.
• The point selected for control should be critical
• this facilitates the manager to increase his span management,
effect cost savings and improve communication.
3. Developing information system which facilitates real time
information regarding operations which deviate from desired
results, specially critical variables and relate results to
individual accountability.
The word information means data relevant for a particular purpose.
Information about a critical variable is a must for managerial control
process.
The formal information system should be structured such that it:
(a) Provides regular collection of data regarding each and every
responsibility center.
(b) Yields, processes and summarizes data
(c) Presents relevant information to managers for control as and
when needed.
 Information Systems
All managers require information to perform their managerial
functions of planning and controlling, and make effective decisions.
The information that managers will require will vary depending upon
the nature of work they do and the tasks they seek to accomplish.
The information needs vary as per the organizational hierarchy.

.
Information Systems
The information that originates
within the organization is referred
to as internal information. This type
of information is essential for
managing day-to-day operations.
The information that originates
outside the organization is referred
to as external information. Such
information is required by top level
managers to plan and guide the
organization successfully
Different Levels of Information Systems

Senior level managers

Executive

Info. System

Decision support system

Middle level
Marketing Info system
managers
Office Automation
System

Front end
Transaction Processing System personnel
 Performance Measures

Performance measures are a central component of management

information and reporting system.
It deals with performance measures for different organizational units
and their managers.
 Levels of Performance Measures

1. Customer/ Market Level

2. Total Organizational Level
3. Individual Facility Level
4. Individual activity Level
5. By product
 Performance Reports
Format and Essential Features

1. Tailored to the organization Structure and Controllability:

The performance report should be designed according to the
structure and requirements of the organization.
2. Designed to implement the exception principle in
management:
Performance report must clearly distinguish between controllable
and non-controllable items
3. Repetitive:
Performance should be repetitive; generally on a monthly basis.
4. Adapted to the requirements of the principal user:
According to the level of management, the performance reports
must be altered.
5. Simple, Understandable and report only essential
information:
Report should not be too long and complex. It should be carefully
screened to eliminate all non-essential information.
6. Prepared and presented promptly:
Consistent with the cost of detailed recording record keeping and
reporting, performance reports should be available on a timely
basis.
7. Effective Management Follow-up Procedures:
Effective follow-up procedures form a key aspect of effective
control.
 Types of reports for different
management levels
TOP MANAGEMENT
(i) Balance sheet
(ii) Profit &Loss Statement
(iii) Position of stock
(iv) Disposition of funds
(v) Cash flow statements
(vi) Capital expenditure and financial commitments
(vii) Sales, production and other appropriate statistics
SALES MANAGEMENT
(i) Actual sales compared with budgeted sales
(ii) Standard profit and loss by product for fixing selling prices
(iii) Selling expenses in relation to budget and sales value analysis
(iv) Bad debts and accounts which are slow and difficult to collect
(v) Status report on new doubtful customers
PRODUCTION MANAGEMENT
(i) To buyer: price variations on purchases analyzed by
commodities
(ii) To foremen/ shop leader:
(a) Operational efficiency for individual operations duly
summarized
(b) Labor utilization report and causes of lost time and controlled
time
(c) Indirect shop expenses against standard allowed
(d) Scrap report
SPECIFIC REPORT
These reports are usually prepared at the request of the general
management or at the initiative of the controller. They provide
detailed information regarding areas under control. Some of these
areas are:
(i) Taxation legislation and its effects on profits
(ii) Break-even analysis
(iii) Estimates of the earning capacity of a new project
(iv) Replacement of capital equipment
(v) Special pricing analysis
(vi) Make or buy certain components
(vii) Statement of surplus available for making bonus payment.
 Chapter 2

INFORMATION THEORY
 Meaning of Information

Information is a fact, datum, observation, perception that adds to

knowledge.
Information is obtained either by direct observation or by
communication.
Definition of Information
Information as commonly understood, refer to raw data, organized
data, the capacity of a communication channel etc. Information is
data that has been processed into a form that is meaningful to the
recipient and is real or perceived value in current or prospective
decisions.
 Value of Information
The concept of information has a value and cost. It must be
preserved, protected and utilized like any other valuable asset.
In order to obtain information, additional costs are incurred. These
additional costs may arise from the various surveys, consultancy
services that an organization may resort to, in order to obtain the
desired information.
This approach is used in order to create an optimum information
system in an organization. By an optimum information system, it is
meant that the difference between the expected value of sample
information and the cost of obtaining the information is the
maximum.
 Characteristics of Information
1. Purpose:
Any information that is transmitted, must have a purpose.
Otherwise it shall be categorized as mere data. The purposes
include identifying problems, solving problems, decision-
making, planning and control.
2. Frequency:
The frequency with which information is supplied, affects its
value. It depends on the needs of the receiver of the information.
At times, very frequent information may be considered to be an
interference.
3. Cost:
Cost is a limiting factor in obtaining information. The value of
the information must be evaluated against its cost.
4. Reliability:
Reliability is the degree of confidence that the decision maker
places in the information. More reliable the information, higher is
the cost of obtaining it.
5. Continuous or Discreet:
Information could be in either of the two forms.
6. Noise:
In case of information, ‘noise’ refers to the factors that may dilute
information or add an element of ambiguity to it. Any element
that reduces the clarity of information is considered to be noise.
7. Relevance:
A business information system aims at filtering out unwanted
information and retaining the required and important part. The
information retained has to be in context of the area being
analyzed; otherwise, it will prove to be futile.
8. Precision:
Most messages on a management information system are
measurements and measurements are accurate only within a
range. Thus, to ensure accuracy, the information must be concise
and precise (to the point).
 Types of Information

Classification on the basis of flow of information:

(i) Systematic Information
It flows through a formal system and reaches the end user.
(ii) Unsystematic Information
The flow of information is not through a specified or set
channel. This includes source like media, casual conversations,
etc.
Classification on the basis of source of information:
(i) External Information
Any information that is obtained from sources outside the
organization is termed as external information. These sources
may include reports of trade associations, govt. agencies, etc
(ii) Internal Information
Any information that is obtained from sources within the
organization is termed as internal information. The sources
include employees, company financial statements, etc.
ACCOUNTING INFORMATION
Information can be accounting or non-accounting. More importance
is given to accounting information as the management control
system is built around the accounting core.
OPERATING INFORMATION
Operating information refers to information that is generated in the
course of day-to-day operations. The largest quantity of
information that flows through a business is operating
information. It has been classified into the following streams:
(a) Production stream
(b) Purchasing and materials stream
(c) Payroll stream
(d) Plant & equipment stream
(e) Finance stream
(f) Cost stream
(g) Responsibility accounting stream
(h) Sales and accounts receivables stream
 MANAGEMENT CONTROL INFORMATION
This information is received from the control reports which focus on
actual performance compared with planned performance.
Each reader studies these reports to detect whether or not something
is worth looking into. If nothing significant is noted, the report is set
aside. If some peculiarity is identified, then action is taken.
The information in these reports comes from accounting reports and
other sources .
 CONTROL INFORMATION AND
PROCESS
• Strategic plan implements the goals of organization.
• The strategic plan is converted to annual budget, focussing on
revenues and expenses.
• Responsibility centers perform activities according to rules set for
them.
• Actual results are compared with those in the budget.
• If performance is satisfactory, feedback is given to the
responsibility center in the form of reward or praise.
• If performance is not up to the mark, feedback leads to punitive
measures and revision of the plan.