A comprehensive 50 page summary of the Management Control Systems minor taught by Frans Eijpe at Hogeschool van Amsterdam. Covers and explains all essentials, including agency theory, transfer pricing, profit centers, behavioral/motivation theories and different types of management control systems....
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Management Control Systems
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Finance & Control
Management Control Systems
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Class 1
Management control system can be defined as comprising of a combination of control
practices designed and implemented by top managers to increase the probability that lower
level managers and employees will behave in ways consistent with the organisation’s
mission, goals and strategies.
Lack of appropriate management control systems may cause company failure.
Management control systems enable innovative activities using input and output
controls.
Management control has an important “enabling” role in designing control practices that
help maintain or enhance the skill set, job motivation and organisational commitment of
lower-level managers and employees.
Small organisations:
- Little need for systematic, complex and costly management control systems.
- Direct, informal communications.
Large organisations:
- Power to make decisions shared as lower-level managers have the authority to take
decisions on their own.
- Formal control practices required such as budgets, mission statements, transfer
pricing arrangements, performance measures and reward systems.
Top-down functions:
- Top managers implement appropriate control practices so that lower-level managers
and employees have a clear sense of what decisions to take, what results to achieve,
where to lead the people and how to use the resources under their responsibility.
Bottom-up functions:
- Lower-level managers report up the chain on results and performance.
- Enable lower-level managers and employees to acquire the support to develop their
skills, as well as the organisational resources to execute their responsibilities.
Need for control:
Lower-level managers and employees may not automatically understand the mission,
goals and strategies of the organisations, nor how they can contribute to these. For
example, when an organisation aims to achieve a certain amount of yearly profit, this does
not mean that individual managers and employees automatically understand how this profit
should be achieved.
,Lower-level managers and employees may not automatically agree with the
organisational mission, goals and strategies. Managers may have private goals out of
self-interest, such as an inclination to increase holiday and leisure time. For example, a
sales manager is often better informed about local market conditions than higher-level
managers in the firm.
Lower-level managers and employees may not automatically have the resources
needed to act according to the organisational mission, goals and strategies, e.g. manager
personal skills, monetary or physical resources.
Control is often regarded as a basic managerial function, alongside other managerial
functions that are typically labelled planning, organizing, leading and staffing.
,Input controls:
- People (employee selection processes, value statements, employee socialization
processes). As top managers design these controls, management style will have an
influence.
Throughput controls:
- Formal delegation of decision-making responsibility to lower-level managers
(the organisation’s set of rules, the organisational structure).
Output controls:
- Making managers accountable (budgets, financial and non-financial performance
systems, often combined with rewards systems, risk management).
Enabling:
- Lower level manager and employee involvement during the control implementation
process.
- Lower-level manager and employee understanding.
- Communication and visualisation.
- Input controls (value statement).
, Coercive:
- Is management control simply a way for the top managers to ensure obedience?
- Many lower-level managers and employees view certain control practices as
structural devices for top managers to “check” what they are doing, to coerce them
into cooperation, or to force them to do things that they would never do on their free
will.
- Certain rules should never be broken.
The most senior controller may have the job title of chief financial officer (CFO).
CFO is responsible for:
- Guiding top management in their joint effort to design the appropriate mix of input,
throughput and output controls.
- Preparing financial statements and financial reports.
- Preparing and analysing performance reports and budgets.
- Supervising internal audit procedures.
- Developing personnel.
The controller’s relationship to the rest of the organisation:
- Responsible for designing and analysing performance measures and for
recommending actions to managers.
- Monitoring adherence to the spending limitations laid down by the CEO.
Controlling the integrity of the accounting system.
- Safeguarding company assets from theft and fraud.
- Does not make or enforce management decisions.
- Plays an important role in the preparation of long-term strategic plans and budgets.
Responsibility center controllers:
- Work for a division or profit center.
- Dual responsibility: reporting to CFO and center management.
- Short lines of communication, increased expertise in financial management, may
reduce their independence from the responsibility center management, conflict of
interest.
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