http://highered.mheducation.com/sites/0077133269/student_view0/chapter1/
multiple_choice_quiz.html Multiple choice questions.
Week 1
Formal control: guidelines in manuals, rules, procedures, separation of tasks, budgeting,
performance evaluation (output/results controls, action/behaviour controls)
Informal control: Chat at the coffee machine, norms, values and culture.
Management control system: A system which helps in realizing organizational goals by influencing
the behaviour of people in the organization, so that they optimally contribute to the realizing of the
goals and strategy. ALSO: all arrangements, tools and techniques which are used to realize the
strategy and goals of an organization and thus safeguard its continuity.
Roles of a budget are: planning, accountability. Budgets act as a guideline for activities and
responsibilities.
Chapter 1: Management control and management
control systems
A manager are the employees who are responsible for choosing the organization’s direction and for
implementing its chosen strategies.
Management control is defined as: the systematic process by which the organization’s higher
managers influence the organizations lower level managers to implement the organizations
strategies. So management is about Sturing en richting geven. The ultimate goal of management
control is to implement organizational strategies. A few typical control system elements are:
budgeting, resource allocation, performance measurement, evaluation and reward, responsibility
centre allocation and transfer pricing.
Performance pressure may incentive executives to commit fraud in reporting performance levels that
have no economic substance. Smaller companies have less need for complex management systems
because the communication is easier. If top management fails to implement the right management
controls, lower level management wont know what decisions to make or to follow what
organizational strategy. There is top-down management and bottom up management.
Top down management tells the lower managers to: what decisions to take, what results to achieve
and where to lead the employees and how to use the resources.
Bottom up management: Tells the higher managers: what decisions will be taken or have been
taken, what the results are and for the future.. etc…
Three reasons that hinder automatic organizational goal achievement by decentralized managers:
- Decentralized managers do not automatically understand the goals and strategies set by top
management, nor can they contribute to these goals and strategies.
The top management needs to give the lower management a clear sense of direction.
- Decentralized managers do not automatically agree with organizational goals and strategies
set by the top management.
,Not enough motivation to reach the goals. Some managers have private goals, which are not
compatible with the companies goals. Self-interest which leads to use of organizational resources for
private reasons. They can also disagree with the goals set by the top management because the
decentralized manager often has better information about the local conditions of the firm. The
lower manager also has more specialized skills.
- Decentralized managers do not automatically have the resources needed to act with
organizational goals and strategies set by top management.
It is important to ensure that decentralized managers have the skills and organizational resources
they need to perform in line with the goals and strategies.
Human behaviour in organizations: management control is about influencing the behaviour of
humans in organizations in such a way this behaviour becomes goal congruent. Goal congruent is
alignment of goals between company and employees. Goal congruent is not reached because of the
lack of understanding, agreement and lack of resources about the goals and strategies.
Managers have three kinds of managerial motivation:
- Managers are motivated by goals that they are asked to achieve
Goals need to be achievable and agreed on.
- Managers are motivated by the rewards that they may get from their efforts
Variable pay has the tendency to lose their attraction over time. The variable pay also leads to
internal competition. And third, good performance often shows up much later than the decision
which caused the good performance. This will make managers short-term performance led. A pro for
variable pay is the control over labour costs. With good performance comes higher variable pay but
with bad performance there is also lower variable costs.
- Managers are motivated by the social context in which they work in.
It is also important to take the informal processes into account, like work ethic, management style
and culture, in organizations because successful implementation of organizational strategies
requires good informal processes. The social context consists of external and internal factors.
External factors are norms and desirable behaviour.
Cultural norms are very important because it explains why two organizations, with identical formal
management control systems, may vary in terms of actual control. And second culture can explain
why organizations are harder to change.
Chapter 9: Planning and budgeting
Budgeting is about planning, accountability, process and ritual. Planning is about what the company
is going to do and coordinates the plan through the whole organization. Once the budget has been
set, the managers are made accountable for their budget, which they have to fulfil. It consists of
monitoring the process and motivation to reach the budget. Process is about reflection and
communication. Budgeting might make managers sit down for a moment and reflect on matters.
Once they know the problem, they also need to communicate with others to solve the problem.
Once the budgeting process is a ritual, it will become a habit.
, A long-range strategic plan is a break down of the strategic goals into a concrete plan. This plan can
be directly formulated as a direct input for the budget. The strategic plan narrows the strategic goals
so that it can be implemented more easily into the budgets.
Top-down or bottom-up budgeting:
With top-down budgeting the top management sets the budget for lower levels. With bottom-up
budgeting the lower levels participate in the budget amounts.
Top-down budgeting is quite fast. A drawback is that employees have had little input into the
process which leads to lack of commitment to a budget.
Bottom-up budgeting is generates more commitment and more realistic budgeting. But there is a
change the budgets will be set at a low level so they can be reached easily.
There is also a third budgeting method called iterative budgeting. Iterative budgeting starts bottom-
up and then the top management checks and makes a new proposal. This method makes the lower
levels more involved in the process, and at the same time involve the top management and their
intentions. This method takes a really long time. Another drawback is that the top management has
the last word.
Gaming: The behaviour that does not necessarily have the purpose to improving the control in an
organization, it can also help individual goals or department goals. Exposure: showing a better
budget, showing higher revenues and or lower costs. Showing lower revenues and higher costs
Hedging.
There are also a few critiques against budgeting:
- Budgets create internal gaming and myopia: only care about their own budget not the
whole company and only care about the short term.
- Budgeting is too resource consuming: Time and resources.
- Calendar year is not a good time period: 12 months of budgeting is to long of a period.
- Impossible to make a reliable budget these days: Things change fast in the world.
- The budget makes the company less flexible: Flexibility is killed by budgeting.
Alternatives to budgeting:
Rolling forecasts: The forecasts overlap each other every 3 months. So the first forecast is made for
12 months. The next forecast is made after 3 months for the following 9 months and 3 months extra.
And this continues every 3 months. The rolling forecast also builds less on the real budgeting but also
more on KPI’s.
Paper Merchant & Otley 2007
Important paragraphs: 1, 3, 4, 5.1, 5.2, 5.3, 5.4.
Merchant & Otley distinguish four kinds of control: Results, action, personnel and cultural controls.
Results controls: control of employees on the basis of certain specified results / performances to
inform employees as to what result areas are important. (financial budget, customer satisfaction,
effective development of employees).
