MACS- Module 1-Basic Concepts

Management Control - Definition

• Management Control is the process by which managers
influence other members of the organization to implement the
organisation’s strategies.
• It involves PLANNING, CO-ORDINATING, COMMUNICATING,
EVALUATING, DECIDING AND INFLUENCING.

• Elements of MCS:
• Strategic Planning Budgeting
• Resource Allocation Performance Review
• Evaluation Reward
• Responsibility Center Allocation
• Transfer Pricing

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 MACS- Module 1-Basic Concepts
• Strategy Vs Structure—Which first?

• In the fast changing environment, Strategies emerge

through experimentation and adhoc processes.
Execution advantage to be seen

• Successful companies, which implemented better

MCS—New York Times, 3M Corporation, Dell
computer, Walmart, Cisco systems, Southwest
Airlines

• Not successful companies: Tyco, Global crossing,

Enron
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 MACS- Module 1-Basic Concepts
Elements of control system: Examples –any human activity.

• A detector or sensor—knowing what is happening

• Assessor- comparing actual happening with what is expected
• Effector-feedback suggesting altering behaviour
• Communication network among all the three

• Managers have personal as well as organizational goals. Goal

congruence means goals of individual members to be consistent
with the organistional goals.

• Organisation structure—Today’s controls and tomorrow’s strategies

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 MACS- Module 1-Basic Concepts
Strategy formulation: It is the process of deciding on the goals of the
organization and the strategies for attaining these goals.
Management Control is the process of implementing them.

Example of Successful moves:

• 3M:
• Jim McNerney CEO 3M—between 2000 to 2003:
• He emphasized on fast growing sectors like health care, display and
graphics
• He instituted six sigma
• He established metrics for new products and introductions
• R & D allocation on the basis of potential growth opportunities

Indian Example: Turnaround of Indian Bank during the period of Ms

Ranjana Kumar

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 MACS- Module 1-Basic Concepts
Impact of internet on management control:

• Instant access

• Multi-targetted communication

• Costless communication

• Ability to display images

• Shifting power and control to the individual

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 MACS- Module 1-Basic Concepts
GOALS: (and objectives)
• Corporations being artificial persons, CEO with other management
members decide goals. Sometimes goals set by founders last for long.
Goals are timeless, they continue till they are changed and the
change is rare.
Eg Ford Motors, Gen Motors, Eastman Kodak and Walmart

• Strategies are plans to achieve the goals. (course of action)

• Goals are long term and long lasting. Objectives are the set plans to
achieve the goals. Eg. Profitability—consistent is the goal. Planning to
achieve a certain profit level is an objective.

• However, many authors do not make much difference

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 MACS- Module 1-Basic Concepts
GOALS: (and objectives)
Important Goals:
• Profitability
• (Revenues MINUS Expenses) / Revenues = Profit margin
percentage
• Revenues/Investment = Investment Turnover
• (Revenues MINUS Expenses) / Revenues * Revenues/Investment
=Return on Investment
• Maximising shareholder value (optimizing/satisfaction)
• Risk—Eg. South Asian Crisis 1996-98
• Multiple Stakeholder approach
• Size/Class of organization
• Quantum or Percentage?

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 MACS- Module 1-Basic Concepts
STRATGEGIC KEY VARAIBLES IN MCS
• Strategic key variables are commonly referred to as strategic
factors, key factors and indicate to the management the necessity
for prompt action.

• Both Corporate and Business Levels analyse Strategic factors. Both

see Key strategic issues and generic options

Some of the strategic factors are:

• Right mix of industry Existential purpose
• Vision, Mission
• Objectives
• Single industry orientation or diversification (related diversification or
unrelated diversification)
• Cost strategies (low cost, differentiation)
• Period—short term,medium term and long term

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 MACS- Module 1-Basic Concepts
MANAGEMENT BY OBJECTIVES:
• MBO is a comprehensive managerial system that integrates many
key managerial activities in a systematic manner and that is
consciously directed toward the effective and efficient achievment of
organizational and individual objectives. It includes HRP career
planning, reward systems, budgeting and other managerial
activities.

Peter F Drucker suggests the following:

• Market standing Innovation
• Productivity Physical and financial resources
• Profitability, Service
• Managerial performance and development
• Worker performance and attitude
• Public responsibility
• Quality

In short, it is a comprehensive goal driven, success oriented

management system
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 MACS- Module 1-Basic Concepts
Management Control:
• Management control is the process by which managers
influence other members of the organisation to implement
the organisation’s strategies.
Activity End Product
• Strategy formulation Goals, strategies and
policies
• Mangement Control Implementation of
strategies
• Task control Efficient and Effective
performance of individual

tasks
Management control in a broader sense includes all the three
levels of activities. Hence it includes task control
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 MACS- Module 1-Basic Concepts
Task Control:

• Task Control is the process of ensuring that specified tasks are

carried out effectively and efficiently.
• It is transaction oriented—individuals performance culminating into
organizational performance. Even Machines (conmputers) are run
by human beings.
• Task control means bringing an out-of control condition back to the
desired state. Hence it is an optimal or appropriate decision
• Examples:
• No of units ordered by customers
• No of units of raw material purchases and consumption
• Components used in manufacture
• Employee productivity
• Amount of cash used
• Procurement, production scheduling, logistics, quality control and
cash management are good examples.

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 MACS- Module 1-Basic Concepts
Task Control Vs Management Control:
• Task Control is scientific and quantifiable

• Management control consists of many task controls and

extends to qualitative aspects ( including behaviour
aspects of managers)

Operations Control:
• Operations control systems ensure that day to day actions are going
according to the plans. These systems are applied in production as
well as service organizations.

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 Cost Center: Profit Center and Investment Centers:
Cost Center:
• Cost center is a location, person or item of equipment for which cost
is to be ascertained and used for control purposes

Types of Cost Centers:

• Personal and Impersonal Cost centers:
• Personal Cost Center: Eg Sales Manager, Works Manager
• Impersonal Cost Center: Eg Location or item of equipment,
production department, a machine or a group of machines
• Production and Service cost center:
• Production Cost center: Conversion of raw material to finished
product
• Service Cost Center: Anciliary to render service to other production
and service cost center EG Maintenance department, Power house
(electricity generation)
• Process Cost Center: A cost center in which a specific process or
sequence of operations is carried out

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 Cost Center: Profit Center and Investment Centers:

Profit Center:
• It is a sub-unit of an organization to which both revenues and costs
are assigned, measured and controlled. Segmental performance is
also evaluated. Both inputs and outputs are measurable in financial
terms.
• It helps to assess the managerial performance

Investment Center:
• Investment Center is a department or an area of responsibility,
where a manager controls revenue and associated costs, assets
and liabilities. His/her performance is assessed largely on the base
of the ROI achieved.

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 Sources for cost information:
Cost unit, Classification of Costs and Cost analysis

Cost Unit:

• Cost unit is a unit of product or unit of service or time to which costs

are ascertained by means of allocation, apportionment and
absorption. Examples: Fabrication Job, Road Construction Contract,
An Automobile Truck, a table, one load of sand for construction,
Hours spent by a lawyer in a case. Cost units pass through the cost
center. Direct and indirect costs of the cost center are charged to
the units of production by an absorption rate.

Classification of Costs: Basis of Classification:

• Financial nature Elements of cost
• Function of cost Control classification
• Cost behaviour
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 Sources for cost information:
Cost unit, Classification of Costs and Cost analysis
Financial Nature:
• Financial Costs—Cash and non-cash costs Egs of Non-cash costs—are
depreciation, opportunity cost etc

• Non-Financial Costs:--Not directly traceable—Eg motivation and morale

of the employees, age composition of the workforce

Elements of Cost: Direct Cost (traceable cost) and Indirect Cost(common

cost—all overhead costs—indirect material, indirect labour and indirect
expenses)

Functional costs: Production cost, admnistration cost, selling and

distribution cost, Research and Development Costs

Control Classification (Accounting Classification): Prime Cost, Works Cost,

Cost of Production, Cost of Sales or Total Cost and Selling Price.

Behaviour of cost: Fixed costs and Variable Costs (also semi-variable

costs—Telephone charges—rentals are fixed whereas the consumption
rates are variable)
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 Cost Analysis for Management decision-making:

Management accountant should have a clear idea regarding the

items and types of costs required to analyse and decide
specific business problems and effect of such costs on
alternative solution.

Management accountant uses tools and techniques like marginal

costing, break even analysis, budgetary control, standard
costing. In addition, he uses funds flow, cash flow, ratio
analysis in decision making.

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