Management Control System Assignment

Management Control Systems Assignment

I hereby certify that I am the sole author of this report. All assistance I have
received from outside sources have been documented in the report, as well
as, listed after the conclusion under References. This report was created
exclusively by me specifically for the Management Control Systems module
at The Hague University of Applied Sciences.

Student: Otto Martinez

Student Number: 10062289
Cohort: MFMC FT14-15
Module: Management Control Systems
Lecturer Name: Mr. Egbert Willekes
Report submission date: 1/15/2015
Total number of pages of submitted work: 8
University: The Hague University of Applied Sciences

Table of Contents
1.0

Management Control Systems Introduction......................................................1

2.0 Chapters Summaries and Critical Reflections.......................................................2

2.1 Chapter 2 Summary.......................................................................................... 2
2.2 Chapter 2 Critical Reflection..............................................................................2
2.3 Chapter 3 Summary.......................................................................................... 3
2.4 Chapter 3 Critical Reflection..............................................................................4
2.5 Chapter 5 Summary.......................................................................................... 5
2.6 Chapter 5 Critical Reflection..............................................................................5
2.7 Chapter 6 Summary.......................................................................................... 6
2.8 Chapter 6 Critical Reflection..............................................................................7
3.0 Conclusion............................................................................................................ 8
4.0 Works Cited.......................................................................................................... 9
5.0 Disclaimer.......................................................................................................... 10

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1.0 Management Control Systems Introduction

Management

Control

Systems

Performance

Measurement,

Evaluation and Incentives Kenneth A. Merchant and Wim A. Van der

Stede, Prentice Hall, Edinburgh Gate, Harlow, Essex CM20 2JE, England,
www.pearson.com\uk, 2012, 815pp ISBN 978-0-273-73761-2
Management Control Systems chapter two introduces the reader to
results controls. This type of management control system purpose is used to
motivate employees to do what is best for the organization. According to
Merchant et al. results controls are an indirect form of control since they do
not focus explicitly on employees actions or decisions (Merchant & Stede,
2012). Additionally, the authors also mention that result controls are the
major element of management control systems (MCS) used in almost all
organizations (Merchant & Stede, 2012). Results controls are complemented
by action and personnel/cultural controls which are the focus of chapter
three. In contrast to results controls, action controls are the most direct type
of management control because the focus on the employees actions to
ensure that they behave properly (Merchant & Stede, 2012). Chapter three
also discusses personnel and cultural controls. This type of controls is
referred to as soft controls and according to the authors this type of
management control encourages the following two positive forces: self and
mutual monitoring (Merchant & Stede, 2012). Chapter five moves away from
the controls themselves and centers on the costs that companies incur when
they implement a management control. This chapter briefly explains the
direct costs a company incurs. However, it focuses more on the indirect costs
of implementing MCS since they mention that indirect costs overshadow
direct costs (Merchant & Stede, 2012). The authors argue that the four most
general

harmful

side

effects

of

MCS

are:

behavioral

displacement,

gamesmanship, operating delays, and negative attitudes (Merchant & Stede,

2012). Lastly, chapter six discusses a general framework that can be used to
design or improve MCSs (Merchant & Stede, 2012). Chapter six describes
how to address the following questions:

What is desired of implementing or improving MCSs?

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What is likely to happen when implementing or improving MCSs?

What MCSs should be used?

How tightly should each MCS be applied?

The chapter concludes with observations about common management

control issues faced when designing or improving MCSs (Merchant & Stede,
2012).

2.0 Chapters Summaries and Critical Reflections

2.1 Chapter 2 Summary
As mentioned earlier chapter two discusses results controls. The first
result control mentioned in the chapter is Pay for performance this is a
motivation

concept

in

which

an

employee

will

receive

additional

compensation if their team, department, or company reach a certain target.

It is also mentioned that pay for performance may only lead to short term
gains and greed. Result controls create meritocracies because they reward
the most talented and hard working employees. Result controls influence
actions or decisions because they cause employees to be concerned about
the consequences of their actions and decisions. One important aspect of
result controls is that they empower employees. Empowerment refers to
increasing the social, political and economic strengths of individuals and it
often involves developing employees self confidence in their own capacities.
Therefore, well designed result control systems can help obtain the desired
result. Consequently, they are commonly used for controlling the behaviors
of individuals at different levels of the organization. These types of MCSs are
particularly useful to control employees with decision authority and are
necessary for the implementation of decentralized forms of organizations
with

largely

autonomous

entities

or

responsibility

centers.

Hence,

decentralization or delegation and the design of incentive systems are two

critical organizational design choices known as organizational architecture.
The implementation of results controls involves the following steps: define
the dimension(s) on which the results are desired, measure performance on
the chosen dimension, set attainable performance targets for each of the
measures and provide rewards to motivate employees to achieve their goals.
Nevertheless, result controls are not always used effectively. For them to
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work properly the following conditions need to be present: organization is

capable of determining the desired results in the controlled area, employees
being controlled have significant influence over the result they are being
held accountable for, and the organization has the capacity to measure the
result effectively. Additionally, result measures need to be precise, objective,
timely, understandable, and cost efficient.
2.2 Chapter 2 Critical Reflection
Result controls dominate in importance in the vast majority of
organizations. On the one hand I feel that this is linked to monetary
compensation. On the other hand, I believe that this type of control is so
important because of their empowering aspect. They motivate individuals to
develop confidence in their own capacities. To illustrate, a little over a year
ago I had a supervisor who would tell me this is the problem we have and
this is the result I want is up to you how you get to the end result. This
delegation of responsibility helped me gain confidence in myself and
motivated me to achieve the desired results. However, I also agree with the
authors argument that result controls are not effective in every situation.
Result controls will not work if there is no knowledge of the desired results, if
one does not has the ability to affect the desired results, and if the result
cannot be measured effectively. A few years ago I was working for a
company that provided outsourcing services to Japanese giant Sony. I
provided technical support for Sony televisions and I was evaluated based on
if I was able to resolve the customers problem. However, this was not
always possible if the television was burned or damaged beyond repair, or if
the television was out of warranty there was nothing I could do. Regardless,
we would ask the customer to fill a form where they stated if the problem
had been resolved. Even if the customer was happy with the service and I
had done my best the customer will still mark that the problem had not been
resolved. Consequently, when I was evaluated on my results this would
affect me. This frustrated me and many of my colleagues greatly because we
felt that we did not had the ability to affect the desire result, and that the
result was not being measured effectively.

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2.3 Chapter 3 Summary

Chapter three discusses action, personnel, and cultural controls. This
type of controls supplement result controls and in some cases they may even
replace them. This form of controls aims to make it more likely that the
employees act in the best interest of the organization. First, action controls
ensure that employees perform or do not perform certain actions that can be
beneficial or harmful for the organization. Action controls are commonly used
but are not always effective. They are only practical when managers know
what actions are desirable and which actions are not and the action controls
ensure that the undesirable actions do not take place. Second, personnel
controls make it more likely that employees perform desired tasks on their
own because they derive a sense of self realization and satisfaction from
performing

tasks

well.

Lastly,

cultural

controls

shape

organizational

behavioral norms and encourage employees to monitor and influence each

others behavior. These controls are part of almost all MCSs and they can be
said to be the dominant form of control. Action controls include behavioral
constrains. These controls make it very difficult and sometimes impossible
for employees to carry out actions that they shouldnt. These controls can be
applied physically (physical constrains) or administratively (separation of
duties). Action controls also include preaction reviews, action accountability,
and redundancy. Action controls work because they address the one or more
of the three basic control problems. The three basic control problems are:
lack of direction, motivational problems, and personal limitations. Moreover,
action controls are also useful because they can serve to either prevent or
detect undesirable behavior. Action controls are effective only when the
following two conditions exist: organizations can determine what actions are
(un)desirable and when the organizations can ensure that the (un)desirable
actions (do not) occur. In the case of personnel controls they can be
implemented through: selection and placement, training, and job design and
resourcing. Selection and placement refers to finding the right person to do a
particular job, and job design and resourcing refer to giving the employees a
good work environment and the necessary resources to increase the
probability that the job will be done properly. Lastly, cultural controls are built
on shared traditions, norms, beliefs, values, ideologies, attitudes, and ways
of behaving. Organizational cultures can be shaped in different ways such as
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codes of conduct, group rewards, and intra-organizational transfers, physical

and social arrangements. Personnel and cultural controls are capable all of
the control problems but not each type of control is effective at addressing
each type of problem. Personnel and cultural controls can have distinctive
advantages over results and actions controls. They are useable in almost
every setting, their costs are often lower than more obtrusive forms of
controls, and they might produce fewer harmful side effects.
2.4 Chapter 3 Critical Reflection
Action, personnel and culture

controls

are part

of

almost

all

management control systems. I believe that action controls are important

because they ensure the proper behaviors of the people on whom the
organization must rely by focusing on their actions. I believe that
administratively constrains such as separation of duties are particularly
important. In separation of duties more than one person is required to
complete a task. To illustrate, in accounting specific duties such as accounts
receivable,

accounts

payable,

authorizing

payments,

recording

of

transactions and checking the transactions must be segregated to prevent

fraud and error. In regards to personnel controls I believe that they are one of
the most important types of controls. To illustrate, we spend a great part of
our time at work therefore it is important that we are happy and motivated
by our jobs. Here is where selection and placement plays such an important
role. Almost two years ago I was hired in the company where I am currently
working. The department where I was working was quite impressive and the
people where really nice. However, I was not the right person for that job and
after a few months when the excitement of the new job had passed I was
feeling unmotivated. I was then given the opportunity to move to the
department where I am currently working and I love it. Here we can notice
that is the same company with the same MCSs the environment was great,
the people where great, I received proper training however I was just not the
right person for the job. Finally, cultural controls are extremely important
more so if you desire to work in different countries and large international
companies. I have had the opportunity and the blessing to work on three
different large multinational companies located in three different countries.
Needless to say the cultures are very different and sometimes a cultural

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control such as a code of conduct would help me understand what behavior

was expected of me.
2.5 Chapter 5 Summary
Management controls systems have many benefits. However, they
come at a cost. These costs are known as direct costs and indirect costs.
Direct costs of MCSs include monetary costs required to design and
implement the MCS. To illustrate, bonus payments, salaries and wages for
audit staff. Indirect costs on the other hand are the costs that are not directly
accountable to the MCS. Indirect costs of MCS can be caused by any number
of harmful side effects such as behavioral displacement, gamesmanship,
operating delays, and negative attitudes. Behavioral displacement occurs
when MCSs produce and encourage behaviors that are not consistent with
the organizations objectives. Behavioral displacement can occur with results
controls,

actions

controls,

personnel

controls,

and

cultural

controls.

Gamesmanship refers to the actions that employees take to improve their

performance indicators without producing any positive economic effects for
the organization. The two major forms of gamesmanship are slack creation
and data manipulation. Operating delays are unavoidable consequences of
preaction review types of action controls and some of the forms of behavioral
constraints such as requiring multiple signatures from managers. Even when
MCSs are well designed they can lead to negative attitudes such as job
tension, frustration, and resistance to the control. These types of attitudes
can be harmful and lead to absenteeism and turnover. Negative attitudes
can be produced by results controls action controls.
2.6 Chapter 5 Critical Reflection
As many other things in life things that yield positive benefits come
with a cost and management control systems are not the exception. This
chapter briefly discusses direct costs since the authors argue that indirect
costs dwarf direct costs. However, I believe that both are very important.
Therefore, I would have liked if the authors had given a bit more of attention
to direct costs as well. In regards to indirect costs I also believe that they are
very important and if not taken seriously they can really hurt an
organizations performance. One of the indirect costs mentioned by the
authors is behavioral displacement due to results controls. This happens
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when an organization measures are incongruent with the organization true

objective. This takes me back to what I mentioned earlier of when I provided
technical support for Sony. I believe that what was being measured was not
incongruent with the organization true objective. This caused many of the
people working there to lower their performance because even though they
tried

their

best

they

would

still

be

reprimanded.

In

the

case

of

Gamesmanship, I think a very dangerous form of gamesmanship is data

manipulation. We have seen how lack of proper controls over data has made
giants such as Enron and Computer Associates crumble. In the case of both
Enron and Computer Associates both companies engaged in falsification of
data and data management to change the reported results. Consequently,
both organizations took major hits with Enron going out of business and
many of its top management being incarcerated and in the case of Computer
Associates the company had to change its name, they incurred in large
expenses due to litigation, and some of their top management was
incarcerated.

Indirect costs are very important and very challenging

because many times they depend on how employees respond to the MCSs if
the employees have a negative attitude towards the MCS then this could
result harmful behaviors such as game playing, lack of effort, absenteeism,
and higher turnover rates.
2.7 Chapter 6 Summary
Chapter 6 discusses the general framework that can be used to design
or to improve management control systems. In the process of designing and
improving MCSs management needs to ask themselves the following two
basic questions: what is desired? And what is likely to happen? If what is
likely to happen is different to what is desired then management needs to
address the following questions: what controls should be used? And how
tightly should they be applied?
In regards to the first question: what is desired? MCSs cannot be
designed or evaluated if it is not understood what the organization wants to
achieve and what is it that the organization wants its employees to do.
Therefore, it is important to establish objectives and strategies to provide
important guides to the actions that are expected. Second, organizations
need to assess if what they desire is likely to happen if they implement or
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make changes to an MCS. It is important to note that different types of

controls are not equally effective at addressing each of the management
control problems. Subsequently, managers need to decide how tightly they
will implement MCSs. In order to decide the tightness management needs to
answer the following three questions: what are the potential benefits of tight
controls? What are the costs? Are any harmful side effects likely?
The authors also argue that it is important for an organization to adapt
to change. As an organization needs, capabilities, and environments change
the organizations need to adapt their management control systems. It is also
important to note that one of the major challenges of management controls
is that their benefits and side effects are dependent on how employees
react. Therefore, no form of control is optimal in all circumstances.
2.8 Chapter 6 Critical Reflection
When it comes to designing or improving MCSs it is very important that
management has a clear vision of what they want to achieve. It is also
important that management is realistic in their evaluation of what is likely to
occur if they implement or improve a MCS. A few years ago I was fresh out of
University and I was given a job at a hotel as a cost analyst. I was in charge
to establish better controls over the inventory to reduce loss and theft. Being
fresh out of University and with lack of a clear vision I implemented and
made changes to controls. However, the outcomes were not what I had
hoped for and instead of having positive effects they had harmful effects. My
experience or better said my lack of experience I would say were both a
weakness and I strength. A weakness due to what I previously mentioned.
However, strength because I wanted to learn as much as I could and I was
very open minded. Therefore, I was open to change and I adapted the control
systems to the needs, capabilities, and environment of the hotel.

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3.0 Conclusion
In

conclusion,

organizations

are

exposed

to

many

management controls systems help mitigate such risks.

risks

and

However, what

makes the analysis and implementation of management control systems so

difficult is that they are dependent on how employees reach to the controls.
As I mentioned earlier result controls can be great motivators or demotivators. Action controls can keep us out of trouble, personnel controls,
can be the difference between being happy or miserable in a job position and
cultural controls can help us behave as expected. This controls also come
along with costs. If management lacks vision of what they want to achieve
then the controls can have the opposite effect of what is desired and have
harmful effects such as fraud, lack of effort, and higher employee turnover.
Finally, it is very important to emphasize that no one form of control is
optimal in all circumstances. Hence, organizations need to be able to adapt
their management control systems to the needs, and changing environments
in which they operate.

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4.0 Works Cited

Merchant, K. & Stede, W. V. d., 2012. Action, Personnel, and Cultural Controls.
In: K. Merchant & W. V. d. Stede, eds. Management Control Systems
Performance Measurment, Evaluation and Incentive Third Edition. Essex:
Pearson, pp. 81 -123.
Merchant, K. & Stede, W. V. d., 2012. Control System Costs. In: K. Merchant &
W. V. d. Stede, eds. Management Control Systems Performance Measurment,
Evaluation and Incentives Third Edition. Essex : Pearson, pp. 186-209.
Merchant, K. & Stede, W. V. d., 2012. Designing and Evaluating Management
Control Systems. In: K. Merchant & W. V. d. Stede, eds. Management Control
Systems Performance Measurment, Evaluation and Incentives.

Essex:

Pearson, pp. 209 - 260.

Merchant, K. & Stede, W. V. d., 2012. Results Controls. In: K. Merchant & W. V.
d. Stede, eds. Management Control Systems Performance Measurment,
Evaluation and Incentives. Essex: Pearson, pp. 29-81.

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5.0 Disclaimer
All Rights Reserved. No part of this publication may be reproduced, stored in
a retrieval system or transmitted in any form by any means, electronic,
mechanical,

photocopying,

recording

or

otherwise,

without

the

prior

permission of the publisher, Otto Martinez.

The facts of this report are believed to be correct at the time of publication
but cannot be guaranteed. Please note that the findings, conclusions and
recommendations that Otto Martinez delivers will be based on information
gathered in good faith from both primary and secondary sources, whose
accuracy he is not always in a position to guarantee. As such Otto Martinez
can accept no liability whatever for actions taken based on any information
that may subsequently prove to be incorrect.

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