Management Control Systems Introduction An effective management control considers all aspects of the managerial processes, applications, and

strategies by analyzing all possible areas that can further be improved. It is essential that the firm is able to effectively make use of its resources to reach the goals to continuous improvement and profit maximization. Analysis of the company performance must show a reliable data that depicts the companys utilization of assets, the input and output exchanges, labor force participation, and other internal and external activities. Through this, all aspects are seen independently and as a whole to detect areas that needs ample amount of control. Responsibility Centers: Revenue and Expense Centers Responsibility centers, being the first topic discussed is one essential consideration in the management control process. It is an organization unit headed by a manager that measures performance through use of criteria of efficiency and effectiveness, Revenue centers and expense centers are separated for analysis to fully understand the process being implemented in each centers. Thus, for revenue centers, revenues are analyzed distinctly from incurred expenses while for expense centers, all expenses are also distinctly analyzed. There are two broad types of expense centersengineered and discretionary. In the engineered expense centers, it is possible to estimate the right amount of costs that should be incurred to produce a given level of output. In the discretionary expense centers, on the other hand, budgets describe the amounts spent but are not possible to determine with exactitude the optimum levels of expenses. The use of responsibility centers therefore is significant to effective management control because it gives greater focus on the revenue and costs in each departments. An effective control must incorporate effectively the information in the different responsibility centers in the overall analysis of the company growth. One application of the responsibility center is process done by the AIM Global Corporation. The multi-awarded company for marketing excellence was just operating for more than a year but its sales amounted to 189 million because of amazing strategies they have conducted. The company recognized the necessity to have individual analysis of the different departments of their huge firm. With such process, the company is able to view both the companys performance as a whole and the internal system of operation through the different areas it has. Another application/significance of making use of responsibility centers would be with regards to creating budgets. Each department with their specific analysis of their past

performance- considering historical data such as the amount of input and output, the total incurred cost, and justifications for certain questionable expenditures, is able to formulate better analysis of the departments activities, thus, formulation of company budgets is easily facilitated. This is done by almost all companies because there would not be any other basis of the budget preparation than the historical data. G110 Multi-Purpose Cooperative makes use of the internal analysis of the revenue and expense centers to forecast possible disbursements and inputs in the succeeding year. Profit Centers and Transfer Pricing Profit centers provide top management with ready-made information in profitability and performance in the internal individual components. Profit centers simply put, measures the financial performance in terms of profits (the difference between revenues and expenses). Profit centers analysis actually improves the quality and speed operating decisions because the decision does not have to be referred to corporate headquarters. Also, with the use of this system of analysis, profit consciousness is reached and ultimately leads managers to consistently aim to sustain the increase in profits. On the other hand, transfer pricings fundamental principle is that the transfer price that would be charged in the product were sold to outside customers or purchased to outside vendors. The question of the price of product produced inside when transferred between profit centers is a transfer price decision. Ideally, the transfer price should approximate the normal outside market price, with adjustments for costs not incurred in intracompany transfers. Even when sourcing decisions are contained, the market price is the best transfer price. If competitive prices are not available, transfer prices may be set on the basis of cost plus a profit, even though such transfer prices may be complex to calculate and the results less satisfactory than market-based price. Cost-based transfer prices can be made at standard cost plus profit margin, or by the use of the two-step pricing system. A method of negotiating transfer prices should be in place and there should be an arbitration mechanism foe setting transfer price disputes, but these arrangements should not be so complicated that management devotes an undue amount of time to transfer pricing. There are probably few examples in complex organizations of completely satisfactory transfer pricing systems. As with many management control design choices, it is necessary to choose the best of several less-than perfect courses of action. The profit center is usually adopted by most firms in the analysis of the internal

control. One company that makes use of such process is the Smart Telecoms Corporation. The very advantage of the analysis of the profit center is the improved speed in decision making. With profit centers, the company is viewed as a whole and seen predominantly on a large scale. The swift speed in decision making results to effective and timely implementation of new strategies: advertisements and promotions like Alltxt Plus, Smart Unlimited Texting, Wap Services, and many more others. These strategies make the company well-known and gain competitive advantage. The analysis of the profit centers therefore, facilitates the fast assessment of companys performance in terms of its financial aspect, particularly with the profit. Upon seeing the profit (both actual and projected), the top executives can be able to brainstorm alternative courses of actions that would sustain the constant increase in the profit or improve the company strategies to meet the required sales and/or cut down costs. The same process is done by the top competitor of Smart, Globe Telecoms but the only difference is with regards to the target market. Smart focuses on the prepaid subscribers while Globe focuses on providing a number of advantageous services to its Plan Subscribers. Again, the reason is because they make use of the profit centers to assess company performance and upon knowing some areas for improvement, they can be able to formulate new strategies. Transfer pricing, on the other hand, must not be so complex to be given a large amount of time. It is essential to be updated with the prevailing market price as it becomes the basis for the analysis and formulation of the transfer price. The important thing is to be aware of the areas of imperfection and to be sure that administrative procedures are employed to avoid suboptimism decisions. Usually, transfer pricing is done by manufacturing firms since the additional cost is carried on to new assembly departments to ultimately determine the total cost incurred in the entire manufacturing process. Charlie Marvel Enterprise, for instance, decides on the unit price by determining first the unit cost- the accumulated transfer price in the whole process of producing the products divided by the number of units produced. The industry captured by CM Enterprise, candle industry, somehow also influence determining the price. The prevailing market price is considered to arrive at a reasonable pricing scheme. The same process is conducted by student-owned firms like PhotoMoto, Chawerry Enterprise and Basiad Pili Oil Products. Measuring and Controlling Assets Employed Assets are essential factor in the analysis of the liquidity and overall performance of any firm. The number of assets is directly proportional to the capacity of the company to conduct its operation. Firms continually invest on acquisition of assets

(current and fixed) to entice investors to put their share in the company. Assets are considered in the analysis of the companys ability to finance their debts. (Liquidity Ratio) Investment centers have all of the measurement problems involved in defining expenses and revenues. Investment centers raise additional problems regarding how to measure the assets employed, specifically which assets to include, how to value fixed assets and current assets, which depreciation method to use for fixed assets, which corporate assets to allocate, and which liabilities to subtract. An important goal of business organization is to optimize return on shareholder equity (i.e. the net present value of future cash flows.) It is not practical to use each measure to evaluate the performance of business unit managers on monthly or quarterly basis. Accounting the rate of return is the best surrogate measure of business unit managers performance. Economic value added (EVA) is conceptually superior to return on investment (ROI) in evaluating business unit managers. When setting profit objectives, in addition to the usual income statement items, there should be an explicit interest charge against the projected balance of controllable working capital items, principally receivables and inventories. There is considerable debate about the right approach to management control over fixed assets. Reporting on the economic performance of an investment center is quite different from reporting on the performance of the manager in charge of that center. The application of analyzing a business through assets employed is with regards to the cash-on-hand of the company (compared to other accounts). There are companies that are having huge amount of cash as part of their financial statements. This may seem be good but there is an opportunity lost with the cash that they have. It is essential that the company must aspire for continuous improvement by utilizing their cash to improve the companys performance. A company with large sum of cash usually has lesser marketing campaigns, lesser product innovation strategies, and does not acquire additional equipments (assets) that should have become the companys core competency. Competition is inevitable so the company must aggressively be able to make use of the cash that it has to improve the process of production, to lessen the unit cost and other expenses and of course to improve the lead time and manufacturing time. Too much cash therefore may seem be seen negatively, not unless the company has plans of using such cash for any future business ventures. The amount of cash, as one of the most important assets can be analyzed thoroughly through the measurement and controlling the assets employed. Another application of the assets employed was the investments done by SM Corporation. The company invests on real estates, huge groceries and department stores, malls (in fact one is being constructed in downtown Naga), and a whole lot

more. The company has grown big and now not being associated with merely as Shoe Mart, but a well established business in the Philippines and some parts of the globe. Measuring and controlling the assets employed is essential to effectively assess the returns of the investments they have ventured into. It helps in the analysis of the companys performance based on the growth strategies it has done such as construction of new facilities like new branches of malls (long-term assets) and acquisition of new technologies, gadgets, and machineries (current assets). It is a necessary condition to be concerned on where the cash is allocated and disbursed to ensure that each strategy is on the right track towards meeting company goals. Strategic Planning A strategic plan shows the implications, over the next several years, of implementing the companys strategies. It is a broad topic, in fact could not be discuss in a single semester. Strategic planning is the process of formulating corporate, functional and divisional strategies that may be oriented to marketing, production, sales, human resource, product development, research and development and other areas. In period since current strategic plan was prepared, the organization has made capital investment decisions. These decisions usually entails large sum of money and are long-term based, The process of approving proposed capital investments does not follow a set of timetable; senior managers make the decisions as soon the need for them is identified. Planners incorporate in the strategic plan the implications of these decisions, as well as assumptions and guidelines about external forces such as inflation, internal policies, and product pricing. Using on this information, the business units support units propose new strategic plans. If the resulting corporate plan does not indicate the profitability will be adequate, there is a planning gap, which is dealt with by second iteration of the strategic plan, sometimes entailing painful curtailments to business unit plans. Several analytical techniques, such as value chain analysis and activity-based costing, can aid in the strategic planning process. A strategic plan, once formulated and effectively communicated from the top management to the down line employees, becomes the corporate objective. All members of the company would work towards the attainment of such goal. A strategic plan, which is leaned towards attaining a 5% increase in the annual sales, for instance, by making use of new technologically advanced process must be followed by all employees in the company- the workers in the manufacturing area utilizing the new technology, the managers doing an effective control with the way it is being implored, and even the top management in justifying the cost incurred

associated with the research and development. Strategic plan is what leads businesses towards continuous improvement and strengthening the barriers for new businessmen who would want to engage in the same industry. Thus, it develops distinctive competencies (competitive edge) that are often associated with positive brand image (intangible asset), hard-to-imitate technology and many more. Strategic plan must be done to achieve company growth not just in terms of higher income but also towards improving product quality and features, and also improving the services the company offers to its consumers. That is the purpose of strategic plans. Strategic plans need effective control since all plans must be implemented effectively in line with the companys objectives. Fern-Cs strategy of recruiting new members to patronize the product by ensuring health benefits and possibility of having discounts is effectively done by the company. Control comes in when all networks of each member are analyzed to ensure that the all members are provided with all promised benefits. The company must ensure that the members are happy with the benefits that must be rightfully given to them. If the company fails to give due emphasis on the concerns of the members, the company will surely at the verge of its downfall. The strategic plan of Monde Nissin Corporation is to have Step-Ip programs to some universities that will comprise the team of well-chosen graduating students that has equal chance of working eventually for the firm. Consequently, management control comes in with regards to establishing contacts with schools and universities, with possible applicants, with venues for assessment of each students qualifications and many others. Control must always be considered to ensure that the goals set of the program are effectively met. Budget Preparation A budget is in a sense a one-year slice of the strategic plan. However, it is prepared in more detail than the strategic plan, and its preparation involves managers at all levels in the organization. An operating budget shows the details of revenues and expenses for the budget year for each responsibility center and for organization as a whole. It is so structured that amounts are identified with specific responsibility centers. The process starts with the dissemination of guidelines approved by senior management. Using these guidelines, each responsibility center manager prepares a proposed budget, which is reviewed with his or her superior, and an agreed position is negotiated. When these individual pieces reach the top of the business unit or of the whole organization, analysts review them for consistency and adherence to the overall corporate goals. The whole process is primarily behavioral. Responsibility

center managers must participate in the process, but they do so within constraints decided on by senior management. Participative budgeting, in which managers feel they have influence on the process, has benefits generally for the organization. Budgets lead to effective control because it is formulated based on historical data and justifiable changes with regards to strategic plan. Firms would simply follow the trend with the expenses they incurred in the previous years and use such data in the formulation of next years projected costs. Budgets are somehow guidelines that limit excessive expenditures, specifically with each department. If a department allocates only one million pesos in its annual expenses, it should not exceed the budget allocated for it. Budgets are prepared prior to the start (or at the start) of a new year of operation to aid the departments in forecasting the possible expenditures they might incur for the year. For instance, if the company reaches the total projected monthly expenses on the second week of the month, it becomes a call that the department must limit its expenditure since it might go beyond the allotted expenses for each month. Thus, it serves as a signal to analyze the reason why the department is having such expenses when in fact it should not be. The head of the department must investigate the reasons why his department spends to much than what is expected. He must. Ideally, roam around the office and detect possible reasons for such excessive expendituresfrom the number of papers and pencils used each day to the utilization electric supply (computers and air conditioners). The data that he will gather must be reported to top management especially if they would question the excessive expenses of the department. Furthermore, the top management would deliberate and make of concrete plans to resolve the problem in the said department. Even in the government agencies, formulation of budgets is very vital. For instance, if a certain government official would like to pursue a pro-poor program, he must first submit all necessary papers for the City/Municipal Treasurer to approve the disbursement for the funding of the program. Effective control comes in the proper allocation of funds by the government agencies particularly the treasurer. In the same way, control comes in with the disbursements made on each process for the implementation of the program. That is how the budget becomes an effective measurement for control. It is not a budget per se written on papers, but rather a budget that serves as a guideline in the controlling process of expenditure. Analyzing Financial Performance Reports Business unit managers report their financial performance to senior management

regularly, usually monthly. The formal report consists of a comparison of actual revenues and costs and also the budgeted amounts. The differences, or variances, between these two amounts can be analyzed at several levels of detail. This analysis identifies the causes of the variance from budget profit and the amount attributed to each cause. Although it may seem be true that some companies focus on the performance by comparing the actual with the budget, competent operating manages nevertheless must adopt a continuous improvement or kaizen mentality; a company therefore should not assume the optimal performance as the budget. Variances are analyzed to be able to see the companys efficiency in allocating its resources to ultimately meet its objectives. One application of this way of control is with regards to companys with more than one product categories. Each category or product line is analyzed in the context of its cost of production, the variable and fixed cost plus other expenses, the unit cost, the level of supply and raw materials, the labor force, the selling price and the prevailing market price of the product in the same industry. The company analyzes by putting emphasis in each product categories and the factors that are vital in its selling and production. Each product are then compared with the data of those unrelated product lines to effectively analyze the performance of each. A company could not say that it is having an income of 50M when in fact one of its product lines is at net loss and just being compensated by the income of those other products of the company. Therefore, the company could have reached higher income if only it has better control over the product that is of net loss. That is where management control comes in. Another example would be with a company analyzing its profitability based on the comparison with previous years performance and the present years. Variance comes in with the comparison with the projected and the actual data. By comparing the two, the company is able to make conclusion with the attainment of the corporate goals based on the companys financial aspects. If the variance leads to a negative, there must be an internal problem that needs to be addressed by the company. Management control then becomes the core of the strategies that they will implement to resolve the problems associated with the negative variance. Almost all companies do this, which is why specification of a company isnt necessary to prove the advantages of analyzing financial and performance reports. Conclusion

Management control is indeed of great importance. It is essential that a company

must focus on its control systems since it is the key towards attaining the goals set by the company. Through management control, the company is able maximize its resources and detect problems that would hinder company growth. That is the true essence of the management control process.