Course : F0942 Management Control System

Year
: 2013-2014

Control System Costs

Slide 5.3

Chapter 5:
Control System Costs

Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007

Slide 5.4

Cost of control

Benefit of controls
A higher probability that people will both work hard and direct
their energies to serve the organizations interests.

Costs of controls
Direct out-of-pocket costs
Easy to quantify: cost of cash bonuses, internal audit staffs
Difficult to quantify: time spend on planning and budgeting activities,
on pre-action reviews, etc.

Harmful side-effects
Behavioral displacement
Gamesmanship
Operating delays
Negative attitudes
Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007

Slide 5.5

Behavioral displacement

Behavioral displacement occurs when the control system

produces/encourages behaviors that are not consistent
with the organizations objectives.

With results controls, it occurs when the results measures are

incongruent with the organizations true objectives; because
Poor understanding of the desired results
Over-quantification
Intangibles are often overlooked.

With action controls, it comes in the form of

Means-ends inversion
Employees are induced to pay more attention to what
they do and lose sight of what they try to accomplish.
Rigid, non-adaptive, bureaucratic behavior

Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007

Slide 5.6

Gamesmanship

Refers to the actions managers take to improve their performance

indicators without producing any positive economic effects.

Creation of slack resources

Consumption of assets in excess of what is required.
Slack can reduce manager tension and stimulate innovation;
However, it causes inefficient resource allocation.

Data manipulation
Trying to look good by fudging the control indicators.
Falsification, i.e., reporting erroneous data.
Data management, i.e., any action to change the reported result:
Through accounting methods (e.g. reserves, write-offs);
Through operating methods (e.g. delaying expenses).

Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007

Slide 5.7

Operating delays

Mostly associated with action controls,

notably, delays caused by:
Lengthy review processes
Cumbersome authorization layers
Bureaucratic organizations.

When fast action is important, operational

delays can be quite costly.

Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007

Slide 5.8

Negative attitudes

Job tension, conflict, frustration, resistance

Often coincident with many harmful behaviors such
as, gaming, lack of effort, absenteeism, and turnover.

Action controls often annoy employees

It is difficult for people to enjoy following a strict set of procedures
for a long period of time.

Results controls
Lack of employee commitment to the performance targets:
targets are too difficult, not meaningful, not controllable.
Performance evaluations are perceived as being unfair.

Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007

Slide 5.9

Keep a behavioral focus

There is no one best form of control

What works best in one company (or area within
a company), may not work in another.
e.g., accounting personnel vs. design engineers

Therefore, it is important to keep the focus on

the people involved, because
It is their responses that will determine the success
or failure of the control system.

The benefits of controls are derived only from

their impacts on behaviors!
Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007