This document contains the syllabus for a Management Control Systems course at Universitas Padjadjaran. The syllabus covers 8 sessions over topics including the management control environment, responsibility centers, transfer pricing, and measuring and controlling assets and employees. It also lists required literature including a management control systems textbook. Key aspects of management control systems are discussed such as objective setting, strategy formulation, and using systems to influence employee behavior appropriately. Characteristics of good management control and alternatives for addressing control problems like avoidance, automation, and centralization are outlined.
2. SYLLABUS
Session 1
Part One
Management Control Environment
• The Nature of Management Control Systems
• Understanding Strategies
• Behaviour in Organization
3. SYLLABUS
Session 2
• Responsibility Centers – Revenue and Expense Center
• Profit Centers
Session 3
• Transfer Pricing
• Measuring and Controlling Assets Employee
5. Mandatory Literature
• Anthony, Robert N, Vijay
Govindarajan, Management Control
System, 12th Edition, Mc Graw Hill
International Edition, 2007
• Other books and articles
7. MANAGEMENT AND CONTROL
• Management control is a critical function in organization. Management control
failures can lead to large financial losses, reputation damage, and possibly even to
organizational failure. The types of problem – thefts, frauds, and unintentional
errors.
• Management controls are proactive rather than reactive.
• Management control includes all the devices or system managers use to ensure that
the behaviour and decisions of their employees are consistent with the
organization’s objectives and strategies. The system themselves are commonly
referred to as the management control systems.
8. MANAGEMENT AND CONTROL
• Management control is the back end of the management process.
• All relate to the process of organizing resources and directing activities for
the purpose of achieving organizational objectives.
• Management control is along a process continuum involving objective setting,
strategy formulation, and management control.
10. Elements of control system ( Anthony, et al) :
1. Detector or Sensor
2. Assessor
3. Effector
4. Communication network
11. Detector
Information about what is
happening
Assessor
Comparison with standard
Effector
Behavior alteration, if
needed
Entity
Being controlled
Control
device
Elements of
Control Process
13. MANAGEMENT AND CONTROL
• Objective setting
Knowledge of objectives is a necessary prerequisite for the
design of any MCS and indeed, for any purposeful
activities.
In most organization, the objectives are known. That is not
to say that all employees always agree unanimously as to
how to balance their organization’s responsibilities to all of
their stakeholders.
Organizations develop compromise mechanisms to resolve
conflict among stakeholders and take some level agreement
about the objectives they will pursue.
14. THE CONCEPT OF STRATEGY
• Strategy describes the general direction in which
an organization plans to move to attain its goals.
• Two levels of strategy :
1. Corporate strategy ,
2. Business unit strategy.
15. CORPORATE LEVEL STRATEGY
• Corporate strategy is concerned with the question of where to compete than
with how to compete in a particular industry.
• The issues of corporate level are :
• The definition of businesses in which the firm will participate,
• The deployment of resources among those businesses.
16. BUSINESS UNIT STRATEGIES
• Business Unit strategies deal with how to create and maintain competitive advantage
in each industries in which a company has chosen to participate.
• The strategy of business unit depends on two interrelated aspects :
Its mission (what are its overall objectives)
• Its competitive advantage ( how should the business unit compete in its industry to
accomplish its mission)
17. MANAGEMENT AND CONTROL
• Objective setting
Knowledge of objectives is a necessary prerequisite for the
design of any MCS and indeed, for any purposeful
activities.
In most organization, the objectives are known. That is not
to say that all employees always agree unanimously as to
how to balance their organization’s responsibilities to all of
their stakeholders.
Organizations develop compromise mechanisms to resolve
conflict among stakeholders and take some level agreement
about the objectives they will pursue.
18. MANAGEMENT AND CONTROL
• Strategy formulation
Strategies define how organizations should use their resources to
meet their objectives.
Strategies can be specified formally and other organizations do not
have formal.
Major elements of organization’s strategies emerge from a series of
interactions between management, employees, and the environment;
from spontaneously and from local experimentation design to learn
what activities lead to the greatest success.
Sometimes difficult to identify an organization’s strategy and conflict
directly with the organization’s formal strategic statements because
the formal strategic statements have become obsolete and employees
have decided to take actions that are better than the formal strategy.
20. Management Control
versus Strategic Control
• Control system having two basic functions,
strategic control and management control.
• Strategic control
• Strategic control involves managers addressing the question :
• is our strategy still valid, and if not, how should it be changed.
• All firms must be concerned with strategic control issues, but the
concern that a strategy may have become obsolete is obviously
greater in firms operating in more dynamic environment.
21. Management Control
versus Strategic Control
• Management control
• Involves addressing the general question :
• Are employees likely to behave appropriately
• Understand what we expect of them
• Will they work consistently hard and try to do what
expected of them,
• Are they capable of doing a good job.
22. Management Control
versus Strategic Control
• The tools for addressing strategic control issues and management control
issues are quite different.
• Strategic control
Have a focus primarily external to the organization, examine the industry and their
organizations place in it.
How the organization can compete with the other firms in industry ( SWOT Analysis ),
Management control
Have internal focus, how they can influence employees behavior in desired ways.
23. Behavioral Emphasis
• Management control involves managers taking steps to help ensure that
employees do what is best for organization.
• Management controls are necessary to guard against the possibilities that
people will do something the organization does not want them to do or fail
to do something they should do.
• If employees could always be relied on to do what is best for organization,
there would be no need for an MCS but employees are sometimes unable or
unwilling to act in the organization’s best interest.
24. CAUSES OF MANAGEMENT CONTROL PROBLEMS
• The causes of the needs for control can be classified into 3 main categories :
1. Lack of direction,
• Some employees perform poorly simply because they do not know what the organization
wants from them.
• One function of management control involves informing employees as how they can
maximize their contributions to the fulfillment of organizational objectives.
2. Motivational problems
• Even where employees understand what are expected to do, some cause choose no to
perform as the organization would have them perform because motivational problems.
• Effort aversion and other self-interested behaviours are still problem .
3. Personal limitations
• Employees are unable to do a good job because of certain personal limitations.
• Many of these limitations are person specific – lack of intelligence, training, experience and stamina.
• These three management control problems can obviously occur simultaneously and
in any combination.
25. CHARACTERISTICS OF GOOD MANAGEMENT CONTROL
• To have a high probability of success, organizations must maintain good
management control.
• Good control means that management can reasonably confident that no major
unpleasant surprises will occur.
• Out of control is used to describe a situation where there is a high probability of
poor performance.
• Good management control still allows for some probability of failure because
perfect control does not exist except perhaps in very unusual circumstances.
26. CHARACTERISTICS OF GOOD MANAGEMENT CONTROL
• The cost of not having a perfect control system can be called a control loss.
• Optimal control can be said to have been achieved if the control losses are
expected to be smaller than the cost of implementing more controls.
• Optimal is control that is good enough at reasonable cost.
27. CHARACTERISTICS OF GOOD MANAGEMENT CONTROL
• Assessing whether good control has been achieved must be future-oriented
and objectives-driven.
• Assessing whether good control has been achieved is difficult and subjective
because the adequacy of management control must be measured is against
future that can be very difficult to predict.
28. CONTROL PROBLEM AVOIDANCE
• Implementing some combination of the behaviour-influencing devises commonly known as MCS’s is not
always the best way to achieve good control., sometimes the problems can be avoided.
• Avoidance means eliminating the possibility that the control problems will cause the organization harm.
• Organization can never avoid all their control problems but they can often avoid some of them by limiting
exposure to certain types of problem and problem sources or by reducing the maximum potential loss if the
problem occur.
• Four prominent avoidance control problems are :
• Activity elimination,
• Automation,
• Centralization,
• Risk sharing.
29. CONTROL PROBLEM AVOIDANCE
• Activity elimination
Avoid the control problems associated with a particular
entity or activity by turning over the potential risks, and the
associated profits, to third party through such mechanisms
as subcontracts, licensing agreement or divestment.
Limiting risk is a partial avoidance of problems that might
arise.
30. CONTROL PROBLEM AVOIDANCE
• Automations
Sometimes use computers, robots, expert system, and other
means automation to reduce their organization’s exposure to
some control problems.
Computers eliminate the human problems of inaccuracy,
inconsistency, and lack of motivation.
Automation can provide only a partial control solution at best .
One limitation is feasibility
Second limitation is cost
Automation may just replace some control problems with
others. Computer automation often increases control risks.
31. CONTROL PROBLEM AVOIDANCE
• Centralization
Some managers centralize decision making in some areas of their organizations at specific
points in their histories to improve control.
Centralization exists to some extent at all levels of management.
Centralization are decisions regarding major acquisitions and divestment , major capital
expenditures, negotiation of sales contract, organization changes, hiring and firing of
executives.
• Risk Sharing
Risk sharing with outside entities can bound the losses that could be incurred by
inappropriate employee behavior (insurance, joint venture agreement)
32. CONTROL ALTERNATIVES
• Controls that cannot be avoided and those for which
decision have been made not to avoid, managers must
implement one or more control mechanism that generally
called management controls system ( MCS ).
• Examples of controls used in a manufacturing firm :
The cash payment and cash receipt functions are segregated,
Checks are mailed by someone other that the person making
out the check,
Surprise counts of cash funds are conducted periodically,
33. CONTROL ALTERNATIVES
• The MCSs of some organizations consist primarily of:
• Trying to hire people who can be relied upon serve the
organization well.
• Provide modest performance-based incentives (based on
accomplishment of targets defined in terms of accounting
numbers, and others non financial)
• Have elaborate sets of policies and procedures,
• Make extensive use of a large professional internal audit staff,
while others do not have a separate internal audit function,