bab 3-1

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TOPIC 3TOPIC 3
BUDGETING ANDBUDGETING AND
MANAGEMENT CONTROLMANAGEMENT CONTROL
(Part 1)(Part 1)

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Lecture outline:
 The concept of control and management
control.
 Types of control
 How to design an effective MCS
 Control mechanism

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CONCEPTS OF CONTROLSCONCEPTS OF CONTROLS
ControlControl
- a policy or procedure that facilitates- a policy or procedure that facilitates
organization to ensure that its goal andorganization to ensure that its goal and
objectives are met.objectives are met.
-- by setting a standard, received a feedbackby setting a standard, received a feedback
on actual performance and take a correctiveon actual performance and take a corrective
action whenever the actual performanceaction whenever the actual performance
deviates significantly from the planneddeviates significantly from the planned
performance.performance.

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CONCEPTS OF CONTROLSCONCEPTS OF CONTROLS
 Definitions of control

There are 2 main themes;
• There is the idea of control as
domination
• There is the idea of control which
emphasizes the gathering of information
to monitor & regulate activities

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 Operational controlOperational control

The evaluation of operating level employeesThe evaluation of operating level employees
by mid-level managersby mid-level managers

Focus : detailed, std performance measuresFocus : detailed, std performance measures

Has an MBE approach – i.e varianceHas an MBE approach – i.e variance
 Management controlManagement control

evaluation by upper level managers of theevaluation by upper level managers of the
performance of mid-level managerperformance of mid-level manager

focus : long term, strategic issuesfocus : long term, strategic issues

MBO approach. Long term objectives areMBO approach. Long term objectives are
determined and performance is periodicallydetermined and performance is periodically
measured against org’s goalsmeasured against org’s goals
LEVEL OF CONTROLSLEVEL OF CONTROLS

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 Operations / operational control:Operations / operational control:
-- is the process of providing feedback tois the process of providing feedback to
employees and their managers about theemployees and their managers about the
efficiency of activities being performed.efficiency of activities being performed.
-- it measures and compares short-termit measures and compares short-term
performance to short-run targets orperformance to short-run targets or
standards.standards.
OPERATIONAL CONTROLOPERATIONAL CONTROL

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The Position of Management ControlThe Position of Management Control
Within an Organization HierarchyWithin an Organization Hierarchy
Strategic Planning
Management Control
Operational Control

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 Anthony (1965)Anthony (1965)
-- the process by which managers assurethe process by which managers assure
that resources are obtained and usedthat resources are obtained and used
effectively & efficiently in theeffectively & efficiently in the
accomplishment of the organization’saccomplishment of the organization’s
objectivesobjectives
 Lowe (1971)Lowe (1971)
-- A system of organization informationA system of organization information
seeking & gathering, accountabilityseeking & gathering, accountability andand
feedback designed to ensure that thefeedback designed to ensure that the
enterprise adapts to changes in itsenterprise adapts to changes in its
substantive environment.substantive environment.
MANAGEMENT CONTROLMANAGEMENT CONTROL

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 consider 3 aspects of MCconsider 3 aspects of MC

Who is interested in evaluating the performanceWho is interested in evaluating the performance
of organization?of organization?

What is being evaluated?What is being evaluated?

When the performance evaluation is done?When the performance evaluation is done?
 elements of MC :elements of MC :

PlanningPlanning

CoordinatingCoordinating

CommunicationCommunication

EvaluationEvaluation

Decision makingDecision making
DESIGNING MCSDESIGNING MCS

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 MCS components:MCS components:

Formal MCSFormal MCS
• rules, procedures, policies, performance measures,rules, procedures, policies, performance measures,
incentive plans; example :incentive plans; example :
* mgt accounting system * quality system* mgt accounting system * quality system
* info on costs, revenues, income* info on costs, revenues, income
* human resource system* human resource system
* info on recruitment, training, absenteeism* info on recruitment, training, absenteeism

Informal MCSInformal MCS
• aspect such as shared values, loyalties, mutualaspect such as shared values, loyalties, mutual
commitments among member of organization.commitments among member of organization.
• slogan that reinforce values and loyalties…slogan that reinforce values and loyalties…
DESIGNING MCSDESIGNING MCS

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 To be effective, MCS should:To be effective, MCS should:

be closely aligned to organization’sbe closely aligned to organization’s
strategies and goalsstrategies and goals

be designed to fit organization’sbe designed to fit organization’s
structure and decision makingstructure and decision making
responsibility of individual managers.responsibility of individual managers.

motivate managers and employeemotivate managers and employee
- HOW ?- HOW ?
EVALUATING MCSEVALUATING MCS

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KEY DESIGN CRITERIA FORKEY DESIGN CRITERIA FOR
EFFECTIVE MCSEFFECTIVE MCS
The MCS must:The MCS must:
 permit clear links from plannedpermit clear links from planned
organization purpose to operationalorganization purpose to operational
activity.activity.
 be able to assist managers both whenbe able to assist managers both when
planning purpose & when controlling itsplanning purpose & when controlling its
achievement.achievement.
 Enable a manager who so wishes toEnable a manager who so wishes to
ascertain exactly what output is expectedascertain exactly what output is expected
of him & by whomof him & by whom

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 2 main types of control used :2 main types of control used :

Task controlTask control

Result controlResult control

Management accountant must be awareManagement accountant must be aware
of how the balance between the variousof how the balance between the various
controls can be managed.controls can be managed.
TYPES OF CONTROLTYPES OF CONTROL

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Task control and Result ControlTask control and Result Control
 Task control:Task control:
-
is the process of developing standardis the process of developing standard
procedures that employees are told toprocedures that employees are told to
follow.follow.
 Result control:Result control:
-
is the process of hiring qualified people tois the process of hiring qualified people to
do whatever they think best to help thedo whatever they think best to help the
organization achieve its objectives, andorganization achieve its objectives, and
using the control system to evaluate theusing the control system to evaluate the
resulting performanceresulting performance

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1.1. CultureCulture
-- informal social mechanism.informal social mechanism.
-- control is achieved through sharedcontrol is achieved through shared
and inculcate beliefs. People of theand inculcate beliefs. People of the
same profession or culture aresame profession or culture are
encouraged to pursue the sameencouraged to pursue the same
objectives and hold same ethics.objectives and hold same ethics.
-- will have same goal congruence andwill have same goal congruence and
less supervision from the superiors.less supervision from the superiors.
-- everybody knew what to doeverybody knew what to do
without being told consistently.without being told consistently.
CONTROL MECHANISM

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CONTROL MECHANISMCONTROL MECHANISM
2.2. BureaucracyBureaucracy
-- there is specialization of authoritiesthere is specialization of authorities
and hierarchy.and hierarchy.
-- formal route of information and flowformal route of information and flow
of power.of power.
-- a lot of sequential supervision anda lot of sequential supervision and
consequently expense for properconsequently expense for proper
controls to be implemented.controls to be implemented.

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CONTROL MECHANISMCONTROL MECHANISM
3.3. MarketMarket
-- control is carried out by way ofcontrol is carried out by way of
market mechanism.market mechanism.
-- decision making is based on marketdecision making is based on market
price information.price information.
-- less supervision compared toless supervision compared to
bureaucracy.bureaucracy.