management Control System

N/lost of the actions in an organization, over a period of time include repetitive steps and decisions which organization must take, to establish goals and objectives and also to achieve them, these steps are (1)Establishing goals and objectives. (2) Evaluating performance. ` (3) Making decisions to keep the organization on track. (4) Implementing these decisions through people. (5) Obtaining feedback on the results of these decisions. The effectiveness of these decisions depends both on the support received by the decision makers, from the control system and upon the quality of the decision makers themselves. '

Nature /characteristics of management control The main features oi management control are as stated below, (1)Continues process - management control is ongoing process, it is a dynamic activity, The control process as a set of actions, which includes programming. Budgeting analyzing, monitoring, evaluating and reporting the performance. The process is carried out within the framework of strategic planning. which consists of objectives, strategies, policies etc. of the organization. (2) Goal congruence -The purpose of management control is to encourage managers to take action that are in the interest of the organizational goals. (3) Universality - control function is essential at every level of management and in every part of the organization. (4) Total system - Management control system is a total system as it covers all fire aspects of the organizations operations, it is an integrated and coordinate system ' (5) Goal orientation-Management control is intended to assists in the process of attainment of organizational goals through maintaining effectiveness and efficiency of performance, by controlling individual performance rather than that of the organization as whole. (6) Coordinating Agency - Management control is always exercised by a central coordinating agency, which is the top management. (7) Rhythmic - Management control system follows 'a definite pattern and timetable, over months and years. (8) Financial structure - Management control systems generally deal with financial transactions as the inputs and outputs are measured in monetary units (9) Reciprocity - Every living animal tries to control its environment, as a means of fulfilling its needs. At the same time, it has to be controlled. lt refuses to be controlled by the other. lt loses the control it has. It is the reciprocal nature which snakes control effective.

(10) Flexibility -control in the organization has to flexible and not rigid. As the influence of an individual in the organization changes from time to, similarly an organizations influence in the environment changes continuously. ' " (11) Not an automatic process - Management control is not an automatic process. The managers have to perform assessor function to find out existence of- significant difference between actual and standard performance and then take action, if required. (12) Self Control - Management control is not exercised by any external regulating device, like the thermostat but it is exercised by the manager himself in the interest of the organization. (13) Focus on Strategy Execution ~ The main focus of the management control system is mainly on strategy implementation. (14) Emphasis on Programs and Responsibility centers - A program includes activity undertaken by the organization in its efforts for achieving its goals, such as product, product lines , R and D projects etc. A responsibility center is the unit of an organization which is headed by a responsible manager. All responsibility centers produce output or carry out some activities and all have inputs as resources are required to carry out their activities. _ (15) Financial and Non financial emphasis - MCS covers both,financial and non financial performance measures, which are key indicators.

Objective of Management Control :A sound control system is necessary for an organization for the purposes mentioned below. 1) To measure performance Under the process of planning the goals and objectives are finalized. Under the process of control an attempt is made to measure the progress towards achieving these goals. The feedback helps in comparing targets with performance and to take corrective action. whenever deviations are noticed. 2) To find out deviations: - _ There are several internal and external forces which affect the functioning of the organization, hence the organization may not be able to perform exactly according to strategic plans. hence an efficient control system is required for detecting deviations, if any , before they become serious. Generally organizations are taken away form their planned courses by certain forces, such as changes in the internal or external environment, delegation ol authority, mistakes committed by the employees, complexity of the organizations etc, 3) To take corrective actions A sound control system helps in suggesting remedial measures, such as modification of goals, reassigning tasks, training the staff etc. The control system not only reveals deviations but also suggests where the actions need to be taken in order to overcome the deficiencies. Thus once a strategy becomes operational it is necessary to monitor to measure the performance in order to find out deviations and take corrective action , if necessary.

Scope of Management Control System

A management control system is the framework which enables the managers to exercise proper control over the action of their subordinates, and hence to have control over the whole organization, According to Anthony, " A management control system is an explicit set of activities, policies, procedures and reports intended to institutionalize the formal aspects of the managements control process 'The MCS includes the following activities. (1) Setting of Performance Standards:Once the performance targets are set for the whole organization and for each Division, department, section as well as for each employee of the organization, Than the standards are necessary to measure actual performance for evaluation The standards indicate the desired or accepted level of performance, These standards are of two types. (a)quantitative Standards :~ The quantitative standards are expressed in physical or monetary units such as time, cost, revenue etc. Such standards may be set in areas like production , finance, sales where performance can be quantified. (b)Qualitative Standards: - In case of certain areas, performance in quantitative standards cannot be measured. For example goodwill, employee morale, motivation, industrial relations etc where standards have to be laid down in to tangible or 'qualitative terms, The standards laid down, should be precise, accurate, reasonable , objective and flexible as far as possible, & consistent with the overall organization objectives. (2) Reporting Operating Results 1- _ Once actual performance is measured in those terms in which performance standards are set, then the operating results have to be reported, in time to the executives responsible for exercising control the control repons should be complete but brief accurate Bt simple so that executives can get the broad view of the situation. 3) Analysis of performance 1-the actual results are to be compare with the standards set and variances are analyzed to find out reasons underlying them. Variance analysis is Ll cchttntrotrs process, and may lead to recycling it other elements of rnanagente coiittcl process. While analyzing and reporting tttintiices the principle of control by exception sirntiltl be followed. 4) Taking Corrective Acttott - faking corrective action in real Lint; is :tn important aspect ofthe control process, Such actions include, revision of si tnuards. changes in the' organization structure, training of employees, itnorovirrg communication and motivation systems etc. lt is necessary to avoid two common mistakes. First, taking corrective action when no action was required, and secondly, not taking action when afiion was necessary. The real test of good control system is " Right action at the rt_ihi time, According to Anthony and Govindaraian, "Management control is the process by which rnarrgers influence other members of the organization to img. r -:it the

st'utegies." Which includes the following activities. 1) Planning - What the organization should do 2) Coordinating ~ the activities of several pans of the organization 3) Communicating - in formation 4) Evaluating - inform: tion 5) Deciding - what , ii any, action should be taken. 6) influencing - People to change their behaviour. lt may be rembered that the control system has to be flexible because, " lcorifirrning to a budget is not necessarily good , and departure form a budget is not necessarily bad". A Need For Management Control System:Control is an important function of management. ln business organizations, the need for control arises on account of several reasons, 1) Difficulty in establishing accurate standards :- in practice, it is difficult to establish fully accurate standards of performance in large and complex organizations. Executives need all kinds of information in trrne, which is not made available. Control is necessary to judge the accuracy of standards also 2) It minimizing Dishonest Behavior :- There are several temptations in business. Ent iloyees are entrusted with valuable resources including l;itt_;e some of money, ln t e such ternptutiohs, Hence it is necessary to establish uit -:rfectttc control system to minimize dishonest behavior of the employees. lt also helps in discouraging employees and departments to protect self interest, neglecting interests of the organization as a whole. It is useful in developing broader outlook rn the employees and subordinates. ll improving Performance '- lf the control is not owferciserl il-fm the lfwnzince ol the employees tends to be below normal. Hence controls are necessary not only to improve the performance ofthe emoioycec uct also for smooth functioning ofthe organization It also leads to the efficient use oi the SCFXT ce resources of the organization St attainment of organizational coiectrves successfully. orga ll 2i Si Ai 5)

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Importance of Management Control System 1A good control system in the organization plays an important role as stated below. Guide to Operations - Control is necessary for guiding behavior of the employees towards achievement of organizational objectives. Absence of control may result in to erratic behavior which is detrimental to the objectives, A sound control system is necessary to measure progress, to find out deviations, and to indicate and take corrective actions. Policy Verification - When plans are implemented, controls are necessary to verify the quality of various plans. it needed plans have to he modified or goals need to be adjusted. Environmental changes-*may call for modification into workable plans. Management control not only reveals the need for corrective action but also suggests what action need to taken Managerial Accountability - Although a manager may delegate authority to his subordinates, still responsibility remains with him_ rezrgarriirig ultimate performance. A manger has to check up the performance if his sutrcrdinates in order to see that the delegated authority is properly used. Thus control enables managers to discharge their responsibilities efficiently and effectively. Promoting Employee Morale - management control creates an atmosphere of order and discipline in the organization. Under conditions of absence of control employee morale tends to lower as they are not ab0ut to predict what is likely to happen to them. They may become victim of bias and repression of the superiors. Efficiency and Effectiveness :- Control is necessary for maintaining and increasing efficiency of operations by concentrating on achie'/einent ol organizational objectives. A sound control system enables managers tc detect and correct mistakes before they become serious. The control system also helps in reducing wastages of all sorts, and losses. Control thus enables management to increase overall efficiency of the organization through optimum use of available resources Psychological Pressure :- The control system inspires employees to v\fori< to achieve better performance; as they know that their performance will be evaluated and their rewards will depend on such appraisals, they will be motivated to try hard to contribute towards achievement of goals. 7) Coordination of Actions :- As George Terry has pointed out, controlling helps ensure that actions proceed according to plans, that proper direction is taken and that the various factors are maintained in their correct interrelationships, so that, adequate consideration is attained."Thus control provides coordination in efforts. lt enables managers to runction efficiently and effectively. 8) Aid in Developing New Strategies :- In industries which are subject to rapid environmental changes , management control information of nonfinancial in nature, provides the basis forconsidcring new strategies.The interactive control concentrates on positive and negative developments which may indicate the need for new strategies. Thus interactive control is an integral part of the management control system.

Pre requisites of a successful MCS :The control process is not automatic, but it is a deliberate attempt of controlling behavior of employees. Management control system to be effective, its controls shall satisfy the following requirements. l) Controls must be flexible Modern organization have to function under dynamic environment, Star Jards and plan , on which controls are based on frequently meet modification to suit the new environment. 2) Tailoring controls to Plans and positions: - All control systems and techniques should reflect the plans they are designed to follow. Managers need the information that will enable them to know about the progress of the plans, for which they are responsible. Such information should be made available in time, so that, corrective action can be taken whenever it is necessary. Similarly controls should be tailored to positions in the organization. 3) Emphasis on Critical Factors:-mangers must be aware of the critical factors o the plans and strategies, as they are being implemented , so that require controls may be used and they should use such techniques and information that are suitable to them. _ 4) Reflecting organizational structure: - Organizational structure is the means o clarifying roles of people in the enterprise, which specifies who is responsible for the execution of plans and for any deviation from them. ' 5) Fitting control system to the organizational climate 1-To be most effective, any control system and technique must fit the organizational climate. For example in an organization where people have been given considerable freedom and participation, a tight control system will not be effective but a generalized and permissive control system will be successful. _ 6) Economy of controls: - controls must be worth their cost, which is difficult to achieve in practice. Control techniques and approaches are efficient when. They, discover the causes of actual or potential deviations from plans with the minimum costs. 7) Controls leading to corrective Action; - A control system should be able to disclose where failures are taking place and who is responsible for them. It should ensure that, what corrective action needs to be taken. Control is justified only i1 deviations from plans are corrected through appropriate measures. S) Top Management involvement: - Unless top management involvement is there management control system cannot be implemented effectively. 9) Motivation of Employees: - Employees do not like controls. Hence it is necessary to motivate employees through proper system of motivation. 10) Accounting system for control 2- A good accounting system is the backbone ol a management control system, because it is a main source ol data generation for control purposes.

Effective Management Control System :- An effective and adequate control system should satisfy the following requirements, ` . ' 1) lt should be suitable to the nature and needs of the activity which is to be controlled. It should be tailored to lit the organizational structure, 2) lt should be designed to attract attention of concerned manager towards deviations. lt should be aole to predict and report deviations in time , so that corrective action can be initiated immediately, befor the situation becomes out of control. ' 3) The control system should be directedtowards future,The design of the control system should be effective in motivating the people for achieving hlglfer performance. 4) It should focus attentionon critical or significant deviations, It should point out tne strategic points or key areas where immediate action is required. 5) The standards of measurement of, penormance should be objective, and impartial, so that control is acceptable and workable. 6) The control system should be flexible so that it can be modilled to suit the changes in environment. 7) lt should be economical ~ 8) It should be simple and suggestive , so that deviations can be located, cause can be identified and corrective action can be taken at right tim; TWP if Q. 2) Trace briefly the evolution of control systems in an organization. The function ol control, as a process of managing and monitoring the activities ol the organization, has evolved over time, just like other basic functions ot management. Control provides the third and final link In the cycle of managerial process , which includes (I) -investigation , (ii) Planning and (iii) controlling, During early days, before industrial Revolution took place, almost all the economic activities were characterized by one - man business or propitotorship.

Hence. all the elements ol an operation were in the hands ot one person and he alone was res nonsible to take all th-_ decisions regarding production llnance. marketing etc, so as to minimize costs and maximize profits. After lridustnal Revolution, small scale production was replaced hy large scale production which needed a large numoer ol employees to carry out i:it:t~rti: tasks. Division ol work activities and interlinking of these activities resulted into organizations, Initially-organisational structure was simple but later on it became more and more complex. Hence the role of control function gained :ijnilicant importance. (A) Traditional Approach of Control System :The traditional control strt ture was based on the bureaucratic rnonel which as characterized nt/ hierarchial u antrol through division oi |abour,spet;|;1|izat|on ol task and centralizei authority structures. Decisions were mostly taken att the top level ol management ai, lwete carried out below /ts a rule, authority was ._ itllillllftil and planning was centralized and planning was the monopoly ot tt; :i_fr level management However :several factors prompted management to ren tinine its tra iitlonal concept ol control. These tatctors include the progress ot izittiiitirttioti revolution, the impact ol loteign competition, the evolution ol economtt: littse lot the industrial to the service and an increasingly educated work tome, tltttt hats demanded greater control over its own lives within corporations as well ns izithont, Leading corporations started questioning the tradilionalutpproacnes to oonttol and actively seeking control process that were more fully integr \.'-_ ~ l in an organizations overall operations, As Koontz and Weihrich have pot. r~i out, tno basic control process involves three steps. ' ' la) Establishing standards - As plans are yardsticks against V\'lllCll tr.`t:w;tgis device controls. Hence the lust step tn the process ot controlling is tc .st_tt>i:;h plane. However, since plans are complex and detail, managers cannot ,_ isiplex St detail, managers CGIIMUI ~3.;ttch everything, hence special :ilttlil it

established , which setw as .1 q4|\=;.,1olperlottttancefhey are the se.. :,i,.t' tn an entire planning }JlU{jlrUl1||lU at which measures ol pertuiittaitce tt i nie t that managers can receive signals about the progress ol tiitpletricnt wort oi trio plan. <