Meaning and scope of Management Control System

1. MCS Management Control System Meaning and scope of Management Control System

2. Management Control System Management Control System MCS Management Control System

3. MCS Management Control System MANAGEMENT:- Management is the art of getting things done through an individual or group of individuals to achieve the goal and objective of the organization efficiently. The key person involved in the management of an organization is the manager. CONTROLLING- Controlling is the mode of checking the progress of plans and also correcting any deviations that may occur along the way. It involves Fixing the standard for measuring the work performance. Measurement of the actual performance . Comparing the actual with standards & find the deviations. Taking the corrective actions SYSTEM:- System means an organized relationship among the functioning units or components. System can be defined as set of elements joined together for a common objective. Or System is a group of interrelated components working towards a common goal by accepting input thereby producing output in an organized transformation process. When the feedback and control are attached to any system to make it self-regulating and self monitoring it is known as Cybernetic system.

4. MCS Management Control System • Management control System:- • Management control system is a process of assuming that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives. • According to Billy, E. Goaz:- “Management control seeks to compel event to conform to plans.” • According to William Travers Jerome:- “ Some sort of systematic effort to compare current performance to a predetermined plan or objective, presumably in order to take any remedial action required.” • Management controls are used daily by managers and employees to accomplish the identified objectives of an organization. • Management controls are the operational methods the enable work to proceed as expected.

5. MCS Management Control System • often the management controls are documented in terms of policies and procedures. And many times these methods are not documented. • The purpose of management control review is to evaluate the entire system or management control to help your unit operate more efficiently and effectively, and to provide a reasonable level of assurance that the process and products for which you are responsible are adequately protected. • MCR provides a variety of benefits which promote sound management , including the following:- • Ensuring that administrative , financial and programmatic risks have been adequately addressed. • Eliminating excessive controls that may have accumulated over the years, allowing for more efficient operations. • Increased confidence that responsibilities are being carried out according to the plan.

6. MCS Management Control System Characteristics of Management Control System:- The main characteristics of Management Control system are as following:- A total system Monetary standards Definite pattern Coordinated system Line managers Emphasis A total system:- it is total system as it covers all aspects of the company’s operations. It is an overall process of the enterprise to fit together the separate plans for various segments so as to assure that each harmonious with one another and that the aggregate effect of all of them on the whole enterprise is satisfactory.

7. MCS Management Control System Monetary standard:- the MCS is built around a financial structure and all the resources and outputs are expressed in terms of money. The results of each responsibility centre , in respect to production and resources are expressed in terms of common denominator of money. Definite pattern:- the MCS process follow a definite pattern and timetable. The whole operational activity is regular . It is a continuous process even if the plans are changed in the light of experience or change in technology. Coordinated system:- MCS is fully coordinated and integrated system. For example if the information for one purpose varies from the collected for another purpose , the data reconcile with one another. It is therefore more feasible to consider the interlocking sub-processes as a single set for achieving the objectives of the enterprise. Line managers:- figures themselves are nothing more than marks on piece of papers. Anything that the business accomplishes is the result of the actions of the people. Information collected from various sources has to be properly organized. The line managers are the focal points in management control system who alone can influence others to improve the performance. Business budgets are prepared on their advice and suggestions. They can encourage persons to work efficiently in the interest of the enterprise as to achieve the objectives set forth

8. MCS Management Control System Emphasis:- management control emphasises on search for planning as well as control. Both should go hand in hand to achieve the best results . It has an organizational aspect also in as much as lines of communication are required for the collection and transmission of control information.

9. MCS Management Control System SCOPE OF MCS Managerial control is an important process in which accounting information is used as to accomplish the organization’s objective. Therefore the scope of control is very wide that covers a broad range of management activities. According to Holden, Fish and Smith the main areas of control are as follow:- • Policies control • Control over organization • Control over personnel • Control over wages and salaries • Control over cost • Control over technique • Control over capital expenditure • Production control • Overall control • Control over External relations • Control over Research and Development

10. MCS Management Control System Policies control:-the success of business hangs on formulation of sound policies and proper implementation. There is a great need of control over policies. Control over organization:-for the control over organization the management uses organization’s manual and organizational chart. Designing and organizing various departments for smooth running of business is very essential. If any problem or conflict arises the management control attempts to remove the causes of such frictions and rationalize the organizational structure as to ensure its efficient working. Control over personnel :- anything that the business accomplishes is the result of the action of those people who work in the organization. It is people, not figure, that get things done. The personnel manager is responsible to draw a control plan for having control over the personnel of the concern. Control over wages and salaries :-control over wages and salaries is sometimes assigned to the personnel department or a specially constituted wages and salary committee. Control over cost:- the cost accountant who is responsible to control cost set cost standards, labor material and overhead . He makes comparison of actual cost data with standard cost. Cost control is delicate task and is supplemented by budgetary control system.

11. MCS Management Control System • Control over technique:- it implies the use of best methods and techniques so as to eliminate all waste in time, energy and material. The task is accomplished by periodic analysis and checking of activities of each department with a view to avoid and eliminate all non essential motions , functions and method. • Control over capital expenditure :-various projects entailing huge amounts require control. This is exercised through a system of evaluation of projects in terms of capital. Capital budget is prepared for whole concern. Every project is evaluated in terms of advantage accruing to the firm. For this purpose capital budgeting, project analysis , study of cost of capital etc are carried on extensively. • Production control:- the function of production control is to plan, organize, direct and control the necessary activities to provide products and services. Once the production system is designed and activated the problems arise in the areas of production, planning and control. Market needs and attitudes of consumer are studied minutely for revision in product lines and their rationalizing. Routing, scheduling , dispatching , follow up, inventory control, quality control are the various techniques in production control. • Overall control :- a master plan is prepared for overall control and all the concerned departments are made to involve in this procedure.

12. MCS Management Control System • Control over External relations:- public relations department should always be alert in improving external relations. It may also prescribe norms and measure for other operating departments to insist on cordial relations with all the parties. • Control over Research and Development:- research activities , being technical in nature cannot be controlled directly . But is should be seen that all facilities are provided to research staff to improve their ability and keeping in touch with the up-to date techniques and devices . Training facilities should also be provided by having research budget in the business.

13. MCS Management Control System Nature of Management Control:- Control is an important element of the process of managing. It ensure work accomplishment according to plans. It is the process that guides and controls operations towards some predetermined goods. According to Prof. R.N. Anthony “Management control is the process by which manager assures that the resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.” • It is a process by which people in the organization are made to work properly and most efficiently with a view to obtain best results. • It is concerned with measuring and evaluating performance so as to secure the best results under the circumstances. • An effort is made to compare the current performance to a predetermined objective or plan. Thus control is fundamental function of the management to ensure work accomplishment according to predetermined plans and standards.

14. Types of control Preventive Control Defective Control • Defective controls are designed to identify an error or irregularity after it has occurred. • E.g. • An exception report that detects and list incorrect or incomplete transactions. • A manager’s review of long distance telephone charges will detect improper or personal calls that should not have charged to the account. • Preventive Controls are designed to discourage the errors and irregularities. • E.g. • A manager’s review of purchase prior to approval prevents inappropriate expenditures of office funds. • A computer program which ask for password prevent unauthorized access to information. MCS Management Control System • Most controls can be classified as:-

15. MCS Management Control System Other characteristic of control are as follow:- Control is an essential function of every manager. Control implies the existence of goals and plans Control is forward looking Management control is a continuous process People oriented Control is essential function of every manager:-manager at all level have to focus attention towards future operational and accounting data taking into consideration past performance, present trends and anticipated economic and technological changes. The nature, scope and level of control will be governed by the level of managers exercising it. Control implies the existence of goals and plans:- without predetermined goals and plans management control is not possible . These two provides a link between such future anticipations and actual performance as future gets converted into present and past with the passage of time. Managers quantify the their hopes an ambitions of the future on realistic basis and to use them later as standards for measurement of actual performance . In the absence of objections and goals the results are likely to be different from what desired . Plan complement objectives which can be attained on the basis of proper plans.

16. MCS Management Control System Policy sets the intention while control looks and ascertain how far the objectives are attained. Control is forward looking:- planning is the process of deciding what action should be taken in the future. One cannot change the events that have happened in the past. The nature of managerial control is forward looking. It is based on the basis of evaluation of past performance that future plans or guidelines can be laid down. Management control involves managing the overall activity of the enterprise for the future. It prevents the deviations in operational goals. Management control is a continuous process:- control is a continuous process over the human and material resources . It demands eternal vigilance of every step. Regulating the activities of the organization is the primary aim of the management control which the manager controls the men and circumstances around him on a regular basis. Business conditions are always changing so management must be always adapting itself to the changed circumstances. Therefore it is a continuous process. People oriented:-Management control is significant to internal control system as its approach is people oriented. People assumes a new role, attitudes and motivated under a sound management . Control is attained through people and not lifeless materials . It is manager, engineers and operators who implement

17. MCS Management Control System the ideas and objectives of management. The coordination of main divisions of a concern makes for smoother operations and less friction who results in the achievement of predetermined objectives. Process of Control:- Well defined objective:- the objective and goals of the organization should be clear and well defined. The organization goals should be split into sub-goals at departmental level. The operation of various functions and their coordination should be vested in the hands of executives who are armed with sufficient authority or power to fulfill their responsibility . The planned goals of the enterprise or of a particular department serve as standard for performance measurement. Determination of strategic point of control:-the responsibility centers and strategic points of control should be selected and fixed. To make the control process effective , the management should concentrate upon strategic points only. Establishment of control standards:-these standards are established criteria against which actual performance can be compared and measured in terms of money, time ,physical units or some other index. The object of predetermined

18. MCS Management Control System standard is that comparison between actual performance and target performance is made possible. Continuous comparison is very necessary. This requires tabulating the targets framed, collecting and collating data regarding actual performance and reporting variations periodically to the controlling authorities. Controls is not possible unless actual performance and the standards against which it is being measured are comparable. Determination of controllable costs and control period:-optimum control does not mean excessive control. Sometimes good results are achieved only if critical points are identified. Secret of good control is to establish strategic points where corrective actions will be cheapest and most effective. Strengthening the organization:- the complete framework of control is aimed at strengthening the organization. Planning is a prerequisites. Control should be tailored to fit the organization. There should be a system of checks on the managerial activity of subordinates. The organization should be strengthened first to overcome the weakness of deviations. Control should incorporate sufficient flexibility in them so as to remain effective despite the failure of plan. Measurement of performance:- it is not only a process of comparison of actual performance with objectives, but to initiate steps to achieve the objectives. This is done without encroaching upon the scope of authority of manager concerned . The evaluation of performance is very necessary.

19. MCS Management Control System it involves the measurement of performance in respect of work and in terms of control standards. According to Peter F Drucker the measurement of performance must be clear , simple and rational, relevant and reliable. The effectiveness of control system depends upon the prompt reporting of past results to the persons who has power to produce changes . The next step is to compare the performance of with the planned standards. It is important to determine the limits within which the variations can be held and still to be regarded within control when performance is measured accurately. The management is not only required to find out the extent of variations but the causes of variation must also be ascertained correctly . The manager should be able to distinguish between minor and unimportant variation and variations indicating need for immediate correction. To access whether actual performance is in accordance with the target comparison with the standards has to be made and variation is properly analyzed to understand the reason for variation. The comparison should be done at frequent interval so that immediate corrective action should be taken. Control period:-the proper control period is the shortest period of time in which the management can usefully intervene and in which significant changes in performance are likely. The period is different for different responsibility centres and for different items within responsibility centres. Spoilage rates

20. MCS Management Control System in a production operation may be measured hourly or often. The key cost element of the centre may be measured daily. Reports on overall performance , particularly those going to the levels of management are often on a monthly basis and sometimes for quarterly or longer intervals, since top management does not have either the time or the inclination to explore the local temporary problems. Adequate or Effective Control System:- “since management control involves the behaviour of human beings, the relevant principles are those drawn from such disciplines as social psychology and organizational behavior rather than from Economics, Mathematics or any discipline.”. The following are the important requirements for making any control system effective in application:- Control by objectives 6. Flexibility Direct Control 7. Economy Forward looking control 8. Feedback Managerial self control Simple and balanced control

21. MCS Management Control System • Control by objective: - • the control must be goal oriented and by objectives . • As objectives classify the expected results in meaningful and realistic terms, • they provide the control standards by which actual performance can be measured. • The control system should be according to the nature and need of the organization. • Direct control:- • Control should be exercised on people who work on machines and material. • It should be employee oriented rather than work oriented. • It the people who resent control and not the inanimate articles. • Therefore it is necessary to alter the attitude of personnel who oppose control measures • An attempt should be made to understand the attitude of the people by proper education. • Forward looking Control :- • Control should always be forward looking. • It should bring out the deviation in light as soon as possible. • It must focus on strategic point with exception.

22. MCS Management Control System • Managerial Self- Control:- • Control should be enforced through managerial positions in the organizational structure. • Each manager must be vested with adequate authority for exercising control and taking decisions. • Simple and Balanced Control:- • To be effective control must be simple and well balanced. • Any control device which is not intelligible cannot be put into practice. • So the control lines must be simple and intelligible both to the controller and the controlled. • Flexibility:- • The control procedure should not be rigid. • Even the best plans and other predetermined criteria need to be changed form time to time to meet a particular situation. • However , an effective control system should retain its basic structure. • Economy:- • A simple control system is bound to be economical . • It should not be cumbersome and expensive . • Economy is the basic requirement of any good control system.

23. MCS Management Control System • Feedback:- • Feedback is the process of adjusting future actions based upon information about past performance. • This proves the worth and utility of control process. Control should not be negative . It should be positive , constructive and helpful . Control is not a command, it is guidance. The system is really concerned with the arrangement for implementing decision made in strategic planning. Control Environment:- An effectivecontrol environment supports and strengthen the other control elements, whereas a weakcontrol environment undermines the other elements, rendering them useless. In an effective control environment , employees know that doing the right thing is expected and will be supported by upper level management, even if it hurts the bottom line. In a weak environment control procedure are frequently overridden or ignored , providing an opportunity for fraud.

24. MCS Management Control System • Traditionally, auditors issue questionnaire to senior management to determine whether management policies and procedures , such as code of ethics , have been implemented. The problem with this approach is that it measures managements effort to create a sound environment and not its effectiveness in doing so. • The more direct method of evaluating whether management has created an environment in which ethical behavior is encouraged is for internal auditors to survey the people who work in that environment. The focus of the assessment should not be on the message management thinks it is sending, but on the message employees are actually receiving. • The control environment is one of the key component of an entity’s internal control it sets the tone of an entity, influences the control consciousness of people within all organization and is the foundation for all other components of the internal control system. • Management is responsible for evaluating and reporting on company’s controls. The external auditors are responsible for auditing management’s assertion and independently coming to their own conclusion about the company’s internal control effectiveness. They must evaluate management’s assessment and also perform their own independent test in many areas, including the control environment:-

25. MCS Management Control System The control environment has a pervasive structure that affects many business process activities. It includes element such as management’s integrity and ethical values ,operating philosophy and commitment to organizational competence. Test of control environment will consist of a combination of procedures, including a review of relevant documentation of design , inquiries of management and employees and direct observation. Auditor will have to probe for understanding and awareness and try to understand the company’s attitude toward internal control over financial reporting. They should also ask management for self assessment.

26. MCS Management Control System Concept of Goals and strategy:- • A strategy invariably indicates the long term goals toward which all the efforts are directed. E.g. long term goals might be to dominate the market to be the technology leader or to be the premium quality firm. Such enduring goal help the employees give their best in a unified manner and enable the firm to specify its competitive position very clearly to its rivals. • strategy is the overall plan of a firm deploying its resources to establish a favorable position and compete successfully against its rivals. • Strategy describes a framework for charting a course of action. • It explicates an approach for the company that builds on its strength and is a good fit with the firms external environment. It is basically intended to help firms achieve competitive advantage. • Competitive advantage comes from a firms unique ability to perform activities more distinctively and more effectively than rivals. A firm’s distinctive competence or unique ability here implies those special capabilities , skills, technologies or resources that enable a firm to distinguish itself from its rivals and create competitive advantage.

27. Element of Strategy Competitive advantage Goals Scope Logic MCS Management Control System • The term “Terrain” is highly relevant in explaining the concept of strategy more clearly. From the business sense “Terrain” refer to markets, segments and products used to win over customers. • The essence of strategy is to match strength and products used to win over customers. The essence of strategy is to match strength and distinctive competence with terrain in such a way that one’s own business enjoys a competitive advantage over rivals competing in some terrain.

28. MCS Management Control System Elements of Strategy:- Goal:-a strategy invariably indicates the long term goals towards which all the efforts are directed . For example long term goals might be to dominate the market , to be the technology leader or to be the premium quality firm. Such enduring goal help employees give their best in a unified manner and enable the firm to specify its competitive position very clearly to its rivals. Scope :-a strategy defines the scope of the firm that is the kind of products the firm will offer, the market ( geographies , technologies , processes) it will pursue and the broad areas of activity it will undertake. It also laid down the activities the firm will not undertake Competitive advantage:-a strategy also contains a clear statement of what competitive advantage the firm will pursue and sustain. Competitive advantage arises when the firm is able to perform an activity that is distinct or different form that of its rivals. Firms build competitive advantage when they take steps that help them gain an edge over their rivals in attracting buyers. These steps vary for example making the highest quality product , offering the best customer services , producing at the lowest cost or focusing resources on a specific segment or niche of the industry.

29. MCS Management Control System Logic:-this is the most important element of strategy. ‘Why’ is the logic of strategy. For example:- Strategy- a firms strategy is to dominate the market for inexpensive detergents by being the low –cost, mass market producer. Goal- goal is to dominate the detergent market Scope- is to produce low –cost detergent powder for the Indian Mass Market Competitive advantage- is firms low cost. But all these fails to answer why this strategy will work. Thus logic is the core of the strategy . To see how the logic is the core of the strategy consider the following statement:- ‘our strategy is to dominate the Indian Market for inexpensive detergent powder by being the low cost producer selling through mass-market channels. Our low price will generate high volumes,. This in turn will makes us a high volume, low –cost producer . The economies of scale would help us improve our bottom-line even with low price.