introductin to mcs

7/27/2019 Introductin to Mcs

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Introduction toManagement Control

Systems (MCS)

Chapter 1

Session 1


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Breaking the Ice

Before 17th January 1995, Nick Leeson was a 28-year old successful trader (of Japanese stockindex futures and options) in Singapore for one ofBritains oldest (233 years old) investment

banksBarings Plc. Within a few weeks, Leesonalone lost > US $ 1 billion of Barings money(i.e.,twice its available capital) and brought aboutthe collapse of the firm.

2001The dark year of control lapses: 9/11 andWTC; Enron; Tyco International; WorldCom;Arthur Andersen


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2 Important Laws

Murphys Law :If anything cango wrong, it will

Andersons Law:If you haveeffective controls,it wont


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Our Learning Objectives

To study the significance of management controlsystems in different activities of organizations

To understand the nature of management control

systems

To study the purpose and types of managementcontrol systems


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The Discussion Themes

Introduction to MCSThe importance of control

in a managerial setting

Key Elements of a Control System Nature of MCS

Purpose of MCS

Domain of MCS

Organizational Context of MCS

Types of MCSFormal and Informal Control

Systems


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The Many Images ofManagerial Control

Automation Behaviour Correction Discipline Effectiveness Fear Goals Hierarchy Inspection Jeopardy


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Why do Managers need

Control? To provide reassurance to stakeholders that the

organization is running smoothly.

To provide reassurance to managers that the organizationis moving in the chosen directions.

To provide guidance to employees for channelling theirbehaviour in desired directions.

To provide guidance from higher management to lower-

level managers to identify significant problems andopportunities


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What is Control?

The essence of control is ACTION, which adjustsoperations to predetermined STANDARDS, and itsbasis is INFORMATION in the hands ofmanagersDoug Sherwin (1956).

So, control involves:1. Deciding acceptability ofresults

2. Reference to what was planned

3. Information for measurement and comparison

4. Action for correction5. Effective use of capabilities to achieve goals


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What do ManagersControl?

Money Operations

Information

Time

Behaviour (of people)

Control efforts in 5 inter-related areas:


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Levels of ControlStrategic Management Operational

Linked tostrategyformulation

Involvestranslation ofcorporate goalsinto objectives

Ensures functionalefficiency

Topmanagement

Mid-level First-linesupervisors

Goal-oriented Resource-allocationoriented

Task-oriented

Long-term Medium-term Short-term

Aggregateperformance;unstructuredand summarized

reports

Combination; adhoc, summarizedand exceptionreports

Detailedperformance instructured reports


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What is a MCS ?

A management control system is the process by which

managers ensure that resources are used effectively and

efficiently in the accomplishment of organizational

objectives. (Anthony, Dearden, Govindrajan, 1992)

A management control system is a means of gathering

and using information. It aids and coordinates the

process ofplanning and control decisions throughout theorganization. It guides the behaviour of managers and

employees (Horngren, Datar and Foster, 2003).


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General Electric (GE)Levels of MCS

Total-organization levele.g., net income, share price;ROI; CF from operations; total employment; pollutioncontrol; community investment.

Customer/market levele.g., customer satisfaction; cost

of competitor products; time to respond to customerrequests.

Individual-facility levele.g., materials costs; labourcosts; rates of accidents and absenteeism in various

divisions/business functions. Individual-activity levele.g., time taken and costs

incurred for inbound logistics activities; units reworked onproduction line; number of shipments per employee;revenue generated per salesperson


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MCS includes

Financial data

Nonfinancial data

Formal control system

Informal control system


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Basic Elements of aManagement Control System

CONTROL

DEVICE ASSESSOR-Comparison with

Standard

EFFECTOR-Behaviour

Modification

ENTITY BEING

CONTROLLED

DETECTOR-Observation andreporting of

facts


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Purpose of MCS

Assist in target- setting

Collecting information on actual performance

Comparing actual performance with targets

Reporting the variations

Initiating suitable actions to ensure that the targetsare achieved efficiently and effectively.


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The Discussion Themes(contd.)

Nature of MCS

Organizational Context of MCS

Types of MCSFormal and Informal ControlSystems

Types of Formal MCS

Types of Informal MCS


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Desirable Attributes of a MCS An effective

MCS ensures

organizationalsuccess.

It enhances theability and

confidence ofemployees forhighperformance.

1. Future-orientedseek opportunities

2. Derived from strategy

facilitatesimplementation

3. Based on clear multiple, balanced, andobjectives

4. Multidimensionalfits any functional

organization

5. Minimizes control losses (i.e., TPP

introductin to mcs

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