A management control system (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole in light of the organizational strategies pursued. Management

control system A control system manages, commands, directs, or regulates the behavior of other devices or systems using control loops. It can range from a single home heating controller using a thermostat controlling a domestic boiler to large industrial ...

influences the behavior of organizational resources to implement organizational strategies. Management control system might be formal or informal.

Overview

Management control systems are tools to aid management for steering an organization toward its strategic objectives and competitive advantage. Management controls are only one of the tools which managers use in implementing desired strategies. However strategies get implemented through management controls, organizational structure, human resources management and culture. According to Simons (1995), Management Control Systems are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities Anthony & Young (1999) showed management control system as a black box. The term black box is used to describe an operation whose exact nature cannot be observed.

History

One of the first authors to define management control systems was

Ernest Anthony Lowe Ernest Anthony (Tony) Lowe (June 1928 - 5 March 2014) was a British economist, and Professor of Accounting and Financial Management at the University of Sheffield, known for his work on management control, and management control systems. Biograph ...

, Professor of Accounting and Financial Management at the

University of Sheffield The University of Sheffield (informally Sheffield University or TUOS) is a public university, public research university in Sheffield, South Yorkshire, England. Its history traces back to the foundation of Sheffield Medical School in 1828, Firth C ...

, in his 1971 article "On the idea of a management control system." He listed the following four reasons for the need for a planning and control system: :''The need for a planning and control system within a business organization flows from certain general characteristics of the nature of business enterprises, the chief of which are follows:'' :* ''firstly, the enterprise has (by definition) organizational objectives, as distinct from the separable and individual ones of the members constituting the 'managerial coalition';'' :* ''Secondly, the managers of the sub-units of the enterprise must necessarily be ambivalent in view of their own personal goals, as well as have a good deal of discretion in deciding how they should behave and in formulating their part of any overall plan to achieve organizational objectives; '' :* ''thirdly, business situations (and people's behaviour) are full of uncertainty, internally as well as externally to the business enterprise.'' :* ''fourthly, there is a necessity to economize, in human endeavours we are invariably concerned with an allocation of effort and resources so as to achieve a given set of objectives...'' The term ‘

management control Control is a function of management which helps to check errors in order to take corrective actions. This is done to minimize deviation from standards and ensure that the stated goals of the organization are achieved in a desired manner. Accordi ...

’ was given of its current connotations by

Robert N. Anthony The name Robert is an ancient Germanic given name, from Proto-Germanic "fame" and "bright" (''Hrōþiberhtaz''). Compare Old Dutch ''Robrecht'' and Old High German ''Hrodebert'' (a compound of ''Hrōþ, Hruod'' ( non, Hróðr) "fame, glory ...

(Otley, 1994).

Management control system, topics

Management control

According to Maciariello et al. (1994), management control is concerned with coordination, resource allocation, motivation, and performance measurement. The practice of management control and the design of management control systems draws upon a number of academic disciplines. * Management control involves extensive measurement and it is therefore related to and requires contributions from accounting especially management accounting. * Second, it involves resource allocation decisions and is therefore related to and requires contribution from economics especially managerial economics. * Third, it involves communication, and motivation which means it is related to and must draw contributions from social psychology especially organizational behavior (see Exhibit#1). nthony and Govindajaran(2007) defined Management Control as the process by which managers influence other members of the organization to implement the organization’s strategies. According to Kaplan, management controls are exercised on the basis of information received by the managers.

Management accounting and management accounting system

Anthony & Young (1999) showed that management accounting has three major subdivisions: *

full cost accounting Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical costs and benefits or ad ...

, * differential accounting and * management control or responsibility accounting. Chenhall (2003) mentioned that the terms management accounting (MA), management accounting systems (MAS), management control systems (MCS), and organizational controls (OC) are sometimes used interchangeably. In this case, management accounting refers to a collection of practices such as budgeting, product costing or incentives. Organizational controls are sometimes used to refer to controls built into activities and processes such as statistical quality control, just-in-time management.

Finance-oriented vs. operational-oriented management control

Traditionally, most measures used in management control systems are accounting-based and financial in nature. This emphasis on financial measures, however, distracts from essential non-financial factors such as customer satisfaction, product quality, etc. Furthermore, non-financial measures are better predictors of long-run performance. Consequently, a management control system should include a comprehensive set of performance aspects consisting of both financial and non-financial metrics. The inclusion of non-financial measures has become an essential characteristic of current management control systems, to the point of becoming the main criterion in distinguishing different systems. Therefore, depending on the balance between financial and non-financial measures, a management control system may be characterized as finance-oriented or operations-oriented. Finance-oriented control systems are primarily based on financial accounting data, such as costs, earnings or profitability, whereas operations-oriented control systems are primarily based on non-financial data that focus on operational output and quality, for example service volume, employee turnover, or customer complaints.

Management control system techniques

According to Horngren et al. (2005), management control system is an integrated technique for collecting and using information to motivate employee behavior and to evaluate performance. Horngren, C., Sundem, G. and Stratton, W., 2005. Introduction to Management Accounting, New Jersey, Pearson. Management control systems use many techniques such as *

Activity-based costing Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more i ...

Balanced scorecard A balanced scorecard is a strategy performance management tool – a well structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from ...

* Benchmarking and Benchtrending *

Budgeting A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environme ...

Capital budgeting Capital budgeting in corporate finance is the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects ...

* JIT *

Kaizen is concept referring to business activities that continuously improve all functions and involve all employees from the CEO to the assembly line workers. ''Kaizen'' also applies to processes, such as purchasing and logistics, that cross org ...

(Continuous Improvement) *

Program management Program management, is the process of managing several related projects, often with the intention of improving an organization's performance. It is distinct from ''project'' management. In practice and in its aims, program management is often ...

techniques *

Target costing Target costing is an approach to determine a product's life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting a desired profit m ...

* Total quality management (TQM) *

Incentive system The term incentive system refers to a variety of fields, including biology, education, and philosophy. Organizational Psychology, Economics, and Business In organizational psychology, economics and business an incentive system denotes a struc ...

References

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