Give an overview on Management control system and its importance

in different organizations with examples?

Management Control Systems (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 considering the
organizational strategies. Finally, MCS influences the behavior of organizational
resources to implement organizational strategies. MCS might be formal or
informal. The term ‘management control’ was given of its current connotations by
Robert N. Anthony.
Robert N. Anthony (2007) defined management control as the process by which
managers influence other members of the organization to implement the
organization’s strategies. Management control systems are tools to aid
management for steering an organization toward its strategic objectives.
Management controls are only one of the tools which managers use in
implementing desired strategies.

Management Control System - Formal and Informal:

Management control system includes both formal control system and informal
control system. A formal control system requires that an organisation should have
clear-cut rules, procedures, guidelines, plans relating to different managerial
aspects. Such things are needed to guide, direct, motivate the managers and other
employees and coordinate their behaviour to achieve organizational goals.

In an organisation, many formal control systems may exist such as cost accounting
system, management accounting system, production engineering systems, human
resource system, quality maintenance system etc. Informal management control
systems are always unwritten and implicit.

However, they contribute greatly in the implementation of business goals and

strategies and help the organisation to attain high degree of motivation and goal
congruence. Examples of informal management control systems are unwritten
norms about good behaviour of managers and employees, loyalties, shared values,
organizational culture and ethics, mutual commitments among managers and
employees.
Characteristics of Management Control Systems
 Management control systems should be closely aligned to an organisation’s
strategies and goals.
 Management control systems should be designed to fit the organisation’s
structure and the decision-making responsibility of individual managers.
 Effective management control systems should motivate managers and
employees to exert efforts toward attaining organisation goals through a variety
of rewards tied to the achievement of those goals.

Factors Influencing Management Control Systems

1) Size and Spread of the Enterprise:
The size and spread of a large firm is bound to be different compared with that of a
small firm. This would certainly determine the content and nature of the control
system for each organisation.

2) Organisational Structure, Delegation and Decentralisation:

Statutes and conventions govern organisational structure, and the extent of
decentralization and delegation in all enterprises. For example, the management
philosophy of the State Bank of India is bound to be different from that of the State
Trading Corporation. Also, within an enterprise, the degree of decentralization and
delegation changes from one point of time to another to meet changed
environmental challenges and the opportunities that these may present. All these
influence management control systems practiced in organizations.

3) Nature of Operations and Divisibility:

Nature of operations and their divisibility affect management control systems. For
example, in the oil industry, for instance, sub-units cannot be formed on the basis
of products. In many large trading companies, however, divisions can be created
on the basis of products. Again, in the paper industry, the different stages in pulp
making cannot be subdivided for the purposes of management control, though pulp
making as a whole can be regarded as a division.

4) Types of Responsibility Centres:

Different control systems are needed for the various responsibility centres or sub-
systems within an organisation. Whether the performance of a responsibility centre
should be measured in terms of expenses or profitability or return on investment
depends on the type of responsibility centre. For example, a bank may apply
different performance measures to measure performance of its different branches.
 5) People and their Perceptions:
Perceptions of people in the organisation about the likely effects of the control
system on their work life, job satisfaction, job security, promotion and general
well-being could differ across organisations. These considerations will
significantly influence the nature and content of the management control system
needed in the organisation and must be duly considered while designing
management control systems.

Importance of Management Control system in organization

Control is an indispensable function of management. Without control function, the
management process is incomplete. In business organizations, the need for
control arises due to several factors;

1. Firstly, it is difficult to establish fully accurate standards of performance in

large and complex organizations. An executive needs all kinds of timely
information, which are not always available. Control is required to judge the
accurate of standards.
2. Secondly, there are several temptations in business. Employees are entrusted
with large sums of money and valuable resources. In the absence of control
employees may yield, to these temptations. An efficient control system helps to
minimize dishonest behavior on the part of employees.
3. Thirdly, in the absence of control employees may become lax in their efforts
and their performance may be below normal. The signals at, a busy road crossing
very well illustrates the significance of control. Just as road signals are essential to
ensure accident- free and smooth traffic, managerial control is necessary to ensure
smooth functioning of an organization.

It is through control that managers ensure that the resources of an organization are
obtained and utilized effectively for the attainment of desired objectives; a good
control system offers the following benefits:

1. Guide to operations. Control guides behavior towards organizational goals.

Lack of control results in errors behavior that may be detrimental to the goals. Like
a traffic signal control guides the organization and keeps it on the right tract It
measures progress towards goal and brings to light the adjustments, if any required
in day-today operatic; A sound control system is needed to measure progress, to
uncover deviations and to, indicate, corrective actions. It encourages Managers to
become more explicit about, objectives.
2. Policy verification. Control enables management to verify the quality of
various plans. It may reveal that, plans need to be redrawn or goals need to be
 modified. Changes in the environment may render the original plans non-workable
or deficient. Control helps to review, revise and update the plans. Without watchful
and feed- back-of an, efficient control system even the best plans may not work out
as expected. Management control not only reveals the need for corrective action, if
also provides the information by which managers can judge whether their targets-
are still appropriate in the changed environment.
3. Managerial accountability. When a manager assigns some activities and
delegate’s authority to his subordinates, he remains responsible for ultimate
performance. Therefore, a manager should check up the performance of
subordinates to ensure that they are utilizing the delegated authority in the-desired
manner. In this way-control enables managers to discharge their responsibilities
and at the same time delegate authority.
4. Employee morale. Control creates an atmosphere of order and discipline in the
organization. Absence of control leads to a lowering of morale amount employees
because they cannot predict what will happen to them. They become the victims of
the bias and repression of the superior.
5. Psychological pressure. The existence of a sound control system inspiring
employees to work hard and give better performance. When they know that they
performance is being judged and their rewards are linked to such appraisal, the, try
to contribute their best efforts.
6. Efficiency and effectiveness. Control contributes to the efficiency of
operations by focusing on goal accomplishment. Without control, managers will
not be able to check on subordinates progress towards the targets and take
corrective actions until after failure has occurred. A sound control system enables,
managers to detect and correct mistakes before they become serious, the presence
of control system helps to minimize wastage and loss. Control ensures efficiency
by monitoring the allocation and use of resources. It focuses attention on the key
factor essential to the success or effectiveness of the organization.