Financial Control Systems

C - 502

Objective To build awareness regarding various control measures and their application in management decisions.

Suggested Readings: 1. Merchant, Kenneth A, Modern Management Control Systems, Pearson 2. Allen Bandt R. et al, Cases in Management Accounting and Control System, Pearson 3. Russel, Contemporary Aspect of Cost and Management Accounting, Pearson 4. Horngren, Charles T., Introduction to Management Accounting, Pearson

Management

Management is the process of organising resources and directing activities for the purpose of achieving organisational objectives. Organization consists of a group of people who work together to achieve desired results. Organization consists of hierarchy of managers with a top of - CEO. Each Manager is superior and a subordinate. The leaders of the organisation are collectively named as management.
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Control

Control is the regulating, restraining and also a unifying action in an organisation that brings unity out of the diverse activities performed by various units and subunits. It is the system of ensuring that actual state of affairs is in line with the desired state of affairs. A control system has 4 essential elements: 1. Detector or sensor identifies what is actually happening in the process 2. Assessor or selector determine the significance of what is happening by comparing information on what is actually happening with what is expected. 3. Effector or feedback device that alters behavior if the assessor indicates the need for doing so. 4. Communication network transmits information between detector, assessor and effector
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Examples of different control systems.

Thermostat It has thermometer inside which measures temperature and acts as a detector. It continuously reads the temperature and the assessor compares the readings with the preset standard. As the temperature drops or rises the effector switches off according to the communication received through the network.
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Examples of different control systems.

Human body temperature It is an automatic control device. Human body temperature is controlled at 98.6 F through sensory nerves called detectors. If the body temperature increases or decreases, the assessor (brain), compares information received from detector with the standard of 98.6 F, the effectors are muscles and organs which react eg, sweating, panting, shivering. Nerves act as communication network. This is self regulatory system.
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Examples of different control systems.

Motor Car Driver A motor car driver running his car at the speed of 55 km per hour. The driver observes the current speed, from the speedometer and compares it with the standard. A careful driver will automatically press brake to control the speed. A careless driver may not bother at all. A speedy driver may even accelerate to higher speed. Thus the control of a human being is never automatic. His decision will depend on his personality, attitude and behavior.
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Examples of different control systems.

In short, control is Automatic, like in thermostat Self regulatory like human body temperature. Discretionary, like motor car driver.

Systems

A system is a prescribed way of carrying out a set of activities. It consists of a structure and a process. - Structure outlines the nature of the organisation and how it is headed by responsible managers indicating their authority, responsibility and accountability. - The process indicates the methods of communication and interaction, which may be formal and informal.
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Management Control

1. 2. 3. 4.

5.
6.

Management Control is the process by which managers influence other members of the Organization to implement the organizations strategies. Management Control involves Planning Coordinating Communicating Evaluating Deciding Influencing people
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MANAGEMENT CONTROL SYSTEMS

According to Prof. John Dearden :

MCS is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization goals.
EFFECTIVE The maximum output is obtained with the minimum input. DOING THE RIGHT THINGS

EFFECIENCY Things are being done well. DOING THE THINGS RIGHT Efficiency is necessary to attract, hold and motivate individual.

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MANAGEMENT CONTROL SYSTEMS

According to Prof. Joseph A Maciariello & Calvin J Kirby :

MCS is a set of interrelated communication structures that facilitates the processing of information for the purpose of assisting managers in coordinating the parts and attaining the purpose of an organization on a continuous basis.
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MANAGEMENT CONTROL SYSTEMS

This is a logical integration of techniques for gathering and using information.

Planning and control

Motivating

Evaluating

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Management Control Systems

Set goals, measures, targets

Plan and execute

Feedback and learning

Evaluate, reward

Monitor, report
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MCS

Management control is the process by which managers influence other members of the organization to implement the organizations strategies. Management Control Activities includes: - Planning : what the organization should do - Coordinating the activities of several parts of the organisation - Communicating information - Deciding what, if any, action should be taken - Influencing people to change their behavior The purpose of management control is to ensure that strategies are carried out so that the organizations objective are attained.
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Effects of MCS on Behavior

MCS involves managers taking steps to help ensure that the organization's employees do what is best for the organisation. Controls are necessary to guard against the possibilities that people will do something the organisation does not want them to do or fail to do something they should. Unfortunately, individuals are some times unable or unwilling to act in the organization's best interest, so managers take steps to guard against the occurrence of undesirable behaviors and encourage desirable behaviors.
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Causes of Management Control problems

Lack of Direction Some people perform poorly because they do not know what the organisation wants from them. Motivational Problems Individuals objectives and organization's objectives do not naturally coincide; individuals are self-interested. Personal Limitation Due to lack of requisite intelligence, training, experience, stamina, or knowledge for the tasks at hand.
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Good MCS

Good Control means an informed person can be reasonably confident that no major, unpleasant surprises will occur. It allows for some probability of failure Good control v/s Perfect control
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Characteristics of Good MCS

Future oriented no unpleasant surprises in the future. Objectives driven things which the organisation seeks to attain. Not always economically driven should be implemented only if the expected benefits exceed the costs.
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Control problem avoidance

Activity Elimination Managers can avoid the control problems associated with a particular activity by turning over the potential profits and associated profits, to a third party. Example : General Motors
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Control problem avoidance

Automation Managers can sometimes use computers, expert systems and other means of automation to reduce their organisations exposure to some control problems Once programmed, these are absolutely consistent in their treatments of transactions and they never have any dishonest or disloyal motivations. In managerial situations, automation provides only a partial control system mainly due to cost and feasibility factor
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Control problem avoidance

Centralisation Extreme form of centralisation, in which all the key decisions are made at the top management levels, are common in small businesses which are run by a strong leader, who is also the founder. However, in most organisations, it is not possible to centralize all critical activities, and other control solutions are necessary.
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Control problem avoidance

Risk Sharing It involves buying insurance to protect against certain types of large, potential losses they might not be able to afford. It is rarely possible to avoid all risk because firms are rewarded for bearing risk, but most firms use some form of elimination, automation, centralisation and risk sharing in order to limit their areas of exposure to the control problems.
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