Chapter 15 Management Control Systems 2015 YOLO Learning Solutions Management control includes all activities an organization undertakes to ensure that its actions lead to achievement of its objectives. A management control system is a planned, ordered scheme of management control that allows managers to readily assess where the firm actually is at a point in time relative to where it wants or expects to be. Internal controls refer to processes that are developed to provide assurance that an organization reaches its objectives relating to operational efficiency, accuracy of financial reporting, and regulatory compliance. Control in Organizations 2015 YOLO Learning Solutions Control helps an organization adapt to changing conditions, limits the magnification of errors, assists in dealing with increased organizational complexity, and helps minimize costs. Most large organizations employ individuals, often called controllers (also comptrollers), whose chief responsibility is to coordinate and supervise financial and other control activities. For control to be effective, it must be integrated with planning so that managers can readily compare actual results with planned projections. Control in Organizations (continued) 2015 YOLO Learning Solutions The control process consists of four basic steps: Establishing performance standards (targets set by management against which actual performance is compared at a future date) Measuring actual performance in the context of the specific activities that management wishes to control Comparing performance against standards Evaluating performance and taking corrective action Should discrepancies occur between desired and actual performance, a firm can decide to correct the deviations, change the performance standards, or maintain the status quo. The Control Process 2015 YOLO Learning Solutions Organizational control is a broad-based form of control that guides all organizational activities and oversees the overall functioning of the whole firm. The two dominant forms of organizational control are bureaucratic control and clan control: Bureaucratic control, sometimes called hierarchical control, attempts to control the firms overall functioning through formal, mechanistic structural arrangements. Clan control, also referred to as decentralized control, seeks to regulate overall organizational functioning through reliance on informal, organic structural arrangements. Forms of Management Control 2015 YOLO Learning Solutions Operations control regulates one or more individual operating systems within an organization. Most companies practice three basic forms of operations control: Preliminary control monitors deviations in the quality and quantity of the organizations inputs with the objective of preventing deviations before they enter the system. Screening control regulates the transformation process to ensure that it is consistent with objectives. Feedback control monitors the firms outputs. In practice, most companies use all three forms simultaneously. Operations Control 2015 YOLO Learning Solutions Strategic control ensures that the organization effectively understands and responds to the realities of its environment. Effective strategic control should tell managers if their strategies are appropriate, given the actual circumstances faced. Effective strategic control is especially important for companies operating in highly complex and dynamic environments. Strategic Control 2015 YOLO Learning Solutions The most commonly used and basic methods of financial control include budgetary control, analysis of financial statements, and financial audits. The principal means of controlling the availability and cost of financial resources is through budgeting, the process of establishing formal, written planscalled budgetsfor future operations in financial terms Two main forms of budgeting are: Operating budgeting Capital budgeting Financial Control 2015 YOLO Learning Solutions Companies have traditionally developed control budgets in one of three ways: Top-down budgeting Bottom-up budgeting Negotiated budgeting Advantages of budgeting: Can lead to better coordination of organizational activities Serves as a means of bringing together diverse organizational members to determine overall objectives Implies a need for the organization to adapt continually in the face of constant environmental change Financial Control (continued) 2015 YOLO Learning Solutions Disadvantages of budgeting: It is difficult to do. It often involves the extensive use of incremental budgeting. It sometimes is used as a method of legitimizing current power structures. Zero-based budgeting is a method of budgeting in which managers thoroughly reevaluate organizational activities to determine their true level of importance. Regardless of how effective budgetary control may actually be, it should never be the sole means of a companys financial control. Financial Control (continued) 2015 YOLO Learning Solutions The two principal financial statements used in management control are: Balance sheetsA snapshot of the organizations financial position at a given moment; indicates what the firm owns and what proportion of its assets are financed with its own or borrowed money Income statementsShows the profitability of an organization over a period of timea month, a quarter, or a yearand helps managers focus on the organizations overall revenues (from sales and investments) and the costs incurred in generating those revenues Financial Control (continued) 2015 YOLO Learning Solutions Using ratio analysis, managers take information from the balance sheet and income statement so that they can measure the companys efficiency, profitability, and sources of finances relative to those of other organizations. A financial audit is a periodic and comprehensive examination of a firms financial records. Financial Control (continued) 2015 YOLO Learning Solutions Nonfinancial controls provide a company with a method to measure nonfinancial performance, such as ethics and compliance activities as well as those related to sustainability. Nonfinancial control methods include: The Balanced ScorecardA management control system customized for a companys industry, technology, mission, and strategy The triple bottom lineFocuses on the social, environmental, and economic impact of a companys operations equally and simultaneously; also known as people, planet, profit Nonfinancial Control 2015 YOLO Learning Solutions Developing the Control Process Because of differing circumstances faced by individual organizations, what makes the ideal control system for one is not necessarily appropriate for another. Effective control systems are: Well-integrated with planning Flexible Accurate Timely Objective Managing the Control Process 2015 YOLO Learning Solutions Common reasons for resistance to control include: Overcontrol Inappropriately focused control Control that rewards inefficiency The creation of enhanced accountability Overcoming Resistance to Control To overcome resistance to control, managers can: Create effective control from the outset Encourage employee participation Employ both management by objectives and a system of checks and balances Understanding Resistance to Control 2015 YOLO Learning Solutions Indicators of possible control-related difficulty include: A high incidence of employee resistance to control A unit that meets control standards but fails to achieve its overall objectives Increased control that does not lead to increased or adequate performance The existence of control standards that have been in place for an extended period of time Organizational losses in terms of sales, profits, or market share Signs of Inadequate Control Systems 2015 YOLO Learning Solutions