MACS- Module 1-Basic ConceptsManagement Control - Definition• Management Control is the process by which managers

influence other members of the organization to implement the organisation’s strategies.

• It involves PLANNING, CO-ORDINATING, COMMUNICATING, EVALUATING, DECIDING AND INFLUENCING.

• Elements of MCS:• Strategic Planning Budgeting• Resource Allocation Performance Review• Evaluation Reward• Responsibility Center Allocation• Transfer Pricing

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MACS- Module 1-Basic Concepts• Strategy Vs Structure—Which first?

• In the fast changing environment, Strategies emerge through experimentation and adhoc processes. Execution advantage to be seen

• Successful companies, which implemented better MCS—New York Times, 3M Corporation, Dell computer, Walmart, Cisco systems, Southwest Airlines

• Not successful companies: Tyco, Global crossing, Enron

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MACS- Module 1-Basic ConceptsElements of control system: Examples –any human activity.

• A detector or sensor—knowing what is happening• Assessor- comparing actual happening with what is expected• Effector-feedback suggesting altering behaviour• Communication network among all the three

• Managers have personal as well as organizational goals. Goal congruence means goals of individual members to be consistent with the organistional goals.

• Organisation structure—Today’s controls and tomorrow’s strategies

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MACS- Module 1-Basic ConceptsStrategy formulation: It is the process of deciding on the goals of the

organization and the strategies for attaining these goals. Management Control is the process of implementing them.

Example of Successful moves:• 3M:• Jim McNerney CEO 3M—between 2000 to 2003:• He emphasized on fast growing sectors like health care, display and

graphics• He instituted six sigma• He established metrics for new products and introductions• R & D allocation on the basis of potential growth opportunities

Indian Example: Turnaround of Indian Bank during the period of Ms Ranjana Kumar

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MACS- Module 1-Basic ConceptsImpact of internet on management control:

• Instant access

• Multi-targetted communication

• Costless communication

• Ability to display images

• Shifting power and control to the individual

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MACS- Module 1-Basic ConceptsGOALS: (and objectives)• Corporations being artificial persons, CEO with other management

members decide goals. Sometimes goals set by founders last for long. Goals are timeless, they continue till they are changed and the change is rare.

Eg Ford Motors, Gen Motors, Eastman Kodak and Walmart

• Strategies are plans to achieve the goals. (course of action)

• Goals are long term and long lasting. Objectives are the set plans to achieve the goals. Eg. Profitability—consistent is the goal. Planning to achieve a certain profit level is an objective.

• However, many authors do not make much difference

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MACS- Module 1-Basic Concepts

GOALS: (and objectives)Important Goals: • Profitability• (Revenues MINUS Expenses) / Revenues = Profit margin

percentage• Revenues/Investment = Investment Turnover• (Revenues MINUS Expenses) / Revenues * Revenues/Investment

=Return on Investment • Maximising shareholder value (optimizing/satisfaction)• Risk—Eg. South Asian Crisis 1996-98• Multiple Stakeholder approach• Size/Class of organization• Quantum or Percentage?

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MACS- Module 1-Basic ConceptsSTRATGEGIC KEY VARAIBLES IN MCS• Strategic key variables are commonly referred to as strategic

factors, key factors and indicate to the management the necessity for prompt action.

• Both Corporate and Business Levels analyse Strategic factors. Both see Key strategic issues and generic options

Some of the strategic factors are:• Right mix of industry Existential purpose• Vision, Mission• Objectives• Single industry orientation or diversification (related diversification or

unrelated diversification)• Cost strategies (low cost, differentiation)• Period—short term,medium term and long term

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MACS- Module 1-Basic ConceptsMANAGEMENT BY OBJECTIVES:• MBO is a comprehensive managerial system that integrates many

key managerial activities in a systematic manner and that is consciously directed toward the effective and efficient achievment of organizational and individual objectives. It includes HRP career planning, reward systems, budgeting and other managerial activities.

Peter F Drucker suggests the following:• Market standing Innovation• Productivity Physical and financial resources• Profitability, Service• Managerial performance and development• Worker performance and attitude• Public responsibility• Quality

In short, it is a comprehensive goal driven, success oriented management system

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MACS- Module 1-Basic ConceptsManagement Control:• Management control is the process by which managers

influence other members of the organisation to implement the organisation’s strategies.Activity End Product

• Strategy formulation Goals, strategies and policies• Mangement Control Implementation of strategies• Task control Efficient and Effective performance of individual

tasks Management control in a broader sense includes all the three

levels of activities. Hence it includes task control 10

MACS- Module 1-Basic ConceptsTask Control:

• Task Control is the process of ensuring that specified tasks are carried out effectively and efficiently.

• It is transaction oriented—individuals performance culminating into organizational performance. Even Machines (conmputers) are run by human beings.

• Task control means bringing an out-of control condition back to the desired state. Hence it is an optimal or appropriate decision

• Examples: • No of units ordered by customers• No of units of raw material purchases and consumption• Components used in manufacture• Employee productivity• Amount of cash used• Procurement, production scheduling, logistics, quality control and

cash management are good examples.

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MACS- Module 1-Basic Concepts

Task Control Vs Management Control:• Task Control is scientific and quantifiable

• Management control consists of many task controls and extends to qualitative aspects ( including behaviour aspects of managers)

Operations Control:• Operations control systems ensure that day to day actions are going

according to the plans. These systems are applied in production as well as service organizations.

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Cost Center: Profit Center and Investment Centers:Cost Center:• Cost center is a location, person or item of equipment for which cost

is to be ascertained and used for control purposes

Types of Cost Centers: • Personal and Impersonal Cost centers: • Personal Cost Center: Eg Sales Manager, Works Manager• Impersonal Cost Center: Eg Location or item of equipment,

production department, a machine or a group of machines• Production and Service cost center:• Production Cost center: Conversion of raw material to finished

product• Service Cost Center: Anciliary to render service to other production

and service cost center EG Maintenance department, Power house (electricity generation)

• Process Cost Center: A cost center in which a specific process or sequence of operations is carried out

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Cost Center: Profit Center and Investment Centers:

Profit Center:• It is a sub-unit of an organization to which both revenues and costs

are assigned, measured and controlled. Segmental performance is also evaluated. Both inputs and outputs are measurable in financial terms.

• It helps to assess the managerial performance

Investment Center:

• Investment Center is a department or an area of responsibility, where a manager controls revenue and associated costs, assets and liabilities. His/her performance is assessed largely on the base of the ROI achieved.

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Sources for cost information:Cost unit, Classification of Costs and Cost analysis

Cost Unit:

• Cost unit is a unit of product or unit of service or time to which costs are ascertained by means of allocation, apportionment and absorption. Examples: Fabrication Job, Road Construction Contract, An Automobile Truck, a table, one load of sand for construction, Hours spent by a lawyer in a case. Cost units pass through the cost center. Direct and indirect costs of the cost center are charged to the units of production by an absorption rate.

Classification of Costs: Basis of Classification:• Financial nature Elements of cost• Function of cost Control classification• Cost behaviour

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Sources for cost information:Cost unit, Classification of Costs and Cost analysis

Financial Nature: • Financial Costs—Cash and non-cash costs Egs of Non-cash costs—

are depreciation, opportunity cost etc

• Non-Financial Costs:--Not directly traceable—Eg motivation and morale of the employees, age composition of the workforce

Elements of Cost: Direct Cost (traceable cost) and Indirect Cost(common cost—all overhead costs—indirect material, indirect labour and indirect expenses)

Functional costs: Production cost, admnistration cost, selling and distribution cost, Research and Development Costs

Control Classification (Accounting Classification): Prime Cost, Works Cost, Cost of Production, Cost of Sales or Total Cost and Selling Price.

Behaviour of cost: Fixed costs and Variable Costs (also semi-variable costs—Telephone charges—rentals are fixed whereas the consumption rates are variable) 16

Cost Analysis for Management decision-making:

Management accountant should have a clear idea regarding the items and types of costs required to analyse and decide specific business problems and effect of such costs on alternative solution.

Management accountant uses tools and techniques like marginal costing, break even analysis, budgetary control, standard costing. In addition, he uses funds flow, cash flow, ratio analysis in decision making.

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