Performance Management
Week 8
Management Control Systems
Chapter 16: Management Control Systems
Colin Drury
1
Learning outcomes







Describe the three different types of controls used in
organisations.
Describe the cybernetic control system
Distinguish feedback and feed forward controls
Explain the potential harmful side- effects of results
controls
Describe responsibility accounting and controllable
principles
Determining how challenging the targets should be
Describe the influence of participation in budget
setting
2
Planning and Controlling
Management Accounting System
Planning
Budgets
Control
Accounting
System
Performance
Evaluation
Performance
Reports
Feedback
Management Decision
3
Planning and Controlling
What is planning?
Setting
goals
Predicting
results
Deciding how
to attain goals
4
Planning and Controlling
What is control?
Deciding
and
taking
actions
Deciding on
performance
evaluation
and feedback
5
Planning and Controlling
What are budgets?
They are
quantitative
expressions
of a proposed
plan of action.
They aid in the
coordination
and
implementation
of the plan.
6
Planning and Controlling
What are performance reports?
These are reports that
compare actual results
with budgeted amounts.
7
Management Control Systems
Controls
• The
process of ensuring that an
organization’s activities conform to its plans
and its objectives are achieved.
• No control without plans and objectives (
need to assess the achievement)
• They set, specify & predetermine desirable
behaviour and procedures for employees
to follow.
8
Management Control Systems
Controls
• Encompasses
all methods and procedures
directing employees towards achieving the
organization objectives
• Many mechanisms are used and
Management Accounting Control System
(MACS) is just one aspect
• Necessary to relate the MACS to the whole
control mechanism in an organisation.
9
Management Control Systems
Controls
• Different
level of control:
• Strategic control
•External focus
•Emphasis on external competition internal strengths, weaknesses, and
limitations( opportunities and threats)
• Management control systems
•Internal focus
•Collection of control mechanisms
•Aim to influence employee behaviours
to achieve organizational objectives
10
Management Control Systems
Different types of controls
• Action
or behavioural controls
• Personnel, cultural and social controls
• Results or output controls
11
Management Control Systems
Different types of controls
•(1) Action or behavioural controls
•Actions are the focus of control
•Superiors watch and guide actions of
subordinates
•Cause and effect relationships are clear and
well understood
12
Management Control Systems
•Action or behavioural controls
•Forms:
•behavioural constraints - prevention,
restriction, ceilings, authority
•pre-action review – scrutiny and approval of
action plans of the individuals being
controlled.
•action accountability – work rules,
procedures, codes of conduct, budgets,
rewards and punishment
13
Management Control Systems
•Action or behavioural controls
• Effective if actions are simple, desirable v
undesirable, cause-and-effect relationship
are clear, production line
• Limited if work is complex, uncertain causeand-effect relationship
• Need action tracking, good v bad actions
• Preventing action ideal – avoid costs of
undesirable behaviour
• Detection action – useful if applied timely,
early stop to undesirable behaviour
14
Management Control Systems
(2) Personnel, cultural and social controls
•From “clan controls”
• fostering strong sense of solidarity &
commitment towards organizational goals
people immerse in the interest of Company.
• high degree of discipline (Japanese pilot) by
dedication of individual to interest of the
whole
•Approach adopted to social and personnel
controls
15
Management Control Systems
• Personnel, cultural and social controls
•Social controls
• view as form of corporate culture
• Promote people who share committed to
same corporate objectives
•Personnel controls
• Helping employees to institute self-discipline
and self-control through:
• Selection & placement
• Training
• Job design
16
Management Control Systems
• Personnel, cultural and social controls
•Cultural controls (same as social controls)
• values, social norms, beliefs shared by
members, that influence actions
• exercise by one over the others action
(procedures)
• methods to shape culture:
•Codes of conduct - expectation
•Group based rewards – collective achievements
•Inter-organizational transfers – better
understanding
17
Management Control Systems
(3) Results or output controls
• Collect and report on information on work
effort outcome
•Establish results – performance measures
that minimise undesirable behaviour
•Establish performance targets
•Measure performance
•Provide reward and punishment
• Effects of desirable v undesirable behaviours
on performance
18
Management Control Systems
• Results or output controls
• Div manager with current ROI of 30% will reject
project with 25% ROI – while project has +ve
NPV & will benefit organization
• Pre-set and clear performance target essential
– quantitative target more motivational
• Measurements should sufficiently accurate,
objective, bias free, timely
• Effective control – individual whose behaviour
being controlled must be able to control and
influence the result
19
Management Control Systems
Cybernetic control systems
• Traditional management control approach
• mechanical model – thermostat control system
•The process
•The room temperature
•Continually monitored by a thermostat
•Deviation
•From desired temperature – identified by thermostat
•Corrective action
•Start if output not equal to predetermined level
•Thermostat cause input to be adjusted
(temperature)
•Turn on/off when temperature same/not same with
predetermined level.
20
© 2000 Colin Drury
Management Control Systems
21
Management Control Systems
Cybernetic control systems
• Process is controlled if:
•Objectives must exist
•Output must be measurable
•Compared in terms defined by the objectives.
•Predictive model exist – non-attainment can be
identified (feed back)
• corrective action evaluated
22
Management Control Systems
Cybernetic control systems
• The thermostat control system
•Same as result control system
•Performance Standards are determined
•Performance monitor by measurement systems
•Compare standard with actual
•Feedback on variance
•Action
23
Management Control Systems
Feedback and feed-forward controls
• Feedback controlled
• The cybernetic control system
• Actual output monitored against desired performance
• Corrective action on deviation
• Feed-forward control
• Control b4 deviation
• Monitor base on predicted/expected future output
• Take steps to avoid likely errors
• Require predictive model (accurate)
• Preferable when significant time lag occurs in
corrective action
• Budget is an example
• MACS consist of both feed forward and feed-backward
24
Management Control Systems
Harmful side-effects of controls
1. Occurs when controls motivate employees to engage
in behaviour that is not organizationally desirable
(system lack of goal congruence).
2. Results controls:
• focus only on what is measured, regardless of
whether it is organizationally desirable
• Focuses mainly on quantifiable and easily measurable
items.
• Subject to data manipulation. ( self measured)
• Can lead to negative attitudes towards the control
system. ( used as punitive )
(What you measured is what you get)
25
Management Control Systems
Harmful side-effects of controls
3. Action controls:
• May discourage creativity because divergence
are treated as abnormal.
4. Cultural controls:
• Lack of goal congruence where group goals do
not coincide with firm goals( lead to suboptimisation)
© 2000 Colin Drury
26
Management Control Systems
Management accounting control
systems (MACS)
• Tend to be the predominant controls in most
organizations because:
1 Monetary measure provides a means of
aggregating results from dissimilar activities.
2. Profitability and liquidity are essential for
company survival.
3. Financial measures enable a common
decision rule to be applied.
4. Measuring results in financial terms enables
managers to be given more autonomy.
27
Management Control Systems
Responsibility accounting
• Responsibility accounting is a fundamental
part of the MACS.
• Four types of responsibility centres:
1. Cost or expense centres (Two types:standard
cost centres and discretionary cost centres).
2. Revenue centres
3. Profit centres
4. Investment centres
28
Management Control Systems
• Issues that must be addressed by
responsibility accounting include:
1. Distinguishing between controllable and noncontrollable items (i.e. the controllability
principle).
2. Determining how challenging the targets should
be.
3. Determining how much influence managers
should have in the setting of targets.
29
Management Control Systems
The controllability principle
• Principle advocates that it is appropriate to
charge to a responsibility centre only
those costs that can be influenced by the
manager of the responsibility centre.
• Implemented by either eliminating
uncontrollables or reporting controllable
and uncontrollable items separately.
30
Management Control Systems
The controllability principle
•Types of uncontrollable factors:
1. Economic and competitive factors (Because
managers can respond to some of these
changes most MACS do not shield
managers completely from them).
2. Acts of nature (Managers normally protected
from them).
3. Interdependencies where outcomes are
affected by other units within the organization:
• Pooled interdependencies
• Sequential interdependencies
• Reciprocal interdependencies
31
Management Control Systems
• Adjustments for the distorting effects of uncontrollable
can be made either before or after the
measurement period.
• Adjustments before the measurement period:
1. Specify which budget line items are
uncontrollable (eliminate or report separately
in performance report).
2. Insurance
• Adjustments after the measurement period:
1. Variance analysis
2. Flexible performance standards (e.g.flexible
budgeting and ex post budget adjustments)
3. Relative performance evaluations
32
4. Subjective performance evaluations
Management Control Systems
Guidelines for applying the controllability
principle
• Price and quantity of service controllable =
Controllable expense
• Quantity controllable but not price = Manager
accountable for difference between (actual
quantity × budgeted price) and (budgeted
quantity × budgeted price)
• Quantity and price not controllable = Non- controllable
expense
• General principle = Hold managers accountable for
33
performance areas you want them to pay attention to.
Management Control Systems
Determining how challenging the targets
should be
• A clearly defined quantitative goal is likely to motivate higher
levels of performance.
• Level of budget difficulty should be related to task uncertainty.
• Targets must be accepted to motivate managers to achieve
higher levels of performance.
• Literature identifies a theoretical relationship between budget
difficulty,aspiration levels and performance (see figure 16.3
- Drury).
• Hypothesized relationships suggest that budget level that
motivates best performance is unlikely to be achieved most
34
Management Control Systems
Arguments in favour of setting highly achievable
Budgets
• Conflict between planning and motivational
purposes.
• Psychological benefits (e.g.achievement and selfesteem).
• Shields managers from adverse impact of
environmental changes.
• Alleviates harmful side-effects of controls.
35
Management Control Systems
Determining how much influence managers
should have in setting standards
• Advantages of participation in the setting of
performance standards:
1. Targets more likely to be accepted
2. Reduces the information asymmetry gap
3. Reduces negative attitudes and dysfunctional
behaviour
36
Management Control Systems
• Empirical studies provide conflicting evidence on
the effectiveness of participation.
• Factors influencing the effectiveness of participation:
1. Personality variables:
• Authoritarianism
• Locus of control
2. Work situation
3. Job difficulty
• Limitations on the positive effects of participation:
1. Budgetee has the opportunity to negotiate lower
targets.
2. Depends on personality traits and work situation.
3. A top down approach may be preferable where a
large number of similar units exist.
© 2000 Colin Drury
37