MANAGEMENT CONTROL SYSTEMS

MEANING: A management control system (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 behaviour of organizational resources to implement organizational strategies. MCS might be formal or informal. Robert N. Anthony (2007) defined Management Control as the process by which managers influence other members of the organization to implement the organizations strategies. Management control systems are tools to aid management for steering an organization toward its strategic objectives and competitive advantage. Management controls are only one of the tools which managers use in implementing desired strategies. However strategies get implemented through management controls, organizational structure, human resources management and culture. TECHNIQUES OF MCS: a)Traditional Techniques 1) Direct Supervision and Observation:
'Direct Supervision and Observation' is the oldest technique of controlling. The supervisor himself observes the employees and their work. This brings him in direct contact with the workers. So, many problems are solved during supervision. The supervisor gets first hand information, and he has better understanding with the workers. This technique is most suitable for a small-sized business.

2) Financial Statements All business organisations prepare Profit and Loss Account. It gives a summary of the income and expenses for a specified period. They also prepare Balance Sheet, which shows the financial position of the organisation at the end of the specified period. Financial statements are used to control the organisation. The figures of the current year can be compared with the previous year's figures. They can also be compared with the figures of other similar organisations. Ratio analysis can be used to find out and analyse the financial statements. Ratio analysis helps to understand the profitability, liquidity and solvency position of the business. 3) Budgetary Control: A budget is a planning and controlling device. Budgetary control is a technique of managerial
control through budgets. It is the essence of financial control. Budgetary control is done for all aspects of a business such as income, expenditure, production, capital and revenue. Budgetary control is done by the budget committee

4) Break Even Analysis: Break Even Analysis or Break Even Point is the point of no profit, no loss. For e.g. When an organisation sells 50K cars it will break even. It means that, any sale below this point will cause losses and any sale above this point will earn profits. The Break-even analysis acts as a control device. It helps to find out the company's performance. So the company can take collective action to improve its performance in the future. Break-even analysis is a simple control tool. 5) Return on Investment Investment consists of fixed assets and working capital used in business. Profit on the investment is a reward for risk taking. If the ROI is high then the financial performance of a business is good and vice-versa. ROI is a tool to improve financial performance. It helps the business to compare its present performance with that of previous years' performance. It helps to conduct inter-firm comparisons. It also shows the areas where corrective actions are needed. 6. Management by Objectives (MBO) MBO facilitates planning and control. It must fulfill following requirements :Objectives for individuals are jointly fixed by the superior and the subordinate. Periodic evaluation and regular feedback to evaluate individual performance. Achievement of objectives brings rewards to individuals. 7) Quality Control: Quality control uses operational techniques and activities to sustain quality of the product or service to satisfy customer needs. It aims to maintain quality of goods at each stage of the manufacturing process rather than detecting errors at the end of the production cycle where faulty products may have to be discarded or rewarded . 8) Self-Control Self-Control means self-directed control. A person is given freedom to set his own targets, evaluate his own performance and take corrective measures as and when required. Selfcontrol is especially required for top level managers because they do not like external control. The subordinates must be encouraged to use self-control because it is not good for the superior to control each and everything. However, self-control does not mean no control by the superiors. The superiors must control the important activities of the subordinates.

B) MODERN TECHNIQUES
1) MANAGEMENT INFORMATION SYSTEM- The system of obtaining timely, relevant and accurate information based on computer technology is known as information system. The system helps managers in preparing reports for effectively carrying out planning and controlling functions. MIS is a formal system of gathering, intergrating, comparing, analyzing and dispersing information internal and external to the enterprise in a timely, effective and efficient manner Features of MIS Timeliness Accuracy Relevance Concise Completeness

Advantages Of MIS Accurate Information Relevant Information Facilitates managerial functions Facilitates Coordination

2) MANAGEMENT AUDIT Audit means periodic inspection of financial statements and verifying that the statement and verifying that the statement are honestly and fairly prepared according to accounting principles. Audit thus provides the basis for control. Two types of audit can be conducted by firmExternal Audit- It refers to verification of financial statement. Companys assests,liabilities and capital accounts are checked and deviations are reported to managers for action. Control is thus facilitated through verification of accounts against the standard principle. This is known as financial audit.

External audit checks fraudlent practices in preparing financial accounts .Outside parties like , investors , bankers and financial institutions can enter into fair and honest dealing with the firm if its accounts are audited. B. Internal Audit- It refers to verification of various statistical data and reports so that correct and fair presentation of financial statements is made. It evaluates the firm's internal operations , determines where things have gone wrong and where corrective action is needed. 3) RESPONSIBILITY ACCOUNTING: It divides the organization into small units where manager of each unit is responsible for achieving the targets of his unit. These units are called responsibility centers and head of each responsibility centre is responsible for controlling the activities of his centre. Performance of responsibility centre is judged by the extent to which targets of the centre are achieved. There are four main types of Responsibility Centre Control centre Revenue Centre Profit Centre Investment Centre

4) BALANCE SCORE CARD: Balanced scorecard: a performance measurement tool that looks at four areas- financial, customer, internal processes and people/ innovation/ growth assets that contributes to a companys performance. The four general perspectives which have been proposed by balanced scorecard are as under: Financial perspective Customer perspective Internal processes perspective Innovation and learning perspective

Limitations Scores are not based on any proven economic or financial theory. Balanced scorecard does not provide a bottom-line score.

5) BENCHMARKING: Benchmarking: the search for best practices among the competitors or non-competitors that lead to their superior performance. Benchmark: the standard of excellence against which to measure and compare. The methodology adopted is as under: Identify the problem areas. Identify other industries. Identify organizations that are leaders in these areas. Survey companies for measure and practices. Visit the best practice companies to identify leading edge practices. Implement new and improved business practices.

6) PERT and CPM Techniques Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM) techniques were developed in USA in the late 50's. Any programme consists of various activities and subactivities. Successful completion of any activity depends upon doing the work in a given sequence and in a given time. CPM / PERT can be used to minimise the total time or the total cost required to perform the total operations. Importance is given to identifying the critical activities. Critical activities are those which have to be completed on time otherwise the full project will be delayed. So, in these techniques, the job is divided into various activities / sub-activities. From these activities, the critical activities are identified. More importance is given to completion of these critical activities. So, by controlling the time of the critical activities, the total time and cost of the job are minimised.

MCS in Services
Service organizations are those organizations that provide intangible services. Service organizations include hotels, restaurants, and other lodging and eating establishments; barbershops, beauty parlors and other personal service; repair services; motion picture, television and other amusement and recreation services; legal services; and accounting, engineering, research/development, architecture and other professional service organizations. CHARACTERISTICS OF SERVICE ORGANIZATIONS:

1. Absence of Inventory: Services cannot be stored. If the services available today are not sold today, the revenue from these services is lost forever. In addition the resources available for sale in many service organizations are essentially fixed in the short run. A key variable in most service organizations therefore is the extent to which current capacity is matched with demand. Organizations attempt this matching in two ways: 1. They try to stimulate demand in off-peak periods by marketing efforts and price concessions. Airlines and resort hotels offer low rates in off-seasons; utilities offer low rates on slack periods during a day. 2. If feasible, they adjust the size of the work force to the anticipated demand, by such measures as scheduling training activities in slack periods and compensating for long hours in busy periods with time off later. 2. Labour Intensive: Service organizations tend to be labouring intensive. It is difficult to control the work of a labour-intensive organization than that of an operation whose workflow is paced or dominated by machinery. Manufacturing companies add equipment and automate production lines that replace labour and reduce costs. Most service companies cannot do this. Hospitals do add expensive equipment; but most of these provide better treatment, and they increase, rather than reduce costs. 3. Quantity Measurement: It is not easy to measure the quantity of many services. For many services, the amount rendered can be measured only in the crudest terms, if at all it can be measured. 4. Quality Measurement: The quality of a service cannot be inspected in advance (as in the case of tangible goods). At best, it can be inspected during the time that the service is being rendered to the client. Judgments as to the adequacy of the quality of most services are subjective; measuring instruments and objective quality standards do not exist. A public accounting firm can measure the number of hours spent on an audit, but not the thoroughness of the work done during those hours.

5. Historical Development: Cost accounting started in manufacturing companies because of the necessity for valuing work-in-process and finished goods inventories for financial statement purposes. These amounts provided raw data that was easily adapted to use, first for setting selling process and then for other management problems. Standard cost systems, the separation of fixed and variable costs, and the analysis of variances and the foundation of actual cost systems, and the fact that managers in manufacturing companies were accustomed to using cost information facilitated the general adoption of these techniques. Until the last few decades, most books on cost accounting and related subjects dealt only with manufacturing companies. 6. Size: With some notable exceptions, service organizations are relatively small and operate in a single location. Top management in such organizations can personally observe what is going on and personally motivate employees. Thus, there is less need for a sophisticated management control system, with profit centers and heavy reliance on formal reports of performance. (Nevertheless, even a small organization needs a budget, a regular comparison of actual performance against a budget, and the other essential ingredients of a management control system.

7. Multi-unit Organizations: Some service organizations operate many units in different locations, each of which is relatively small. These include fast food restaurant chains, auto rental companies, gasoline service stations, and many others. Some of the units are owned; others operate under a franchise. The similarity of these separate units provides a basis for analyzing budgets and evaluating performance that is not present in the usual manufacturing company. The information for each unit can be compared with system wide or regional averages, and high performers and low performers can be identified. Because units differ in the mix of services they provide, in the resources that they use, and in other ways, care must be taken in making such comparisons.

Implications for Management Control System in Service Organizations There are some differences between management control system in service organizations and those in manufacturing organizations. There are differences in degree, rather than in kind, however. The essential features are the same in both types of organizations. In both, planning is done in terms of programs and responsibility centres, including profit centres and investment centers for organization units that meet the criteria. The management control process in both organizations involves the steps of programming, budgeting, the measurement of performance, and the appraisal of that performance . Because of their relatively recent development, systems currently found in service organizations tend to be less advanced than those in manufacturing organizations. Because

of the difficulty of measuring both the quantity and the quality of output, judgments about both the efficiency and the effectiveness of performance are more subjective than is the case when output consists of physical goods, which means that there is more room for legitimate differences of opinion about performance. Managers are coming to recognize that performance is not easy to measure; this suggests that a search for better tools for improving its measurement is likely to be eminently worthwhile.

Definition of 'Investment Center'

A business unit that can utilize capital to directly contribute to a company's profitability. Companies evaluate the performance of an investment center according to the revenues it brings in through investments in capital assets compared to the overall expenses. An investment centre is sometimes called an investment division. 'Investment Center' An investment center is different than a cost center, which indirectly adds profit and is evaluated according to the money it takes to operate. Moreover, unlike a profit center, investment centers can utilize capital in order to purchase other assets. Because of this complexity, companies have to use a variety of metrics, including return on investment (ROI), residual income and economic value added (EVA) to evaluate performance