Management control for A&C
Summary
,Table of Contents
CHAPTER 1: INTRODUCTION TO MANAGEMENT CONTROL .......................................................................... 4
INTRODUCTION .........................................................................................................................................................4
MANAGEMENT CONTROL: ROLE AND POSITION ...............................................................................................................5
HUMAN BEHAVIOR IN ORGANIZATIONS ..........................................................................................................................6
CHAPTER 9: PLANNING AND BUDGETING .................................................................................................... 7
INTRODUCTION .........................................................................................................................................................7
LONG-RANGE STRATEGIC PLANNING ..............................................................................................................................7
THE PARTS AND LINKAGES OF THE BUDGET .....................................................................................................................7
BUDGETING PROCESS .................................................................................................................................................8
BUDGET PREPARATION ...............................................................................................................................................8
BEYOND BUDGETING ............................................................................................................................................... 10
ALTERNATIVE BUDGETING ........................................................................................................................................ 10
CRITIQUE AGAINST BEYOND BUDGETING ..................................................................................................................... 10
CHAPTER 10: PERFORMANCE MEASUREMENT AND ANALYSIS ................................................................... 11
INTRODUCTION ...................................................................................................................................................... 11
PERFORMANCE MEASUREMENT SYSTEMS .................................................................................................................... 11
VARIANCE ANALYSIS ................................................................................................................................................ 12
ADDITIONAL CONSIDERATIONS AND LIMITATIONS FO VARIANCE ANALYSIS .......................................................................... 14
COMBINING FINANCIAL AND NON-FINANCIAL PERFORMANCE MEASURES........................................................................... 15
CHAPTER 2: DESIGNING MANAGEMENT CONTROL SYSTEMS...................................................................... 19
INTRODUCTION ...................................................................................................................................................... 19
MANAGEMENT CONTROL SYSTEMS ............................................................................................................................ 19
MANAGEMENT CONTROL SYSTEM AND PROCESSES, IN AND OUT OF CONTROL .................................................................... 20
DELINEATING MANAGEMENT CONTROL, STRATEGIC CONTROL AND TASK CONTROL .............................................................. 22
CHAPTER 3: ORGANIZATIONS AND THEIR ENVIRONMENT .......................................................................... 24
INTRODUCTION ...................................................................................................................................................... 24
SHAREHOLDERS AND STAKEHOLDERS .......................................................................................................................... 24
GOALS OF THE ORGANIZATION .................................................................................................................................. 25
TWO MAJOR TRENDS............................................................................................................................................... 27
THE ENVIRONMENT OF THE ORGANIZATION ................................................................................................................. 28
CHAPTER 4: STRATEGY AND MANAGEMENT CONTROL .............................................................................. 29
INTRODUCTION ...................................................................................................................................................... 29
STRATEGY FROM DIFFERENT PERSPECTIVES .................................................................................................................. 29
STRATEGIC FRAMEWORKS ........................................................................................................................................ 30
STRATEGY AND MANAGEMENT CONTROL SYSTEMS ........................................................................................................ 33
CHAPTER 5: DECENTRALIZATION, CONTROL AND INCENTIVES .................................................................... 37
INTRODUCTION ...................................................................................................................................................... 37
DECENTRALIZATION AND CONTROL ............................................................................................................................ 37
FORMAL CONTROL OF DECENTRALIZED MANAGEMENT ................................................................................................... 38
SHOULD CONTROL BE TIGHT OR LOOSE?...................................................................................................................... 41
CONTROLLERSHIP ................................................................................................................................................... 42
CHAPTER 6: RESPONSIBILITY CENTRES: REVENUE AND EXPENSE CENTRES .................................................. 42
INTRODUCTION ...................................................................................................................................................... 42
RESPONSIBILITY CENTRES ......................................................................................................................................... 42
REVENUE CENTRES.................................................................................................................................................. 45
EXPENSE CENTRES .................................................................................................................................................. 45
CHAPTER 7: RESPONSIBILITY CENTRES: PROFIT AND INVESTMENT CENTRES ............................................... 47
2
, INTRODUCTION ...................................................................................................................................................... 47
CONDITIONS FOR DELEGATING PROFIT RESPONSIBILITY ................................................................................................... 47
ADVANTAGES OF PROFIT CENTRES.............................................................................................................................. 47
DIFFICULTIES WITH PROFIT CENTRES ........................................................................................................................... 48
BUSINESS UNITS AS PROFIT CENTRES .......................................................................................................................... 48
OTHER PROFIT CENTRES ........................................................................................................................................... 48
MEASURING PROFITABILITY ...................................................................................................................................... 49
INVESTMENT CENTRES ............................................................................................................................................. 50
CHAPTER 8: TRANSFER PRICING, SHARED SERVICE CENTRES AND CROSS-FUNCTIONAL MANAGEMENT ....... 52
INTRODUCTION ...................................................................................................................................................... 52
TRANSFER PRICING ................................................................................................................................................. 52
TRANSFER PRICING METHODS ................................................................................................................................... 52
PRICING CORPORATE SERVICES .................................................................................................................................. 55
ADMINISTRATION OF TRANSFER PRICES ....................................................................................................................... 55
SHARED SERVICE CENTRES ........................................................................................................................................ 55
CROSS-FUNCTIONAL MANAGEMENT ........................................................................................................................... 56
CHAPTER 11: COMPENSATION, INCENTIVES AND MOTIVATION ................................................................. 57
COMPENSATION AND INCENTIVES .............................................................................................................................. 57
THEORIES ON INCENTIVES AND MOTIVATION ................................................................................................................ 58
Agency theory................................................................................................................................................ 58
Motivation crowding theory ......................................................................................................................... 60
CHAPTER 12: MANAGEMENT CONTROL CHALLENGES IN SERVICE DELIVERY................................................ 61
INTRODUCTION ...................................................................................................................................................... 61
SERVICE ORGANIZATIONS ......................................................................................................................................... 62
PROFESSIONAL AND FINANCIAL SERVICE ORGANIZATIONS ............................................................................................... 63
MANAGEMENT CONTROL SYSTEMS ............................................................................................................................ 63
THE FINANCIAL SERVICES SECTOR ............................................................................................................................... 64
HEALTH-CARE ORGANIZATIONS ................................................................................................................................. 64
NON-PROFIT AND NGOS ......................................................................................................................................... 65
CHAPTER 14: MANAGEMENT CONTROL AND INTER-ORGANIZATIONAL RELATIONSHIPS ............................. 67
INTRODUCTION ...................................................................................................................................................... 67
INCREASED IMPORTANCE OF INTER-ORGANIZATIONAL RELATIONSHIPS. ............................................................................. 67
INTER-ORGANIZATIONAL MANAGEMENT CONTROL ........................................................................................................ 68
THE JOINT DEVELOPMENT OF INTER-ORGANIZATIONAL MANAGEMENT CONTROL ................................................................ 70
PAPERS .................................................................................................................................................... 72
PAPER: MERCHANT & OTLEY (2007) ........................................................................................................................ 72
PAPER: OUCHI (1979)............................................................................................................................................ 77
PAPER FERREIRA & OTLEY (2007) ............................................................................................................................ 82
PAPER SIMONS (2005) ........................................................................................................................................... 88
PAPER BARTLETT (2013)......................................................................................................................................... 92
LECTURE NOTES ....................................................................................................................................... 96
WEEK 1: LECTURE .................................................................................................................................................. 96
WEEK 2: LECTURE ................................................................................................................................................ 100
WEEK 2: PRACTICUM............................................................................................................................................ 105
WEEK 3: PRACTICUM............................................................................................................................................ 107
WEEK 4: PRACTICUM............................................................................................................................................ 109
WEEK 5: LECTURE ................................................................................................................................................ 110
WEEK 6: LECTURE ................................................................................................................................................ 113
3
, Chapter 1: introduction to management control
Introduction
The goal of management control systems is to implement organizational strategies.
Management control directly concerns organizational performance and one of its challenges is to increase the
organization’s long-term performance.
Management control systems consist of the various ways in which the organization’s TMT attempt to enhance
the organization’s performance in line with strategic objectives. Such typical control system elements include:
› Strategic planning
› Budgeting
› Resource allocation
› Performance measurement
› Evaluation and reward
› Responsibility centre allocation
› Transfer pricing
These elements should work together to ensure that the organization meets its desired performance levels.
Definition of management control:
The systematic process by which the organization’s higher-level managers influence the organization’s lower-
level managers to implement the organization’s strategies.
Management control is about decentralized organizations. The essence of a decentralized organization is that not
all the power to make decisions that affect the future of the organization resides at the highest level in the
organization. Some of this power is shared with lower-level managers. In decentralized organizations, lower-
level managers have the authority to take decisions on their own, such organizations specifically need the formal
mechanisms and routines that facilitate goal sharing and cooperation between the organization’s participants.
Without them, organizations may go astray and fail in achieving their objectives.
The failure of companies is often due to a mix of external and internal circumstances, in many cases companies’
failures can be directly attributed to the lack of appropriate management control. These failures can be avoided
by the proper design and use of management control systems.
Small a decentralized organization, consisting of only a few people, face a smaller challenge of ensuring that
decentralized management behaves in line with organizational objectives, and have little need for the
systematic, complex and costly design of management control systems.
Large and decentralized organizations cannot do without formal management control systems. Large firms that
strive to maximize their value on behalf of their shareholders are the organizations that are the most in need of
informing their decentralized managers about the strategic goals and associated actions that will satisfy their
owners.
Top-down role of management control systems:
If the senior managers fail to implement the appropriate management controls, lower-level managers will simply
not have a clear sense of what decisions to take, what results to achieve and where to lead the people and how to
use the resources under their responsibility.
Bottom-up role of management control systems:
Without appropriate management controls, senior managers will not have a clear sense of what decisions lower-
level managers are taking, what results they are achieving and where they are leading the people and using the
resources under their responsibility
4
Summary
,Table of Contents
CHAPTER 1: INTRODUCTION TO MANAGEMENT CONTROL .......................................................................... 4
INTRODUCTION .........................................................................................................................................................4
MANAGEMENT CONTROL: ROLE AND POSITION ...............................................................................................................5
HUMAN BEHAVIOR IN ORGANIZATIONS ..........................................................................................................................6
CHAPTER 9: PLANNING AND BUDGETING .................................................................................................... 7
INTRODUCTION .........................................................................................................................................................7
LONG-RANGE STRATEGIC PLANNING ..............................................................................................................................7
THE PARTS AND LINKAGES OF THE BUDGET .....................................................................................................................7
BUDGETING PROCESS .................................................................................................................................................8
BUDGET PREPARATION ...............................................................................................................................................8
BEYOND BUDGETING ............................................................................................................................................... 10
ALTERNATIVE BUDGETING ........................................................................................................................................ 10
CRITIQUE AGAINST BEYOND BUDGETING ..................................................................................................................... 10
CHAPTER 10: PERFORMANCE MEASUREMENT AND ANALYSIS ................................................................... 11
INTRODUCTION ...................................................................................................................................................... 11
PERFORMANCE MEASUREMENT SYSTEMS .................................................................................................................... 11
VARIANCE ANALYSIS ................................................................................................................................................ 12
ADDITIONAL CONSIDERATIONS AND LIMITATIONS FO VARIANCE ANALYSIS .......................................................................... 14
COMBINING FINANCIAL AND NON-FINANCIAL PERFORMANCE MEASURES........................................................................... 15
CHAPTER 2: DESIGNING MANAGEMENT CONTROL SYSTEMS...................................................................... 19
INTRODUCTION ...................................................................................................................................................... 19
MANAGEMENT CONTROL SYSTEMS ............................................................................................................................ 19
MANAGEMENT CONTROL SYSTEM AND PROCESSES, IN AND OUT OF CONTROL .................................................................... 20
DELINEATING MANAGEMENT CONTROL, STRATEGIC CONTROL AND TASK CONTROL .............................................................. 22
CHAPTER 3: ORGANIZATIONS AND THEIR ENVIRONMENT .......................................................................... 24
INTRODUCTION ...................................................................................................................................................... 24
SHAREHOLDERS AND STAKEHOLDERS .......................................................................................................................... 24
GOALS OF THE ORGANIZATION .................................................................................................................................. 25
TWO MAJOR TRENDS............................................................................................................................................... 27
THE ENVIRONMENT OF THE ORGANIZATION ................................................................................................................. 28
CHAPTER 4: STRATEGY AND MANAGEMENT CONTROL .............................................................................. 29
INTRODUCTION ...................................................................................................................................................... 29
STRATEGY FROM DIFFERENT PERSPECTIVES .................................................................................................................. 29
STRATEGIC FRAMEWORKS ........................................................................................................................................ 30
STRATEGY AND MANAGEMENT CONTROL SYSTEMS ........................................................................................................ 33
CHAPTER 5: DECENTRALIZATION, CONTROL AND INCENTIVES .................................................................... 37
INTRODUCTION ...................................................................................................................................................... 37
DECENTRALIZATION AND CONTROL ............................................................................................................................ 37
FORMAL CONTROL OF DECENTRALIZED MANAGEMENT ................................................................................................... 38
SHOULD CONTROL BE TIGHT OR LOOSE?...................................................................................................................... 41
CONTROLLERSHIP ................................................................................................................................................... 42
CHAPTER 6: RESPONSIBILITY CENTRES: REVENUE AND EXPENSE CENTRES .................................................. 42
INTRODUCTION ...................................................................................................................................................... 42
RESPONSIBILITY CENTRES ......................................................................................................................................... 42
REVENUE CENTRES.................................................................................................................................................. 45
EXPENSE CENTRES .................................................................................................................................................. 45
CHAPTER 7: RESPONSIBILITY CENTRES: PROFIT AND INVESTMENT CENTRES ............................................... 47
2
, INTRODUCTION ...................................................................................................................................................... 47
CONDITIONS FOR DELEGATING PROFIT RESPONSIBILITY ................................................................................................... 47
ADVANTAGES OF PROFIT CENTRES.............................................................................................................................. 47
DIFFICULTIES WITH PROFIT CENTRES ........................................................................................................................... 48
BUSINESS UNITS AS PROFIT CENTRES .......................................................................................................................... 48
OTHER PROFIT CENTRES ........................................................................................................................................... 48
MEASURING PROFITABILITY ...................................................................................................................................... 49
INVESTMENT CENTRES ............................................................................................................................................. 50
CHAPTER 8: TRANSFER PRICING, SHARED SERVICE CENTRES AND CROSS-FUNCTIONAL MANAGEMENT ....... 52
INTRODUCTION ...................................................................................................................................................... 52
TRANSFER PRICING ................................................................................................................................................. 52
TRANSFER PRICING METHODS ................................................................................................................................... 52
PRICING CORPORATE SERVICES .................................................................................................................................. 55
ADMINISTRATION OF TRANSFER PRICES ....................................................................................................................... 55
SHARED SERVICE CENTRES ........................................................................................................................................ 55
CROSS-FUNCTIONAL MANAGEMENT ........................................................................................................................... 56
CHAPTER 11: COMPENSATION, INCENTIVES AND MOTIVATION ................................................................. 57
COMPENSATION AND INCENTIVES .............................................................................................................................. 57
THEORIES ON INCENTIVES AND MOTIVATION ................................................................................................................ 58
Agency theory................................................................................................................................................ 58
Motivation crowding theory ......................................................................................................................... 60
CHAPTER 12: MANAGEMENT CONTROL CHALLENGES IN SERVICE DELIVERY................................................ 61
INTRODUCTION ...................................................................................................................................................... 61
SERVICE ORGANIZATIONS ......................................................................................................................................... 62
PROFESSIONAL AND FINANCIAL SERVICE ORGANIZATIONS ............................................................................................... 63
MANAGEMENT CONTROL SYSTEMS ............................................................................................................................ 63
THE FINANCIAL SERVICES SECTOR ............................................................................................................................... 64
HEALTH-CARE ORGANIZATIONS ................................................................................................................................. 64
NON-PROFIT AND NGOS ......................................................................................................................................... 65
CHAPTER 14: MANAGEMENT CONTROL AND INTER-ORGANIZATIONAL RELATIONSHIPS ............................. 67
INTRODUCTION ...................................................................................................................................................... 67
INCREASED IMPORTANCE OF INTER-ORGANIZATIONAL RELATIONSHIPS. ............................................................................. 67
INTER-ORGANIZATIONAL MANAGEMENT CONTROL ........................................................................................................ 68
THE JOINT DEVELOPMENT OF INTER-ORGANIZATIONAL MANAGEMENT CONTROL ................................................................ 70
PAPERS .................................................................................................................................................... 72
PAPER: MERCHANT & OTLEY (2007) ........................................................................................................................ 72
PAPER: OUCHI (1979)............................................................................................................................................ 77
PAPER FERREIRA & OTLEY (2007) ............................................................................................................................ 82
PAPER SIMONS (2005) ........................................................................................................................................... 88
PAPER BARTLETT (2013)......................................................................................................................................... 92
LECTURE NOTES ....................................................................................................................................... 96
WEEK 1: LECTURE .................................................................................................................................................. 96
WEEK 2: LECTURE ................................................................................................................................................ 100
WEEK 2: PRACTICUM............................................................................................................................................ 105
WEEK 3: PRACTICUM............................................................................................................................................ 107
WEEK 4: PRACTICUM............................................................................................................................................ 109
WEEK 5: LECTURE ................................................................................................................................................ 110
WEEK 6: LECTURE ................................................................................................................................................ 113
3
, Chapter 1: introduction to management control
Introduction
The goal of management control systems is to implement organizational strategies.
Management control directly concerns organizational performance and one of its challenges is to increase the
organization’s long-term performance.
Management control systems consist of the various ways in which the organization’s TMT attempt to enhance
the organization’s performance in line with strategic objectives. Such typical control system elements include:
› Strategic planning
› Budgeting
› Resource allocation
› Performance measurement
› Evaluation and reward
› Responsibility centre allocation
› Transfer pricing
These elements should work together to ensure that the organization meets its desired performance levels.
Definition of management control:
The systematic process by which the organization’s higher-level managers influence the organization’s lower-
level managers to implement the organization’s strategies.
Management control is about decentralized organizations. The essence of a decentralized organization is that not
all the power to make decisions that affect the future of the organization resides at the highest level in the
organization. Some of this power is shared with lower-level managers. In decentralized organizations, lower-
level managers have the authority to take decisions on their own, such organizations specifically need the formal
mechanisms and routines that facilitate goal sharing and cooperation between the organization’s participants.
Without them, organizations may go astray and fail in achieving their objectives.
The failure of companies is often due to a mix of external and internal circumstances, in many cases companies’
failures can be directly attributed to the lack of appropriate management control. These failures can be avoided
by the proper design and use of management control systems.
Small a decentralized organization, consisting of only a few people, face a smaller challenge of ensuring that
decentralized management behaves in line with organizational objectives, and have little need for the
systematic, complex and costly design of management control systems.
Large and decentralized organizations cannot do without formal management control systems. Large firms that
strive to maximize their value on behalf of their shareholders are the organizations that are the most in need of
informing their decentralized managers about the strategic goals and associated actions that will satisfy their
owners.
Top-down role of management control systems:
If the senior managers fail to implement the appropriate management controls, lower-level managers will simply
not have a clear sense of what decisions to take, what results to achieve and where to lead the people and how to
use the resources under their responsibility.
Bottom-up role of management control systems:
Without appropriate management controls, senior managers will not have a clear sense of what decisions lower-
level managers are taking, what results they are achieving and where they are leading the people and using the
resources under their responsibility
4
