MANAGEMENT
CONTROL
Dr. Filip Roodhooft
,Table of Contents
EXAM INFORMATION: -------------------------------------------------------------------------------------------------------- 2
PART 1: MANAGEMENT CONTROL AND MANAGEMENT CONTROL SYSTEMS. ------------------------------- 3
CHAPTER 1: INTRODUCTION TO MANAGEMENT CONTROL. ----------------------------------------------------------------- 3
Management control and the need for management control. ----------------------------------------------- 3
Management and control. ------------------------------------------------------------------------------------------ 3
Accounting and control. -------------------------------------------------------------------------------------------- 3
Human behavior. ----------------------------------------------------------------------------------------------------- 4
CHAPTER 2: DESIGNING MANAGEMENT CONTROL SYSTEMS ---------------------------------------------------------------- 4
Objects of control. --------------------------------------------------------------------------------------------------- 4
Elements of control. ------------------------------------------------------------------------------------------------- 4
The control model. --------------------------------------------------------------------------------------------------- 5
Relationship between planning and control functions. ------------------------------------------------------- 6
Framework for strategy implementation. ------------------------------------------------------------------------ 6
PART 2: THE ENVIRONMENT AND STRATEGY OF ORGANIZATIONS. -------------------------------------------- 7
CHAPTER 3: ORGANIZATIONS AND THEIR ENVIRONMENT. ------------------------------------------------------------------ 7
Shareholders and stakeholders ----------------------------------------------------------------------------------- 7
Two major trends (1) – Need for Corporate Governance ------------------------------------------------------ 8
Two major trends (2) – Corporate Social Responsibility CSR------------------------------------------------- 8
Mechanistic and organic management systems. -------------------------------------------------------------- 9
National culture. ----------------------------------------------------------------------------------------------------- 9
CHAPTER 4: STRATEGY AND MANAGEMENT CONTROL --------------------------------------------------------------------- 10
Deliberate strategies. ----------------------------------------------------------------------------------------------- 10
Emerging strategies. ------------------------------------------------------------------------------------------------ 10
Corporate strategies and business unit strategies ------------------------------------------------------------ 10
Strategy and management control fit. --------------------------------------------------------------------------- 12
Target costing. ------------------------------------------------------------------------------------------------------- 12
Value chain analysis. ----------------------------------------------------------------------------------------------- 13
PART 3: MANAGEMENT CONTROL AND THE ORGANIZATION’S INTERNAL STRUCTURE. ---------------- 13
CHAPTER 5: DECENTRALIZATION, CONTROL AND INCENTIVES. ----------------------------------------------------------- 13
Management control. ---------------------------------------------------------------------------------------------- 13
Decentralization. ---------------------------------------------------------------------------------------------------- 15
Types of decentralised organizations. --------------------------------------------------------------------------- 15
Tight and loose control. -------------------------------------------------------------------------------------------- 16
Controllership. ------------------------------------------------------------------------------------------------------- 16
CASE STUDY: Southwest airlines corporation. ----------------------------------------------------------------- 17
CHAPTER 6: REVENUE AND EXPENSE CENTRES. --------------------------------------------------------------------------- 17
Responsibility centers. --------------------------------------------------------------------------------------------- 17
E[iciency and e[ectiveness.-------------------------------------------------------------------------------------- 18
Criteria for assigning responsibilities. --------------------------------------------------------------------------- 18
Revenue centres.---------------------------------------------------------------------------------------------------- 19
Engineered expense centres. ------------------------------------------------------------------------------------- 19
Discretionary expense centre. ------------------------------------------------------------------------------------ 19
CASE STUDY: BookWorm. ----------------------------------------------------------------------------------------- 20
CHAPTER 7: RESPONSIBILITY CENTRES: PROFIT AND INVESTMENT CENTRES. --------------------------------------------- 20
Introduction ---------------------------------------------------------------------------------------------------------- 20
Profit centres. -------------------------------------------------------------------------------------------------------- 21
Investment centres. ------------------------------------------------------------------------------------------------ 22
CASE STUDY: Vyaderm Pharmaceuticals. ---------------------------------------------------------------------- 25
CHAPTER 8: TRANSFER PRICING, SHARED SERVICE CENTRES AND CROSS-FUNCTIONAL MANAGEMENT. ----------------- 26
Transfer pricing. ----------------------------------------------------------------------------------------------------- 26
Pricing corporate services. ---------------------------------------------------------------------------------------- 27
Shared service centres. -------------------------------------------------------------------------------------------- 27
1
, Cross-functional management. ---------------------------------------------------------------------------------- 28
CASE STUDY: Birch Paper Company. ---------------------------------------------------------------------------- 28
PART 4: THE MANAGEMENT CONTROL PROCESS. ---------------------------------------------------------------- 29
CHAPTER 9: PLANNING AND BUDGETIN ----------------------------------------------------------------------------------- 29
The goals of budgeting.--------------------------------------------------------------------------------------------- 29
Long range, strategic planning. ----------------------------------------------------------------------------------- 30
Budgetting process. ------------------------------------------------------------------------------------------------ 30
Budget preparation steps. ----------------------------------------------------------------------------------------- 32
Budget gaming. ------------------------------------------------------------------------------------------------------ 33
Critique against budgeting. ---------------------------------------------------------------------------------------- 33
Beyond budgeting. -------------------------------------------------------------------------------------------------- 34
CASE STUDY: Wilson Beverages. --------------------------------------------------------------------------------- 35
CASE STUDY: Vershire Company. -------------------------------------------------------------------------------- 35
CHAPTER 10: PERFORMANCE MEASUREMENT AND ANALYSIS. ------------------------------------------------------------ 35
Performance measurement systems. --------------------------------------------------------------------------- 35
Variance analysis. --------------------------------------------------------------------------------------------------- 35
Strategy mapping and balanced scorecard. ------------------------------------------------------------------- 37
CASE STUDY: PETCO.----------------------------------------------------------------------------------------------- 38
CASE STUDY: Volkswagen do Brazil. ----------------------------------------------------------------------------- 38
CHAPTER 11: COMPENSATION, INCENTIVES AND MOTIVATION. ----------------------------------------------------------- 39
Compensation and incentives. ----------------------------------------------------------------------------------- 39
Types of compensation and incentives.------------------------------------------------------------------------- 39
Agency theory. ------------------------------------------------------------------------------------------------------- 40
Motivation crowding theory. --------------------------------------------------------------------------------------- 41
CASE STUDY: Quality Metal Service Centre. ------------------------------------------------------------------- 41
Exam information:
4 types of questions:
• Explain five concepts (4/20);
• 2 open questions about the theory (8/20);
• 2 questions about the case studies linked to the theory (4/20);
• Small case study (4/20).
2
,Part 1: Management control and management control systems.
Chapter 1: Introduction to management control.
Management control and the need for management control.
Management control is the systematic process by which the organization’s higher-level
managers influence the organization’s lower-level managers to implement the
organization’s strategy.
Decentralization is the single most important reason for organizations to need
management control systems.
There are three reasons why we need control and they all require top-down and bottom-
up functions of management control.
1. Decentralized managers do not automatically understand the strategies and
goals developed by higher-level managaers, nor how they can contribute to these
goals and strategies. Top-down functions of management control: Explain the
goals and strategies of the organization in as operational a way as possible.
Coordinate between decentralized units. Bottom-up functions of management
control: Report and comment on the expectations. Propose changes when goals
are uncertain. We can also add to the coordination between decentralized units.
2. Decentralized managers do not automatically agree with organizational goals
and strategies developed by higher-level managers. Top-down functions of
management control: Motivate lower-level managers (use incentive schemes)
and create goal congruence. Bottom-up functions of management control:
Share the private information based on which you do not agree with the
strategies and goals of the organization.
3. Decentralized managers do not automatically have the resources needed to act
with organizational goals and strategies developed by higher-level managers.
Top-down functions of management control: Allocate resources. Train or
coach the lower-level managers and their subordinates. Bottom-up functions of
management control: Train/coach your subordinates and improve your own
resources.
Link with firm size, the larger the firm, the larger the need for management control.
Management and control.
We can see the management control as a part of the overall managerial function:
1. Planning: think about the future.
2. Organizing: how will we organize and who gets which resources?
3. Sta>ing: make sure the right people are at the right places.
4. Leading: motivate your subordinates, lead by example.
5. Controlling: did our plans come true?
Accounting and control.
Management control can be seen as an activity that uses management accounting
information. There is a strong connection between the two because money has always
3
,been an important measure of organizational performance and because stakeholders
need the accounting system to satisfy their information needs.
Human behavior.
Management control is about eliciting desired behaviors by decentralized managers.
This requires having some understanding of the behavior of people in organizations.
We’ll define the desired behavior in terms of the principal agent theory: 1) We want our
decentralized managers to deliver eYort. 2) We want this eYort to be in line with the
organization’s strategy. 3) We want persistence of this eYort, we want the managers to
continue to deliver this eYort.
These are the three elements that might add to this eYort:
1. Managers are motivated by goals they are asked to achieve (= target setting).
These goals must be clear and directional, not too distant and the
achievement of these goals must be valued positively.
BUT they should be aligned with strategy, they might (if for example multiple
goals) reduce clarity and direction and they might be seen as a threat.
2. Managers are motivated by rewards that they may get from their eYorts.
There must be variation in their dependence on output, they are controlled by
labor laws and there is a large variety across firms and functions.
But they should be matched in time, they can’t be seen as fixed salary so only
when performance is exceptional and they might enhance internal competition
(for example when there is a price pool distributed across all employees).
3. Managers are motivated by the social context in which they work.
This social context consist out of external factors (for example diYerent work
ethic in Silicon Valley than in Brussels) and internal factors (for example
organizational culture, tone-at-the top and management style). Be aware that
this culture is the reason why it is really hard to change a company. But we can
use this culture as an informal form of management control (by shaping
employees’ shared values, norms, and behaviors, and aligning these with the
organization’s goals, we can guide decision-making and actions without the need
for constant supervision or formal rules).
Chapter 2: Designing management control systems
Objects of control.
There is a cascade of objects of control and for every object there is a diYerent
complexity; it will be much more complex to control all units with management teams,
than one individual manager.
Elements of control.
4
, So the detector will gather the information from the entity that’s being controlled and
will give it to the control device in the form of a report (the actuals), and then the
assessor will compare this report with the standard (the budget). The e>ector will use
this comparison to alterate the behavior of our entity that’s being controlled. It looks
simple but there are a lot of considerations that the eYector should take into account.
The control model.
Manager control (= input control) has to do mostly with HR and getting the right people
at the right places. Some examples are sta>ing (recruiting the right people, right
promotions, determine the strategic jobs), development (making sure the managers
are able to broaden their talents, competence development) and culture building
(cultural values of the organization should be represented by lower-level managers,
cheer on colegiality).
Decisions control (= e>ort control = throughput control) is about restricting the
decisions of the managers. Some examples are delegation of authority (who gets to
decide what), delegation of responsibility (how far can they go in their decisions, for
example only up to 20k) and prescribing behaviors (like protocols).
Results control (= performance control = output control) makes sure we can hold
people accountable for their performances. Examples are stating performance targets
5
CONTROL
Dr. Filip Roodhooft
,Table of Contents
EXAM INFORMATION: -------------------------------------------------------------------------------------------------------- 2
PART 1: MANAGEMENT CONTROL AND MANAGEMENT CONTROL SYSTEMS. ------------------------------- 3
CHAPTER 1: INTRODUCTION TO MANAGEMENT CONTROL. ----------------------------------------------------------------- 3
Management control and the need for management control. ----------------------------------------------- 3
Management and control. ------------------------------------------------------------------------------------------ 3
Accounting and control. -------------------------------------------------------------------------------------------- 3
Human behavior. ----------------------------------------------------------------------------------------------------- 4
CHAPTER 2: DESIGNING MANAGEMENT CONTROL SYSTEMS ---------------------------------------------------------------- 4
Objects of control. --------------------------------------------------------------------------------------------------- 4
Elements of control. ------------------------------------------------------------------------------------------------- 4
The control model. --------------------------------------------------------------------------------------------------- 5
Relationship between planning and control functions. ------------------------------------------------------- 6
Framework for strategy implementation. ------------------------------------------------------------------------ 6
PART 2: THE ENVIRONMENT AND STRATEGY OF ORGANIZATIONS. -------------------------------------------- 7
CHAPTER 3: ORGANIZATIONS AND THEIR ENVIRONMENT. ------------------------------------------------------------------ 7
Shareholders and stakeholders ----------------------------------------------------------------------------------- 7
Two major trends (1) – Need for Corporate Governance ------------------------------------------------------ 8
Two major trends (2) – Corporate Social Responsibility CSR------------------------------------------------- 8
Mechanistic and organic management systems. -------------------------------------------------------------- 9
National culture. ----------------------------------------------------------------------------------------------------- 9
CHAPTER 4: STRATEGY AND MANAGEMENT CONTROL --------------------------------------------------------------------- 10
Deliberate strategies. ----------------------------------------------------------------------------------------------- 10
Emerging strategies. ------------------------------------------------------------------------------------------------ 10
Corporate strategies and business unit strategies ------------------------------------------------------------ 10
Strategy and management control fit. --------------------------------------------------------------------------- 12
Target costing. ------------------------------------------------------------------------------------------------------- 12
Value chain analysis. ----------------------------------------------------------------------------------------------- 13
PART 3: MANAGEMENT CONTROL AND THE ORGANIZATION’S INTERNAL STRUCTURE. ---------------- 13
CHAPTER 5: DECENTRALIZATION, CONTROL AND INCENTIVES. ----------------------------------------------------------- 13
Management control. ---------------------------------------------------------------------------------------------- 13
Decentralization. ---------------------------------------------------------------------------------------------------- 15
Types of decentralised organizations. --------------------------------------------------------------------------- 15
Tight and loose control. -------------------------------------------------------------------------------------------- 16
Controllership. ------------------------------------------------------------------------------------------------------- 16
CASE STUDY: Southwest airlines corporation. ----------------------------------------------------------------- 17
CHAPTER 6: REVENUE AND EXPENSE CENTRES. --------------------------------------------------------------------------- 17
Responsibility centers. --------------------------------------------------------------------------------------------- 17
E[iciency and e[ectiveness.-------------------------------------------------------------------------------------- 18
Criteria for assigning responsibilities. --------------------------------------------------------------------------- 18
Revenue centres.---------------------------------------------------------------------------------------------------- 19
Engineered expense centres. ------------------------------------------------------------------------------------- 19
Discretionary expense centre. ------------------------------------------------------------------------------------ 19
CASE STUDY: BookWorm. ----------------------------------------------------------------------------------------- 20
CHAPTER 7: RESPONSIBILITY CENTRES: PROFIT AND INVESTMENT CENTRES. --------------------------------------------- 20
Introduction ---------------------------------------------------------------------------------------------------------- 20
Profit centres. -------------------------------------------------------------------------------------------------------- 21
Investment centres. ------------------------------------------------------------------------------------------------ 22
CASE STUDY: Vyaderm Pharmaceuticals. ---------------------------------------------------------------------- 25
CHAPTER 8: TRANSFER PRICING, SHARED SERVICE CENTRES AND CROSS-FUNCTIONAL MANAGEMENT. ----------------- 26
Transfer pricing. ----------------------------------------------------------------------------------------------------- 26
Pricing corporate services. ---------------------------------------------------------------------------------------- 27
Shared service centres. -------------------------------------------------------------------------------------------- 27
1
, Cross-functional management. ---------------------------------------------------------------------------------- 28
CASE STUDY: Birch Paper Company. ---------------------------------------------------------------------------- 28
PART 4: THE MANAGEMENT CONTROL PROCESS. ---------------------------------------------------------------- 29
CHAPTER 9: PLANNING AND BUDGETIN ----------------------------------------------------------------------------------- 29
The goals of budgeting.--------------------------------------------------------------------------------------------- 29
Long range, strategic planning. ----------------------------------------------------------------------------------- 30
Budgetting process. ------------------------------------------------------------------------------------------------ 30
Budget preparation steps. ----------------------------------------------------------------------------------------- 32
Budget gaming. ------------------------------------------------------------------------------------------------------ 33
Critique against budgeting. ---------------------------------------------------------------------------------------- 33
Beyond budgeting. -------------------------------------------------------------------------------------------------- 34
CASE STUDY: Wilson Beverages. --------------------------------------------------------------------------------- 35
CASE STUDY: Vershire Company. -------------------------------------------------------------------------------- 35
CHAPTER 10: PERFORMANCE MEASUREMENT AND ANALYSIS. ------------------------------------------------------------ 35
Performance measurement systems. --------------------------------------------------------------------------- 35
Variance analysis. --------------------------------------------------------------------------------------------------- 35
Strategy mapping and balanced scorecard. ------------------------------------------------------------------- 37
CASE STUDY: PETCO.----------------------------------------------------------------------------------------------- 38
CASE STUDY: Volkswagen do Brazil. ----------------------------------------------------------------------------- 38
CHAPTER 11: COMPENSATION, INCENTIVES AND MOTIVATION. ----------------------------------------------------------- 39
Compensation and incentives. ----------------------------------------------------------------------------------- 39
Types of compensation and incentives.------------------------------------------------------------------------- 39
Agency theory. ------------------------------------------------------------------------------------------------------- 40
Motivation crowding theory. --------------------------------------------------------------------------------------- 41
CASE STUDY: Quality Metal Service Centre. ------------------------------------------------------------------- 41
Exam information:
4 types of questions:
• Explain five concepts (4/20);
• 2 open questions about the theory (8/20);
• 2 questions about the case studies linked to the theory (4/20);
• Small case study (4/20).
2
,Part 1: Management control and management control systems.
Chapter 1: Introduction to management control.
Management control and the need for management control.
Management control is the systematic process by which the organization’s higher-level
managers influence the organization’s lower-level managers to implement the
organization’s strategy.
Decentralization is the single most important reason for organizations to need
management control systems.
There are three reasons why we need control and they all require top-down and bottom-
up functions of management control.
1. Decentralized managers do not automatically understand the strategies and
goals developed by higher-level managaers, nor how they can contribute to these
goals and strategies. Top-down functions of management control: Explain the
goals and strategies of the organization in as operational a way as possible.
Coordinate between decentralized units. Bottom-up functions of management
control: Report and comment on the expectations. Propose changes when goals
are uncertain. We can also add to the coordination between decentralized units.
2. Decentralized managers do not automatically agree with organizational goals
and strategies developed by higher-level managers. Top-down functions of
management control: Motivate lower-level managers (use incentive schemes)
and create goal congruence. Bottom-up functions of management control:
Share the private information based on which you do not agree with the
strategies and goals of the organization.
3. Decentralized managers do not automatically have the resources needed to act
with organizational goals and strategies developed by higher-level managers.
Top-down functions of management control: Allocate resources. Train or
coach the lower-level managers and their subordinates. Bottom-up functions of
management control: Train/coach your subordinates and improve your own
resources.
Link with firm size, the larger the firm, the larger the need for management control.
Management and control.
We can see the management control as a part of the overall managerial function:
1. Planning: think about the future.
2. Organizing: how will we organize and who gets which resources?
3. Sta>ing: make sure the right people are at the right places.
4. Leading: motivate your subordinates, lead by example.
5. Controlling: did our plans come true?
Accounting and control.
Management control can be seen as an activity that uses management accounting
information. There is a strong connection between the two because money has always
3
,been an important measure of organizational performance and because stakeholders
need the accounting system to satisfy their information needs.
Human behavior.
Management control is about eliciting desired behaviors by decentralized managers.
This requires having some understanding of the behavior of people in organizations.
We’ll define the desired behavior in terms of the principal agent theory: 1) We want our
decentralized managers to deliver eYort. 2) We want this eYort to be in line with the
organization’s strategy. 3) We want persistence of this eYort, we want the managers to
continue to deliver this eYort.
These are the three elements that might add to this eYort:
1. Managers are motivated by goals they are asked to achieve (= target setting).
These goals must be clear and directional, not too distant and the
achievement of these goals must be valued positively.
BUT they should be aligned with strategy, they might (if for example multiple
goals) reduce clarity and direction and they might be seen as a threat.
2. Managers are motivated by rewards that they may get from their eYorts.
There must be variation in their dependence on output, they are controlled by
labor laws and there is a large variety across firms and functions.
But they should be matched in time, they can’t be seen as fixed salary so only
when performance is exceptional and they might enhance internal competition
(for example when there is a price pool distributed across all employees).
3. Managers are motivated by the social context in which they work.
This social context consist out of external factors (for example diYerent work
ethic in Silicon Valley than in Brussels) and internal factors (for example
organizational culture, tone-at-the top and management style). Be aware that
this culture is the reason why it is really hard to change a company. But we can
use this culture as an informal form of management control (by shaping
employees’ shared values, norms, and behaviors, and aligning these with the
organization’s goals, we can guide decision-making and actions without the need
for constant supervision or formal rules).
Chapter 2: Designing management control systems
Objects of control.
There is a cascade of objects of control and for every object there is a diYerent
complexity; it will be much more complex to control all units with management teams,
than one individual manager.
Elements of control.
4
, So the detector will gather the information from the entity that’s being controlled and
will give it to the control device in the form of a report (the actuals), and then the
assessor will compare this report with the standard (the budget). The e>ector will use
this comparison to alterate the behavior of our entity that’s being controlled. It looks
simple but there are a lot of considerations that the eYector should take into account.
The control model.
Manager control (= input control) has to do mostly with HR and getting the right people
at the right places. Some examples are sta>ing (recruiting the right people, right
promotions, determine the strategic jobs), development (making sure the managers
are able to broaden their talents, competence development) and culture building
(cultural values of the organization should be represented by lower-level managers,
cheer on colegiality).
Decisions control (= e>ort control = throughput control) is about restricting the
decisions of the managers. Some examples are delegation of authority (who gets to
decide what), delegation of responsibility (how far can they go in their decisions, for
example only up to 20k) and prescribing behaviors (like protocols).
Results control (= performance control = output control) makes sure we can hold
people accountable for their performances. Examples are stating performance targets
5
