MANAGEMENT CONTROL
CHAPTER 1: DEFINITION AND CONCEPTS
1. DEFINITION AND GOAL OF MANAGEMENT CONTROL
Management control = a process that serves to motivate all organizational members to perform actions that
contribute to the achievement of the organisation’s goal and to the implementation of its strategies
Why do we need controls?
1. Behaviour of employees and managers is not automatically in line with the goals of the organisation
2. They are unable or unwilling to do what is best for the organisations
Accounting information serves 2 primary roles:
1. Facilitating (informing decision-making processes)
2. Providing motivation (directing decision-making processes)
Primary function of controls: to influence behaviour in desirable ways
To achieve goal congruence between personal goals of individual managers and overall company goals
2. SCOPE OF MANAGEMENT CONTROL
Management control assumes that strategy is given because MC is about strategy execution
Corporate governance = the sets of mechanisms and processes that help to ensure that companies are
directed and managed to create value for their owners while concurrently fulfilling responsibilities to other
stakeholders
Main focus: controlling the behaviours of top management
Shareholders vs. Stakeholders
Management control = takes the perspective of top management and asks what can be done to ensure the
proper behaviours of managers and employees in the organisation
Managers vs. Employees (within the firm)
3. BUILDING BLOCKS OF A MANAGEMENT CONTROL SYSTEM
Structure = dividing the organisation in responsibility
centres and making sure that all noses are in the same
direction
Process = cycle of planning expected inputs & outputs,
measuring results, comparing plan & actuals and acting
where needed; cybernetic process
Culture = using common values and other types of softer
control to shape the behaviour of organisational
members (managers & employees)
Package deal
1
,CHAPTER 2: ESTABLISHING THE MANAGEMENT CONTROL STRUCTURE
Management control structure = the structure and formal system of communication, division of labour,
coordination, control, authority and responsibility necessary to achieve the organisations’ goals
Responsibility centre management = assigning responsibility for a particular set of outputs and/or inputs to a
manager in charge of an organisational entity
Financial responsibility centre = assigned responsibilities are defined in financial terms
Elements of the management control structure:
1. Which departments/units need to be directed?
2. What are the responsibilities of the unit managers?
3. How are unit activities to be coordinated, what are the coordination mechanisms to work together?
1. CHOICE OF THE UNIT STRUCTURE
Functional organisations = combining all activities of 1 particular discipline within a single unit
Line functions = relate to primary business processes (ex. manufacturing, sales)
Staff functions = merely support line functions by means of services and advice (ex. finance, HR)
Divisional organisations = structure around products or geographical markets
If business units have different strategies, they are called strategic business units
The design of multidivisional structures is often based on SBU
Horizontal divisions: formed around products or business units at the same level of the supply chain
Vertical divisions: when separate divisions in the supply chain deliver to each other (customer-supplier
relation)
Matrix organisations = combination of functional and product or market structures
Employees and middle managers from various functional units report to 2 bosses
2. ESTABLISHING UNIT RESPONSIBILITIES
Responsibility centre = an organisation unit that is headed by a manager who is responsible for its activities
Levels of responsibility need to be matched with levels of authority
Responsibility requires controllability
Levels of responsibility need to match with appropriate levels of accountability
Accountability = managers are accountable when they are evaluated in terms of achievements
Responsibility centres are evaluated in terms of output (obtained results) & input (amount of resources
needed)
2 criteria:
1. Efficiency: output/input
2. Effectiveness: are the realized outputs in line with the specified goals and strategies?
Once efficiency and effectiveness are defined, performance measures should be determined
2
,Financial responsibilities:
1. Cost centres
2. (Revenue centres)
3. Profit centres
4. Investment centres
Strategic responsibilities = managers need to be appraised with respect to their strategic decisions and to what
extent these decisions have led to successful results if these responsibilities are delegated to lower levels
Operational responsibilities = managers are also responsible for the management of daily operations
Rules (of acceptable and non-acceptable behaviour) and procedures (steps to be undertaken in executing tasks
or making decisions) may constrain the responsibility and actions of responsibility centre managers!
Responsibility constraints
Action constraints
2.1 COST CENTRES
Cost centres = managers are only responsible for the costs (inputs) of their departments
Outputs are NOT measured in financial ways
Discretionary cost centres = the amount the manager can spend is determined discretionary as it has no clear
quantifiable relation with specified goals (algemene kostenplaatsen); ex. R&D, admin. departments
Control is exercised by ensuring that the discretionary cost centre adheres to a budgeted level of
expenditures while successfully accomplishing the tasks assigned to it
Engineered cost centres = the causal relationship between inputs and outputs is direct and both inputs and
outputs are easy to quantify (hulpkostenplaatsen); ex. manufacturing departments
Control is exercised by comparing a standard cost (cost of inputs that are allowed to produce the
output) with the costs that were actually incurred
2.2 REVENUE CENTRES
Revenue centres = departments where the outputs are measured in financial terms but not the inputs/costs
Managers are responsible for generating revenues; NOT COMMON
2.3 PROFIT CENTRES
Profit centres = managers are responsible for both revenues (outputs) and costs (inputs) but not for the
investments made to generate them
Separate P&L statement is reported for each profit centre (manager)
Should not necessarily generate revenues from outside the organisation (ex. transfer pricing)
2.4 INVESTMENT CENTRES
Investment centres = both profits and the investments made to generate those profits are measured
3
, Managers are authorized to make investment decisions and are responsible for ROI
3. COORDINATION MECHANISMS
Unit and divisions are NOT independent; they often need to cooperate
Rules should be defined in such a way that managers are maximally motivated to direct efforts
towards realization of the corporate objectives
Formal coordination mechanisms:
1. Project groups/tasks forces
a. Finite lifetime
2. Standing committee of representatives of various units
a. Meet on a regular basis to discuss coordination issues
3. Integration managers
a. Top management delegated coordination assignments to these integration managers
b. Ongoing responsibilities for coordinating activities of various company units in specific
business areas
Transfer prices = prices when responsibility centres supply products or services to other responsibility centres
in the same firm
1. Transfer pricing based on market prices
2. Cost-based transfer pricing
3. Negotiated transfer prices
4. OPTIONS FOR OPTIMIZING MANAGEMENT CONTROL STRUCTURES
Mechanistic structures = formal rules, centralized decision authority, limited delegation of responsibilities and
rigid application of hierarchical relations
Organic structures = fewer rules, decentralized decision authority, team decision making, broadly defined
responsibilities of functions and flexible application of hierarchical relations
Optimal management control structure = maximally triggers desired goal-congruent behaviour and prevents
from engaging in dysfunctional behaviours
4
CHAPTER 1: DEFINITION AND CONCEPTS
1. DEFINITION AND GOAL OF MANAGEMENT CONTROL
Management control = a process that serves to motivate all organizational members to perform actions that
contribute to the achievement of the organisation’s goal and to the implementation of its strategies
Why do we need controls?
1. Behaviour of employees and managers is not automatically in line with the goals of the organisation
2. They are unable or unwilling to do what is best for the organisations
Accounting information serves 2 primary roles:
1. Facilitating (informing decision-making processes)
2. Providing motivation (directing decision-making processes)
Primary function of controls: to influence behaviour in desirable ways
To achieve goal congruence between personal goals of individual managers and overall company goals
2. SCOPE OF MANAGEMENT CONTROL
Management control assumes that strategy is given because MC is about strategy execution
Corporate governance = the sets of mechanisms and processes that help to ensure that companies are
directed and managed to create value for their owners while concurrently fulfilling responsibilities to other
stakeholders
Main focus: controlling the behaviours of top management
Shareholders vs. Stakeholders
Management control = takes the perspective of top management and asks what can be done to ensure the
proper behaviours of managers and employees in the organisation
Managers vs. Employees (within the firm)
3. BUILDING BLOCKS OF A MANAGEMENT CONTROL SYSTEM
Structure = dividing the organisation in responsibility
centres and making sure that all noses are in the same
direction
Process = cycle of planning expected inputs & outputs,
measuring results, comparing plan & actuals and acting
where needed; cybernetic process
Culture = using common values and other types of softer
control to shape the behaviour of organisational
members (managers & employees)
Package deal
1
,CHAPTER 2: ESTABLISHING THE MANAGEMENT CONTROL STRUCTURE
Management control structure = the structure and formal system of communication, division of labour,
coordination, control, authority and responsibility necessary to achieve the organisations’ goals
Responsibility centre management = assigning responsibility for a particular set of outputs and/or inputs to a
manager in charge of an organisational entity
Financial responsibility centre = assigned responsibilities are defined in financial terms
Elements of the management control structure:
1. Which departments/units need to be directed?
2. What are the responsibilities of the unit managers?
3. How are unit activities to be coordinated, what are the coordination mechanisms to work together?
1. CHOICE OF THE UNIT STRUCTURE
Functional organisations = combining all activities of 1 particular discipline within a single unit
Line functions = relate to primary business processes (ex. manufacturing, sales)
Staff functions = merely support line functions by means of services and advice (ex. finance, HR)
Divisional organisations = structure around products or geographical markets
If business units have different strategies, they are called strategic business units
The design of multidivisional structures is often based on SBU
Horizontal divisions: formed around products or business units at the same level of the supply chain
Vertical divisions: when separate divisions in the supply chain deliver to each other (customer-supplier
relation)
Matrix organisations = combination of functional and product or market structures
Employees and middle managers from various functional units report to 2 bosses
2. ESTABLISHING UNIT RESPONSIBILITIES
Responsibility centre = an organisation unit that is headed by a manager who is responsible for its activities
Levels of responsibility need to be matched with levels of authority
Responsibility requires controllability
Levels of responsibility need to match with appropriate levels of accountability
Accountability = managers are accountable when they are evaluated in terms of achievements
Responsibility centres are evaluated in terms of output (obtained results) & input (amount of resources
needed)
2 criteria:
1. Efficiency: output/input
2. Effectiveness: are the realized outputs in line with the specified goals and strategies?
Once efficiency and effectiveness are defined, performance measures should be determined
2
,Financial responsibilities:
1. Cost centres
2. (Revenue centres)
3. Profit centres
4. Investment centres
Strategic responsibilities = managers need to be appraised with respect to their strategic decisions and to what
extent these decisions have led to successful results if these responsibilities are delegated to lower levels
Operational responsibilities = managers are also responsible for the management of daily operations
Rules (of acceptable and non-acceptable behaviour) and procedures (steps to be undertaken in executing tasks
or making decisions) may constrain the responsibility and actions of responsibility centre managers!
Responsibility constraints
Action constraints
2.1 COST CENTRES
Cost centres = managers are only responsible for the costs (inputs) of their departments
Outputs are NOT measured in financial ways
Discretionary cost centres = the amount the manager can spend is determined discretionary as it has no clear
quantifiable relation with specified goals (algemene kostenplaatsen); ex. R&D, admin. departments
Control is exercised by ensuring that the discretionary cost centre adheres to a budgeted level of
expenditures while successfully accomplishing the tasks assigned to it
Engineered cost centres = the causal relationship between inputs and outputs is direct and both inputs and
outputs are easy to quantify (hulpkostenplaatsen); ex. manufacturing departments
Control is exercised by comparing a standard cost (cost of inputs that are allowed to produce the
output) with the costs that were actually incurred
2.2 REVENUE CENTRES
Revenue centres = departments where the outputs are measured in financial terms but not the inputs/costs
Managers are responsible for generating revenues; NOT COMMON
2.3 PROFIT CENTRES
Profit centres = managers are responsible for both revenues (outputs) and costs (inputs) but not for the
investments made to generate them
Separate P&L statement is reported for each profit centre (manager)
Should not necessarily generate revenues from outside the organisation (ex. transfer pricing)
2.4 INVESTMENT CENTRES
Investment centres = both profits and the investments made to generate those profits are measured
3
, Managers are authorized to make investment decisions and are responsible for ROI
3. COORDINATION MECHANISMS
Unit and divisions are NOT independent; they often need to cooperate
Rules should be defined in such a way that managers are maximally motivated to direct efforts
towards realization of the corporate objectives
Formal coordination mechanisms:
1. Project groups/tasks forces
a. Finite lifetime
2. Standing committee of representatives of various units
a. Meet on a regular basis to discuss coordination issues
3. Integration managers
a. Top management delegated coordination assignments to these integration managers
b. Ongoing responsibilities for coordinating activities of various company units in specific
business areas
Transfer prices = prices when responsibility centres supply products or services to other responsibility centres
in the same firm
1. Transfer pricing based on market prices
2. Cost-based transfer pricing
3. Negotiated transfer prices
4. OPTIONS FOR OPTIMIZING MANAGEMENT CONTROL STRUCTURES
Mechanistic structures = formal rules, centralized decision authority, limited delegation of responsibilities and
rigid application of hierarchical relations
Organic structures = fewer rules, decentralized decision authority, team decision making, broadly defined
responsibilities of functions and flexible application of hierarchical relations
Optimal management control structure = maximally triggers desired goal-congruent behaviour and prevents
from engaging in dysfunctional behaviours
4
