Chapter 1 Introduction to management control systems
Management control system (MCS) is a set of practices, tools, and processes used by top managers to
steer lower‐level managers and employees toward the organization’s mission, goals, and strategies. In
other words, MCS ensures everyone is pulling in the same direction so the organization can succeed.
Examples of management control practices=
• Budgets and financial plans
• Performance measures (e.g., financial or customer satisfaction)
• Reward systems (e.g., bonuses, promotions)
• Mission and value statements
• Transfer pricing (how divisions within a company charge each other)
MCS as a Package of Controls=
o Organizations are typically complex and have various interconnected departments and processes.
o No single type of control can guarantee full alignment with strategic goals.
o Therefore, most companies combine different control activities (e.g., input controls like training,
throughput controls like standardized procedures, and output controls like financial incentives) to
reinforce each other.
o This combination of control activities and types, with the relationships and interdependencies among
them, makes up the organization’s MCS.
Why the need for management Top-down role of management Bottom-up role of management
control systems related to lower- control systems control systems
level management and employees
1. They may not understand the Communicate the mission, Report to higher‐level managers on
organization’s mission, goals, goals, and strategies clearly progress, achievements, or problems
and strategies or how their (making them understandable in (e.g., telling top management when
decisions affect those broader practical, day‐to‐day terms). goals are unrealistic or resources are
aims. insufficient).
2. They may not agree with these Motivate and align the interests Share specialized knowledge and
goals or may have different of decentralized managers and skills from the lower levels so top
personal incentives employees with the managers can make better strategic
organization’s goals (e.g., via decisions.
rewards, recognition).
3. They may lack resources (skills, Provide resources (budgets, Acquire additional support (e.g.,
budget, training) to effectively training, tools) that lower‐level extra staff or a new IT system) by
pursue the organization’s goals. managers and employees need highlighting gaps and needs to top
to do their jobs. management.
Types of control practices=
• Input Controls: Focus on the people hired into the organization and the qualities they bring.
o Selection and placement processes (hiring for specific skills/values)
o Value statements (guiding beliefs)
o Socialization/training that instils company culture and norms
, • Throughput Controls: Focus on how the work is done once people are in the organization. Often
formal rules or structures that guide daily actions toward the desired goals.
o Organizational architecture (who reports to whom, how decisions get made)
o Specific procedures and guidelines (e.g., approval workflows)
• Output Controls: Focus on results or outcomes and hold managers responsible for achieving targets.
o Budgets and targets for sales, costs, or profits
o Measuring performance (financial or non‐financial) and linking it to rewards
o Risk management systems (ensuring results align with acceptable risk levels)
Formal Controls
o Output controls: setting targets (e.g., profit, customer satisfaction) and measuring whether
managers hit them.
o Behaviour controls: prescribing or prohibiting certain actions (e.g., mandatory approvals, step‐by‐
step procedures).
Informal Controls
o Clan controls: relying on shared values, beliefs, and culture to influence behavior (e.g., a strong
corporate culture, mission statements).
o Personnel controls: ensuring employees have the right skills and mindset so that they act in the
organization’s best interest on their own (e.g., selection, training, job design)
! In practice, companies rarely rely on only one control type. They use a combination of formal and
informal controls the mix of these controls forms the organization’s MCS
Why Use Multiple Control Types?
1. Complexity: Different activities or departments may require different forms of control.
2. Risk Management: Having multiple controls (input, throughput, output) helps reduce the risk that any
single control fails or is bypassed.
3. Flexibility and Adaptation: A comprehensive MCS can adapt to changing environments, strategies,
and goals.
Mechanistic MCS Organic MCS
• Motivation primarily through pay (financial rewards, • Motivation primarily through goal contribution
bonuses). (employees feel personally invested).
• Clear and specialized roles and responsibilities. • Emphasis on cooperation, teamwork, and
• Hierarchical communication (top‐down horizontal communication.
supervision). • More informal and loose structures.
• Formal and tight controls. • Encourages creativity, flexibility, and external
• Focus on cost, productivity, and internal focus (customer and market oriented).
processes. • Focus on non‐financial measures, people, and
• Heavy use of technology, routines, planning, and culture.
budgeting. • Typically emphasizes clan controls (shared
• Typically emphasizes output controls (meeting values) over strict rules.
targets) and/or behaviour controls (clear rules).
Management control system (MCS) is a set of practices, tools, and processes used by top managers to
steer lower‐level managers and employees toward the organization’s mission, goals, and strategies. In
other words, MCS ensures everyone is pulling in the same direction so the organization can succeed.
Examples of management control practices=
• Budgets and financial plans
• Performance measures (e.g., financial or customer satisfaction)
• Reward systems (e.g., bonuses, promotions)
• Mission and value statements
• Transfer pricing (how divisions within a company charge each other)
MCS as a Package of Controls=
o Organizations are typically complex and have various interconnected departments and processes.
o No single type of control can guarantee full alignment with strategic goals.
o Therefore, most companies combine different control activities (e.g., input controls like training,
throughput controls like standardized procedures, and output controls like financial incentives) to
reinforce each other.
o This combination of control activities and types, with the relationships and interdependencies among
them, makes up the organization’s MCS.
Why the need for management Top-down role of management Bottom-up role of management
control systems related to lower- control systems control systems
level management and employees
1. They may not understand the Communicate the mission, Report to higher‐level managers on
organization’s mission, goals, goals, and strategies clearly progress, achievements, or problems
and strategies or how their (making them understandable in (e.g., telling top management when
decisions affect those broader practical, day‐to‐day terms). goals are unrealistic or resources are
aims. insufficient).
2. They may not agree with these Motivate and align the interests Share specialized knowledge and
goals or may have different of decentralized managers and skills from the lower levels so top
personal incentives employees with the managers can make better strategic
organization’s goals (e.g., via decisions.
rewards, recognition).
3. They may lack resources (skills, Provide resources (budgets, Acquire additional support (e.g.,
budget, training) to effectively training, tools) that lower‐level extra staff or a new IT system) by
pursue the organization’s goals. managers and employees need highlighting gaps and needs to top
to do their jobs. management.
Types of control practices=
• Input Controls: Focus on the people hired into the organization and the qualities they bring.
o Selection and placement processes (hiring for specific skills/values)
o Value statements (guiding beliefs)
o Socialization/training that instils company culture and norms
, • Throughput Controls: Focus on how the work is done once people are in the organization. Often
formal rules or structures that guide daily actions toward the desired goals.
o Organizational architecture (who reports to whom, how decisions get made)
o Specific procedures and guidelines (e.g., approval workflows)
• Output Controls: Focus on results or outcomes and hold managers responsible for achieving targets.
o Budgets and targets for sales, costs, or profits
o Measuring performance (financial or non‐financial) and linking it to rewards
o Risk management systems (ensuring results align with acceptable risk levels)
Formal Controls
o Output controls: setting targets (e.g., profit, customer satisfaction) and measuring whether
managers hit them.
o Behaviour controls: prescribing or prohibiting certain actions (e.g., mandatory approvals, step‐by‐
step procedures).
Informal Controls
o Clan controls: relying on shared values, beliefs, and culture to influence behavior (e.g., a strong
corporate culture, mission statements).
o Personnel controls: ensuring employees have the right skills and mindset so that they act in the
organization’s best interest on their own (e.g., selection, training, job design)
! In practice, companies rarely rely on only one control type. They use a combination of formal and
informal controls the mix of these controls forms the organization’s MCS
Why Use Multiple Control Types?
1. Complexity: Different activities or departments may require different forms of control.
2. Risk Management: Having multiple controls (input, throughput, output) helps reduce the risk that any
single control fails or is bypassed.
3. Flexibility and Adaptation: A comprehensive MCS can adapt to changing environments, strategies,
and goals.
Mechanistic MCS Organic MCS
• Motivation primarily through pay (financial rewards, • Motivation primarily through goal contribution
bonuses). (employees feel personally invested).
• Clear and specialized roles and responsibilities. • Emphasis on cooperation, teamwork, and
• Hierarchical communication (top‐down horizontal communication.
supervision). • More informal and loose structures.
• Formal and tight controls. • Encourages creativity, flexibility, and external
• Focus on cost, productivity, and internal focus (customer and market oriented).
processes. • Focus on non‐financial measures, people, and
• Heavy use of technology, routines, planning, and culture.
budgeting. • Typically emphasizes clan controls (shared
• Typically emphasizes output controls (meeting values) over strict rules.
targets) and/or behaviour controls (clear rules).
