Lecture 1 -The control function of management
Management and its component
1- Objective setting
- Knowledge of objectives is necessary prerequisite for design of MCS
- Objectives don’t have to be quantified or financial
- Objectives in organization are known, however, not everyone agrees
- Compromise mechanisms to prevent conflicts, results in some level of agreement
2- Strategy formulation
- Strategies define how resources should be used to meet the proposed objectives
- Act as guidelines for employees
- Intended strategy is when organizations develop formal strategies
- Unintended strategy is when organizations anticipate to opportunities that present
themselves
Difference between actual and formal strategy originates from employees taking different
(better or worse) actions
3- Management control
Definition: Process by which management ensures that the organizational objectives and
strategies are carried out
Function: Influence behaviour in desirable way
Benefit: Increased probability of achieving organization’s objectives
Causes management control issues
1- Lack of direction
- Employees do not know what company wants from them
Solution: Communication + reinforcement
2- Lack of motivation
- Conflicts of interest, self-interested behavior, effort aversion
Solution: Effective incentive systems
3- Lack of abilities
- Employees can be motivated and knowledgeable but still are unable to do the job
Solution: Training, job assignment/design, promotion
,Important characteristics of good management control
1- Future-oriented
Low probability of major unpleasant surprises
2- Objectives driven
High probability of achieving firm’s objectives
3- Cost effectiveness
a. Control losses < control implementation costs
b. Optimal MCS: Control losses = Implementation costs
Out of control = situation in which there is a high probability of low performance
Management control process
= the primary method of ensuring that the organization takes the right actions to execute its
strategy and create value
- Focuses on incentives to take actions in the best interests of the organization’s desired
goals/objectives
o Goals and objectives can be
▪ (non)financial
▪ Economic, social, and environmental
- Focuses on information used to set targets and to evaluate employee performance
Management accounting and control
= aspect of management control that uses management accounting information
- Management accounting system provides tools for MC
- ccounting techniques contribute to control:
o Enables managers to exchange information about strategies between hierarchical
levels
o To coordinate actions
o To formulate motivating strategic targets
o To evaluate and reward performance
, Lecture 2 – Controlling behaviour
Overview control framework
Control problem avoidance strategies
= eliminating the possibility of control problem occurring
Types of avoidance strategies:
- Activity elimination
o = elimination of the uncontrollable activity
o When managers are not able to control certain activities, potential risks and relate
profits outsourced to third parties
- Automation
o = use of automated devices
o Automated devices perform more consistently and can be set to behave as
required
o Downside: automation often partial control solution
▪ Major investments required
▪ May introduce new control issues = cyber security risks
▪ Lack of human intuitive judgement
- Risk sharing
o = reduce potential losses
o Examples
▪ Buying insurances (fidelity bonds)
▪ Joint venture agreements
- Centralization
o = reclaim decision making authority
o High degree of centralization means key decisions are made at top management
level
o Top management has the potential to avoid lower-level employees making poor
decision
o Degree of centralization depends on business operation and firm size
Management and its component
1- Objective setting
- Knowledge of objectives is necessary prerequisite for design of MCS
- Objectives don’t have to be quantified or financial
- Objectives in organization are known, however, not everyone agrees
- Compromise mechanisms to prevent conflicts, results in some level of agreement
2- Strategy formulation
- Strategies define how resources should be used to meet the proposed objectives
- Act as guidelines for employees
- Intended strategy is when organizations develop formal strategies
- Unintended strategy is when organizations anticipate to opportunities that present
themselves
Difference between actual and formal strategy originates from employees taking different
(better or worse) actions
3- Management control
Definition: Process by which management ensures that the organizational objectives and
strategies are carried out
Function: Influence behaviour in desirable way
Benefit: Increased probability of achieving organization’s objectives
Causes management control issues
1- Lack of direction
- Employees do not know what company wants from them
Solution: Communication + reinforcement
2- Lack of motivation
- Conflicts of interest, self-interested behavior, effort aversion
Solution: Effective incentive systems
3- Lack of abilities
- Employees can be motivated and knowledgeable but still are unable to do the job
Solution: Training, job assignment/design, promotion
,Important characteristics of good management control
1- Future-oriented
Low probability of major unpleasant surprises
2- Objectives driven
High probability of achieving firm’s objectives
3- Cost effectiveness
a. Control losses < control implementation costs
b. Optimal MCS: Control losses = Implementation costs
Out of control = situation in which there is a high probability of low performance
Management control process
= the primary method of ensuring that the organization takes the right actions to execute its
strategy and create value
- Focuses on incentives to take actions in the best interests of the organization’s desired
goals/objectives
o Goals and objectives can be
▪ (non)financial
▪ Economic, social, and environmental
- Focuses on information used to set targets and to evaluate employee performance
Management accounting and control
= aspect of management control that uses management accounting information
- Management accounting system provides tools for MC
- ccounting techniques contribute to control:
o Enables managers to exchange information about strategies between hierarchical
levels
o To coordinate actions
o To formulate motivating strategic targets
o To evaluate and reward performance
, Lecture 2 – Controlling behaviour
Overview control framework
Control problem avoidance strategies
= eliminating the possibility of control problem occurring
Types of avoidance strategies:
- Activity elimination
o = elimination of the uncontrollable activity
o When managers are not able to control certain activities, potential risks and relate
profits outsourced to third parties
- Automation
o = use of automated devices
o Automated devices perform more consistently and can be set to behave as
required
o Downside: automation often partial control solution
▪ Major investments required
▪ May introduce new control issues = cyber security risks
▪ Lack of human intuitive judgement
- Risk sharing
o = reduce potential losses
o Examples
▪ Buying insurances (fidelity bonds)
▪ Joint venture agreements
- Centralization
o = reclaim decision making authority
o High degree of centralization means key decisions are made at top management
level
o Top management has the potential to avoid lower-level employees making poor
decision
o Degree of centralization depends on business operation and firm size
