Page 8 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 1: Introduction to Management Control System

Notes

Notes A management control system is designed to assist managers in planning and
controlling the activities of the organization. A management control system is the means
by which senior managers ensure that subordinate managers, efficiently and effectively,
strive to attain the company’s objectives.
Every MCS has certain generic components. There must be a reliable performance measurement
system. Realistic standards should be planned and maintained. The standards should be
consistently and regularly compared with performance measurement data. Any variances that
exceed predetermined thresholds should be enthusiastically investigated and reported to the
people who have responsibility and authority to make appropriate and timely adjustments. All
adjustments should be controlled, especially any adjustments that affect predetermined standards
and thresholds. If the management monitors the activities of the business units frequently, then
it is exercising tight control. Limited monitoring of the business units’ activities can be termed
as loose control.
The difference between tight and loose control thus relates to the degree to which the management
monitors the activities of a unit. When there is tight control by the management, there is
extensive involvement of the management in the day-to-day operations of the business unit.
The budget is considered a binding constraint with a strong emphasis on meeting the budgeted
targets. Deviations from the budget are generally not considered acceptable. Loose control is
characterized by limited involvement by the management in day-to-day operations. Under
loose control, the budget is regarded more as a tool for planning and communication than as a
binding commitment.

Did u know? Management control systems involve a number of activities in an organization,
including:

 Planning the future course of action;
 Coordinating and communicating the various activities of the organization to
different departments;

 Evaluating information and deciding the various activities; and finally,
 Influencing people to work in accordance with the goals of the organization.
However, nature of management control system is concerned with three words management,
control and systems.
1.2.1 Management

An organization consists of a group of people who work together to achieve certain common
goals (in a business organization an important goal is to earn a satisfactory profit). In an
organization you have hierarchy of managers, with the Chief Executive Officer (CEO) at the top,
the managers of the business units, departments, sections and other sub units below the CEO.
Depending on the size and complexity of the organization, there may be several layers in the
hierarchy. Except for CEO, each manager is both a superior and a subordinate. Each one supervises
people in his own organization unit and is a subordinate of the manager to whom he reports.
The CEO (or in some organization, a team of senior managers) decides on the overall strategies
that will enable the organization to meet its goals. Subject to the approval of the CEO,
the various business and managers formulate additional strategies for their respective units to

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