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Cost Analysis, Profit

Planning, and Control

MBA 603
Chapter 3 - Behavior in
Organizations

Goal Congruencies
Successful management control systems
influence corporate behavior in a fashion
that fosters individual attention on
completing their goals and corporate goals
at the same time.
Evaluating management control practices
focus on two key questions:
What actions cause people to act in their selfinterest?
Are these actions in the best interest of the
firm?

Informal Factors that


Influence Goal Congruence

Important Informal Factors to consider when


designing a formal control system:
Work Ethic
Management Style
Culture

External Factors: Desirable behavior that


exists in society and infiltrates the
organization.
Work Ethic: Employee Attitudes which
manifests itself through loyalty,spirit, pride in
doing a good job, etc. toward an organization.

Informal Factors that Influence


Goal Congruence - Continued

Internal factors are embedded in all business


organizations and are strong factors in their
overall performance.
Culture: This is the most important internal
factor and consists of:

Common Beliefs
Shared Values
Norms of Behavior
Assumptions Accepts throughout the Organizations

Certain of these factors become rituals and


are done automatically.

Informal Factors that Influence


Goal Congruence - Continued

The strongest internal factor that impacts


management control is referred to as
management style.
The tone for the style is set at the very
top and is then emulated by managers
throughout the organization.
Various styles are:
Out-going and very communicative
Extremely Conservative
Marketing Orientated or Numbers Driven

Informal Factors that Influence


Goal Congruence - Continued

Within every organization there is an


informal organization.
This organization within the organization is
made up of relationships between
management teams, departments,
divisions, etc.
These informal forces actually drive the
firm onward and interpret policies and
procedures that effectively operate the firm
on a daily basis.

Informal Factors that Influence


Goal Congruence - Continued

The daily operations of a firm and working


toward its strategic goals causes
managers to receive information through
various channels.
These channels are:
Formal: Budgets and official documents
Informal: conversations, emails, meetings

Because of the complexity of


organizations, information is often unclear
and subject to differing interpretations.

The Formal Control


System
The formal factors consist of:
The management control system itself.
Rules of the organization.

Rules are all forms of written instructions


and controls such as:
Operating policies
Procedure Manuals
Job Descriptions
Ethical Guidelines

The Formal Control


System - Continued
Physical Controls consist of :
Security Guards or Systems
Locked Storage Rooms or Vaults
System Passwords
Television Surveillance
Biometrics Systems

Manuals serve a formal guidelines to


execute goals and conduct everyday
business operations.
They tend to be outdated and inflexible.

The Formal Control


System - Continued
System Safeguards are integral parts of all
management information systems.
They insure that the information flowing
into and out of the system meets corporate
standards and operational standards.
They perform the collection and protection
umbrella for both internal and external
audit functions.

Types of
Organizations
Usually a firms structure plays a major role
in it strategy which, in turn affects the
design and implementation of the firms
management control system.
Organizations fall into three distinct forms:
Functional: Each manager has responsibility
for a specific function. (Accounting, Marketing)
Business Unit: Managers are responsible for
semi-independent unit(s) of the overall firm.
Matrix: Functional units have dual jobs.

Types of Organizations Continued


Functional Organizations employ the
specialist approach where a manager
focuses all their special knowledge on
managing a function.
The main advantage of functional
organizations is that they are very efficient.
Please refer to the Exhibit 3.2 - Page 101.
There are 4 disadvantages to a functional
organization:

Types of Organizations Continued


There are 4 disadvantages to a functional
organization:
There is no effective way to measure a
functions contribution to profits, etc.
Disagreements between functions can only be
resolved by the leaders of affected functions.
A firm with diversified products and markets
do not operate well with a functional structure.
Silos are created under this organizational
structure which inhibits new product
development.

Business Units
Business Units are also called divisions
and are responsible for managing a
specific product, market or mix of products.
BU are usually operated as a singular
operating entity in terms of developing
strategy, plans, budgets, and creating
performance metrics.

Business Units Continued


Headquarters continue to control several
key facets of BU operations such as:
Invested Funds are procured by the treasurer
of the firm, etc.
HQ approves budgets and measures a units
performance.
HQ manages the charter for the BU which
establishes what it can sell and/or make within
specific boundaries.

Business Units Continued


There are several advantages to the BU
form of organization:
It provides a training ground for senior
management.
They are closer to markets and therefore,
should make better decisions than someone
far removed at HQ.

Business Units Continued


There are several disadvantages to the
BU form of organization:
Each BU staff may duplicate HQs work.
BUs may have disputes that are hard to
resolve.

In summary, BUs are preferred for


control and system design purposes
because of their symmetry and the clear
accountability by management.

Functions of a
Controller
A Controller is someone who is
responsible for designing and operating the
management control system.
Controllers perform the following
functions:
Designing and implementing control systems.
Preparation of financial statements and
external reports.
Preparation of internal performance reports.

Functions of a
Controller - Continued
Supervision of internal and external audit
functions.
Developing personnel in the controllers
function to educate all levels of management
in controllership matters.

The controllers function is a staff position


that usually reports to the Chief Financial
Officer of the firm.
Controllers play an important part in an
organizations strategic plan process.