Aiswarya Mohandas

Ajin.K.Johny
Akshaya Chandran
Akshaya.K.A
Anjali Maria
Deena Babu
MANAGEMENT CONTROL
SYSTEM
 Management :The process of dealing with or
controlling things or people.
 System :A system is a prescribed way of carrying
out any activity or set of activities.
 Control: The process of monitoring activities to
ensure that they are being accomplished as planned
and of correcting any significant deviations.
 MCS: The system used by management to control
the activities of an organization is called
management control system
DEFNITION OF MCS
 A management control system (MCS) is a
system which gathers and uses information to
evaluate the performance of different
organizational resources like human, physical,
financial and also the organization as a whole in
light of the organizational strategies pursued.
 Management control system influences the
behaviour of organizational resources to
implement organizational strategies. Management
control system might be formal or informal
CHARACTERISTICS OF
MCS
 Management control systems designed in an
organisation should fulfill the following
characteristics:
 (i) Management control systems should be closely
aligned to an organisation’s strategies and goals.
 (ii) Management control systems should be designed to
fit the organisation’s structure and the decision-making
responsibility of individual managers.
 (iii) Effective management control systems should
motivate managers and employees to exert efforts toward
attaining organisation goals through a variety of rewards
tied to the achievement of those goals.
Continues...
 Control is a managerial process
 Control is forward looking
 Control exists at each level of organization
 Control is a continues process
 Control is closely linked with planning
 Purpose of controlling is goal oriented and
hence positive
PROCESS OF MCS

1. Establish the standards

2. Measure actual performance
3. Compare performance with the standards
4. Take corrective action and reinforcement of
successes
IMPORTANCE OF MCS
1. Guide the management in achieving pre
determined goals
2. Ensures effective use of scarce and valuable
resources
3. Facilitate coordination
4. Leads to delegation and decentralization of
authority
TYPES OF CONTROL
 Financial control
 Marketing control
 Human resource control
 Information control
 Production control
 Project control
CORE ELEMENTS OF
IMPLEMENTING
MANAGEMENT CONTROL
SYSTEMS
Elements of MCS include:-

 Strategic planning
 Responsibility centre allocation
 Transfer pricing
 Budgeting
 Resource allocation
 Performance measurement
 Evaluation and reward
Strategic planning
 Understanding strategy
In 2001, Enron Corporation, the global energy giant,
collapsed in one of the largest cases of bankruptcy in
US corporate history.

• The news that WorldCom, the telecom giant indulged

in deliberate enhancement of its earnings by $ 3.8
billion, rocked the corporate world.

• In India it was Satyam Computers, which indulged in

accounting irregularities with the active support by one
of the leading financial auditing firms.
• All these examples show, the absence or ineffective
control systems can lead to huge losses, and even to
corporate bankruptcy.

• Consider world-class companies like Microsoft,

Colgate-Palmolive, Procter & Gamble, Infosys, Wipro
etc.

• Their long term success is not just because they have

developed good strategies but also they execute and
control the strategies effectively.
 One view argues that management control systems must fit the firm’s
strategy.
• This implies that strategy is first developed through a rational and formal
process and this strategy then dictates the design of the firm’s management
systems.

• Another view is that strategies emerge through experimentation, which are

influenced by the firm’s management systems.
• In this view, management control systems can affect the development of
strategies.

• When firms operate in industries where environmental changes are

predictable, they can use a formal and rational process to develop the
strategy first and then design management control systems to execute the
strategy.
• However, in a rapidly changing environment, it is difficult for a firm to
formulate strategy first and then design management systems to execute
the chosen strategy.
Framework For Strategy
Implementation
MCS help managers to move an organization toward
strategic objectives. Thus, management control
primarily focuses on strategy execution.• MCS is only
one of the tools used for implementing desired
strategies. Other tools listed below also are important
for strategy implementation.
 - Organization structure
 - Human resource management
 - Organizational culture.
 Organization structure: It refers to the authority,
responsibilities, reporting relationships and the decision
making process in an organization.

 Human resource management: Selection ,training, evaluation,

promotion and termination of employees so as to develop the
knowledge and skills required to execute organizational
strategy.

 Organizational culture: It refers to the set of common beliefs,

attitudes and norms that explicitly or implicitly guide
managerial actions.
BEHAVIOUR IN ORGANISATION
 Implementing strategies through MCS involves
human interaction, social and behavioural processes
which can’t be automated.
 MCS requires human judgement and intervention,
which an internet cannot do.
Human element in MCS includes the following aspects:

1. Understanding the individual goals

2. Aligning these individual goals with those of the
organization
3. Setting performance measures for functional areas.
4. Communicating strategy and specific performance
objectives throughout the organization.
5. Evaluating the performance against the set standards
6. Reviewing the performance and taking appropriate
corrective actions
7. Influencing the individuals to change their behaviour.
Meaning
A responsibility center is an organizational unit
headed by a manager, who is responsible for
its activities and results. In responsibility
accounting, revenues and cost information
are collected and reported on by
responsibility centers.
Examples
 A specific store in a chain of grocery stores.
 A work station in a production line
manufacturing automobile batteries.
 The payroll data processing center within a
firm.
Attributes of a responsibility
center
 It is like a small business, and its manager is
asked to run that small business and preserve
the interests of the larger organization
 Goals of the center should be specific and
measurable
 It promote the long terms interests of the
organization
EFFICIENCY AND
EFFECTIVENESS
A responsibility center must both be efficient
and effective.
EFFICIENCY: it is used in its engineering
sense i.e,the amount of output per unit of
input.
EFFECTIVENESS: it means how well the
responsibility center does its job i.e., the
extent to which it produces the intended or
expected results
Types of responsibility
centers
 Cost center-accountable for costs only
 Revenue center- accountable of revenue only
 Profit center – accountable for revenue and
costs
 Investment center – accountable for
investments, revenue and costs
Cost center
 A cost or expense center is a segment of an organization
in wh8ich manager are held responsible for the cost
incurred in that segment but not for revenues.
 Responsibility in a cost center is restricted to cost.

 Out can be measured and specify the amount of input.

Cont…
 Efficiency is measured by the amount of
input consumed.
 Managers are not responsible for volume
variances.
Revenue center
 Revenue center is a segment of the
organization which is primarily responsible
for generating sales revenue.
 Manager does not possess control over cost
and investment in assets but usually has
control over some of the expenses of the
marketing department.
Cont……..
 Revenue center is evaluated by comparing
the actual revenue with budgeted revenue.
 Example: an individual sales representative
Profit centers
 It is a segment of an organization whose
manager is responsible for both revenues and
costs.
 Managers has responsibility and authority to
make decisions that affect both cost and
revenues for the department or division.
 Main purpose – earn profit
Benefits of profit center
 Better planning and decision making.
 Participation in organizational plans and
policies.
 Beneficial competitive environment
Investment center
 An investment center is responsible for both
profits and investments.
 Manager has control over revenues, expenses
and the amounts invested in the centers assets.
 Investment center is also known as investment
division.
Cont….
 The return on investment (ROI) is as the
performance evaluation criterion in an
investment center.
Responsibility accounting
 Responsibility Accounting is a system of
control where responsibility is assigned for the
control of costs. The persons are made
responsible for the control of costs.
 Proper authority is given to the persons so that
they are able to keep up their performance. In
case the performance is not according to the
predetermined standards then the persons who
are assigned this duty will be personally
responsible for it. In responsibility accounting
the emphasis is on men rather than on systems.
 For example, if Mr. A, the manager of a
department, prepares the cost budget of his
department, then he will be made responsible
for keeping the budgets under control. A will be
supplied with full information of costs incurred
by his department. In case the costs are more
than the budgeted costs, then A will try to find
out reasons and take necessary corrective
measures. A will be personally responsible for
the performance of his department.
Louderback and Dominiak:
“Responsibility accounting is the name given to that
aspect of the managerial process dealing with the
reporting of information to facilitate control of
operations and evaluation of performance.”
Charles T. Horngren:
“Responsibility accounting is a system of accounting
that recognises various decision centres throughout
an organisation and traces costs to the individual
managers who are primarily responsible for making
decisions about the costs in question.”
PRINCIPLES OF RESPONSIBILITY ACCOUNTING:

1. Determination of responsibility centres.

2. A target is fixed for each responsibility centre.
3. Actual performance is compared with the target.
4. The variances from the budgeted plan are analysed
so as to fix the responsibility of centres.
5. Corrective action is taken by the higher
management and is communicated to the
responsibility centre i.e., the individual responsible.
6. Offer incentive as inducement.
7. All apportioned costs and policy costs are excluded in
determining the responsibility for costs because an
individual manager has no control over these costs.
Only those costs and revenues over which an
individual has a definite control can be attributed to
him for evaluating his performance.
8. Report to responsible individual for action.
9. Transfer Pricing Policy. To get the desirable result of
responsibility accounting, a suitable transfer pricing
policy should be followed.
Advantages of Responsibility
Accounting:
1. It establishes a sound system of control.
2. It is tailored according to the needs of an organisation.
It forces the management to consider the organisational structure to result in
effective delegation of authority and placement of responsibility. It will be
difficult for individual manager to pass back unfavourable results as it
clearly defines the responsibility of each executive.
3. It encourages budgeting for comparison of actual achievements with the
budgeted figures.
4. It increases interests and awareness among the
supervisory staff as they are called upon to explain
about the deviations for which they are responsible.
5. It simplifies the Structure of reports and facilitates the
prompt reporting because of exclusion of those items
which are beyond the scope of individual responsibility.
6. It is helpful in following management by exception
because emphasis is laid on reporting exceptional
matters to the top management.
 Steps for Achieving Goals of
Responsibility Accounting:
1. The organisation is divided into various responsibility centres
each responsibility centre is put under the charge of a
responsibility manager. The managers are responsible for the
performance of their departments.
2. The targets of each responsibility centre are set in. The targets or
goals are set in consultation with the manager of the
responsibility centre so that he may be able to give full
information about his department. The goals of the
responsibility centres are properly communicated to them.
3. The actual performance of each responsibility centre is recorded
and communicated to the executive concerned and the actual
performance is compared with goals set and it helps in assessing
the work of these centres.
4. If the actual performance of a department is less
than the standard set, then the variances are
conveyed to the top management. The names of
those persons who were responsible for that
performance are also conveyed so that
responsibility may be fixed.
5. Timely action is taken to take necessary
corrective measures so that the work does not
suffer in future. The directions of the top level
management are communicated to the
concerned responsibility centre so that
corrective measures are initiated at the earliest.
 WHAT
IS TRANSFER PRICING?
A Transfer pricing is the internal price charged by a selling department,
division or subsidiary of a company for a raw material , component or
finished goods or services which is supplied to a buying department,
division or subsidiary of the same company.

The concept of transfer price is fundamentally aimed at simulating external

market conditions within the organization so that the managers of
individual business unit are motivated to perform well.

Transfer pricing is a business tool used by many companies. This enables

companies to keep profits high, no matter what the economy is doing. The
objectives of transfer pricing are, therefore, keeping the profit margin high
by over charging or undercharging on goods and services. Usually this is
done when a company has a branches in multiple companies.
OBJECTIVES OF TRANSFER
PRICING
1.Goal Congruence
While designing the mechanism for
transfer pricing , the interest of individual profit centers should not supersede those
of the organization as a whole. The division manager in maximizing the profits of
his/her division should not engage indecision making that fails to optimize the
organization’s performance.
2.Performance Appraisal
Transfer pricing should aid in reliable and objective assessment of the activities of profit
centers. Transfer prices should provide relevant information to guide decision
making , assess the performance of divisional manager and also assess the value
added by profit center toward the organization as a whole.
3. Divisional autonomy
The transfer pricing should aimed at providing optimum divisional autonomy , thereby
allowing the benefits of decentralization to be retained . Each divisional manager
should be free to satisfy the requirements of his/ her profit center form internal or
external sources. There should be no interference in the process by which the
buying center manager rationally strives to minimize the costs and the selling center
manager strives to maximize revenues.
Method of calculating transfer
prices
1.Market-Based Pricing Method: Organization that uses
this method price the goods and services they transfer
between their profit centres at a level equal to the
prevailing open market price for those goods and
services.
2.Negotiated Pricing Method :In this method of transfer
pricing , the buying and selling division negotiate a
mutually acceptable transfer prices. Since each division
is responsible for its own performance, this will
encourage cost minimization and encourage the parties
to seek a transfer price that yields them an appropriate
return. Tax authorities have reservation about this
method because it gives organization greater scope to
manipulate the transfer prices and thus minimize
3.Cost Plus Method :It is the simplest method of transfer pricing is
to use full historical cost. The full cost of product is material ,
labour and overhead cost required to produce and ship the
product to the buying unit. Full costs are the most economical
transfer prices to develop because they are routinely prepared
for inventory evaluation.
4. Marginal Cost :the marginal cost of a unit is the additional cost
required to produce it. If the transfer pricing system is designed
to ensure efficient allocation of resources than the best transfer
price to use is marginal cost. At less than full capacity, marginal
cost consist of the variable costs of producing and shipping
goods plus any cost directly associated with the transfer.
Measurement of
divisional accounting
Large organizations have a variety of activities
which they carry out in different locations. In
order to manage it effectively, such an
organization may be subdivided into separate
units, each of which is responsible for planning
and control of its own activities and for some
aspects of decision making. Each of the separate
units is called a division of the company
Divisionalised companies
The benefit of creating a divisional structure is
that those managing and working in each division
have a sense of responsibility for their own area
of operations, but the risk lies in the divisional
management taking actions which may appear to
benificial to the division but which are not good
for the organisation as a whole.
Methods of divisional
performance
 Return on investment
 Residual income
 Economic value added
 Transfer price between divisions
Evaluation of divisional
performance
1. Quantitative marketing measurement
metrics – evaluates tangible assets and can be
more easily expressed in monetary value, count,
percentage. Such metrics are:
 customer count, sales, gross margins,
profitability, market share, penetration, net
profit, economic profit (EVA), net present value
(NPV), payback, internal rate of return (IRR),
impressions, cost per click (CPC), net reach,
baseline sales, promotion lift, customer lifetime
value (CLV), etc.
2.Qualitative marketing
measurement
metrics – evaluates intangible assets which
over the last 40 years have become more
significant as drivers of market value. These
metrics indirectly derive at value; value is not
always about money, instead, it is also focused
around consumer reactions. Such metrics are:
loyalty, awareness, likeability, satisfaction,
word of mouth (WOM), willingness to search,
willingness to recommend, perceived quality,
etc.
Investment center
Definition:
 An investment center, also called and
investment division, is a way to classify and
evaluate a department based on its revenues,
costs, and asset investments. Instead of
categorizing departments into cost centers and
profit centers, management often looks at
departments as investment centers. In other
words, it’s a different way of looking at and
evaluating how divisions and departments
perform
What is an Investment Center

An investment center is a business unit that can utilize capital

to contribute directly to a company's profitability. Companies
evaluate the performance of an investment center according to
the revenues it brings in through investments in capital assets
compared to the overall expenses
An investment center is a center that is responsible for its own
revenues, expenses, and assets, and manages its own financial
statements which are typically a balance sheet and an income
statement. Because costs, revenue, and assets have to be
identified separately, an investment center would usually be a
subsidiary company or a division. One can classify an
investment center as an extension of the profit center where
revenues and expenses are measured. However, only in an
investment center are the assets employed also measured and
compared to the profit made.
Measuring and Controlling Assets Employed.
The purpose being to provide information that is
useful in making sound decisions about assets
employed and to motivate managers make these
sound decisions that are in the best interests of the
company. Also , to measure the performance of
business units as an economic entity.
3Structure of the Analysis

Purpose of measuring assets employed-

1.To provide information that is useful in making
sound decisions about assets employed and to
motivate managers to make these sound decisions that
are in the best interest of the company.
2. To measure the performance of the business unit as
an economic entity.
Business units managers have two performance
objective:

1. Earn adequate profit from the resources at

the disposal
2. Invest in additional resources only when the
investment will produce an adequate return.
Two ways of relating profits to assets employed- ROI and EVA:

ROI: It is a ratio of income as reported in the income statement

to the asset employed. Asset employed = Total Assets less
current liabilities.

EVA: It is an amount found by subtracting a capital charge

from the net operating profit. Capital charge is found by
multiplying the amount of assets employed by a rate. It is a
Rupee amount, rather than a ratio
Thank you