Summary Class notes - Management Control

Course
- Management Control
- E. Reusen
- 2017 - 2018
- Erasmus Universiteit Rotterdam (Erasmus Universiteit Rotterdam, Rotterdam)
- Accountancy and Financial Management
290 Flashcards & Notes
2 Students
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Summary - Class notes - Management Control

  • 1509404400 Lecture 1

  • Definition Management Control
    The process by which management ensures that people in the organization carry out organizational objectives and strategies
  • Function of Management Control
    Influence behavior in desirable ways
  • Benefit of MC
    Increased probability of achieving organization's objectives
  • How does a typical business organization looks like?
    Like a pyramid with a hierarchy.
  • As a president, you work towards a goal. What do employee usually think?
    - Why should I care?
    - What's in it for me?
  • What's the fundamental control problem?
    How do we make sure that everybody in the organization is goal-directed?
  • What's are the key questions of MC?
    - Are our employees likely to behave appropriately?
    - Do they understand what we expect from them?
    - Will they work consistently hard and try to do what is expected of them?
    - Are they capable of doing what is expected of them?
  • Lack of direction
    Do they understand what we expect of them? People simply do not know what the organization wants from them. It should not be taken for granted that employees know the direction
  • What's the solution for lack of direction?
    Solution: communication + reinforcement
  • Lack of motivation
    Will they work consistently hard and try to do what is expected of them?

    Lack of motivation common because organizational and personal objectives do not naturally coincide. Individuals are self-interested --> Effort aversion or other self-interest behavior, both prevalent in almost all organizations. 
  • What's the solution for lack of motivation?
    Solution: effective incentive systems
  • Lack of abilities/Personal limitations
    Are they capable of doing what is expected of them?

    Limitations are person specific, e.g. lack of aptitude (aanleg), training, experience, stamina, knowledge. All individuals face limitations in their abilities to perceive new problems, to remember important facts and to process information properly.
  • What's the solution for lack of abilities/personal limitations?
    Solution: training, job assignment/promotion, job design
  • What is MC about?
    MC is about encouraging PEOPLE to take desirable actions.
  • What does MC guard against?
    It guard against the possibilities that employees will do something the organization does not want them to do, or fail to do something they should do.
  • What kind of orientation does MC has?
    MC has a behavioral orientation.
  • When would there be no need for a management control system?
    If all personnel could always be relied on to do what is best for the organization, there would be no need for a management control system.
  • Understanding how to manage and control is essential for the long-term effectiveness of an organization.
  • What's "good" management control?
    - a high probability that the firm's objectives will be achieved
    - a low probability that major unpleasant surprises will occur
  • Does perfect management control exists?
    No
  • Does an organization have to strive for a lot of MC systems?
    No, MCS are costly. You need to have "enough" controls and need to make a cost-benefit trade-off.
  • Control loss
    The costs of not having a perfect control system.

    Theoretical performance - actual performance
  • Optimal control
    Optimal control is when the costs of the control losses are smaller than the costs of implementing more controls.
  • Out of control
    A situation where there is a high probability of poor performance, despite having a sound strategy in place
  • MC should be future-oriented and objectives-driven.
  • Why future-oriented?
    The goal is to have no unpleasant surprises in the future, past is not relevant except as a guide for the future
  • Why objectives-driven?
    Objectives represent what a company seeks to attain
  • What's the MC process?
    It's the primary method of ensuring that the organization takes the right actions to execute its strategy and create value.
  • What does the MC process looks like?
    1. Set direction and context
    2. Execute and manage performance and health
    3. Measure stakeholder value
  • What does the "execute and manage performance and health" stage looks like?
    It's a circle:
    - Establish clarity, transparency and accountability
    - Create adequate plans, budgets and targets
    - Track performance effectively
    - Hold robust performance dialogues
    - Ensure rewards, consequences and actions
  • On which two things does the MC process focusses?
    - It focuses on the incentives that employees get to take actions that are consistent with the goals set by top-management, that is, to align employees' efforts with desired organizational goals

    - It focuses on the information used to set targets and to evaluate and reward employees' performance
  • MC is an aspect of management that uses management accounting information.
  • MC is an interdisciplinary subject between...
    - Management Accounting (extensive measurement)
    - Managerial Economics (resource allocation)
    - Social Psychology/Organizational Behavior (communication, coordination, motivation)
  • MC is a function of management
  • MC play an important role in strategy execution and value creation
  • What does MC include?
    It includes all the devices/mechanisms managers use to ensure that the behavior or employees is consistent with the organization's objectives and strategies
  • Where does MC relies on?
    It relies on the organization's management accounting system. Management accounting provides the tools for MC.
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Summary - Class notes - Management Control

  • 1520204400 Flashcards lectures 1 t/m 3

  • The definition of 'management control'
    The process by which management ensures that people in the organization carry out organizational objectives and strategies. It is about encouraging people to take desirable actions
  • The function of MC
    Influence behaviour in desirable ways
  • The benefit of MC
    Increased probability of achieving the organization's objectives
  • What is 'good' management control?
    - A high probability that the firm's objectives will be achieved
    - A low probability that major unpleasant surprises will occur
    Good MC is essential for the long term effectiveness  of the organisation
  • Characteristics MC
    - Future oriented
    - Objectives driven
  • What does the management control process focus on?
    -Focuses on the incentives that employees get to take actions that are consistent with the goals set by top-management (align employees’ efforts with desired organizational goals).
    -Focuses on the information used to set targets and to evaluate and reward employees’ performance.
  • Why is it an interdisciplinary subject?
    Management accounting information enables managers to exchange information about the organization’s strategies between the hierarchical levels, to coordinate actions between managers across functions and to formulate motivating strategic targets and to evaluate and reward performance (i.e. Management accounting provides a tool for management control).
  • Control problems
    Lack of direction
    Lack of motivation
    Lack of abilities
  • Avoidance strategies
    - Activity elimination (eliminate the uncontrollable event e.g. outsourcing)
    - Automation
    - Risk sharing
    - Centralization
  • Most direct form of control
    Action controls
  • Description people controls
    Ensure that people will control:
    - Their own behavior --> personnel controls
    - Each other's behavior --> cultural controls
  • Personnel control
    Based on self-monitoring. Can be strengthened by selection & placement and training & development
  • Cultural controls
    Based on mutual monitoring. About the social context in which people work. Built upon the social pressure exerted by groups on individuals.
    - Codes of conduct & tone at the top
    - Job rotation
    - Physical and social arrangements
    - Team work
  • Action controls
    Ensure that people perform (do not perform) certain actions known to be beneficial (harmful) to the firm. Most direct form of control. Generally take on one of these 4 forms:
    - Behavioral constraints
    - Pre-action reviews
    - Action accountability
    - Redundancy
  • When are action controls effective?
    - When actions are measurable
    - When managers know what actions are desired
  • Result controls
    Involves rewarding or punishing employees for good or bad behavior.
    - Pay for performance
    - Promotion policies 
    - Management by objectives
    - Balanced scorecard
  • Balanced scorecard
    The BSC suggests we view the organization from four perspectives. 
    - Financial
    - Customer and stakeholder
    - Internal process
    - Organizational capacity or Learning & growth
  • When are result controls effective?
    - Managers know what results are desirable
    - Individuals have significant influence on results
    - Results can be measures effectively
  • Three drivers for tightness
    - Detailed 
    - Applied frequently 
    - Low tolerance for non-compliance
  • Tightness of action accountability depends on
    - The definition of (un)desired actions --> must be congruent, specific, well communicated and complete
    - Action tracking system --> employees should have the feeling that their actions are noticed
    - Reinforcement provided: Making the rewards or punishments more significant to the employees affected
  • Tightness of results accountability depends on
    - Definition of the desired results --> must be congruent, specific, well communicated and complete
    - The performance measurement --> should be precise, objective, timely and understandable
    - The reinforcement provided --> Link between performance and rewards must be direct & definite
  • Tightness people controls may be enhanced by
    - Strict selection procedures
    - Compulsory courses of training
    - Strong culture
    - Code of conduct
    - Group rewards
  • Direct costs
    Out-of-pocket costs, e.g. bonus payments, cost to set up the system
  • Indirect costs
    - Harmful side-effects, e.g. behavioral displacement
    - Gamesmanship, e.g. slack creation, data manipulation
    - Managerial myopia, e.g. short-termism
    - Negative attitudes, e.g. tension, stress
  • Decentralization
    The delegation of freedom to make decisions, the reallocation of decision rights
  • benefits and costs decentralization
    Benefits:
    - Lower level managers have the best knowledge to react to market demands
    - It promotes management skills, which, in turn, helps to ensure leadership continuity
    - Managers enjoy higher status from being independent and thus are better motivated 
    Costs:
    - Managers may make decisions that are not in the organization's best interest
    - Managers also tend to duplicate services that might be less expensive if centralized
    - Costs of accumulating and processing information frequently rise
  • Responsibility centre
    An organizational unit headed by a managers responsible for its activities
  • Business goal of earning a satisfactory return on investment (ROI) leads to 4 types of responsibility centers:
    - Revenue center: e.g. Sales department
    - Expense center: Standard/Engineered expense center or managed/discretionary expense center
    - Profit center: Decisions involve/expense trade-off
    - Investment center: Expected to earn a satisfactory return on assets
  • ROI
    (revenue-expenses)/investments
  • RI
    dollar amount obtained by subtracting a capital charge from the reported accounting profits 
    Profit - capital charge
    capital charge = cost of capital (percentage)*assets employed
  • Operating budget
    Desired financial results of a future plan of action(s) proposed by management for an organizational unit for a certain period
  • Types of targets
    - Model based
    - Historical: based on prior performance levels, problem is ratchet-effect (higher historical performance results in higher targets)
    - Benchmarked: involves comparison of performance, internal or external  
    - Fixed vs. Flexible: flexible targets are changed according to conditions faced
  • How difficult should targets be?
    'Challenging but achievable', to increase management commitment, minimize game-playing and create a winning atmosphere.
    Planning purpose = realistic & accurate
    Motivation purpose = slightly 'stretched' targets
  • Benefits & costs budget participation
    Benefits: information sharing & higher commitment
    Costs: Slack building & inefficient procedures
  • Risks and solutions traditional budget based compensation plans
    Provide economic incentives for subordinate managers to misrepresent their productivity and build slack.
    Solutions:
    - Promote managers who have a reputation for truth telling
    - Implement truth-inducing budget scheme that explicitly rewards subordinate managers for truthful revelation of their personal information
  • Controllable vs. uncontrollable outcomes
    Uncontrollable outcomes are often influencable
  • Ways to eliminate controllables
    - Variance analysis
    - Relative targets 
    - Flexible targets
  • The total budgeting cycle comprises
    Budget preparation --> periodic evaluations against 'actuals' --> budget revisions or 'revised forecasts' --> results evaluation (after budget period)
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Summary - Class notes - Management Control

  • 1420066800 College 1

  • Management control is
    Care about desired behaviors by decentralized managers, including:
    1. Goal achievement
    2. Rewards
    3. Social context
  • Examples of formal, information-based management accounting routines:
    • Costing: absorption vs variable vs cost allocation
    • Budgeting
    • Cost-volume profit analysis
    • Performance evaluation: ROI, Variance analysis
  • How can control problems be avoided?
    • Elimination
    • Automation
    • Risk sharing
    • Centralization
  • What is 'Good control'?
    A situation where an informed person can be reasonably confident that no major, unpleasant surpises will occur:
    • Future oriented
    • Objectives driven
  • Personnel controls:
    build on employees' natural tendencies to control themselves
  • Examples of personnel controls:
    • Selection and placement
    • Training
  • Cultural controls:
    Build upon the social pressure exerted by groups on individuals in the group
  • Examples of cultural controls:
    • Codes of conduct & Tone at the top
    • Job Rotation
    • Physical & social arrangements
    • Teams
  • Managerial input controls:
    Personnel controls
    Cultural controls
  • What kind of control is job rotation?
    Cultural control --> Managerial input control
  • What kind of control is training?
    Personnel controls --> Managerial input control
  • What kind of control are codes of conduct?
    Cultural controls --> Managerial input controls
  • Four examples of action controls:
    1. Behavioral constraints
    2. Preaction reviews
    3. Action accountability
    4. Redundancy
  • When are action controls effective?
    • Managers know what actions are desirable
    • Managers can do desirable actions occur
    • Actions are observable
  • Management control by controlling decisions is 
    Ensuring that employees (do not) perform certain actions known to be beneficial to the organization
  • Examples of management control by controlling decisions
    • Delegation of authority
    • Delegation of responsibility
    • Prescribing behaviors
  • Examples of Results control
    • Pay-for-performance
    • Management-by-objectives, balanced scorecards
    • Franchising
  • When is results control effective?
    • When managers know what results are desirable
    • Individuals have significant influence on results
    • Results can be measured effectively
  • What are the causes of control problems?
    • Lack of direction
    • Lack of motivation
    • Lack of ability
  • 1420153200 College 2

  • Name four examples of indirect costs due to management control:
    1. Behavioral displacement (Encouragement of harmful behavior)
    2. Gamesmanship (Actions intended to improve performance indicators without improving performance)
    3. Operating delays
    4. Negative attitudes
  • Name four examples of tight action controls:
    1. Behavioral constraints
    2. Pre-action reviews
    3. Action accountability
    4. Redundancy
  • Name three examples of tight results controls:
    1. Definition of desired results
    2. Performance measurement
    3. Rewards and punishments
  • Name four examples of tight personnel/cultural controls:
    1. Strong culture
    2. Strict selection procedures
    3. Compulsory courses/training
    4. Group rewards
  • Psychologists always accuse economists of oversimplifying reality, while economists accuse psychologists of basing their ideas on immeasurable realities. 
  • What are piece-rate incentives?
    Rewards for a direct function of output
  • When are piece-rate incentives effective?
    If performance measure is relatively low in 'noise'
  • Tournament incentives:
    Tournaments for prize among agents.
  • Cognitive evaluation theory (Deci & Ryan) is
    Monetary rewards (extrinsic motivator) can reduce existing intrinsic motivation
  • Equity theory is:
    Reward enhances motivation if there is a link between output and input/effort
  • Expectancy theory is 
    Motivation depends on the expected value of the reward, probability of achieving it, and instrumentatility of the reward
  • Goal setting theory is
    Motivation depends strongly on the extent to which goals are specific, clear and difficult
  • Responsibility accounting is
    Allocating responsibility through responsibility centers.
  • Name the four responsibility centers:
    1. Investment centers
    2. profit centers
    3. Revenue centers
    4. Cost centers
  • Budgeting is defining:
    Desired financial results of a future plan of actions proposed by management, for an organizational unit, for a certain period
  • Name the purposes of budgeting:
    • Planning
    • co-ordination
    • Performance evaluation
    • Motivation
    • Authorization
    • Communication
  • Easier targets at higher organizational levels lead to:
    • Higher commitment
    • protection against over-optimistic behavior and excessive risk-taking
    • Lower incentive for game playing
    • Better coordination
  • Name three examples of model-based targets:
    1. Engineered
    2. Derived through modelling
    3. Time-and-motion studies
  • Name three types of targets:
    1. Model-based (engineered)
    2. Historical (Based on prior performance levels)
    3. Negotiated (budgetary participation)
  • Ratchet-effect is 
    Higher performance results in higher targets
  • Name the benefits of bottom-up target setting:
    • Information sharing
    • Higher goal and organizational commitment
    • Cognitive benefits (clarifying, learning)
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Latest added flashcards

What are the limitations of automation?
- Feasibility (haalbaarheid) --> not all human talents can be duplicated by machines.
- Cost
Avoidance strategies
Eliminating the possibility that the control problem will occur
What are the benefits of controls?
The benefits of controls are the increased probability of achieving the organizational objectives.
What's the primary function of control?
The primary function of control is to influence behavior in desirable ways
Why objectives-driven?
Objectives represent what a company seeks to attain
Why future-oriented?
The goal is to have no unpleasant surprises in the future, past is not relevant except as a guide for the future
Control loss
The costs of not having a perfect control system.

Theoretical performance - actual performance
Optimal control
Optimal control is when the costs of the control losses are smaller than the costs of implementing more controls.
Does an organization have to strive for a lot of MC systems?
No, MCS are costly. You need to have "enough" controls and need to make a cost-benefit trade-off.
Does perfect management control exists?
No