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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.
Contents
- Overview
- History
- Management control
- Management accounting and management accounting system
- Finance oriented vs operational oriented management control
- Management control system techniques
- References
Management control system influences the behavior of organizational resources to implement organizational strategies. Management control system might be formal or informal.
Overview
Management control systems are tools to aid management for steering an organization toward its strategic objectives and competitive advantage. Management controls are only one of the tools which managers use in implementing desired strategies. However strategies get implemented through management controls, organizational structure, human resources management and culture.
According to Simons (1995), Management Control Systems are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities
Anthony & Young (1999) showed management control system as a black box. The term black box is used to describe an operation whose exact nature cannot be observed.
History
One of the first authors to define management control systems was Ernest Anthony Lowe, Professor of Accounting and Financial Management at the University of Sheffield, in his 1972 article "On the idea of a management control system." He listed the following four reasons for the need for a planning and control system:
The need for a planning and control system within a business organization flows from certain general characteristics of the nature of business enterprises, the chief of which are follows:The term ‘management control’ was given of its current connotations by Robert N. Anthony (Otley, 1994).
Management control
According to Maciariello et al. (1994), management control is concerned with coordination, resource allocation, motivation, and performance measurement. The practice of management control and the design of management control systems draws upon a number of academic disciplines.
Alif Aiqal (2007) defined Management Control as the process by which managers influence other members of the organization to implement the organization’s strategies.
Management accounting and management accounting system
Anthony & Young (1999) showed that management accounting has three major subdivisions:
Chenhall (2003) mentioned that the terms management accounting (MA), management accounting systems (MAS), management control systems (MCS), and organizational controls (OC) are sometimes used interchangeably.
In this case, management accounting refers to a collection of practices such as budgeting or product costing. But management accounting systems refers to the systematic use of management accounting to achieve some goal and management accounting systems is a broader term that encompasses management accounting systems and also includes other controls such as personal or clan controls.
Finally organizational controls is sometimes used to refer to controls built into activities and processes such as statistical quality control, just-in-time management.
Finance-oriented vs. operational-oriented management control
Traditionally, most measures used in management control systems are accounting-based and financial in nature. This emphasis on financial measures, however, distracts from essential non-financial factors such as customer satisfaction, product quality, etc. Furthermore, non-financial measures are better predictors of long-run performance.
Consequently, a management control system should include a comprehensive set of performance aspects consisting of both financial and non-financial metrics. The inclusion of non-financial measures has become an essential characteristic of current management control systems, to the point of becoming the main criterion in distinguishing different systems.
Therefore, depending on the balance between financial and non-financial measures, a management control system may be characterized as finance-oriented or operations-oriented. Finance-oriented control systems are primarily based on financial accounting data, such as costs, earnings or profitability, whereas operations-oriented control systems are primarily based on non-financial data that focus on operational output and quality, for example service volume, employee turnover, or customer complaints.
Management control system techniques
According to Horngren et al. (2005), management control system is an integrated technique for collecting and using information to motivate employee behavior and to evaluate performance. Management control systems use many techniques such as