Management Control Systems - Term Paper Example

?Running Head: Management Control Systems Management Control Systems [Institute’s Management Control Systems The holistic view on management control systems (MCS) is not fresh. The academics have recognized to a rising degree that MCS should be thought as functioning simultaneously with the intention of understanding the design as well as application of MCS. According to Bedford (2006), different MCS components represent a package if they function jointly with the purpose of attaining organisational outcomes. Following this line of discussion, it is further stated that if the links between the control system components (for instance, financial plan and organisation’s traditions) are not sufficient, then the system may not execute its planned functions. That is, the MCS may be unsuccessful to control behaviour in the anticipated manner (Macintosh & Quattrone, 2010, p. 41). Management control systems (MCS) facilitate businesses to raise the possibility that workers take decisions and actions that are in the businesses' best interest. There are a number of management control components or systems, for instance, accounting controls or non-accounting controls such as conduct and clan controls. Management control components or systems do not function independently, but might connect and influence one another. This notion of MCS functioning as a package has been there for decades pursued by calls to evaluate this feature. The complexity in evaluating particular constituents of MCS individually from other organisational controls is the chance for severe under-specification. Hence, it is essential to know the way arrangements of controls can be united to go well with the specific situation of the organisation. The term package indicates to several MCS being used within businesses that can either be purposely planned or synchronized or not. In the first instance, the complete system could be known as a MCS. The second case portrays a condition within which the various operational MCS are not synchronized deliberately such as due to the design and execution by diverse organisational divisions, and should not be considered as single system but instead as a package of systems. “Thus, the term ‘MCS package’ leaves open the questions whether and how its management control elements or MCS are coordinated” (Macintosh & Quattrone, 2010, p. 63). Regardless of its justifiable position within management control study, contingency theoretic approach has developed on organisational eventuality presumption. Organisational issues have described management accounting as well as control systems existence and aim, but the results have stayed somewhat disjointed. This is perhaps because earlier contingent issues - that is, the management control systems further than what is studied - have an effect on the central MCS more than isolated organisational traits and factors. Thus, package approach to MCS has chance to create a contingency presumption of management accounting. As a general notion, a management control systems (MCS) package is a group or set of controls as well as control systems. The individual control systems may be extra conventional accounting controls, for instance, finances and financial measures, or organisational controls, for instance, organisation structure and governance systems, together with more socially based controls like principles and traditions. The structure of Malmi and Brown (2008) contain five separate control components: planning, cybernetic, reward and compensation, administrative and cultural controls. Planning controls have two special control systems that are ‘long range planning’ and ‘action planning’. Long range planning usually has a further strategic concentration while action planning has a tactical concentration. The component of planning control has a number of special roles. They create the objectives that facilitate in directing effort as well as activities within an organisation. They as well facilitate correspondence by supporting objectives all over the working parts of an organisation, in that way controlling the activities of factions as well as people. Figure 1: Management control systems package (Malmi & Brown, 2008, p. 291) Cybernetic controls incorporate four special control systems: (1) budgets, (2) financial measures, (3) non-financial measures and (4) hybrids including both financial and non-financial measures. The objectives of cybernetic systems are to quantify the fundamental occurrence, setting the values for performance or facilitating a response procedure between objectives and attained outcomes. Reward and compensation controls target at inspiring and boosting the performance of worker by connecting incentives to “effort direction, effort duration, and effort intensity” (Malmi & Brown, 2008, p. 291). This control factor is detached from the factor of cybernetic control since organisations have quite a lot of motives for rewarding, for instance, keeping hold of workers, supporting cultural control and setting reachable objectives. Administrative controls involve three separate control systems. The function of administrative controls is to direct worker attitude by the categorizing of people (known as configuring), the observing activities and who workers are made answerable to for their activities (known as authority) and through the procedure of indicating how jobs are to be done (known as guidelines and practices). The MCS structures reveal potential control systems as well as components and facilitate in evaluating the likely links among systems. Nevertheless, they do not indicate the links between the MCS that create a package. There is small speculation of the way components or systems in an MCS package connect with one another. It has been noted that connections within the control systems package are a critical feature of its design. The literature on “loosely coupled” (Sandelin, 2008, p. 331) systems can help to explain and evaluate the links of MCS as component of a package. Coupling is generally described as the link between components or variables. The notion of loosely coupled systems suggests that components within organisations are not just coupled by solid, firm links, but as well linked regularly and loosely. There is loose coupling when systems either have a small number of variables in common or the variables they have in common are not strong. Orton (1990) launched the dimensions uniqueness as well as receptiveness to separate four forms of couplings. If there is neither uniqueness nor receptiveness, the system is not actually a system. It will be a non-coupled system. Is there uniqueness, but no receptiveness, the system is called to be decoupled. If there is receptiveness with no uniqueness, the system is known to be firmly coupled. If both uniqueness as well as receptiveness is given, the system is considered as loosely coupled. Therefore, three formations of how components or systems relate with one another can be named as (1) decoupled, (2) loosely coupled, and (3) firmly coupled systems. “Different foci to characterise different levels of distinctiveness are derived from the framework” (Sandelin, 2008, p. 335). For example, an incentive and compensation system concentrates on encouraging workers, while an administrative system concentrates on the administration as well as regulation of procedures. Variations in use can be because of whether MCS are mostly applied “ex ante or ex post” (Sandelin, 2008, p. 335). For instance, a budget may be utilized like an ex ante factor, a financial measure like an ex post factor which make them distinctive. In addition, variations in utilization can be because of the type of activities. While organisation configuration is applied to group activities, guidelines and practices reveal how tasks are to be carried out. As a result, the two MCS are separate even though the both are organizational MCS. Uniqueness is as well present by variations within factors. For instance, non- financial method such as deficiency rates are “different to EVA as component of the FMS though both MCS are cybernetic MCS” (Merchant & Stede, 2011, p. 102). Reliance as the initial aspect of receptiveness beside directness and vigour indicates the level to which there is exchange amid two or more MCS. The level is found out through the comparative degrees of the exchange in addition to a lack of alternatives. If a director’s reimbursement is similarly reliant on economic value added as well as individual growth objectives, the incentive is less reliant on any particular basis. An insufficient economic value added can be remunerated by attaining personal growth objectives. Strong point of coupling is decided by the regularity, strength and prospect of alteration created by one element to another. For instance, two workers are loosely coupled if they have occasional social interactions, but may as well be firmly coupled if those discussions are deep and goes on an extended period of time. Uniqueness and receptiveness are two aspects to distinguish whether components or systems are decoupled, loosely or tightly coupled. The two aspects can be additionally characterised by three further sub-dimensions “focus, use and components for distinctiveness, dependence, directness and strength for responsiveness” (Merchant & Stede, 2011, p. 171). The package approach directs interest at MCS arrangements rather than reductionist approach, distinctive for contingency theory. Given that the variables are assessed in one-to-one manner, the understanding of empirically manifested MCS arrangements will stay modest. At best, three variables were examined at a time, but even three variable contact analyses look at acceleration cause on reliant variable instead of fit variables. Recognition of successful MCS arrangements, the most excellent arrangements of management controls, created foundation for expanding study to micro dynamism between different MCS, that is, the couplings amid the MCS, and as a result, describing the fit by its constitutive components. Furthermore, package approach permits more than one optimum. There might be a number of typical MCS arrangements that are, even regardless of related organisational contingencies, equally useful. Therefore, package approaches holds the likelihood of equifinal MCS arrangements. This being the case, it offers proof that design of MCS packages, that is corresponding couplings amid the MCS components, are possible justification for MCS usefulness. On the whole, governance structures in the organisation direct workers’ behaviour by the checking of behaviour as well as the “formal lines of authority and accountability” (Anthony, 2006, p. 211). It is further proposes that governance structures include, for instance, business’s board formation and composition, different management and project groups, and structures that allow a number of functions and organisational divisions to synchronize their actions both vertically as well as horizontally. References Anthony, R. N. 2006. Management Control Systems. Twelfth Edition. London: McGraw-Hill. Macintosh, N. B., and Quattrone, P. 2010. Management Accounting and Control Systems: An Organizational and Sociological Approach. Second Edition. New York: Wiley. Malmi, T. and Brown, A. D. 2008. ‘Management control systems as a package - Opportunities, challenges and research directions.’ Management Accounting Research. Vol. 19, No. 4, pp. 287-300. Merchant, K. and Stede, W. V. 2011. Management Control Systems: Performance Measurement, Evaluation, and Incentives. Third Edition. New York: Prentice Hall. Sandelin, M. 2008. ‘Operation of management control practices as a package - a case study on control system variety in a growth firm context.’ Management Accounting Research. Vol. 19, No. 4, pp. 324-343. Read More