The Importance of Management Control on the Organisation - Research Paper Example

The Importance of Management Control on the Organisation 1. Introduction This paper analyses the importance of management control on organizations. This will discuss the theory of management control and in relation to relavant literature review of related theories particularly on the need to balance the objectives of effienciency and effectives, to strategy and to the use of management accouting information in organization. The analysis will attempt to reconcile the conflicts or issues or the purpose a arrivving with a well defended position on the matter. 2. Discussion of related theories of management control 2.1 Management control need to consider both efficiency and effectivess Management control was defined as “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organizations' objective" (Nilsson & Rapp, 2005, p. 123, citing Anthony, 1965). The twin objectives of efficiency and effectiveness are obvious and as to which should be given importance between is silent on the definition and this is one of issues that this paper will tackle. It may be seen in the definition that the accomplishment of both effecitiveness and efficiency are necessary if management control is to be considered as such. Accomplish both objectives are easier said done. Effectiveness may refer to getting things done but in so doing the same may result to ineffiencieny as the latter concept has something to do with cost-effectivess or doing something at the least cost. The need therefore to strike the balance between the two objectives becomes necessary. 2.2 Management Control and Strategy Just like any other concept which evolves over time, management control’s definition was later found modified in the light of the bigger role that it plays in organization management by connecting the control systems within implementing strategy. Thus, after about three decades after the definition made earlier, management control was defined as “the process by which managers influence other members of the organization to implement the organization's strategies." (Nilsson & Rapp, 2005, p. 123 citing Anthony and Govindarajan, 2004, p.7). One cannot discuss therefore the concept of management control without without regard for the correct organization’s strategies. Strategies of course my have its basis from external and internal environments of the organization . By dealing on strategies it would therefore expand the traditional or limited definition of management control. 2.3 Management Control and Accounting information Management control necessarily connotes measurable objectives to be attain and therefor accounting information which are quantitative in character and therefore measurable should be easily accepted as part of the concept of control. Accounting information is a means to assist decision makers in organizations, who can only act with activities in order to accomplish their objectives. There is a need to measure the revenues or benefits that they get from these activities and to reflect the cost and expenses related therefore (Helfert, 2001). Accounting therefore can readily assist decision makers to adapt their activities in a manner that would allow them act with responsibility. It would be foolish for example for organization to have always higher expenses than revenues per period as in effect they would not be attaining their objectives. Instead of attaining profitability that should cover cost of capital (Brigham, and Houston, 2002), continued loses would only be served as evidence of inefficiency and therefore lack of management control in said organizations. Management accounting cannot escape to be a part of the process of controlling the activities of the organizational (Emmanuel, et al, 1990) 3. Analysis of the issues The need to strike a balance between efficiency and effective as objectives to be attained in management control can be readily appreciated in having attained the lowest cost but not having maximized revenues simply because the products were not produced and desired level of revenues were not attained. As such, management control must not only control costs and activitivities but its should take take into consideration the effectiveness in the use of management information. The use of accounting information should be properly done so that decision that would attain the objectives since since the activities happened to accepted and supported by peoople in the organization. Strategies need to be formulated by management before they are implemented. If the management control is necessary part of implementing strategy, there is also reason that even in the formulation stage of the strategy, management control is deemed seriously considered. On the premise that what is formulated is to be implemented, controlling the activities at the early part is deemed an inherent part of the job of managers since they would eventually make an implementation of strategies. More significant effect of the evolved definition as part of strategy is the need for management control not only inward-looking but it must also outward looking. This means that management control is also responsive to external environment or the need to be entreprenerial if necessary for the attainment of objectives. It would surely then involved being involved with the changing conditions of the market for which organizations would have to find themselve needing to balance their need for management control and entreprenuership. As to accounting information in relation to management control, the former must be viewed just one of the means to accomplish the purpose of management control. However, even the design and implementation of management accounting control may actually be including difficult issues to resolve. To work with management accounting may for example mean using the budget to control the level of expenses for each departs in an organization. Some organizational departments whose expenses are controlled would generally be considering as achieving cost minimization objective but the result could be in actually restraining the opportunities for more innovation that would come with better flexibility in the organization. In one sense, control is an antithesis of flexibility by assuming that a certain department should only spending a certain level of resources to the organization. This must be understood with the fact the organization involve human resources who would different reactions to different situations. One may just have controlled the costs but to control people in how they will have is the more important challenge in management control. This would bring an issue as to usefulness of accounting information for decision making which must meet the objectives of the decision makers which should be viewed as individuals and group members together. This should include considering to how these users may benefit and make use of information due the possibility of different types of personalities, orientations and motivations of people in the organization. The individual must increase knowledge that would help the person to process more the information as this would mean competence (Edwards, Miles, and Winterfeldt, 2007). But competence alone cannot benefit completely organization if objectives and the attainment of the same are not shared with rest of the people in the organization. Hence the need for an organizational culture would become part of management control (Pfister, 2009). Thus, apart from individual perspective, there is a need to look at the organization or the corporate level, which is expected define their financial and nonfinancial objectives (Helfert, 2001) in relation to corporate mission and vision (Pearson, 1999). From this essence of such concept as the balance scorecard as close related to managerial accounting (Atkinson, et al, 2005) comes into the picture. In the balance scorecard, management control would be deemed translated into financial and non-financial measures to attain corporate objectives (Helfert, 2001). In organizations where there are several departments, the reality that the processes and procedures become bureaucratic can be expected. Thus an effective managerial accounting system for effecting desirable management control has to be capable to addressing issues related to inter-divisional transactions such which include in transfer pricing (Atkinson, et al, 2005). Thus, the conflict that would come from each of the departments when each would like to survive at the expense of the other must be reduced or tempered with the greater objective of the organization as a whole. The individual who may represent the head or part of a division or department should allow flexibility by blending the departmental objectives with the organization objectives as long as that individual is within the organization. Asserting individuality of such department for the need to survive and to that disadvantage of another depart, which is considered normal tendencies given the need to protect their own employments should not disregard of the entire group’s objectives. Otherwise this would be disastrous to organization. The departments and their managers should have goal congruence (Atkinson, Anthony, et al 2005) and managerial accounting must help provide the information for the proper environment. 4. Conclusions The need for management control in organization could be deciphered for the need of the organization to its objectives. Control is therefore referring to bringing those objectives into reality with full realization of the factors involved. Management control is indeed important but it must be able to do its function in really viewing a bigger perspective than simply making sure that efficiency is attained. The need to be entreprenureal is a necessity for an organization wanting to be relevant to market. The need to be strategic in view is therefore for the so called management control in organizations . This would have of effect of balancing effeciency and effectiveness. Management control can be considered strategic at ther same time as being responsible to the market is part of the essence of strategies which takes into consider both internal and external factors as basis for strategy formulation and eventual implementation. If the same is complemented with the correcness of the accounting information, it should be easier to connect management control with organizational objectives. By so setting the measurable objectives, decisions makers would in effect be reducing the subjectivity of the human individuals who fashioned themselves into group via an entity or corporate organizations and their behaviour would be easier to connect with the need of an organization to have culture that would promote and support the attainment of corporate objectives. It is in this sense that management control may have significant roles in broader management of organizations. 5. References Anthony RN & Govindarajan V. (2004). Management Control Systems. Eleventh Edition. Irwin: Homewood Anthony RN. (1965). Planning and Control Systems: A Framework for Analysis. Graduate School of Business Administration, Harvard University: Boston Atkinson, Anthony, et al. 2005. Management Accounting. New Jersey: Person Custom Publishing Brigham, E. and Houston, J. (2002) Fundamentals of Financial Management, London: Thomson South-Western Edwards, Miles, and Winterfeldt. (2007). Advances in decision analysis: from foundations to applications. Cambridge University Press Emmanuel, C., D. Otley & K. Merchant (1990). Accounting for management control. Cengage Learning EMEA. Helfert, E. (2001). Financial Analysis: Tools and techniques: a guide for managers. McGraw-Hill Professional Meigs, R, Meigs, W., & Meigs, M. (1995). Financial Accounting. New York: McGraw-Hill Nilsson, F and B. Rapp (2005). Understanding competitive advantage: The importance of strategic congruence and integrated control. Springer Pearson, G. (1999). Strategy in Action. Prentice Hall Financial Times. Pfister, J. (2009). Managing Organizational Culture for Effective Internal Control: From Practice to Theory. Springer Read More