Unit 1: Foundations of management control

Management control is the process by which managers influence other members of the organisation to implement the organisation's strategies (Anthony and Govindarajan).

• Elements of any control system: detector (sensor), assessor (compares with standard), effector (corrective action), communication network.
• Characteristics: focus on programmes and responsibility centres; financial and non-financial measures; rhythmic (budgets, reviews); total system covering the whole organisation; coordinated and integrated.

Formal and informal systems

• Formal control: strategic plans, budgets, reports, performance evaluation, rules and policies.
• Informal control: culture, norms, management style, informal communication, external environment (labour market, industry norms).

• Goals: profitability and shareholder value, balanced with stakeholder interests.
• Corporate-level strategy: single industry, related diversification, unrelated diversification — affects control (more decentralised for diversified firms).
• Business-unit strategy: mission (build, hold, harvest, divest) and competitive advantage (low cost vs differentiation) — determines the type of controls (tight budgets for harvest units, flexible for build units).

Responsibility accounting is a system of accounting that recognises various responsibility centres throughout the organisation and reflects the plans and actions of each centre by assigning particular revenues and costs to the person having the related responsibility (Charles Horngren).

Principles

• Each centre headed by a manager with clear authority.
• Only controllable costs used to evaluate the manager.
• Targets set with the participation of the manager.
• Timely reports flowing upward with increasing summarisation (pyramid reporting).

Significance

• Fixes accountability; management by exception; cost consciousness; motivation through clear goals; better decentralised decision-making; improved planning and control.

Controllable and uncontrollable costs

• Controllable cost: can be influenced by the manager of the centre within a period (materials used, overtime).
• Uncontrollable cost: cannot be influenced (allocated head-office costs, rent fixed by HQ). Controllability depends on the level and the time horizon.

• ERP systems integrate data across functions — real-time budgets, variance reports, drill-down.
• Business intelligence and dashboards (Power BI, Tableau) — KPIs, exception alerts.
• Data analytics and AI for forecasting, anomaly detection, continuous monitoring and auditing.
• Benefits: timely, accurate information, consistency, lower cost; risks: information overload, cyber security, over-reliance on quantitative measures.

• Goal congruence: the actions people take in their own self-interest are also in the best interest of the organisation — the central aim of control design.
• Motivation and morale: controls should motivate (attainable targets, fair evaluation, rewards linked to performance); overly tight controls cause gaming, short-termism and low morale.
• Participative management: involving managers in budgeting and target-setting improves commitment and information, but may create budgetary slack.