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Unit 3 of 4 · M.Com Sem 4

Unit 3: The management control process

Management Control System notes · PTU syllabus (MCOP401-18)

4 min read7 topics10 exam questions
On this page
  1. Unit summary
  2. Strategic planning and analysis of programmes
  3. Budget preparation and budgetary control
  4. Balanced scorecard: perspectives and implementation
  5. Interactive control and variance analysis
  6. Variance analysis
  7. Activity-based costing and management
  8. Ethics in management control and management audit
  9. Key terms
  10. Quick revision
  11. Important questions

Unit summary

The control process runs through strategic planning, budgeting, performance measurement and analysis. This unit covers strategic planning and programme analysis, budget preparation and budgetary control, the balanced scorecard and its implementation, interactive control and variance analysis, activity-based costing and management, ethics in control and management audit.

After this unit you can

  • Explain strategic planning and programme analysis
  • Explain budget preparation and budgetary control
  • Explain the balanced scorecard and interactive control
  • Explain variance analysis, ABC/ABM, ethics in control and management audit

PTU syllabus topics

  • Strategic planning and analysis of programmes
  • budget preparation process and budgetary control
  • balanced scorecard perspectives and implementation
  • interactive control and variance analysis
  • activity-based costing and management
  • ethical dimensions in management control
  • management audit
ClassificationBalanced scorecard perspectives
Balanced scorecard

  • Financial

    How do shareholders see us?

  • Customer

    How do customers see us?

  • Internal processes

    What must we excel at?

  • Learning and growth

    Can we keep improving?

1

Topic 1

Strategic planning and analysis of programmes

  • Strategic planning: deciding on programmes the organisation will undertake and the resources allocated to them over the next several years (typically 3–5).
  • Benefits: framework for budgets, management development, mechanism for cross-unit coordination, alignment with strategy.
ProcessStrategic planning process
  1. 1

    Review and update the strategic plan

  2. 2

    Decide assumptions and guidelines

  3. 3

    First iteration of the plan by business units

  4. 4

    Analysis and discussion with senior management

  5. 5

    Second iteration

  6. 6

    Final review and approval

  • Programme analysis: evaluating new and ongoing programmes (capital investment, product lines, R&D) using NPV, cost–benefit and strategic fit.
2

Topic 2

Budget preparation and budgetary control

  • Budget: a quantitative plan of action for a future period. Budgetary control: setting budgets, comparing actual performance, and taking corrective action.
ProcessBudgetary control process
  1. 1

    Establish budget centres and committee

  2. 2

    Prepare budget manual

  3. 3

    Fix budget period and key factor

  4. 4

    Prepare functional budgets

  5. 5

    Consolidate into the master budget

  6. 6

    Compare actual with budget

  7. 7

    Analyse variances and take action

Functional budgets

BudgetContent
Sales budgetQuantity and value of sales by product, area, period
Production budgetUnits = Sales + Closing stock − Opening stock
Materials budgetMaterials needed and purchases
Labour budgetLabour hours and cost
Overhead budgetsFactory, administration, selling overheads
Cash budgetReceipts, payments and balances
Capital expenditure budgetPurchase of fixed assets
Master budgetSummary — budgeted P&L and balance sheet

Example

Budgeted sales 10,000 units; opening stock 1,500; desired closing stock 2,000. Production = 10,000 + 2,000 − 1,500 = 10,500 units. At 2 kg per unit, material needed = 21,000 kg; with opening material 3,000 kg and desired closing 4,000 kg, purchases = 21,000 + 4,000 − 3,000 = 22,000 kg.

3

Topic 3

Balanced scorecard: perspectives and implementation

FrameworkBalanced scorecard perspectives

  • Financial

    Revenue growth, ROI, EVA, cost reduction

  • Customer

    Market share, retention, satisfaction, acquisition

  • Internal business process

    Quality, cycle time, innovation, productivity

  • Learning and growth

    Employee skills, information systems, culture

  • Strategy map: cause-and-effect links — learning drives process improvement, which drives customer outcomes, which drive financial results.
ProcessImplementing the balanced scorecard
  1. 1

    Define strategy

  2. 2

    Define measures for each perspective (leading and lagging)

  3. 3

    Set targets and initiatives

  4. 4

    Integrate with budgets and incentives

  5. 5

    Communicate and cascade to units

  6. 6

    Review and refine

  • Difficulties: too many or poorly linked measures, weak cause–effect links, lack of top management commitment, measures not tied to rewards.
4

Topic 4

Interactive control and variance analysis

  • Simons' levers of control: belief systems, boundary systems, diagnostic control systems (monitor critical variables against targets) and interactive control systems (top management personally engages with strategic uncertainties — emerging strategies).
5

Topic 5

Variance analysis

Standard costing sets predetermined costs for each element, compares actual costs with standards, and analyses variances to control performance.

Key formulasMaterial and labour variances

  • Material cost variance

    (SQ × SP) − (AQ × AP)

  • Material price variance

    AQ × (SP − AP)

  • Material usage variance

    SP × (SQ − AQ)

  • Labour cost variance

    (SH × SR) − (AH × AR)

  • Labour rate variance

    AH × (SR − AR)

  • Labour efficiency variance

    SR × (SH − AH)

  • Idle time variance

    Idle hours × SR

Key formulasOverhead variances

  • Variable overhead cost variance

    Standard VOH for actual output − Actual VOH

  • Fixed overhead cost variance

    Absorbed FOH (actual output × standard rate) − Actual FOH

  • Fixed overhead expenditure variance

    Budgeted FOH − Actual FOH

  • Fixed overhead volume variance

    Absorbed FOH − Budgeted FOH

Example

Standard: 2 kg per unit at ₹10. Output 500 units; actual 1,050 kg at ₹9.50. SQ = 1,000 kg. MCV = 10,000 − 9,975 = ₹25 (F). MPV = 1,050 × 0.50 = ₹525 (F). MUV = 10 × (1,000 − 1,050) = ₹500 (A). Check: 525 F − 500 A = 25 F.

  • Favourable (F) when actual cost is below standard; adverse (A) when above.
  • Advantages: cost control, management by exception, pricing, performance evaluation; limitations: setting standards is difficult, standards become outdated, may demotivate.
  • Revenue and profit variances: sales price, sales volume, sales mix and market share/market size variances explain profit differences.
6

Topic 6

Activity-based costing and management

Activity-based costing (ABC)

Overheads are traced to activities (cost pools) and then to products using cost drivers — number of set-ups, purchase orders, inspections, machine hours.

ProcessActivity-based costing
  1. 1Identify activities
  2. 2Create activity cost pools
  3. 3Identify cost drivers
  4. 4Compute cost driver rates
  5. 5Assign overheads to products by driver usage

Example

Set-up cost pool ₹60,000 for 30 set-ups = ₹2,000 per set-up. Product A needs 20 set-ups (₹40,000) while Product B needs 10 (₹20,000) — even if B uses more machine hours.

  • Gives more accurate product costs where overheads are large and products diverse.

Other techniques

TechniqueKey idea
Just-in-Time (JIT)Produce and buy only when needed; near-zero inventory; pull system (Toyota)
Target costingTarget cost = Target selling price − Desired profit; design product to meet it
Life-cycle costingTrack costs over the product's entire life — R&D, design, production, marketing, disposal
Value analysisExamine each component to reduce cost without reducing function, quality or reliability
Kaizen costingContinuous small cost reductions during the manufacturing stage
Total Quality Management (TQM)Organisation-wide commitment to quality and customer satisfaction; cost of quality — prevention, appraisal, internal and external failure
Back-flush costingCosts recorded only at completion or sale, then "flushed back" to inventory — suits JIT environments

Exam tip

Target costing works before production (design stage); Kaizen costing works during production — a neat contrast for exam answers.

  • Activity-based management (ABM): using ABC information to improve processes — eliminate non-value-adding activities, redesign products and customer service, price decisions, customer profitability analysis.
7

Topic 7

Ethics in management control and management audit

  • Ethical dimensions: pressure to meet targets can lead to earnings management, budget gaming, falsified reports; controls must include ethical codes, whistle-blower channels, balanced incentives, and leaders modelling integrity.
  • Management audit: systematic, independent appraisal of the effectiveness of management — planning, organisation, control, decision-making and performance of functions — to identify weaknesses and recommend improvements (covered in detail in Corporate Accounting and Auditing).

Key terms

Strategic planning
Deciding programmes and resource allocation for several years
Balanced scorecard
Performance system across financial, customer, process and learning perspectives
Interactive control
Senior managers' personal involvement in strategic uncertainties
Activity-based management
Using ABC information to improve processes and decisions
Management audit
Appraisal of the effectiveness of management

Quick revision

  • Strategic planning: programmes, 3–5 years, iterative process.
  • Budget preparation; budgetary control; participation.
  • Balanced scorecard: four perspectives, strategy maps, implementation.
  • Simons' levers; variance analysis (price, usage, rate, efficiency, sales).
  • ABC and ABM; ethics in control; management audit.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.What is programme analysis?
  2. Q2.State the steps in budget preparation.
  3. Q3.Name the four perspectives of the balanced scorecard.
  4. Q4.What is a strategy map?
  5. Q5.Distinguish diagnostic and interactive controls.
  6. Q6.What is activity-based management?

Long-answer questions

  1. Q1.Explain the strategic planning process and programme analysis.
  2. Q2.Explain budget preparation and budgetary control.
  3. Q3.Explain the balanced scorecard and its implementation.
  4. Q4.Explain variance analysis, activity-based management and ethics in management control.

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