Management Control Systems (2nd Edition)

Management Control Systems Contents

Detailed Contents

Part One: Introduction to Management Control Systems
1. FUNDAMENTALS OF MANAGEMENT CONTROL 3
Management Control – An Overview 4
The Cybernetic Approach to Management Control 5
Management by Objectives 8
Objectives of Management Control 10
Schemes for Classifying Management Controls 12
Based on Object of Control 12
Based on Extent of Formalization of Control 14
Based on Time of Implementation of Controls 15
Contextual Factors Influencing Management Control 15
Nature and Purpose of the Organization 16
Organization Structure and Size 16
National Culture 17
Corporate Strategy and Organizational Diversification 18
Competitive Strategy 19
Managerial Styles 19
Organizational Slack 19
Stakeholder Expectations 20

2. DESIGN OF ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 25
Organization Structure 26
Structural Dimensions of Organization Design 26
Types of Organization Structures 29
Responsibility Structure 33
Controllability, Goal Congruence, and Transfer Pricing 34
Responsibility Centers 34
Designing Control Systems 37
Control Alternatives 38
Management Control of International Businesses 43
Strategy of International Business 43
Centralization Decision in International Business 43
Choice of Organization Structure for International Business 44
Designing Control Systems for International Business 44
Management Control of Non-Profit Organizations 46
Control Systems for Empowerment, Innovation, and Creativity 48
Diagnostic Control Systems 49
Beliefs Systems 49
Boundary Systems 50
Interactive Control Systems 51

3. STRATEGIC PERFORMANCE CONTROL 55
Strategy and Control 56
Critical Success Factors and Controls 57
Performance Measurement 58
Information Technology and Systems for Strategic Control 62
Nature of Operations and Information Intensity 63
Extent of Geographical and Operations Spread 63
Nature of Industry 64
The Balanced Scorecard 64
Customer Perspective 64
Financial Perspective 65
Internal Business Process Perspective 65
Innovation/Learning and Growth Perspective 65
Implementing the BSC 66

Part Two: Selected Techniques for Management Control

4. BUDGET AS AN INSTRUMENT OF CONTROL 73
Formulation and Administration of Budgets 74
The Importance of Budgets 74
Budget and Strategy 75
Steps in Budget Formulation and Administration 76
Rolling Budgets/Forecasts 78
Budgeting – The Human Dimension 79
Participative Budgeting 79
Degree of Budget Goal Difficulty 80
Budgetary Slack 80
Culture and Budgeting 80
Budgets and Compensation 81
Types of Budgets 81
Master Budget 82
Zero-based Budgeting 85
The ZBB Process 85
Benefits of ZBB 86
Issues in Implementing ZBB 86

5. BUSINESS PERFORMANCE: TARGETS, REPORTING, AND ANALYSIS 89
Introduction to Targets and Performance Tracking 90
Role of Targets 90
Tracking of Performance 91
Factors Affecting Business Performance 93
Top Management and Organizational Culture 93
Product and Service Quality and Quality Management 94
Market Orientation 94
Performance Reports 95
Report Format 95
Internal Performance Reports 96
Corporate Annual Report (CAR) 96
Performance Analysis 99
Revenue Variance 101
Expenditure Variance or Cost Variance 106

6. AUDITING 109
Categories of Audits 110
Financial Statement Audit 111
Concepts in Financial Statement Auditing 112
Importance of Financial Statement Audits 114
Internal Audit, Fraud Auditing, and Forensic Accounting 115
Internal Audit 115
Fraud Auditing and Forensic Accounting 117
Management Audit 118
Objectives and Benefits of a Management Audit 118
Types of Management Audits 119
Issues in Organizing the Management Audit Program 120
Social Audit and Environmental Audit 122
Social Audit 122
Environmental Audit 123
The Auditing Process 124
Staffing the Audit Team 125
Creating an Audit Project Plan 126
Laying the Groundwork 126
Conducting the Audit 127
Analyzing Audit Results 128
Sharing Audit Results 128
Writing Audit Reports 128
Dealing with Resistance to Audit Recommendations 129
Building an Ongoing Audit Program 130
Benefits and Limitations of Auditing 130
Benefits 130
Limitations 131

7. TRANSFER PRICING 135
The Concept of Transfer Pricing 136
Objectives of a Transfer Pricing Policy 137
Transfer Pricing Objectives in International Business 137
Factors Influencing Transfer Pricing 139
External Constraints 140
Internal Constraints 141
Methods of Calculating Transfer Prices 142
Market-based Pricing Method or Comparable Uncontrolled Price (CUP) Method 142
Cost-based Pricing Method or Cost Plus (CP) Method 142
Negotiated Pricing (NP) Method 143
Resale Price (RP) Method 143
Alternative Methods for Transfer Price Calculation 144
Administration of Transfer Prices 146
Implementing Transfer Pricing 146
The Indian Perspective 148
Transfer Pricing Guidelines 148

Part Three: Management Control - The Ethical Perspective

8. BUSINESS ETHICS AND MANAGEMENT CONTROL 153
Ethical Behavior in Organizations 154
Ethical Philosophy and Ethical Decision Ideology 154
Individual Factors 156
Organizational Factors 156
External Environmental Factors 158
Integrated Framework for Ethical Behavior 158
Controlling Ethical Behavior 159
Management Control and Ethical Issues in Different Functions 159
Budgetary Slack 160
Managing Earnings 161
Ethical Issues in Sales 161
Ethical Issues in Operations 162
Ethical Issues in Human Resource Management 162
Regulating Ethical Conduct 164
Code of Ethics 165
Ethics Committee 165
Ethics Training for Employees 165
Corporate Governance and Ethics 166
Whistleblowing 166
Reward Systems and Ethics 168

Part Four: Management Control - Functional Perspectives

9. FINANCIAL CONTROL OF THE ENTERPRISE 173
Introduction to Financial Controls 174
Financial Policies and Procedures 175
Segregation of Duties 175
Book-keeping 176
Tools of Financial Control 177
Financial Statements 177
Financial Ratios 178
Economic Value Added (EVA) 182
Market Value Added (MVA) 185
Cash Flow Return on Investment (CFROI) 187
Strategic Profit Model (SPM) 188
Segment Margin Report 189
Controlling Assets Employed in the Business 190
Fixed Assets 191
Working Capital 192
Financial Information Systems and Control 192
Financial Accounting System 193
Sales Accounting System 194
Purchase Accounting System 196
Inventory Accounting System 197
Roles in Financial Control and Accountability 199
Annexure 9A: Computation of Financial Ratios 203
Annexure 9B: Analyzing Trends in Financial Performance – An Illustration 213

10. MARKETING CONTROL 217
Types of Marketing Controls 218
Strategic Control 218
Annual Plan Control 219
Profitability Control 219
Efficiency and Effectiveness Control 220
Marketing Audit 221
External and Internal Marketing Audits 221
Characteristics of an Effective Marketing Audit 222
Conducting a Marketing Audit 222
Sales Control 224
Sales Budgets 224
Sales Quotas 225
Sales and Cost Analysis 227
Sales Reporting 230
Credit Control 231
Performance Evaluation and Performance-based Compensation 232
Sales Force Management Audit 233
Distribution Control 233
Channel Integration 234
Channel Management 236
Evaluation of Channel Performance 236
Channel Conflict Management 237
Marketing Communications Control 239
Advertising 239
Sales Promotion 240
Direct Marketing 240
Public Relations 241
Marketing Control in Branding 243
Brand Equity and Brand Measurement 243
Brand Portfolio Management 244
Information Systems for Marketing Control 246
Marketing Decision Support System 246
Marketing Intelligence 247
Sales Force Automation as a Control Tool 248

11. MANAGEMENT CONTROL OF PRODUCTION AND OPERATIONS – I 255
Control of Production and Operations – An Overview 256
Production Controls 257
Measuring Production Performance 260
Production Control Reports 261
Operations Controls 262
Quality Controls 262
Inventory Controls 264
Purchasing Controls 264
Warehousing Controls 264
Supply Chain Management 265
Performance Assessment of the Supply Chain 267
Information Systems in Production and Operations Management 269
Annexure 11A: The Supply Chain Operations Reference (SCOR) Model 271

12. MANAGEMENT CONTROL OF PRODUCTION AND OPERATIONS – II 273
Controlling Cost of Operations 274
Make-or-buy Analysis 274
Life Cycle Costing 276
Target Costing 276
Activity-based Costing 278
Cost Management across the Value Chain 279
Environmental Cost Management 279
Enhancing Organizational Performance 280
Value Engineering 281
Business Process Reengineering 281
Kaizen 282
Total Quality Management 282
Benchmarking 283
Benchtrending 285
Just-In-Time (JIT) 285
Lean Manufacturing 286
Six Sigma 287
Operational Audit 288
Usefulness of Operational Audits 289
Steps in Operational Audit 289
Classification of Operational Audit 290
Safety Audit 290

13. MANAGEMENT CONTROL OF SERVICE OPERATIONS 295
Characteristics of Services 296
Intangibility 296
Heterogeneity 296
Inseparability 297
Perishability 297
Generic Techniques for Control of Services 299
Service Blueprinting 299
Capacity Management 300
Yield Management 301
Service Quality Management 303
Service Recovery 306
Classification of Service Organizations 308
Dimensions for Classifying Service Organizations 309
Categories of Service Organizations 311
Control of Different Categories of Service Organizations 312
Professional Service Organizations 312
Mass Services and Service Shops 313
Service Factories 313

14. MANAGEMENT CONTROL OF PROJECTS 317
Introduction to Project Control 318
Project Overview Statement as the Basis for Control 319
Project Plan as the Primary Control Mechanism 320
Organizing for Project Control 320
Roles of Members in Project Control 323
Control of Project Execution 324
Project Review 324
Cost Monitoring and Control Tools 325
Schedule Control Tools 328
Earned Value Analysis 329
Progress Measurement 330
Productivity Measurement 331
Progress Reporting 331
Information Technology for Project Control 332
Overall Change Control 333
Scope Change Control 334
Schedule Change Control 335
Cost Change Control 335
Change Control System 335
Project Auditing 336
Depth of the Project Audit 337
Timing of the Project Audit 337
Project Audit Report 338
Conservation and Utilization of Resources 339
Conservation of Physical Assets 340
Conservation of Financial Resources 340
Conservation and Development of Human Resources 340

15. MANAGEMENT CONTROL OF RESEARCH AND DEVELOPMENT 343
Dilemmas in Controlling Research and Development 344
Linking R&D Activities to Organizational and Customer Needs 344
R&D Project Planning and Control 346
Viewing R&D as Strategic Infrastructure 348
Impact of Culture on R&D and Innovation 348
National Culture and R&D 348
Organizational Culture and Innovation 351
Measurement and Control of R&D 352
Types of Controls 353
Systems Approach to R&D Performance Measurement 354
R&D Activities and Levels of Effectiveness 357
Measuring Value of R&D 359
R&D Audit 361
Management Control of New Product Development 362
Stage-Gate™ Framework 362
Balanced Scorecard 363
Concurrent Engineering 365

16. CONTROL OF HUMAN RESOURCE MANAGEMENT 371
Human Resource Planning 372
Control of the HR Department’s Functions 373
Recruitment and Selection 374
Training and Development 375
Attrition Management 378
Welfare Management 379
Compensation Management 379
Selected Techniques for Assessing Effectiveness of HRM 380
Survey Feedback 380
HRD Audit 381
Evaluating HR Interventions 381
Human Resource Accounting 381
Assessment of Employee Engagement 382
The Workforce Scorecard 383
Human Resource Information Systems for Control 385
Using HRIS for Controlling HRM 385

17. CONTROL AND GOVERNANCE OF INFORMATION SYSTEMS 389
Overview of Control of Information Systems 390
Need for Control of Information Systems 390
Objectives of Control of Information Systems 391
Information Technology Governance 391
IT Infrastructure Library (ITIL) 392
Control Objectives for Information and Related Technology (COBIT) 393
Management Control of Information Systems 394
Top Management Controls 395
Systems Development Management Controls 396
Programming Management Controls 399
Data Resource Management Controls 400
Security Management Controls 400
Operations Management Controls 401
Quality Assurance Management Controls 403
Application Control of Information Systems 405
Boundary Controls 406
Input Controls 407
Communication Controls 408
Processing Controls 409
Database Controls 410
Output Controls 411
Information Systems Audit 412
Information Systems Audit Procedures 413
Business Continuity and Disaster Recovery 414
Business Continuity Management 415
Disaster Recovery Planning (DRP) 415

Part Five: Implementation Issues

18. IMPLEMENTATION OF MANAGEMENT CONTROL SYSTEMS 425
Operationalizing a Management Control System 426
Control Activities 426
Communication 429
Monitoring the Control System 430
Organizational Roles Involved in Implementation 431
Internal Entities 431
External Entities 434
Challenges in Implementation 435
Hindrances to the Management Control Process 435
Dysfunctional Consequences of Management Control Systems 437
Impact of Organizational Life Cycle on Control Systems 439
Creativity Phase 439
Direction Phase 439
Decentralization Phase 440
Coordination Phase 440
Collaboration Phase 440
Control Systems and Organizational Decline or Change 441