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21Apr

Management Control systems assignment

Management Control systems assignment is about how organizations evaluate the performance of the employees in organization.

Introduction:-

The case here refers to a very common problem in organizations and companies that is management control and performance management evaluation. The conventional method of evaluating the performance is seeing the number in results and deciding based on these numbers. Factors like commitment to regular customers. Life time value of customers and delivery of quality is sidelined for the short term financial gains or meeting the numbers. What companies usually forget is the long term benefits and damages of their strategies. Marketing myopia is causing lot damage to the company than they gain in short term benefits. Here in this case we are going to evaluate these points and discuss what could be better management control system and performance evaluation method.

Key issues with the case

There are following issues with the given case which needs to be addressed:-

As it is quite evident from the discussion among managers that they are not sure about what should be there focus on and they are wasting too much time on report preparation. They are not sure what the senior management wants from them and how they are going to be evaluated and how company sometimes focus on small term benefits and ignore there long term customers so after going through them these key issue were recognized

  1. Lack of planning in processes and procedures
  2. A long and cumbersome procedure of reporting
  3. Short term benefit strategy of company
  4. Managers not motivated
  5. Performance evaluation method is not very effective and satisfying to mangers

Different models of management control

( models of management control which can be applied to the case are mentioned and explained )

Before getting into control of systems we need to understand what a system is

System theory: – a system is a chain of activities pre decided and modified to work in a specific way to get the desired results. The system can be divided into two categories namely

  1. Open system
  2. Closed system

Open system: – in this kind of system it gets integrated with change environment and accepts their inputs and responds accordingly.

Closed system: – they are self contained system accept no input from outside and unable to respond to external environment. Ideally organizations should be a perfectly open system but is rarely happens. (Anthony R. 2007)

Inputs and outputs: – an organization has assets’ people and money as input and product and services as output.( Otley, D.1994).

Types of control systems

1.      Feed back control

a.      Open loop

In a open loop control only disturbance can be counteracted for which it is designed rather than any kind of disturbance. This is a pre defined method which can let things to slip by it if it does not fit into its criteria of evaluation. In a the given case the open loop mechanism is still in place as they have there fix criteria to evaluate the performance.

b.      Closed loop

This works on negative feedback and shows a closed loop action and counteracts disturbances. In this method if anything is different than its specifications then it sends a feedback to the beginning of process making it more like a loop and keeps on doing it until the products becomes right. Once the product comes out is correct then the feedback mechanism remains dormant.

2.      Feed forward control

In this type of control the things are anticipated proactively and control mechanism is developed accordingly. Whenever a system is trying something new or dynamic to do it anticipates a few commonly happening complications mostly based on past experience of self or others. It gives a prior warning to get things ready for action if complications occur. In the given case if anything out of the procedure is attempted by company like pushing in last minute orders then they should anticipate problems and put feed forward control in place.

Read more : Global Supply Chain Assignment

Behavioural control

This done by conditioning the behaviour of a person like putting peer pressure’ rewards etc. This kind of control mechanism provides a conditioned environment for people to behave in a desired way. This can be done by both positive as well as negative reinforcement. In positive reinforcement desired behaviour is rewarded while in negative reinforcement undesired behaviour is punished. This kind of behaviour in applicable in all aspects of case.

Result based or output oriented control

Performance is directly linked to the appraisal and compensation. That ways everybody strives to give in their best output. This mechanism is effective in controlled environment like manufacturing plants etc where output is the measure which is counted but in other circumstances it remains unable to take into account creativity’ risk taking capacity’ efforts’ attitude and human behaviour. Which is a problem in given case as it is only taking numbers into account for evaluation.

Levels of control

  1. Long term
  2. Medium term
  3. Short terms (Simons, 1995),

After studying literature on topic and reviewing them following things could be inferred and identified. Control is considered as an integral part of management and it is an important part of the overall process of operations management. It is the responsibility of management at all levels of the organization to:

  • To take notice and evaluate the exposures to losses which are related to their particular area of expertise.
  • To ensure controlling processes that needs and motivates directors are in place and all employees also respond to this.

It helps in Managing the affectivity of the controlling processes that has been in place.  (Upchurch, A. 2002).

Accounting

( here different ways of accounting explained which act as a measure of control as well as answers the issue of budgeting and evaluation in case)

Conventional management accounting control techniques is skewed towards keeping emphasis on cost containment whereas cost management is always generally concerned about cost reduction.

Life cycle costing

It is a procedure of costing that takes into account a product’s complete value chain from a cost angle. Conventional costing routinely considers production process, in contrast to life-cycle costing which keeps everything in loop and weigh costing from the starting of research methods and development phase of a product’s life, all the way to the decrease and gradual ending of a product’s life.Life cycle costing helps us in getting a better control over the cost during research and development as well as manufacturing and post sales service cost associated with the products. (Drury, C. 2008).

Activity based accounting

Activity-based costing (ABC) is a well known accounting method which aids into businesses to gather data regarding their operating costs. Costs are assigned to each and every individual activities—for example  planning, designing’ engineering, manufacturing’ marketing and then these activities are aligned with different products or services. Thus help them in eliminating or reducing the cost by focusing on activities which are causing losses by making them more efficient or outsourcing those activities.( Garrison, R, et.al 2009).

Target costing:-

It represents a basically different approach. It is developed on the basis of three understanding which are

 1.) Making products more aligned with customer purchasing power or market-linked pricing,

 2.) Assessing product cost as an independent variable while considering the product’s cost needs. ( Groot T, Lukka K 2001)

Kaizen costing:-

Kaizen costing is a slightly different edition of standard costing. Standard costing defines a cost target for the team working on production for the upcoming period. Generally standard cost is budgeted on a yearly basis. It usually gets revised on yearly basis. Any deviation from normal course is examined and the reasons are marked and understood.

The emphasis here is on large number of small improvements, rather than on big leaps. (B. Modarress et.al 2005)

Throughput accounting:-

Throughput Accounting is an integrated, principle-based, dynamic, and comprehensive management accounting approach that provides managers with information for making decisions which in turn will helps in achieving enterprise optimization. Throughput Accounting focuses on increasing revenue (throughput), improving cash flow (investment) and providing capacity (operating expense) through put accounting is comparatively new in management accounting.

Analysis and discusion:- (all the key issues determined above in case are discussed’ analysed and relates to models of control)

Based on the case facts provided we observed some key problem in the case and now we would like to discuss and analyse each issue

  1. Lack of planning in process and procedures:-  It is clearly seen from the case facts that there is lack of planning. The managers are not sure whom should they give priority to the regular customers or the short term benefit customers. There is no effective planning system which gives clear guidelines to the standard operating procedures. If there would be a proper planning system in place the managers can anticipate problems properly and handle them more efficiently and arising of situations will be rare. As we can see in the case managers are having problems in planning their activities and unseen last minute orders rise up to complicate the process.
  1. Lengthy procedure of reporting:- As provided in the case facts the reporting procedure is very long and it takes them days to make a report. This is the productive hours of an employee the companies are wasting on reporting procedure. The procedure can be automated using advanced computing techniques and automatic counting at source itself to reduce the time taken.
  1. Short term benefit strategy of the company:- The company or top management is putting much stress on fulfilling the demands of last minute rush orders and even is not concerned about sidelining the regular customer’s order or compromise in the quality delivered to them. It clearly shows that company is acting on a myopic vision and does not consider the life time value and real profitability associated with a customer. There is no system in place to find out how much is the losses the company will suffer if a continuing customer breaks because of problems  (both tangible and intangible) and is it worth  to service a last minute order on a priority basis.
  1. Managers not motivated:- Managers conversing in the case also seem too unmotivated by the system. They are more concerned about the reports and how their performance is going to be evaluated rather than being concerned about the productivity. Also the performance is linked individually here so all managers are concerned about their personal evaluation and being in the safe zone. This de motivates the manager for thinking originally’ innovative and sometimes take moderate risk chances also. As it is evident from the case that managers are afraid to try anything creative or innovative.
  1. Performance evaluation method:- The evaluation method is not very satisfactory to the managers. It is simply based on financial numbers not on the long term effects of those numbers. The full context of any transaction is not being taken into consideration and also the incentives must be based on pure numeric evaluation. The performance evaluation should be based on a 360 degree approach to get the complete picture in hand before evaluating an employee. If a all round performance evaluation method will be used it gives a total idea about the productivity and effectiveness of an employee rather than just his output numbers which is the scenario in the given case as if now.

Recommendations

( recommendations are based on issues faced by company and which models can be exercised to answer them)

  1. To ensure and communicate all details of budgeting policy and guidelines to people responsible for preparing the budget like Activity based budgeting along with zero based budgeting should be done simultaneously for different activities. This way unproductive activity can be rooted out and budgeting for each activity is done from the ground level. Flexible budgets in certain area to give some degrees of freedom to managers this will also help them cope up with sudden necessities and make choices as per the requirement of dynamic environment.
  2. Reporting should be integrated and real time with other activities rather than at the end of it. This saves time and provides real time information a real time reporting will also help in keeping a good control as feedback can be given immediately to control the damage and act proactively. This will save a lot of cost to company in financial as well as time value.
  3. Establishing a minimum set of benchmarking for the quality of products. This way substandard product can never go out of organization’s facility. Benchmarking could be ISO standards SIX SIGMA OR TQM for complete assurance of quality
  4. Rather than just having an output control there should be more of cultural or behavioural control over the systems. This encourage employee to act more efficiently and put peer pressure on other employee to work better as they will thrive prove themselves to each other and in totality the overall productivity of company goes up
  5. Life cycle based costing to avoid myopic vision of organization and find out the real profitability as company will know exactly what kind of earning can be expected from a product at different stages of life and how total cost can be incorporated in it with a healthy margin (Maciariello, J. and Kirby, C.1994).

Conclusion

After going through all case facts and analysing it a few problems were revealed in the system established. During discussion we tried to get insight about the root cause of these problems and linked them with the theory available for the subject matter. There are areas which need to address and recommendations were made. The reporting should be real-time’ integrated and if possible outsourced to get the desired results. I believe that this and other recommendation should improve the present situation effectively.

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References

  • Drury, C. (2008). ‘Management and Cost Accounting”.; 7th Cengage Learning
  • Modarress; A. Ansari; D. L. Lockwood, 2005  “Kaizen costing for lean manufacturing: a case study” ; International Journal of Production Research, Volume 43  , pages 1751 – 1760.
  • Garrison, R, Noreen, E. and Seal, W. (2009).” Management Accounting”: (3rd edition) McGraw-Hill.
  • Groot T, Lukka K(2001) “Cases in Management Accounting ”;:Prentice Hall
  • Horngren, C.T, Bhimani, A, Datar, S.M. and Foster, G. (2005). “Management and Cost Accounting”. ;3rd ed. FT Prentice Hall.
  • Johnson G & Scholes K (2005) “Exploring Corporate Strategy” ; Prentice Hall