The management control system is also referred to as MCS and is defined as an informal as well as a formal framework that an organization puts in place to compare its strategy and goals against the actual outcome.
It is a measurement tool that determines whether the business is able to perform its functions effectively and is it able to meet its objectives.
It wants to be consistent in its efforts to reach goal alignment. The information after the comparisons helps the management in making important managerial decisions.
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Meaning of management control system
An organization adopts the management control system to keep a vigilant eye on its performance levels. The system helps to communicate the objectives and goals of a business entity to the managers and ensuring that everyone works towards attaining them as quickly and effectively as possible.
It is a comprehensive system where a framework is crafted to control and monitor internal aspects of the business as well as the external behavior and environment.
The organizations that have adopted a management control system use it for both nonfinancial and financial measures as both of them leave a direct impact on the business which needs to be monitored.
Here one of the internal factors can include human resources and the external factor can be industry development, for instance, new regulations for a product.
Factors affecting management control system
There are several factors that have a direct influence on the designing of a management control system. These are –
#1. Size and spread of an entity
A small firm is very different from a larger one in terms of size and spread. The content and nature for a management control system hence will also be different to suit individual purposes.
#2. Types of responsibility centers
You cannot have one MCS for different types of responsibility centers as identifying, measuring, and comparing individual centers is not possible; hence, you need its implementation accordingly.
#3. Decentralization and delegation
The extent of decentralization and delegations differs from company to company so that it can meet the necessary challenges head-on.
#4. Nature of operations in terms of divisibility
The MCS is affected by the nature of operations in terms of divisibility within an organization. In some companies, the division is as per the products whereas in others it can be something else.
#5. Perceptions of people
Objectives of management control system
It is also described as a technique that assists in the decision-making process of a business entity.
It supports and motivates individuals so that they can overcome their limitations and work together towards common organizational goals. Its objectives are as follows-
#1. Measuring progress
The MCS is required to measure the progress of a company. It verifies that everything is going as per the plan that was adopted and the instructions that were given.
The navigator takes reading to ascertain that the company is walking on the planned and predetermined path. The received feedback helps to compare the performances with expectations
#2. Uncovering deviations
Both internal and external forces can move the company from its selected path. The objective of a management control system is to detect deviations from the charted course. The factors that result in moving away from a selected path are –
The only thing constant in this world is change, and it is an integral part of an organization. New government policies, new raw materials, market shifts, or a dispute in the labor resources can be a reason for the change.
The objective of the management control system is to help the manager in detecting and identifying the change to take proper action against any threat
Delegation s a part of working faster and efficiently and can cause deviations from the normal course of action. The objective of a management control system is to help the manager in determining whether the individuals to whom he has delegated work are making headways or not.
Mistakes can occur anytime, for instance, the accounting software might become faulty, or the wrong parts of equipment might have been ordered. The objective of implementing a management control system is to detect and rectify the deviation in the form of a mistake to avoid another one
Large corporations have a complex framework due to scattered geographical locations. The objective of a management control system is multidimensional as it indicates any deviations and can record and analyze the sales figures at different locations.
Monitor the diversified product or service line and ensure the quality and profitability of a business.
#7 Indicating corrective actions
The objective of a management control system is to suggest the corrective actions to the management to overcome mistakes and deficiencies in the company.
Elements of management control system
The core elements that determine the effectiveness and success of a management control system framework are as follows-
#1. Aligning with goals and strategies of a company
The first step you need to do before implementing management control system is to understand the current policies, strategies, objectives, and operational goals of the company that it wants to fulfill.
Remember, t is important to align the goals of MCS and operational goals of the organization so that both of them can complement each other. Moreover, in case of differences, the management control system will end up being worthless and ineffective.
The implementation of MCS will not require a change in core objectives or policies of a company instead the system must be integrated in such a manner that it proves a true fit and ensures maximum efficiency in organization operations.
#2. A perfect fit inside the organizational structure
Consider the organizational structure as you need to make the management control system to fit perfectly with the current framework. Understand the decision making structures and create an MCS that understands and enhances it instead of hindering it in any capacity.
It can be done by dividing the responsibilities as per the new framework so that the control becomes more focussed on the new system
#3. Motivating via reward systems
One of the reasons for using a management control system is motivating the employees and of course, the managers so that they can work efficiently to achieve organizational goals.
The reward structure is a part of MCS, and it can be done by tying the rewards with the achievement of goals. It includes monetary reward like raise, bonus or material reward like access to the health club, pass for food court, or a voucher that you can reimburse.
Functions of management control system
#1. Operational objectives
Management control system outline and document both the long-term and short term goals of an organization. It could relate to both non-financial and financial performance as well as social objectives
#2. Operational policies and strategies
Achieving operational objectives is not just a piece of cake as you need to be aware of how to achieve it. Management control system outline and document the policies in place in the organization along with the resources and equipment needed for implementing proper strategies.
#3. Organizational processes
Tools are necessary to assess the performance of organizational processes. The management control system helps to gather information and data from numerous sources so that the management can check what and how it is operating. The system offers a detailed outline of the policies and strategies
#4. Comparing performances
The actual essence of the business system is to compare actual performance with the desired performance of the company.
The structures, resources, working, planning, implementing, documenting and comparing are part of a business and the management control system helps the company in comparing performances about policies and objectives so that it can take necessary steps if needed for the growth of the company.
#5. Rectifying deviations
The function of a management control system is to execute an appropriate course of action so that it can rectify any deviations if found and take corrective measures to bring back the company on its path of growth and eventual success.
8 Advantages of a management control system
The MCS is adopted by business entities of all sizes and shapes as it has proved its worth. Some of the advantages of adopting this system are as follows-
- An effective management control system facilitates the gathering of relevant data and offering the information to management so that operations can continue seamlessly.
- It communicates the goals of an organization in a precise and clear manner
- Ensures that the manager, as well as other employees, understand the particular action plan to reach company goals
- The system helps to generate feedback at every stage
- It becomes possible to realign and make adjustments accordingly
- Helps in both forecasting and budgeting
- Implementing the system results in better coordination and communication that ultimately leads to aligning the objectives of a company.
- The management control system acts as a middleman between the employee and the manager as it feeds necessary information of the former to the latter.
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