Introduction What is Management control system? Management control system is a must in any organization that practices decentralization.

Firms which operate in an industry context where the environmental changes are predictable, they often use a formal and rational process to develop the strategy first and then design management control systems to execute that strategy. However in a rapidly changing environment, it is difficult for a firm to formulate the strategy first and then design management systems to execute the chosen strategy, in such situation, strategies emerge through experimentation and ad hoc processes that are significantly influenced by the firms management control systems. According to Robert N. Anthony (2007), Management Control is the process by which managers influence other members of the organization to implement the organizations strategies. Management control systems are tools to aid management for steering an organization toward its strategic objectives and competitive advantage. Management controls are only one of the tools which managers use in implementing desired strategies. However strategies get implemented through management controls, organizational structure, human resources management and culture. Management control is one of the three planning and control functions that are present in almost very organization. The other two are a strategy formulation which is an unsystematic process of identifying threats and opportunities and deciding on new strategies in response; and task control, the process of ensuring that specified tasks are carried out effectively and efficiently. ( diagram on page 7 for ppt) A typical Management Control process : Elements of MCS are strategic planning; budgeting; resource allocation; performance measurement; evaluation, and reward; responsibility centre allocation; and transfer pricing.
These elements form the part of such a system which involves the activities : (1) Strategic planning (2) Budget preparation (3) Execution, and (4) Evaluation of performance. Each activity leads to next, in a regular cycle in a closed loop. Step 1 : Strategic planning: Strategic Planning is the process of deciding on the major programs that the organization will undertake to implement its strategies and the approximate amount of resources that will be devoted to each. The result of this process is a strategic plan which covers a period typically 3

or 5 years. A profit oriented company has its product or product line as a program and a nonprofit organization the services it offers are its programs. Step 2 : Budget preparation: An operating budget is the organizations plan for a specified time period,usually a year. In a budget, revenues and expenses are rearranged from programs to responsibily centres;the budget shows the expenses that each manager is expected to incur. The end product is an agreed upon statement of the anticipated expenses for the coming year or the planned profit or expected ROI on centres respectively. Step 3: Execution: During the year the managers execute the program for which they are responsible and also report on what has happened in the course of fulfilling that responsibility, this is done in the form of structured reports that provide informationg on Resposibility center and program. Step 4: Evaluation of performance: The reports from the managers are used as a basis for control . The process of evaluation is a comparison of actual expenses and those that should have been incurred under the circumstances. The analysis leads to praise or constructive criticism of the responsibility centre managers. Then comes the phase of incorporation of financial and non-financial measures in the design of Balanced score card. Management control Systems in Service organization: Meaning of Service industry

An industry made up of companies that primarily earn revenue through providing intangible products and services. Service industry companies are involved in retail, transport, distribution, food services, as well as other service-dominated businesses. Also called as service sector, tertiary sector of industry. Characteristics of Service Industries Management control systems in the service industre is somewhat different from management control systems in manufacturing companies.

Charateristics Inventory Buffer

Manufacturing industry

Service Industry

Goods are held in inventory. They can earn revenue in the future from the products that are on hand today.

Services inventory.

cannot

be

held

in

They have to use the services now when its available or else its gone forever. Service industries have to try to minimize its unused capacity. They always have to match the current capacity with demand.

Controlling Quality

They can inspect its product before they are shipped and their quality can be measured visually or with instruments lie weight, tolerances etc.

They

cannot

judge

product

quality until the moment the services are rendered and then the judgements are often subjective.

Labour intensiveness

They add equipment and automate and reducing costs. production lines,thereby replacing labor

Most are labour intensive and they can hardly reduce costs.

Multi-Unit organization

Not there in Manufacturing industry

Some service org. operate in many units in various locations, each unit relatively small. Some are owned and some are franchised.

Historical development

Cost accounting started in manufacturing companies because of the need to value work-inprocess and finished goods inventories for financial statement purposes. Now this has been extended to service organizations for their use of product cost and other management accounting data. Nowadays, the management control systems of service industry are rapidly becoming as well developed as those in manufacturing companies. Types of service organizations and their management control systems Professional Service organizations Research and development organizations, law firms ,accounting firms ,health care organizations ,engineering firms ,architectural firms, consulting firms, advertising firms, symphony and other art organizations and sports organizations are example of professional service organizations. Characteristics: 1. Goals Unlike a manufacturing company, a professional organization has relatively few tangible assets; its principle asset is the skill of its professional staff, which doesnt appear on its balance sheet. Return on assets is therefore meaningless in such organizations. Their financial goal is to provide adequate compensation to the professionals. In many organizations the related goal is to increase its size. Such a goal in part associates the success with large size and in part economies of scale in using the efforts of a central personnel staff and units responsible for keeping the organization up-to-date. 2. Professionals Professional organizations are labour intensive and the labour is of special type. Many professionals prefer to work independently, rather than as part of a team. They tend to give inadequate wt to the financial implications of their decision; they want to do the best job they can , regardless of its cost. 3. Output and input measurement The output of a prof.org cannot be measured in physical terms such as units, tons or gallons. Eg : (BOOK)

Furthermore, the work done by many professionals is nonrepetitive. No two consulting jobs or research and development projects are quite the same. Eg: 4. Small Size They operate in small and at a single location. 5. Marketing

Unlike manufacturing companies there is no clear dividing line in the marketing and production activites in the case of service industry. In some,such as law , medicine and accounting ,the professions ethical code limits the amt and charater of overt marketing efforts by professionals. (Book) Management control systems. Pricing The selling price of work is set in a traditional ways in many firms. The hourly billing rate typically is based on the compensation of the grade leading for overhead costs and profit. Actually, the total value of the whole organizations is greater of the sum of what the value of the individuals would be if they worked separately. This is because the firms already has incurred the cost of acquiring and training these individuals, has organized them according their personality fit and othe considerations, and has developed policies and procedures for insuring the work is done effectively and efficiently. Profit Center and Transfer Pricing ?? Strategic Planning and Budgeting??? Profesional organizations have no great need for such system. In profesional organization the principal asset is people, although the organizations tries to avoid short-run fluctuations in personal levels, change the size and composition of the staff are easier to make and reserved than changes in the capacity of a physical plan. The strategic plan of professional organizations typically consist primarily of a longrange staffing plan, rather than a full-blown for all aspect of the firms operations. Control of Operations The billed time ratio, which is the ratio of hours billed to total profesional hours available, is watched closed. The inability to set standard for task performance, the desirability of carrying out work by teams, the consequent problems of managing a matrix organizations, and the behavioral characteristics of profesionals all complicate the planning and control of the day-to-day operations in a profesional organization. Performance Measurement and Appraisal For some profesions, objectives measurement of performance are sometimes available. Judgement made by superior are the most common. For these, profesional organizations increasly use formal system to collect performance appraisals as a basis for personal

decisions and for discussion with the profesional. Appraisals by a personal peers, or by subordinates, are sometimes part of a control system. The budget can be used as the basis for measuring cost performance and the actual time taken can be compared with the planned time. In some professions, internal audit procedures are used to control quality.
FINANCIAL SERVICE ORGANIZATION

The Financial Service Sector First, the financial services sector constitutes an important backbone to the US and world economies. Second, Financial services firms not only operate in multiple segment but also the global in scope. Third, financial services firms have used the information technology revolution to innovate new product and discover new method of trading. Fourth, the need of control in the financial services sector has become paramount. Fifth, new forms of financial instrument designed by financial service firms sometimes resulted in million of dollars of losses for their client. Finally, the corporate have created a huge push for investment bank to spin of their research departments. Special characteristics While the general principles and concepts of management control system apply, they need to be adapted the following special characteristics of the financial service industry. Monetary assets Most of the asset of financial service firm are monetary The current value of monetary assets is much more easily measured than value of plant and other physical assets. Or patents and other intangible assets. in the financial service industry, quality refers to quality of service rendered and to quality of financial instruments other than money there is no need for quality control safeguard for money. Time period for transactions There is need for system to report securities held and to assess the risk to the organization if prices move against the traders securities. This means that the firm must have an accurate, prompt system for obtaining this information, for summarizing it, for estimating the risk of the securities held(if applicable), and for making the information available to traders, a computer model(expert system)evaluates the information and in some cases acts without human intervention. Risk and reward In financial service firms, this trade off is more explicit than in business investments such as those involving the purchase of a machine of the introduction of a new product. interest rates loans an premiums insurance policies are based on assumptions about risk that may, or may not, turn out to be accurate. Technology

Financial service firm have used information technology as a way to offer innovative services. Health Care Organization Special characteristics Difficult social problem Society cannot pay for predictable increases if the present rates of increase in cost continues much longer . health care providers are aware of this problem , but they dont know how society especially the congress, with deal with it. Change in mix of providers Within the overall increase in health care cost, the hospital must have the flexibility to adapt to the changes of providers, either by providing more out patient services themselves or by eliminating inpatient services that are no longer profitable. Third party payers, Third party payer shave moved toward a similar system of reimbursement. Its called Diagnostic Related Groups(DRGs) system. These system provide information on individual patient(similar to job cost systems in automobile repair shops), and they report actual cost compared with standard cost for each DRG, Cost are classified by departments and even by attending physicians within departments. Professionals, The management control implication of professionals are: departmental managers typically are professionals whose management function is only part time. Importance of quality control The health care industry deals with human lives, so the quality of the service it provides is paramount importance. There are tissue reviews of surgical procedures, peer review of individual physicians, and out side review agencies mandated by the federal government. Management control process Because of the shift in the product mix and because of the increase in the quantity and cost of new equipment, the strategic planning process in hospitals is important. The annual budget preparation process is conventional. Huge quantities of information are available quickly for the control of operating activities. Financial performance is analyzed by comparing actual revenues and expenses with budgets, identifying important variances, and taking appropriate action on them.