Management Control Systems & Budgetary Control PDF

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Summary

assignments on the beginning of the semester ...

Description

Design and Use of MA-systems, Models & Methods Theme B1- Management Control Systems & Budgetary Control

Contents 1 Introduction……………………………………………………………………………….…1 Background……………………………………………………………………1 Purpose…………………………………………………………………..…….1 Theory……………………………………………………………...…………………..… (2-5) 4 Conclusions.............................................................................................................................6 5 References...............................................................................................................................6

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Introduction

Background

Strategy and goals are the integral part of a management control systems. The main purpose of management control system is to attain the strategic goals that have been set for the organization. Another important part is budgetary control which is used as a management tool for planning and controlling. Measuring performance and compare the actual with the budget is a management tool. Balanced scorecard is a common performance tool in management control systems.

Purpose

In this paper, I try to focus on the importance of strategy and goals in Management control systems. I have showed the existence of budgetary control in today’s business world. I have also discussed about the concept of performance in today’s MCS.

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Theory Q1: Strategy and Goals are said to be essential in MCS? Why and how does it work? Answer: Strategy, Goals and Management control systems: Strategy, Goals and Management control systems are connected one another. The terms strategy commonly used in companies in 1960s. One has to make strategy which describes how a company should reach the set goals with the available resource. In 1965 Anthony divided organizations planning and strategy implementation into three levels – Strategic, tactical and operational. The strategic planning is a long term planning a period of three or more. Tactical planning is a shorter than strategic planning a period of one to three years. The operational planning focus on the on-going work in the near future which is the shorter one than tactical planning. The main aim of MCS is to attain the strategic goals which have been set for the company. MCS stars with organization’s strategy. For deciding on the strategy one must need to consider the Vision and business idea. Strategies are the future directions which should be followed by an organization. At present, every society has been changed rapidly. Every company require changing both strategy and MCS to cope with the changing society. Nilsson 2011 describes management control can be two types, one is strategy and behaviour. It provides information and incentives for employees in an organized way. He suggests that there are three elements in an organization. They are Metrics, decisions and responsibilities. They link these Simon et al. (1954, p. 22) statement that “figures” are used in three ways: to direct attention, solve problems, and ‘as a sort of score card’ (Nilsson et al. (2011, p. 177).

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Q2: Is classical budgetary control dead in today’s business organizations? Or are there new ways instead? Which internal or external factors-/conditions are most important in understanding today are budgeting/control/planning processes?

Answer: I think classical budgetary control is not dead in today`s business organizations. Budgeting: Technology has changed rapidity and every company need to think more about its management control and budget systems. Budgeting is one of the most used management tools for controlling and planning. Its purpose is to generate a system for performance evaluation and increase the motivation of all employees by enhancing coordination and communication between subsections of companies (Horngren et al., 2005). Weaknesses of Traditional budgeting: Although its benefits are known and widespread usage all around the world, some companies are dissatisfied with weaknesses of traditional budgeting practices (Ekholm and Wallin, 2000). A research is made that 80% of the companies are not pleased with their budgeting and planning procedures (Neely et al., 2003). Neely et al. (2003) identify twelve weaknesses of traditional budgeting in three categories from the literature, as follows: 

Budgets are rarely strategically focused and often contradictory

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Budgets concentrate on cost reduction and not on value creation Budgets constrain responsiveness and flexibility, and are often a barrier to change Budgets add little value, they tend to be bureaucratic and discourage creative thinking.

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Budgets are time consuming and costly to put together

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Budgets are developed and updated too infrequently-usually annually

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Budgets are based on unsupported assumptions and guesswork Budgets encourage gaming and dysfunctional behaviour

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Budgets strengthen vertical command and control Budgets do not reflect the emerging network structures that organizations are adopting Budgets reinforce departmental barriers rather than encourage knowledge sharing Budgets make people feel undervalued

Alternatives of Budgeting: The uses of traditional budgeting has become controversial. New budgeting approaches such as better budgeting or beyond budgeting should replace traditional budgeting. 1. Better budgeting approaches are: * Activity based budgeting * Balanced scorecard

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* Zero-base budgeting * Value-based management * Profit planning * Rolling budgets 2. Beyond budgeting approach: Hope and Fraser (2003a) describe beyond budgeting as a series of leading principles which enables the decentralisation of companies’ decision-making mechanisms, and manage their performance free from traditional budgets. Beyond budgeting has three main objectives:   

Implementing an adaptive management mentality in changing conditions, A high level of decentralisation to organisations (CIMA, 2007), and Performance measurements based upon relative performance contracts with hindsight to prevent dysfunctional management behaviours (Hansen et al., 2003).

Budgeting in modern conditions is carried out under the influence of internals factors, such as the following: 1. Industrial 2. Technological and organizational; 3. Human resources; 4. Automation and corporate information systems Budgeting in modern conditions is carried out under the influence of internals factors, such as the following: 1. 2. 3. 4. 5.

Competition, Scientific and technological progress, International relations, Macro- and microeconomics, A political situation and the social segment

To cope with the changing environments and value creation companies should improve their budgeting practices by implementing traditional budgeting together with other budgeting approaches.

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Q3: The concept of Performance is visual in most control systems today? Why? What is Performance in this context, what does it mean? Answer: A performance management control system is one kind of control system which is used to control the performance and outcomes in business operations. It helps manager to take the correct decision regarding how business is conducted. In a performance management control systems there contain several key principles. They are  

All work activity must be measured; If an activity cannot be measured, its process cannot be improved; All measured work should have a predetermined outcome regarding performance.

In the performance management control system process a manager needs to determine what the outcome of each activity should be. If an activity cannot be measured, the organization tries to eliminate it. It damages lot to the company. When each activity is measured, then it needs to compare to the desired results. If the activity is not performing according to the plan, then changes to the activity are implemented to improve the performance. Two major influences have impacted on performance measurement in the past decade: customer value creation and the public and non-profit sectors.

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Conclusions: In conclusion, it can be said that management control systems maintain a systematic rules and regulations for attaining the business goal. There are a number of control systems such as budget, the accounting system, auditing and project control which are used in different organizations.

References: 1. Anthony, R. 1965. Planning and Control Systems: A Framework for Analysis. Boston, MA: Harvard Business School. 2. Neely, A., Bourne, M. and Adams, C., (2003). Better budgeting or beyond budgeting? Measuring Business Excellence, 3. Hope, J. and Fraser, R., (2003). Beyond Budgeting. Soundview Executive Book Summaries, 4. Ekholm, B.-G. And Wallin, J., (2000). Is the annual budget really dead? European Accounting Review, 9(4), 5. Nilsson et al. (2011, p. 177) Strategy, Control and Competitive Advantage: Case Study Evidence. 6. Horgnren, Charles T, Bhimani, Alnoor, Datar Srikant M, Foster, George 2005, Management and Cost accounting, Third edition. Prentice Hall: UK. 7. Cima 2007, Management Accounting - Risk and Control Strategy 8. Simons, R. (1987). ‘Accounting Control Systems and Business Strategy: An Empirical Analysis’,Accounting, Organizations and Society. 9. Hansen, S. C., Otley, D. T. & Van der Stede, W. A. 2003. “Practice developments in budgeting: an overview and research perspective”, Journal of Management Accounting Research.

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