Name : TANZEEL AHMED

Course : Masters in Business Administration (MBA 4 Sem)

Subject : Management Control Systems

Q1. What is goal congruence? What are the informal factors that influence goal congruence.
(10 marks)
Q2. Explain ideal Management Control in organization and its features. (10 marks)
Q3. Describe the various types of budget with suitable examples. (10 marks)
Q4. Write a short note on Decision-Support System (10 marks)
Q5. Explain Flexible Budgeting. (10 marks)
Q6. Application of MCS in Service Organizations and Proprietary organizations. (10
marks)
Q7. Give advantages of flexible Budgeting . (10 marks)
Q8. Give Formal Control process block diagram. (10 marks)

Q1. GOAL CONGRUENCE

SPM has a main goal to ensure (as far as possible) the level of high goal congruence.
Goal congruence is an harmony between the actions of individuals to achieve personal goals
to help the achievement of organizational goals.
In an organization, human behavior must be influenced by the formal system (which was
formed by the organization) and informal (work ethic, management style and culture).
Goal setting involves the development of an action plan designed to motivate and guide a
person or group toward a goal. Goal setting can be guided by goal-setting criteria (or rules)
such as SMART criteria. Goal setting is a major component of personal-development and
management literature.
Studies by Edwin A. Locke and his colleagues have shown that more specific and ambitious
goals lead to more performance improvement than easy or general goals. The goals should be
specific, time constrained and difficult. Difficult goals should be set ideally at the 90th
percentile of performance assuming that motivation and not ability is limiting attainment of
that level of performance. As long as the person accepts the goal, has the ability to attain it,
and does not have conflicting goals, there is a positive linear relationship between goal
difficulty and task performance.
The theory states that the simplest most direct motivational explanation of why some people
perform better than others is because they have different performance goals. The essence of
the theory is fourfold. First, difficult specific goals lead to significantly higher performance
than easy goals, no goals, or even the setting of an abstract goal such as urging people to do
their best. Second, holding ability constant, as this is a theory of motivation, and given that
there is goal commitment, the higher the goal the higher the performance. Third, variables
such as praise, feedback, or the involvement of people in decision-making only influences
behavior to the extent that it leads to the setting of and commitment to a specific difficult
goal. Fourth, goal-setting, in addition to affecting the three mechanisms of motivation,
namely, choice, effort, and persistence, can also have a cognitive benefit. It can influence
choice, effort, and persistence to discover ways to attain the goal.
Factors that influence informal goal congruence consists of external factors and internal.

• External factors, namely the norms of behavior expected to occur in the community
(and the organization is part of the community).
• External factors affecting goal congruence is the work ethic and appropriate industry-
specific norms.
• Working ethos is one of the organization's loyalty, and perseverance, spirit and pride
that have in carrying out their duties.
• The internal factors that affect goal congruence is the culture, management style,
informal relationships within the organization and perception and communication.
• Culture includes beliefs in the organization together, the values embraced life,
behavioral norms and assumptions that implicitly and explicitly accepted applied at
all levels of the organization.
• Culture is strongly influenced by the personality and policy managers.
• Style of management has the strongest impact on management control, because the
attitude is a reflection of his subordinates superiors.
• Informal relations are also needed, although the formal relationship has been
established.
• The means to achieve organizational goals must also be well communicated and the
messages conveyed are expected to be interpreted with the same meaning.

Q2. The management function of implementation of strategies is termed as ‘Management

Control’. It is defined as “the process by which managers influence the members of the
organisation to implement the organisation strategies”
Features of Management Control:
Management control definition amplifies the following features:
1. Management Control Activities:
Management control function is carried through various managerial activities which are
grouped as:
Management Control Function
2. Behavioural Consideration:
Management control aims at influencing people for implementation of strategies by goal
congruence. Goal Congruence means that when individual members of organisation seek
their personal goals they help to attain the organisation’s goals.
The performance appraisal of managers by results, contributions to goal achievement,
development of optimum compensation plans and other incentives are important
considerations for promoting goal congruence.
3. Financial and Non-Financial Performance:
Financial and Non-financial performance measures are developed to compare the actual
performance against the plans, as overemphasis on financial performance alone may not
contribute to the organisation’s long term goals.
Relationship among Planning and Control Functions
Management Control System:
The management control system is made effective through two components, namely:
1. Management Control Structure:
The organisation is sub-divided into various sub-units. Each sub-unit is designated as a
Responsibility Centre (RC), whose head is called Responsibility Centre Manager.

Q3. There are four common types of budgets that companies use: (1) incremental, (2)
activity-based, (3) value proposition, and (4) zero-based. These four budgeting methods each
have their own advantages and challenges, which will be discussed in more detail in this
guide.
1. Incremental budgeting
Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to
obtain the current year’s budget. It is the most common method of budgeting because it is
simple and easy to understand. Incremental budgeting is appropriate to use if the primary
cost drivers do not change from year to year. However, there are some problems with using
the method:
It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an
opportunity to grow his budget by 10% every year, he will simply take that opportunity to
attain a bigger budget, while not putting effort into seeking ways to cut costs or economize.
It is likely to result in budgetary slack. For example, a manager might overstate the size of the
budget that the team actually needs so it appears that the team is always under budget.
It is also likely to ignore external drivers of activity and performance. For example, there is
very high inflation in certain input costs. Incremental budgeting ignores any external factors
and simply assumes the cost will grow by, for example, 10% this year.
2. Activity-based budgeting
Activity-based budgeting is a top-down budgeting approach that determines the amount of
inputs required to support the targets or outputs set by the company. For example, a company
sets an output target of $100 million in revenues. The company will need to first determine
the activities that need to be undertaken to meet the sales target, and then find out the costs of
carrying out these activities.
Budgeting Methods
3. Value proposition budgeting
In value proposition budgeting, the budgeter considers the following questions:
Why is this amount included in the budget?
Does the item create value for customers, staff, or other stakeholders?
Does the value of the item outweigh its cost? If not, then is there another reason why the cost
is justified?
Value proposition budgeting is really a mindset about making sure that everything that is
included in the budget delivers value for the business. Value proposition budgeting aims to
avoid unnecessary expenditures – although it is not as precisely aimed at that goal as our final
budgeting option, zero-based budgeting.
4. Zero-based budgeting
As one of the most commonly used budgeting methods, zero-based budgeting starts with the
assumption that all department budgets are zero and must be rebuilt from scratch. Managers
must be able to justify every single expense. No expenditures are automatically “okayed”.
Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not
considered absolutely essential to the company’s successful (profitable) operation. This kind
of bottom-up budgeting can be a highly effective way to “shake things up”.
The zero-based approach is good to use when there is an urgent need for cost containment,
for example, in a situation where a company is going through a financial restructuring or a
major economic or market downturn that requires it to reduce the budget dramatically.
Zero-based budgeting is best suited for addressing discretionary costs rather than essential
operating costs. However, it can be an extremely time-consuming approach, so many
companies only use this approach occasionally.
Levels of Involvement in Budgeting Process
We want buy-in and acceptance from the entire organization in the budgeting process, but we
also want a well-defined budget and one that is not manipulated by people. There is always a
trade-off between goal congruence and involvement. The three themes outlined below need
to be taken into consideration with all types of budgets.
Imposed budgeting
Imposed budgeting is a top-down process where executives adhere to a goal that they set for
the company. Managers follow the goals and impose budget targets for activities and costs.
It can be effective if a company is in a turnaround situation where they need to meet some
difficult goals, but there might be very little goal congruence.
Negotiated budgeting
Negotiated budgeting is a combination of both top-down and bottom-up budgeting methods.
Executives may outline some of the targets they would like to hit, but at the same time, there
is shared responsibility for budget preparation between managers and employees. This
increased involvement in the budgeting process by lower-level employees may make it easier
to adhere to budget targets, as the employees feel like they have a more personal interest in
the success of the budget plan.
Participative budgeting
Participative budgeting is a roll-up approach where employees work from the bottom up to
recommend targets to the executives. The executives may provide some input, but they more
or less take the recommendations as given by department managers and other employees
(within reason, of course). Operations are treated as autonomous subsidiaries and are given a
lot of freedom to set up the budget.

Q4. A decision support system (DSS) is a computerized program used to support

determinations, judgments, and courses of action in an organization or a business. A DSS
sifts through and analyzes massive amounts of data, compiling comprehensive information
that can be used to solve problems and in decision-making.
Typical information used by a DSS includes target or projected revenue, sales figures or past
ones from different time periods, and other inventory- or operations-related data.
Understanding a Decision Support System
A decision support system gathers and analyzes data, synthesizing it to produce
comprehensive information reports. In this way, as an informational application, a DSS
differs from an ordinary operations application, whose function is just to collect data.
The DSS can either be completely computerized or powered by humans. In some cases, it
may combine both. The ideal systems analyze information and actually make decisions for
the user. At the very least, they allow human users to make more informed decisions at a
quicker pace.
KEY TAKEAWAYS
A decision support system (DSS) is a computerized system that gathers and analyzes data,
synthesizing it to produce comprehensive information reports.
A decision support system differs from an ordinary operations application, whose function is
just to collect data.
Decision support systems allow for more informed decision-making, timely problem-solving,
and improved efficiency in dealing with issues or operations, planning, and even
management.
Using a Decision Support System
The DSS can be employed by operations management and other planning departments in an
organization to compile information and data and to synthesize it into actionable intelligence.
In fact, these systems are primarily used by mid- to upper-level management.
For example, a DSS may be used to project a company's revenue over the upcoming six
months based on new assumptions about product sales. Due to a large number of factors that
surround projected revenue figures, this is not a straightforward calculation that can be done
manually. However, a DSS can integrate all the multiple variables and generate an outcome
and alternate outcomes, all based on the company's past product sales data and current
variables.
A DSS can be tailored for any industry, profession, or domain including the medical field,
government agencies, agricultural concerns, and corporate operations.
Characteristics of a Decision Support System
The primary purpose of using a DSS is to present information to the customer in an easy-to-
understand way. A DSS system is beneficial because it can be programmed to generate many
types of reports, all based on user specifications. For example, the DSS can generate
information and output its information graphically, as in a bar chart that represents projected
revenue or as a written report.
As technology continues to advance, data analysis is no longer limited to large, bulky
mainframe computers. Since a DSS is essentially an application, it can be loaded on most
computer systems, whether on desktops or laptops. Certain DSS applications are also
available through mobile devices.
The flexibility of the DSS is extremely beneficial for users who travel frequently. This gives
them the opportunity to be well-informed at all times, providing the ability to make the best
decisions for their company and customers on the go or even on the spot.

Q5. A comparison of budgeted costs at the budgeted activity level with actual costs at the
actual activity level is meaningless if there is a significant difference between budgeted and
actual activity levels.
If actual costs are dramatically higher than budget, it does not necessarily mean that costs are
out of control, if sales levels are dramatically higher than planned.
Actual fixed costs should be the same as budgeted, regardless of changes in sales levels –
only the variable costs should change.
It is essential that actual costs and revenues are compared with planned amounts.
However, to make the comparison meaningful, it is essential to adjust the variable cost
element of the budget to reflect the actual activity levels.
This process is referred to as ‘flexing the budget’.
A flexible budget adjusts to changes in actual revenue levels. Actual revenues or other
activity measures are entered into the flexible budget once an accounting period has been
completed, and it generates a budget that is specific to the inputs. The budget is then
compared to actual expenses for control purposes. The steps needed to construct a flexible
budget are:
Identify all fixed costs and segregate them in the budget model.
Determine the extent to which all variable costs change as activity measures change.
Create the budget model, where fixed costs are “hard coded” into the model, and variable
costs are stated as a percentage of the relevant activity measures or as a cost per unit of
activity measure.
Enter actual activity measures into the model after an accounting period has been completed.
This updates the variable costs in the flexible budget.
Enter the resulting flexible budget for the completed period into the accounting system for
comparison to actual expenses.
A flexible budget can be created that ranges in level of sophistication. Here are several
variations on the concept:
Basic flexible budget. At its simplest, the flexible budget alters those expenses that vary
directly with revenues. There is typically a percentage built into the model that is multiplied
by actual revenues to arrive at what expenses should be at a stated revenue level. In the case
of the cost of goods sold, a cost per unit may be used, rather than a percentage of sales.
Intermediate flexible budget. Some expenditures vary with other activity measures than
revenue. For example, telephone expenses may vary with changes in headcount. If so, one
can integrate these other activity measures into the flexible budget model.
Advanced flexible budget. Expenditures may only vary within certain ranges of revenue or
other activities; outside of those ranges, a different proportion of expenditures may apply. A
sophisticated flexible budget will change the proportions for these expenditures if the
measurements they are based on exceed their target ranges.

Q6. The type of control which would be suitable for a particular firm depends upon the nature
and complexities of its operations. A suitable control system has to be designed to suit the
specific requirements of a particular firm.
Service organizations are those organizations that provide intangible services. Service
organizations include hotels, restaurants, and other lodging and eating establishments;
barbershops, beauty parlors and other personal service; repair services; motion picture,
television and other amusement and recreation services; legal services; and accounting,
engineering, research/development, architecture and other professional service organizations.
Characteristics of Service Organizations
1. Absence of Inventory: Services cannot be stored. If the services available today are not
sold today, the revenue from these services is lost forever. In addition the resources available
for sale in many service organizations are essentially fixed in the short run.
A key variable in most service organizations therefore is the extent to which current capacity
is matched with demand. Organizations attempt this matching in two ways:
They try to stimulate demand in off-peak periods by marketing efforts and price concessions.
Airlines and resort hotels offer low rates in off-seasons; utilities offer low rates on slack
periods during a day.
If feasible, they adjust the size of the work force to the anticipated demand, by such measures
as scheduling training activities in slack periods and compensating for long hours in busy
periods with time off later.
2. Labor Intensive: Service organizations tend to be labor intensive. It is difficult to control
the work of a labor-intensive organization than that of an operation whose workflow is paced
or dominated by machinery. Manufacturing companies add equipment and automate
production lines that replace labor and reduce costs. Most service companies cannot do this.
Hospitals do add expensive equipment; but most of these provide better treatment, and they
increase, rather than reduce costs.
3. Quantity Measurement: It is not easy to measure the quantity of many services. For many
services, the amount rendered can be measured only in the crudest terms, if at all it can be
measured.
4. Quality Measurement: The quality of a service cannot be inspected in advance (as in the
case of tangible goods). At best, it can be inspected during the time that the service is being
rendered to the client. Judgments as to the adequacy of the quality of most services are
subjective; measuring instruments and objective quality standards do not exist. A public
accounting firm can measure the number of hours spent on an audit, but not the thoroughness
of the work done during those hours.
5. Historical Development: Cost accounting started in manufacturing companies because of
the necessity for valuing work-in-process and finished goods inventories for financial
statement purposes. These amounts provided raw data that was easily adapted to use, first for
setting selling process and then for other management problems. Standard cost systems, the
separation of fixed and variable costs, and the analysis of variances and the foundation of
actual cost systems, and the fact that managers in manufacturing companies were accustomed
to using cost information facilitated the general adoption of these techniques. Until the last
few decades, most books on cost accounting and related subjects dealt only with
manufacturing companies.
6. Size: With some notable exceptions, service organizations are relatively small and operate
in a single location. Top management in such organizations can personally observe what is
going on and personally motivate employees. Thus, there is less need for a sophisticated
management control system, with profit centers and heavy reliance on formal reports of
performance. Nevertheless, even a small organization needs a budget, a regular comparison
of actual performance against a budget, and the other essential ingredients of a management
control system.
7. Multi-unit Organizations: Some service organizations operate many units in different
locations, each of which is relatively small. These include fast food restaurant chains, auto
rental companies, gasoline service stations, and many others. Some of the units are owned;
others operate under a franchise. The similarity of these separate units provides a basis for
analyzing budgets and evaluating performance that is not present in the usual manufacturing
company. The information for each unit can be compared with system wide or regional
averages, and high performers and low performers can be identified. Because units differ in
the mix of services they provide, in the resources that they use, and in other ways, care must
be taken in making such comparisons.
Implications for Management Control System in Service Organizations
There are some differences between management control system in service organizations and
those in manufacturing organizations. There are differences in degree, rather than in kind,
however. The essential features are the same in both types of organizations. In both, planning
is done in terms of programs and responsibility centers, including profit centers and
investment centers for organization units that meet the criteria. The management control
process in both organizations involves the steps of programming, budgeting, the
measurement of performance, and the appraisal of that performance
Because of their relatively recent development, systems currently found in service
organizations tend to be less advanced than those in manufacturing organizations. Because of
the difficulty of measuring both the quantity and the quality of output, judgments about both
the efficiency and the effectiveness of performance are more subjective than is the case when
output consists of physical goods, which means that there is more room for legitimate
differences of opinion about performance. Managers are coming to recognize that
performance is not easy to measure; this suggests that a search for better tools for improving
its measurement is likely to be eminently worthwhile.

Q7. Advantages of Flexible Budgeting

The flexible budget is an appealing concept. Here are several advantages:
Usage in variable cost environment. The flexible budget is especially useful in businesses
where costs are closely aligned with the level of business activity, such as a retail
environment where overhead can be segregated and treated as a fixed cost, while the cost of
merchandise is directly linked to revenues.
Performance measurement. Since the flexible budget restructures itself based on activity
levels, it is a good tool for evaluating the performance of managers - the budget should
closely align to expectations at any number of activity levels.
Budgeting efficiency. Flexible budgeting can be used to more easily update a budget for
which revenue or other activity figures have not yet been finalized. Under this approach,
managers give their approval for all fixed expenses, as well as variable expenses as a
proportion of revenues or other activity measures. Then the budgeting staff completes the
remainder of the budget, which flows through the formulas in the flexible budget and
automatically alters expenditure levels.
Disadvantages of Flexible Budgeting
The flexible budget at first appears to be an excellent way to resolve many of the difficulties
inherent in a static budget. However, there are also a number of serious issues with it, which
we address in the following points:
Formulation. Though the flex budget is a good tool, it can be difficult to formulate and
administer. One problem with its formulation is that many costs are not fully variable, instead
having a fixed cost component that must be calculated and included in the budget formula.
Also, a great deal of time can be spent developing cost formulas, which is more time than the
typical budgeting staff has available in the midst of the budget process.
Closing delay. A flexible budget cannot be preloaded into the accounting software for
comparison to the financial statements. Instead, the accountant must wait until a financial
reporting period has been completed, then input revenue and other activity measures into the
budget model, extract the results from the model, and load them into the accounting software.
Only then is it possible to issue financial statements that contain budget versus actual
information, which delays the issuance of financial statements.
Revenue comparison. In a flexible budget, there is no comparison of budgeted to actual
revenues, since the two numbers are the same. The model is designed to match actual
expenses to expected expenses, not to compare revenue levels. There is no way to highlight
whether actual revenues are above or below expectations.

Q8. The proper performance of the management control function is critical to the success of
an organization. After plans are set in place, management must execute a series of steps to
ensure that the plans are carried out. The steps in the basic control process can be followed
for almost any application, such as improving product quality, reducing waste, and increasing
sales. The basic control process includes the following steps:
Setting performance standards: Managers must translate plans into performance standards.
These performance standards can be in the form of goals, such as revenue from sales over a
period of time. The standards should be attainable, measurable, and clear.
Measuring actual performance: If performance is not measured, it cannot be ascertained
whether standards have been met.
Comparing actual performance with standards or goals: Accept or reject the product or
outcome.
Analyzing deviations: Managers must determine why standards were not met. This step also
involves determining whether more control is necessary or if the standard should be changed.
Taking corrective action: After the reasons for deviations have been determined, managers
can then develop solutions for issues with meeting the standards and make changes to
processes or behaviors.