Name : Dinda Putri Novanti

Student ID : 1910533004
Management Control System / Summary
Financial Control in Presence of Uncontrollable Factors
Control principle:
- People should be responsible only for what they control.
- Employees should not be punished for bad luck or given extra rewards for good
luck.
- Many important outcome measures are only partially uncontrollable.
The Controllability Principle
Control Principle
 When employees are held accountable for uncontrollable factors,
- organization bears the cost of doing so
- because most employees are risk averse.
 Employees love rewards that depend on their performance to come directly
from their efforts and not be swayed by uncontrollable oddities
 Risk aversion is the basis for the main argument
*which supports the principle of control.
 Owners are risk neutral as they can diversify their portfolio through the
complex financial markets that were created for that purpose.
 The owner's rewards come directly from the function of taking on the risks
they undertake
Types of Uncontrollable Factors
Types of Factors that Cannot be Controlled
 Economic and competitive factors
- Profit is influenced by many factors
- Which changes and any other measurement results
- Which can be influenced by many uncontrollable factors.
- Most evaluators do not fully protect managers from changing
economic and competitive factors, although they may take
steps to
have the organization share some of the risk with managers.
 Natural disaster
This is a big, unexpected, one-time event, completely out of control,
like :
- storm,
 - earthquake,
- flood.
 Mutual dependence
- Indicates that the area of the organization or individual is not
completely self-sufficient, and
- Thus, the measured results are influenced by others in the
organization
- There are three types:
a. Clustered interdependence: where corporate entities use
shared resources of shared resources. Low when the entity
is relatively self-sufficient.
b. Sequential interdependence: when the output of one entity
is the input of another entity. Height: vertically integrated
company.
c. Reciprocal interdependence: organizational entities produce
outputs used by other entities and use inputs from them.
- Intervention from higher level management:
- Higher-level managers can force decisions about lower-level
managers and
- Thereby significantly affects the outcome measure associated with
one or more forms of rewards.
Controlling for the Distorting Effects of Uncontrollables
Controlling the Uncontrollable Distorting Effect
Managers can mitigate some of the distorting effects with one of these
two complementary approaches:
- Before the measurement period begins, they can define outcome measures to include
only those items that employees can control or at least influence.
- After the measurement period ends, they can calculate and adjust for the effects of
the remaining uncontrollable factors.
1. Controlling for those that cannot be controlled before the measurement period:
-Buying insurance
-Design responsibility structure
2. Controlling for the uncontrollable after the measurement period:
-Analysis of Variances
- Flexible performance standards:
-Relative performance evaluation:
-Subjective performance evaluation:
 Other Uncontrollable Factor Issues
Another Uncontrollable Factor Problem
Problems when considering adjustments for the uncontrollable:
 The purpose of the adjustment.
 Direction of adjustment.
*Only to protect employees from suffering due to bad luck, but not to
protect owners from paying inappropriate rewards for good fortune.