1. What is MCS?

MCS is the mechanism and routines which involves a set of activities and tools that is
done repetitively to ensure strategy implementation is done effectively and efficiently.
which involves various activities (elements):
o Strategic planning
o Budgeting
o Resource allocation
o Performance measurement
o Evaluation & reward
o Responsibility center allocation
o Transfer pricing

What is MCS: systems, processes, routines made by the top management to influence the
behaviour of middle management/employees in the organisation, to ensure that strategy
implementation can be conducted efficiently and effectively to achieve the organisation
goals.
Structure MCS/MC environment: Understanding strategies, behaviour in organisation,
responsibilities centres (rev, exp, profit, investment), transfer pricing, measuring and
controlling assets employed
Process MCS: strategic planning, budget preparation, analysing financial performance
reports, performance measurement, management compensation
a) Control is a device to ensure one is doing the right thing in the right way to achieve
objectives  to achieve goal congruence. Every control system has four elements:
o Detector : a device that measures what is actually going on
o Assessor : a device that compares what’s going on with how it should be (the
standard)
o Effector : a device that adjusts behaviour if assessor believes it’s needed to do so
o Communications network: a device that communicates information between these
devices
o Example: It is detected that there is a decline in sales; then the information is assessed
by comparing it to the budget; and it will be decided what strategy is needed for this
(effector); and the issue will be communicated through meetings (communications
network).

b) Types of Control:
o Feedforward control : identifying and preventing problems before problems occurred
which gives focuses on inputs. Example: Honda Anugerah Sejahtera hires the right
employees and test service equipment regularly to prevent service problems.
o Concurrent control : identifying and preventing problems as they occur. Example:
Honda Anugerah Sejahtera monitor in real time how long does it take for service
 assistant to start assisting customers and as managers think it’s already too long they
will ask SA to speed up the process
o Feedback control : controls performed after feedbacks are given. Example: Honda
Anugerah Sejahtera is given a feedback on the waiting time and since then HAS
allocate more people during busy hours to assist customers to reduce wait time.

2. When does MCS apply?

o When a company employs decentralization that prevents top-level managers to
directly ensure strategy implementation.
o In decentralized organizations, Lower-level managers also have the authority to make
decisions on their own, such organizations then need formal mechanisms and
routines that facilitate these managers to supervise strategy implementation with a
shared understanding of objectives.

3. Management Control vs Management Control System

o Management control is the activity of influencing and ensuring people to implement
strategy through management functions
o MCS is the mechanism and routines which involves a set of activities and tools that
is done repetitively to ensure strategy implementation is done effectively and
efficiently.

4. Goal Congruence
o A situation where individual members’ personal goals are aligned or consistent with
organizational goals. Meaning that the effort to achieve personal goals are
simultaneously performed to achieve organizational goals.
o Goal Congruence cannot be 100% achieved // why is there a need for control?
o Not all employees understand the goals established by BOD (Personal
limitations)  MCS enables coordination and cooperation with other
decentralised unit
o Not all employees agree with the goals established by BOD (Lack of goal
congruence)  MCS facilitate top managers to benefit from the specialised
knowledge and skills of lower managers and employees.
o Not all employees have the skill/resource to achieve organizational goals. 
MCS enable lower-level managers to acquire the support and resources to
execute their responsibilities.
o Factors contributing:
o Formal: rules and formal control process
o Informal: internal (culture, management style, informal organization,
perception, communication) and external (social norms, work ethics)

5. Responsibility Center
o Organization units headed by managers responsible for their activities.
o To attain organizational goal and promote goal congruence, each responsibility centre
is given objectives that support the overall strategy of the organization.
o Revenue Centre
o Input tidak dapat diukur secara moneter  doesn’t control input
o Output can be measured in monetary terms  output is revenue
o Input dan output tidak berhubungan
o Kinerja dinilai dari banyaknya revenue yang dihasilkan  performance
measure: both financial & non-financial measures e.g customer satisfaction,
loyalty, growth in market share
o Incur sales and marketing cost
o E.g marketing/sales unit
o FEB:
 SIFE, because SIFE doesn’t make any consideration in buying printer
or not
 Bagian administration
o UGM:
o Expense Centre
o Input dapat dinilai secara moneter
o Output tidak berhubungan langsung dengan input
o Output tidak dapat dinilai secara moneter (terkadang berupa produk, biasanya
diitung fisiknya)
o Engineered: engineered costs are those for which the right or proper amount
can be estimated with reasonable reliability.
input berhubungan dengan output sehingga input dapat ditentukan untuk
menghasilkan output yang optimal (direct material, labor, supplies, utilities)
E.g FEB/ESE faculty, manufacturing unit, certain tasks in administrative and
support departments (AR, AP, payroll sections in the controller dept;
personnel records and cafeteria in the HR dept) → input (expense) is in
monetary terms while outputs is measured in physical terms
Performance measure: variance analysis (difference between theoretical and
actual cost)
o Discretionary: not able to estimate the cost easily e.g R&D costs
input tidak berhubungan dengan output, menggunakan management
judgement, penilaian kinerja berdasarkan Management By Objective
(overhead cost, RnD)
 MBO: A formal process in which budgetee proposes to accomplish
specific jobs and suggests the measurement to be used in performance
evaluation
 E.g administrative and support units (e.g accounting, legal, industrial
relations, public relations, HR), R&D operations → output (patent,
new products, new processes) and outcome between input and output
is difficult to measure → input (stated in annual budget may be
unrelated to output.
 Financial control conducted at the planning stage before the expenses
are incurred. Performance measure: Control of a discretionary
expense centre depends on the effective establishment of a reference
point to which the actual expenses can be compared. E.g. Gain
superior’s approval before the budget is overrun; spending less than
budget does not indicate efficiency. Control through non-financial
performance measures such as quality.
o FEB: Perpus
o UGM: Fakultas
o Profit Centre
o Input and output monetary
o Input dan output berhubungan
o Has the authority to control input & output
o Performance evaluation: management performance & economic performance
(non-financial and financial/moneter)
 By motivating and evaluating the management’s performance in terms
of profit, you can incentivize the manager to achieve profits, which is
in tune which the goals of the overall organization
o Measuring tools/financial performance measures (measured in terms of
profits):
 Contribution margin (most effective to measure management
performance)
 Direct profit
 Controllable profit
 Earnings before tax (EBIT)
 Net income (most effective to measure BU performance)
o Primary goal is to optimize subunits net income
o Why:
 Promote goal or behaviour congruence among the managers of the
company’s organizational subunits
 Determine the profitability of the subunit independently from other
departments in the company and from the company as a whole
 Compare profitability across organizational subunits
o Advantages: BASICALLY ADVANTAGES OF DECENTRALISATION
 Improve decision quality  decisions are made by managers closest to
the point of decision
 Increase speed of decision making / operation is faster as problems are
solved by the unit  same as above
 Provide training ground for general management  managers gain
experience in managing all functional areas
 Profit consciousness enhanced  managers who are responsible for
profits will constantly seek ways to increase them
  HQ can concentrate on broader issues
 Increase manager initiative
 Complete data and information of profitability
 Responsive to improve competitive performance
o Challenges:
 Loss of control caused by decentralization decision making
 Managers decision quality may decrease if HQ has better data and
information
 Friction among units (TP, common cost, joint revenue)  arguments
over appropriate transfer pricing  competition between units
 Competition between units
 Additional costs  divisionalisation adds extra cost due to added
management, staff, record keeping as redundancy
 Competent general managers may not exist
 Too focused on short-term profitability
 No assurance of optimizing profit for the company as a whole
 Example: FEB Cafeteria, Stores in Department stores

o Investment Centre
o Inputs monetary, outputs monetary. Profits are related to capital employed
o Manager is responsible for both the profit generated and invested capital
used to generate profit
o Managers can’t only influence profit, but can also influence the assets
employed by earning it. Because focusing on profits without considering the
assets employed are often an inadequate basis for control
o Performance measures: EVA and ROI and RI
o Example: Financing division
o Managers can also influence the assets employed in earning it. Investment
base: the sum of assets employed in an investment centres
o Performance measure: by comparing profits with the assets employed in
making it; Return on investment (ROI) and Residual Income (RI)
RC in FEB:
1. Expense centre: library, OIA  controls input (input measured in monetary terms)
2. Revenue centre: SIFE/administration in FEB  doesn’t control input (SIFE doesn’t
make any considerations in buying computers?), conrols output (output in monetary)
3. Profit centre: canteen  controls input and output
4. Investment centre: P2EB
RC in UGM:
1. Expense centre: Faculties, UGM library  controls input (UKT payment)
2. Revenue centre: UGM administration?
3. Profit centre: UGM canteen
 4. Investment centre: Gamma Multi group (PT Gama Multi Usaha Mandiri merupakan
perusahaan holding dan investasi milik Universitas Gadjah Mada yang bergerak di
berbagai sektor usaha.)

6. Economic Value Added (EVA) and Return on Investment (ROI)

o EVA = NOPAT – (Cost of Capital (WACC) x Capital Employed)
o NOPAT = Net Operating Profit After Tax
o WACC = Required rate of return (return must be paid back to investors)
o Capital Employed = Fund Invested
o Eva is a measurement to see the economic profit and wealth generated for
shareholders from an investment.
 (+): Company generates return more than the required return
 (-): company not generating enough return for shareholders.
o Why EVA over ROI?
 It encourages managers to think about shareholders’ wealth as the
idea of profitability is when the project can generate wealth and
return to shareholders.
 The capital employed involves balance sheet items such as assets that
forces managers to be more aware of assets and expenses when making
managerial decisions.
 Not suitable for intangible-asset rich companies. As it is tangible assets
based.
o ROI = Net Profit/Investment
o A measure to see the percentage of return from an investment
o Focus on improving profitability and not wealth maximization or shareholder
value maximization as it measures the gain or loss from investment.
o Why EVA over ROI?
 Simple to calculate, easy to understand
 Can be applied to any organization regardless of size
 Directly comparable to other units and competitors
7. Strategic formulation vs strategic planning
o Strategic formulation: process of deciding new strategies
o Outputnya adalah strategi
o Dibuat oleh top management
o Long term (> 5 tahun)
o Tidak sistematis
o Strategic planning: the process of deciding how to implement the strategies (THE
FIRST ACTIVITY IN THE management control system) e.g cost-leadership
strategy
o The process of deciding on the programs the organisation will undertake and
the approximate amount of resources that will be allocated to each program
over the next several years  lebih ke resource allocation I think
 o Outputnya strategi yang lebih kecil (action plan?)
o Dibuat oleh middle management
o Short term (3-5 tahun)
o Systematic: there is an annual strategic planning process, with prescribed
procedures and timetables.
o Benefits of systematic planning:
 Framework for developing the annual budget  facilitates optimal
resource allocation decision in support of key strategic options
(narrows the range of options such that planners can make intelligent
resource allocation decision during the budgeting process)
 Management development tool  formal strategic planning is an
excellent management education and training tool that provides
managers with a process for thinking about strategies and their
implementation.
 A mechanism to force managers to think long-term managers tend to
only focus on day-to-day operations. So, strategic planning forces
managers to make time thinking theough important long-term issues.
 A means of aligning managers with the long-term strategies of the
company (goal congruence)  the debates, discussion, and
negotiations that take place during the planning process clarify
corporate strategies, unify and align managers with such strategies and
reveal the implications of corporate strategies for individual managers.
o Limitations:
- Planning can end up being a “form-filling”, bureaucratic
process or devoid of strategic thinking
- The organisation may create a new & large strategic planning
department and delegate the preparation of the strategic
planning to that staff department, forfeiting the input of line-
management
- Time consuming and expensive
o For a strategic planning to be desirable, the organisation must possess the
following criterias:
- Top management is convinced that strategic planning is
important
- Relatively large and complex organisation
- Considerable uncertainty about the future exists, but the
organisation has the flexibility to adjust to changed
circumstances.
 In the strategy formulation process: management arrives at the goals of the
organisation and creates the main strategies for achieving those goals. The strategic
planning process: then takes the goals and strategies as given and develops programs
that will carry out the strategies and achieve the goals efficiently and effectively.
8. Transfer pricing
o Monetary value to transfer goods or services between responsibility centre or
division in the same company. At least, one of the responsibility centre is profit
centre.
o In a determination of price, one needs to consider production cost and selling
expenses in which both is possible in profit centre
o Whenever two or more profit centres cooperate in a product development, each centre
shares the revenue
o Fundamental principles: TP should be similar to price that would be charged if
product is sold to outside customers or purchased from outside vendors (market price)
 arm’s length principle
o Methods:
o Market price
o Competitive price
o Upstream fixed costs and profits: PC selling to outside companies may not
be aware of the upstream fixed costs and profits included in its internal
purchase price.
o Cost-based transfer price: set on the basis of cost + profit → defining cost
and calculating profit markup → cost: standard cost (e.g full absorption or
ABC)
How HQ can intervene in TP//Types of TP:
o Agreement among BU: representatives from buying and selling units → meet
and decide outside selling prices and sharing of profits for products with
upstream fixed costs and profits
o 2-step pricing: standard variable cost (cost for each unit sold) and fixed cost
(periodic charge). Transfers VC on a per-unit basis and transfers FC and profit
on a lump sum basis.
E.g in book, the buying PC pays $6,000 more if it buys 1,000 units less than
expected → penalty for the buying PC for not using a portion of the selling
PC’s capacity that it has reserved. → the selling PC saves money because it
could produce the additional units without incurring additional fixed costs.
Fixed costs calculation → based on the capacity reserved for the production of
product A that is sold to the buying PC.
Under this pricing system, the manuf unit’s profit performance is not affected
by the sales volume of the final unit.
o Profit sharing: the product transferred to the marketing unit at standard
variable cost and after the product is sold, BUs share the contribution earned
(selling price - variable manuf and marketing cost)
Disadvantages: induce arguments over the way contribution is divided
between BUs, costly and time-consuming, dividing profits between BUs does
not give valid information on the profitability of each unit, and contribution is
not allocated until after the sale has been made.
 o Two sets of prices (dual pricing): selling BU’s revenue is credited at the
outside sales price and the buying BU is charged the total standard costs and
the difference of these two prices is charged to the headquarter’s amount and
eliminated during FS consolidation. → both buying and selling BU benefit
This is seen as intervention bcs these divisions are being pushed away from
their independent decision of what they think is best for the division (when
the two divisions cannot agree to a TP), but instead the mgmt comes in with
a lower discount price, taking away the responsibility of the mgmt.
Transfer pricing can be used to reduce the taxes of the overall company:
Division A sells the software to other carmakers as well as its parent company. Division B
pays Division A for the software typically at the prevailing market price that Division A
charges other carmakers. Let's say that Division A decides to charge a lower price to
Division B instead of using the market price. As a result, Division A's sales or revenues are
lower because of the lower pricing. On the other hand, Division B's costs of goods sold
(COGS) are lower, increasing the division's profits. In short Division A's revenues are lower
by the same amount as Division B's cost savings—so there's no financial impact on the
overall corporation.
However, let's say that Division A is in a higher tax country than Division B. The overall
company can save on taxes by making Division A less profitable and Division B more
profitable. By making Division A charge lower prices and pass those savings onto Division
B, boosting its profits through a lower COGS, Division B will be taxed at a lower rate. In
other words, Division A's decision not to charge market pricing to Division B allows the
overall company to evade taxes.  goal congruence for the overall company

9. SPM itu untuk siapa

Yang mengendalikan SPM: top management, yang dikendalikan SPM: middle
management

10. Performance Measurement

o A system to measure the performance management (financial and non-financial) 
why are financial measures are not enough // limitations of financial control
system:
o Financial measures encourage short-term actions that are not in the company’s
long-term interests  e.g delivering inferior-quality products to customers to
meet sales targets, which will hurt goodwill and future sales
o Business unit managers may not undertake useful LT actions to obtain ST
profits  e.g sacrificing R&D, not taking risky investments
o Using ST profits as the sole objective can distort communication between a
business unit manager and senior management  setting target too low in
order to be able to achieve it.
o Tight financial control may motivate managers to manipulate data
Financial measures: revenues, expenses, EBIT, ROI, RI, EVA
RI >>> ROI:
- With RI, all investment centres have the same profit objective for comparable
investments → ROI creates bias towards little or no expansion in high-profit business
unit while low-profit units are making investments at rates of return well below those
rejected by the high-profit units
- Decisions that increase a centre’s ROI may decrease its overall profits → RI relates a
- With RI, different interest rates may be used for different types of assets → take into
account the different degrees of risk
Non-financial measures: customer satisfaction, employee satisfaction, various quality
measures, lead time, market share and no. of development projects started
Controllability principle: responsibility centre managers should be evaluated based on
financial measures that are within their control
11. Balance scorecard
o The Balanced Scorecard provides a framework that continues to measure financial
outcomes but supplements these with nonfinancial measures derived from the
company’s strategy. And, the BSC is not restricted to private-sector companies; many
nonprofits and public sector entities have also adopted this framework to manage their
creation of social value
o Pengukuran finansial dan non finansial menggunakan 4 perspektif yang berhubungan
o Financial: how is success measured by our shareholders?
 ROE
o Customer: how do we create value for our customers?
 % of repeat customers
 Growth in customers’ sales
 % deliveries made on time
 Prices compared to competitors
o Internal business/process: at which processes must we excel to meet our
customer and shareholder expectations?
 % improvement in cycle times
 Product defect rates
 Process yield improvement
o Learning and innovation: what employee capabilities, information systems,
and organizational capabilities do we need to continually improve our process
and customer relationships?
 % employees trained and certified in process improvement capabilities
12. SPM di public & swasta
13. Budgeting: menerjemahkan strategi perusahaan dalam satuan moneter
o Planning: As a reference on how much must be used for activities allocated
o Controlling: to evaluate actual performance with the budget
 o Planning digunakan pada kondisi yang memilki uncertainty yang tinggi di masa
depan, controlling digunakan pada kondisi yang sudah stabil.
o Strategical planning dibuat untuk jangka waktu 3-5 tahun, kerangka untuk menyusun
budget, melekat pada program. Budgeting dibuat untuk jangka waktu 1 tahun, hanya
bagian/potongan dari strategic planning, melekat pada responsibility center (1 RC 1
bugdet)
o Forecast
o Moneter dan moneter
o Hanya prediksi
o Not limited to calendar year: any time period
o Tidak perlu otorisasi
o Tidak ada kewajiban untuk dicapai
o Planning
o Apabila ada varian tidak harus dievaluasi

Relative targets: compare with historic results or competitors

Decentralization: abandon the budget
Rolling forecasts: to tackle the problem with a fixed year as a measure
o Not limited to calendar year: any time period
o Prepared in much less detail: focused on KPI and aggregated budget
o Updated regularly: quarterly
o May be regarded with the same commitment as the budget
o Evaluation: depends on whether the budget forecast is just a forecast or a
commitment as the budget
o
o Budgeting (critiques)
o Moneter
o Impossible to make a reliable budget/Bukan pasti, certain, eksak
o Makes organisation less flexible/Tidak fleksibel, dibuat 1 tahun sekali
o Harus ada otorisasi
o Harus diusahakan untuk mencapai semua yang telah dianggarkan
o Contradicting roles: Planning + controlling
o Apabila ada varian harus dievaluasi

STRATEGY:
Corporate Strategy
Corporate Strategy : Diversification and Vertical Integration
Business Unit Strategy: Differentiation and Low Cost