MANAGEMENT

CONTROL SYSTEMS
Batch PGDM IV
Faculty Neelam Mehra

SYLLABUS
Objective:
This subject presents practice of
management control systems in
organizations. It also covers the
impact of information technology on
management
control.

UNIT - 1
Basic Concepts of Control Systems: Meaning,
nature and purpose of control systems new
paradigms of control systems, four elements
of
control,
organizational
structure,
organizational goals, organizational climate,
strategic planning balancing the four levels
of control, balancing the tensions in control
systems, six sources of tensions in control
systems, opportunities and limitations of the
span of control, key control variables,
delegation and decentralization.

UNIT- 2
Auditing, Budgeting and Variance Analysis:
External audit, internal controls, internal
audit, role of financial controllers, multiple
roles of an auditor, management control
process, budgetary control, flexible budget,
zero base budget, performance budgeting,
master budget, analysis of variance,
accounting aspect of control, management
audit, marketing and distribution control,
different types of audit.

UNIT - 3
Responsibility Centers: Control in
manufacturing activities, control in
distribution activities, Problem of dual
responsibility, non-financial measures,
profit centre boundaries, economic
transfer pricing, ABC costing, transfer
prices.

UNIT - 4
Performance Measurement and Balance
Score
Card:
Behavioral
aspect
of
management control, motivations, morale,
participative management, learning curves,
balanced score cards.

UNIT - 5
Management
Control
of
Service
Organizations, Non-profit and Government
Organizations:
Management
control
systems in financial service organizations,
in
health
organizations,
non-profit
organizations.

REFERENCE BOOKS
Author/ Publication
1.Management Control Systems - A Managerial
Emphasis By Pradip Kumar Sinha, Excel Books
2.Management
Control
Systems
Robert N Anthony & Vijay Govindarajan
(The
McGraw
Hill)
3.Management
Control
N.
Ghosh,
Eastern
Economy

Systems
Edition

UNIT - 1
CONTROL is a function of keeping a check on
any activity/ person/ entity to ensure the
achievement of DESIRED RESULTS.

CONTROL
RESULTS

DESIRED

CONTROL
CONTROL is the Regulating, Directing,
Restraining and also a Unifying action in an
organisation.
Control brings Uniformity out of the diverse
activities performed by various units and
subunits.
Thus Control ensures the actual state of
affairs in line with the planned and desired
state of affairs.

MANAGEMENT
An organisation consists of a group of people,
who work together, to achieve planned Goals.
The LEADERS of any organisation are collectively
called as MANAGEMENT.

ORGANISATION STRUCTURE
CEO (Chairman/ MD / CEO)
VPs of Different Functional Depts
MANAGERS of Functional Depts

SUPERVISORS at different floors and

divisions
Layers of hierarchy depends on the Nature,
Size and Complexity of the Organisation.

MANAGEMENT CONTROL SYSTEM

(MCS)
MCS is a set of interrelated communication
structure that facilitates the processing of
information to assist managers in
coordinating the parts and attaining the
purpose of the organization on a
continuous basis.

PURPOSE OF MCS

Assist management in coordinating the

activities of the firm

Compare actual results with the set standard

to ensure that each work is done as planned.

Driving those activities towards achievement

of firms objectives.

ELEMENTS OF
MANAGEMENT CONTROL SYSTEM

MCS

DETECTOR
(To observe
information and
analyze the
situation.

ASSESSOR
(To compare
actual results
with standards)

EFFECTOR
(To minimize the
gap between
standards and
actual results)

Communication Network
(To transmit information to detector, assessor and the effector)

TYPES OF MCS
MCS
Formal

Informal

Formal controls are laid down in writing by the management, but

the informal controls arise out of employees behavior.
For eg., work plans, rules and regulations etc which are laid down
in writings are called formal controls.
Whereas group behavior, work culture, organisational norms etc
which are not in written form are termed as informal controls.

FORMAL CONTROL SYSTEMS

Formal control systems make explicit the structure, policies and procedures to
be followed by members of the firm. It helps management in planning and
maintaining strategies in order to meet organisational goals.
Control on inputs

Formal control system

Control on processes

Controls on outputs

INFORMAL CONTROL SYSTEMS

Cultural controls

Informal control systems

Social controls

Employees
self
controls

SIX SOURCES OF TENSIONS IN CONTROL SYSTEMS

The 6 sources of tensions in control systems

can be grouped under different categories A. Tension arising due to need to make
strategic choices
1. The tension between profit, growth and
control.
2. The tension between long term and short
needs

A. Tension due to goal divergence among stakeholders and

efforts needed to imaginatively establish goal congruence.
3. Tensions between the several stakeholders all of whom
want a bigger share of the pie. Organisation must seem to
benefit all those who have a stake in it. Conflicts of
interest are built into this situation.
4. The tension between the varying and often conflicting
motivation of the employees.
5. The tension between the different professional aspirations,
propensities and functional skills of the different segments
of an organisation

C. Tensions due to limitations of managerial cognitive

powers
6.

Tensions between the need and desire to seek

opportunities and the constraint due to limitation of
the span of attention.
Any young manager who joins an organisation will
very soon sense these several pulls and pressures in
the organisation.
Each of these can be compounded by the fact that
the responses to these and the decisions need to be
taken are spread over different centers of power.
The organisations will have to ensure that they are
in mutual harmony.

DELEGATION & DECENTRALISATION

When a part of the work is entrusted to others, it is known

as delegation.

Decentralisation refers to tire systematic effort to delegate

to the lowest levels all authority except that which can only
be exercised at central points

Decentralisation is concerned with the decentralisation of

decision-making authority to the lower levels in managerial
hierarchy.

Decentralisation extends to the lowest level of the

organisation.

Decentralisation
delegation.

can

be

viewed

as

an

extension

of

CENTRALISATION & DECENTRALISATON

In Centralization, the overall decision-making power
is vested with the top management.
While Decentralization means delegation of authority
to the lowest feasible level of decision making within
the framework of predetermined responsibilities and
clearly set goals.
When the organisation is small, it is easy to exercise
management control and obtain the advantage of
centralized organisation structure but as size grows,
organisation controls becomes easier through
decentralization.

ADVANTAGES OF DECENTRALISATION
1.
2.
3.
4.
5.
6.
7.

It allows close control and supervision on

subordinates in the department.
It motivates the managers to perform better
by providing right environment and autonomy.
It evaluates overall performance of various
organisational units
Reduces the burden on top executives:
Facilitates diversification
To provide product and market emphasis:
Quick Decision-Making:

DISADVANTAGES OF DECENTRALISATION
1.
2.
3.
4.
5.

Uniform policies not Followed

creates problems of co-ordination as authority
lies dispersed widely throughout the organisation.
More Financial Burden
Decentralisation becomes useless when there are
no qualified and competent personnel.
Decentralisation puts more pressure on divisional
heads to realize profits at any cost. Often in
meeting their new profit plans, bring conflicts
among managers.

SPAN OF CONTROL
Span of control refers to the number
ofsubordinatesthat amanagerorsupervisor
can directlycontrol.
This number varies with the type ofwork.
Complex and variablework reduces it to six,
whereasroutine and fixed work increases it
to twenty or more.

Higher average span of controlmeans fewer layers

of management within the organization, and a relatively
flatter organizational structure. This can lead to:
1.

Faster decision-making due to fewer levels of approvals

required for a specific decision, which allows the
company to respond more quickly to business issues.

2.

Better and more frequent communication between

higher-level managers and staffers, so the staff is more
knowledgeable about company goals and the higher-level
managers are more knowledgeable about daily
operational issues faced by staff.

3.

Reduced costs relative to a taller organization, since

there
are
fewer
management
layers
needing
compensation.

Lower average span of controlmeans relatively more

layers of management within the organization and a
relatively taller organizational structure. This can lead to:
1.

Fewer opportunities for promotions, since there are

fewer management positions in the company.

2.

The concern that manager input will be relatively harder

for staffers to obtain, and managers will have less time
to focus on specific decisions. Employees will need to be
relatively more self-motivated and independent in their
work style due to having less manager input.

3.

Important strategic decisions by the company will have

relatively less time spent on them, due to the reduced
time available to focus on individual decisions. This can
lead to less-than-optimal responses to business
opportunities and threats.

UNIT II

BUDGETING

For effective running of a business, management

must know:

where it intends to go i.e. organizational

objectives

how it intends to accomplish its objective i.e.

plans

whether individual plans fit in the overall

organizational objective. i.e. coordination

whether operations conform to the plan of

operations relating to that period i.e. control

Budgetary control is the device that a

company uses for all these purposes.

WHAT IS A BUDGET?
Budget is a detailed plan of operations for
some specific future period.
A plan expressed in money. It is prepared
and approved prior to the budget period and
may show income, expenditure and the
capital to be employed. May be drawn up
showing incremental effects on former
budgeted or actual figures, or be compiled by
Zero-based budgeting.

CLASSIFICATION OF BUDGETS
ACCORDING TO
TIME

1.
2.
3.
4.

Long term budget

Short term budget
budget
Current budget
Rolling budget

ACCORDING TO
FUNCTION

ACCORDING TO
FLEXIBILITY

1. Sales budget
2. Production budget

1. Fixed budget
2. Flexible

3. Cost of Production budget

4. Purchase budget
5. Personnel budget
6. R & D budget
7. Capital Expenditure budget
8. Cash budget
9. Master budget

1. SALES BUDGET:
Sales budget is the most important budget based on which
all the other budgets are built up. This budget is a forecast
of quantities and values of sales to be achieved in a
budget period.

2. PRODUCTION BUDGET:
Production budget involves planning the level of
production which in turn involves the answer to the
following questions:
a. What is to be produced?
b.

When is it to be produced?

c.

How is it to be produced?

d.

Where is it to be produced?

3. COST OF PRODUCTION BUDGET:

This budget is an estimate of cost of output planned
for a budget period and may be classified into
Material Cost Budget
Labour Cost Budget
Overhead Cost Budget
4. PURCHASE BUDGET:
This budget provides information about the materials to
be acquired from the market during the budget period.

5. PERSONNEL BUDGET:
This budget gives an estimate of the requirements
of direct labour essential to meet the production
target.
This budget may be classified into
a. Labour requirement budget
b. Labour recruitment budget
6. RESEARCH AND DEVELOPMENT BUDGET:
This budget provides an estimate of expenditure to
be incurred on R & D during the budget period.
A

R&D budget is prepared taking into

consideration
the research projects in hand and new
R&D projects to be taken up.

7. CAPITAL EXPENDITURE BUDGET:

This is an important budget providing for acquisition
of assets necessitated by the following factors:
a. Replacement of existing assets.
b. Purchase of additional assets to meet increased
production
c. Installation of improved type of machinery to reduce
costs.
8. CASH BUDGET:
This budget gives an estimate of the anticipated
receipts and payments of cash during the budget period.
Cash budget makes the provision for minimum cash
balance to be maintained at all times.

9. MASTER BUDGET:

CIMA defines this budget as The

summary
budget
incorporating
its
component functional budget and which is
finally approved, adopted and employed.
Thus master budget is a summary of all
functional budgets in capsule form
available in one report.

10. FIXED BUDGET:

This is defined as a budget which is
designed to remain unchanged irrespective
of the
volume of output or
turnover
attained.
This budget will, therefore, be useful only
when the
actual level of activity
corresponds to the
budgeted level of
activity.

11. FLEXIBLE BUDGET:

CIMA defines this budget as one which,
by recognizing the difference in behavior
between fixed and variable costs in relation
to fluctuations in output, turnover or other
variable factors such as number of
employees, is designed to change
appropriately with such fluctuations.

12. ZERO BASE BUDGETING:

The zero base budgeting is not based on the
incremental approach and previous figures are not
adopted as the base.
Zero is taken as the base and a budget is
developed on the basis of likely activities for the
future period.
A unique feature of ZBB is that it tries to help
management answer the question, Suppose we are
to start our business from scratch, on what activities
would we spent out money and to what activities
would we give the highest priority?

Fixed budget
Assumes
conditions

static

Flexible budget
business Based on

the assumption of
changing business environment

Prepared only for one level of Prepared for different capacity

levels or for any level of activity
activity
The values( figures) will not The figures are adjusted according
change when actual level of to the actual level of activity
attained
activity changes
comparison
When actual level of activity Such
differs from budgeted level of realistic.
activity, then fixed budgets
meaningful
comparison
between actual and budgeted
figures is not possible.

are

quite

BUDGETARY CONTROL

Budgetary control is
the establishment of budgets relating to the
responsibilities of executives to the
requirements of a policy,
and the continuous comparison of actual
with budgeted results,
either to secure by individual action the
objective of that policy or to provide a basis
for its revision.

WHAT IS BUDGETARY CONTROL?

Budgetary control is the use of the comprehensive system of
budgeting to aid management in carrying out its functions like
planning, coordination and control.
This system involves:
Division of organization on functional basis into different
sections known as a budget centre.
Preparation of separate budgets for each budget centre.
Consolidation of all functional budgets to present overall
organizational objectives during the forthcoming budget
period.
Comparison of actual level of performance against budgets.
Reporting the variances with proper analysis to provide basis
for future course of action.

Preparation of budgets is the first step in the budgetary

ontrol system.
#

Implementation of budgets is the second phase.

# But preparation and implementation of budgets
alone will not achieve much unless a comparison is
made regularly between the actual performance and the
budgeted performance.
# Continuous and proper reporting makes this
possible.
#

To ensure the success of budgetary control system,

proper follow up action has to be taken immediately
for the reports
submitted.

VARIANCE ANALYSIS
No notes as the topic was discussed and practiced
in the class without slides.
For your reference following are the sub-topics to
be covered in the topic
# Variance analysis meaning, significance
# Types of variances
i. All types of direct material cost variances
ii. All types of direct labour cost variances
Reasons for all these variances and formulae to
compute .
Also practice numericals for computing any of these
variances.

AUDITING

AUDIT
Auditing is defined as a systematic and independent
examination of data, statements, records, operations
and performances (financial or otherwise) of an
enterprise for a stated purpose.
In any auditing the auditor perceives and recognizes the
propositions before him for examination, collects
evidence, evaluates the same and on this basis
formulates his judgment which is communicated through
his audit report.

Auditis anevaluationof a person,

organization,
system,
process,
enterprise,projectorproduct.
The term most commonly refers to
audits in accounting but similar
concepts also exist in project
management, quality management,
water management, and energy
conservation.

HISTORICAL BACKGROUND
The role of auditor goes back many hundreds of
years. These are records from ancient Egypt and
Rome, showing that people were employed to
review work done by taxes collector and estate
managers.
The emphasis was very much on the detection of
fraud and other irregularities.
Emphasis has changed and the role of the auditor
becomes much more sophisticated.

BASIC TYPE OF AUDIT

Audits can be categorized in to two types:

Financial audit

Non financial audit

1. Financial audit:
It is a statutory audit.

Address questions of
accounting, recording, and reporting of financial
transactions. Reviewing the adequacy of internal
controls also falls within the scope of financial audits .

2. Non financial audit:

It is non statutory one and serves two purposes
It checks companys compliance to standards
It determines whether a product or service satisfy the
customers demands and ideal standards established by
the company in terms of quality and features.

AUDIT
DIFFERENCES FINANCIAL AUDIT

NON-FINANCIAL AUDIT

1.Relies primarily on standards set 1. Relies on standards set internally

externally (by govt etc.)
by the mgmt based on customer
and competitor information
2.Procedures are formalized and 2. Procedures are flexible and
consistent from company to company adopted differently by company to
company
3. Interested parties are generally
external and objective is to build 3. Interested party is internal only
credibility
with an objective to improve
performance.
4.Conducted annually

5.Affect only financial performance

4. No specific period as as such .

Depends on company requirements.
Generally 18-24 months
5. Focuses on a broad range of
functions that contribute to the
success of a particular function and

FINANCIAL VS NON FINANCIAL AUDIT

Similarities

1.

Both measure compliance with a set of standards

2.

They both identify opportunities for performance

improvements

3.

Both are systematic ways of generating performance data.

MERITS & DEMERITS OF AUDIT

MERITS
1. Identifies opportunities for improvement
2. Gives a reality check
3. Identifies backdated strategies
4. Increases managements ability to address issues
5. Improves teamwork within organisation
6. Changes mindsets of employees for betterment
7. Measure performance improvements

MERITS & DEMERITS OF AUDIT

DEMERITS OF AUDIT
1. Audit is not a final solution but only a means
2. It cannot mobilize people to action

DIFFERENT CATEGORIZATION
OF AUDIT
Statutory

Audit Non Statutory Audit

Private Audit
Internal Audit - External Audit
Management Audit

Functional Audit
IT Audit

STATUTORY AUDIT
Alegallyrequiredreviewoftheaccuracyofacompany'sorgovernment's
financialrecords.
Thepurposeofastatutoryaudittodeterminewhetheranorganizationis
providing a fair and accurate representation of its financial position by
examininginformationsuchasbankbalances,bookkeepingrecordsand
financialtransactions
ForExample,astatelawmayrequireallmunicipalitiestosubmittoan
annual statutory audit examining all accounts and financial transactions
andtomaketheresultsoftheauditavailabletothepublic.Thepurpose
of such an audit is to hold the government accountable for how it is
spendingtaxpayers'money.

PRIVATE AUDIT
When the audit is not a statutory requirement , but is
conducted at the desire of owners , such an audit is private
audit . The audit is conducted primarily for their own interest.
At times the private audit may become a requirement under
tax laws , if the turnover exceeds a specified limit .

Private Audit is following types

1 Audit of sole proprietorship
2 Audit of partnership firms
3 Audit of individuals accounts
4 Audit institutions not covered by statutory
audit

INTERNAL AUDIT
The examination, monitoring and analysis of activities
related to a company's operation, including its business
structure, employee behavior and information systems.

Internal audit found to play the following rolesCheck weather existing controls are effective and
adequate.
Weather financial and other reports show the actual
results of the company
Weather subunits are following the policies and
procedures laid down by the company.

MANAGEMENT AUDIT
Analysis and assessment of competencies and
capabilities of a company's management in order
to evaluate their effectiveness.
The objective ofa management audit is not to
appraise individual executive performance, but to
evaluate the management team in relation to
their competition.

OBJECTIVES OF MANAGEMENT
AUDIT
(i)

to detect and correct the human limitations

of top management

(ii)

to improve upon managements productivity

(iii)

to avoid possible losses

inefficient management

(iv)

to study the current state of all affairs of

the management and suggest suitable
measures for improvement.

arising

from

TYPES OF MGMT AUDIT

1.
2.
3.
4.
5.

Complete mgmt audit

Compliance mgmt audit
Program mgmt audit
Functional mgmt audit
Efficiency mgmt audit

BENEFITS OF MGMT AUDIT

1.

Provides an early warning signal of managerial problems and

related operational difficulties

2.

It can be used as a source of information in assisting the

organisation to accomplish the desired objectives

3.

Helps to evaluate organisational plans, structure and directions

that mgmt gives in the form of strategies and processes .

INTERNAL AUDIT
IA is an independent appraisal function
established within an organisation to examine and
evaluate its activities as a service to the
organisation.
Objectives of IA
1. To assist employees in effective discharge of
their responsibilities
2. To avoid discrepancies from getting deep in the
system
3. To monitor, track and report discrepancies
4. To motivate and monitor staff

ADVANTAGES OF AUDIT
Companies Directors
Assurance that statutory responsibilities concerning accounts have
been carried out.
Availability of expert advise.
The letter of weakness.

To Shareholders
Assurance that accounts show a true and fair view and comply with
statutory requirements
Other Organization with publish accounts
Assurance that accounts are reliable

In addition they provide reliable accounts to regulatory bodies

such as the companies Registry, the stock exchange etc.

OBJECTIVE OF AUDITING
PrimaryObjective:
To produce a report by the auditor of his opinion of
the truth and fairness of financial statements so
that any person reading and using them can belief
in them.
Secondary Objective:
To detect Error and Fraud
To prevent Errors and fraud by the deterrent and
moral effects of Audit

LIMITATION OF AUDIT

An audit can neither help in prioritizing

changes nor in allocating resources.
Audit cannot mobilize people to take
actions. though audit identifies various
problems that exist in the organizational
system and processes
Audit can not generate better data than the
measures used to gather those.

AUDIT PROCESS

Staffing the audit team

Set up an audit project plan
Laying the basework for audit
Analyzing audit results
Sharing audit results
Writing audit results
Dealing with reservation to audit
recommendations
Building an ongoing audit program

AUDIT TOOLS FOR DATA

COLLECTION
1.
2.
3.
4.
5.

Surveys
Questionnaires
Interviews
Focus groups
Direct observation

WHAT IS IT AUDIT

Aninformation technology audit orinformation

systems audit is an examination of the management
controls
within
anInformation
technology(IT)infrastructure

The evaluation of obtained evidence determines if

the information systems are safeguarding assets,
maintainingdata integrity, and operating effectively
to achieve the organization's goals or objectives.
These reviews may be performed in conjunction
with afinancial statement audit,internal audit, or
other form of attestation engagement.

Other popular audits

1. Cost audit
2. Social audit
3. Environment audit

FINANCIAL CONTROLLER
A financial controller is a senior-level executive who
acts as the head of accounting and oversees the
preparation offinancial reports, responsible for
effectively managing all the financial tasks like
compliance audits, monitoring internal controls,
participating in thebudgetingprocess and analyzing
financial data to varying degrees overseeing budgeting
and accounting.
He/she generally reports to the CFO (Chief Finance
Officer) and contributes to the overall success of the
organization
by
managing
the
effective
implementation of finance functions of the company.

FUNCTIONS OF FINANCIAL CONTROLLER

The Financial Controller performs a wide range of duties and
handles responsibilities including some or all of the following:
1. Financial accounting and reporting - Develop and maintain
timely and accurate financial statements and reports that are
appropriate for the users and in accordance with generally
accepted accounting principles (GAAP)
2. Develop, implement, and ensure compliance with internal
financial and accounting policies and procedures.
3. Ensure that all statutory requirements of the organization are
met
4. Take care of all the direct and indirect taxation matters.
5. Prepare all supporting information for the annual audit with
the approved external auditor.

6.

Develop and maintain financial accounting systems for cash

management, accounts payable, accounts recievable, credit control,
and petty cash.

7.

Reconcile bank and investment accounts.

8.

Review monthly results and implement monthly variance reporting as

compared to budget.

9.

Manage the cash flow and prepare cash flow forecasts in accordance
with policy.

10. Develop

and implement policies and procedures as required to ensure

that personnel and financial information is secure.

11. Assist

the Executive Director and the Board Treasurer with financial

reporting as required at Board meetings and the Annual General
Meetings and provide advice to support the decision making process.

PERFORMANCE AUDIT
Performance auditrefers to an independent
examination of a program, function, operation
or the management systems and procedures of
a profitable ornon-profitentity to assess
whether the entity is achieving economy,
efficiency
and
effectiveness
in
the
employment of available resources.The
examination is objective and systematic,
generally using structured and professionally
adopted methodologies.

MULTIPLE ROLES OF AN AUDITOR

ADVISOR
INVESTIGATOR
TRUSTEES OF SHAREHOLDERS & GOVT
EXPERT CONSULTANT
PLANNER

TRANSFER PRICING (UNIT III)

# WHAT IS TRANSFER PRICING, ITS
SIGNIFICANCE.
# DIFFERENT METHODS OF TRANSFER PRICING
# PRACTICAL QUESTIONS OF TRANSFER PRICING
(PLS REFER TO BOOKS FOR THIS TOPIC)

SYLLABUS OVER FOR MID TERM

EXAM