Management Control Systems

Performance Measurement, Evaluation, and Incentives

4th edition

Chapter 6
Designing and evaluating
management control
systems

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 Designing control systems
• Two basic questions
– What is desired?
– What is likely to happen?
• If what is likely is different from what is desired, then
two basic MCS-design questions must be
addressed
– What controls should be used?
– How tightly should each be applied?

Copyright © 2018, 2012, 2007 Pearson Education, Inc. All Rights Reserved
 What is desired?
• Start from objectives and strategies
– They should be important guides to the actions that
are expected, especially if they are specific
 For example, “Become a leader in the industry”
vs. “15% ROI and 20% sales growth”
– Identify the key actions (KA)
 Actions that must be performed to provide the greatest
probability of success
– Identify the key results (KR)
 Key areas where things must go right (or cannot go wrong)
for the business to flourish

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 What is likely?
• Three questions
– Do employees understand what they are expected to do
(key actions) or to accomplish (key results)?
 lack of direction
– Are they properly motivated?
 lack of motivation
– Are they able to fulfill their desired roles?
 personal limitations
• The discrepancy between what is desired and what is
likely will determine the choice and the tightness of the
management control systems

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 Control system change
• As firms grow, their controls evolve usually
toward:
– Increased formalization of procedures
 for action accountability purposes
and/or
– Development of more elaborate information
(“accounting”) systems
 for results control purposes

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