1. Management Control
System
Presented by:
Ankit Kumar Keshari
MBA (marketing) IInd sem.

2. Management Control System
Is the process of evaluating,
monitoring and controlling the various
sub-units of the organization so that
there is effective and efficient
allocation and utilization of resources
in achieving the predetermined goals

3. Characteristics of Control
System In Organization
• Involvement of people
• Information about the actual state of
the organization is compiled by people.
• It is compared by people.
• With the desired state decided by
people.
• For significant difference, a course of
action is recommended by people
• Action taken by people

4. • The management decides the desired state
or standards against which performance is
compared.
• It decides what the organization plans to
achieve in a given time framework which is
known as Planning Process.
• Actual Performance is compared to Planned
Performance in control, so planning and
controlling are interlinked and are known as
P&C systems

5. Functions
• Planning activities of an organization
• Coordinating activities of an organization
• Communication information to different
levels of the hierarchical structure
• Evaluating information and deciding the
actions to be taken
• Influencing people to change their
behavior.

6. Responsibility CentresResponsibility Centres
A responsibility centre is an organisation
unit that is headed by manager who is
responsible for its activities.
• delegation of responsibility for specific to
successive lower levels of organisation.
• motivation of the level of management to
which a certain task has been delegated.
• measurement of the achievement of
specified objectives.

7. The key consideration in determining the
responsibility centre is
• ability to control cost or revenue
• determining the question of controllability
• evaluation of responsibility centre as per
predetermined criteria

8. The responsibility centres may be classified
as
• Revenue Centres
• Expense Centres
• (III) Profit Centres
• (IV) Investment Centres

9. Revenue Centres
• In a revenue centre, output (I.e., revenue) is measured in
monetary terms, but no formal attempt is made to relate
input (I.e., expenses or cost) to output.
• The main focus of management’s efforts will be on
revenue generated by it.
• The sales department is an example for a revenue
centre.
• The effectiveness of the centre is not judged by how
much sales revenue exceeds the cost of the centre.
• Sales budget are prepared for revenue centre and
budgeted figures are compared with actual sales.
• Generally the costs are not related to output.

10. Expenses Centre
• It is the lowest level of responsibility centre in an
organization.
• Its manager is basically responsible for production of a
product or service; his decision authority relates to how
human resource, machinery and materials should be
used to produce the product or service.
• Expense centre manager has no control over revenues,
profits or investment.
• He has no control over marketing decisions or
investment decisions.
• Total performance of an expense centre manager
depends on how effectively and efficiently an expense
centre is operated.

11. • Effectiveness of an expense centre manager will depend
on a host of non-financial parameters such as
maintaining quality level of output, compliance with
production schedules and targets, maintaining morale of
the workers and so on.
• Normally, separate reporting systems are used to report
effectiveness.
• Efficiency is judged in terms of financial performance.
• It is measured and reported by the responsibility
accounting system.
• Evaluation of the financial performance of an expense
centre manager is by comparing the actual expenses of
the centre against the budgeted expenses.

12. Profit Center
• A profit centre is an organizational unit responsible for
both revenues and costs.
• Profit centre manager has no control over the investment
in the centre’s assets.
• Managers are concerned with both the production and
marketing of the products.
• Activities of the manager is much more broader than that
of a revenue centre manager because of the
responsibility to produce the product most efficiently.
• Profit centre’s performance measured in terms of profit.
• It enhances profit consciousness
• Example:division of a company that produces and
markets different products.

13. Investment Center
• An investment centre is responsible for the
production, marketing and investment in the
assets employed in the segment.
• An investment centre manager decides on
aspects such as the credit policies, inventory
policies, and within broad framework.
• Investment centre manager responsible for profit
in relation to amounts invested in the division.
• Financial performance of the manager of the
division is measured by comparing the actual
with projected rate of return on investments of
the centres

14. AUDITING
• Audit is the activity of examination and
verification of records and other evidence
by an individual or a body of persons so
as to confirm whether these records and
evidence present a true and fair picture of
whatever they are supposed to reflect.
Audits are most commonly used in the
accounting and finance functions

15. Categories Of Audits
Audit category Brief description
Financial
statement audit
•Gives an opinion on the accuracy of the financial
statements
•Ensures compliance with the relevant accounting
standards and reporting framework
Internal audit •An independent appraisal function established within
an organization to examine and evaluate its activities
as a service to the organization
•Need not be limited to books of accounts and related
records
Fraud auditing and
forensic audit
•Deters, detects, investigates, and reports fraud
•Forensic: related to the legal system, especially
issues of evidence
Operational audit •Audits operational aspects of the enterprise
•Quality audit, R&D audit, etc

16. Audit category Brief description
Information
systems audit
•Audit of computer systems
•Checks whether the computer system safeguards
assets, maintains data integrity, and contributes to
organizational effectiveness and efficiency
Management audit •Audit of the management, as a tool for evaluation
and control of organizational performance
•Examines the conditions and provides a diagnosis of
deficiencies with recommendations for correcting
them
Social audit •Audit of the enterprise's reported performance in
meeting its declared social , community, or
environmental objectives
Environmental
audit
•Environmental compliance audit: a checking
mechanism
•Environmental management audit: an evaluation
mechanism

17. The auditing process
• Staffing the audit team
• Creating an audit project plan
• Laying the ground work
• Conducting the audit
• Analyzing audit results
• Sharing audit results
• Writing audit reports
• Dealing with resistance to audit
recommendations
• Building an ongoing audit program

18. Benefits of Auditing
• Identify opportunities for improvement
• Identify outdated strategies
• Increase management’s ability to address
concerns
• Enhance teamwork
• Reality check

19. TRANSFER PRICING
• A transfer is referred to the movement of
goods from a responsibility center to
another, within the same company
• Different types of responsibility center,
belonging to different organizational
levels, are involved in the transfers

20. Many organizations set up business units that
cater to the needs of other business units within
their own fold. For example, one business unit
may manufacture components that are used by
another business unit to assemble the final
product.
• Here , there is a transfer of goods from the first
business to the second and the concept of
transfer pricing comes into play.

21. • Decentralization is one of the approaches that
many large organizations use to attain
operational effectiveness. However , the main
challenges in operating in a decentralized
manner lie in designing responsibility structures
and formulating appropriate policies and
methods to determine the performance of the
responsibility centers.
• The technique of transfer pricing plays an
important role in the smooth functioning of
responsibility structures in such an organization

22. Objectives of TP policy
• Goal congruence:- the divisional manager in
maximizing the profits of his division, should not engage
in decision-making that fails to optimize the
organization’s performance.
• Performance appraisal :-it should aid in reliable and
objective assessment of the value added activities by
profit centers toward the organization as a whole
• Divisional autonomy:- each divisional manger should
be free to satisfy the requirements of his profit center
from internal or external sources. There should be no
interference in the process by other divisions like buying
centers and selling centers

23. BUDGETS
• Budgets are business plans that are stated in
quantitative terms and are usually based on
estimations.
• These plans aid an organization in the
successful execution of strategies.
• Due to the uncertainties in the business
environment and / or due to wrong estimation,
there may be significant deviations between the
a c t u a l s and the plans.
• Budgeting as a control tool, provides an action
plan for the organization to ensure least
deviations

24. • Budgets are used to give an overview of
the organization and its operations. They
are useful in resource allocation whereby
resources are allocated in such a way that
the processes which are expected to give
the highest returns are given priority.
• Budgets are also used as forecast tools
and make the organization better
prepared to adapt to changes in the
environment

25. • Budget preparation requires the participation of
managers from different functions / departments.
This helps in integrating the tactical and
operational strategies of the departments with
the corporate strategy of the organization.
• Budgets act as a means to verify the progress of
the various activities undertaken to achieve the
planned objectives. The verification is done by
comparing the a c t u a l s against standards

26. • They help in the delegation of authority
and allocation of responsibility and
accountability to more people in an
organization. They thus promote division
of labor, which , in turn, promotes the
process of specialization. Functional
specialization leads to the overall
efficiency of the organization

27. Steps in Budget Formulation
• Creating a budget department or appointing a budget
controller
• Developing guidelines for budget preparation
• Developing budget proposals at department/business
unit level
• Developing the budget for the entire organization
• Determining the budget period and key budgets factors
• Benchmarking the budget
• Budget review and approval
• Monitoring progress and revising the budgets

28. Types of Budgets Characteristics Examples
Appropriation budget A ceiling is set for certain
discretionary expenditures
Based on the management
decision
Training, advertising, sales
promotion and R&D
Flexible budget A static amount is established
for discretionary and committed
fixed costs and a variable rate is
determined per unit of activity
for variable cost
The static part: Salaries,
depreciation, property taxes,
and planned maintenance. The
flexible part : direct material,
direct labor, and variable
overhead .sales commission
Capital budget Decisions regarding potential
investments are made using
discounted cash flow
techniques
New plant and equipment
Master budget A comprehensive plan is
developed for all revenue and
expenditure
All revenue and expenditures
for any organization

29. Techniques-controls
Control techniques provide managers
with the type and amount of information
they need to measure and monitor
performance.

30. Financial controls
 Financial statements provide management with
information to monitor financial resources and
activities.
 Theincome statement shows the results of the
organization's operations over a period of time, such
as revenues, expenses, and profit or loss.

31.  Financial audits, or formal investigations, are
regularly conducted to ensure that financial
management practices follow generally accepted
procedures, policies, laws, and ethical guidelines.
Audits may be conducted internally or externally
Financial ratio analysis examines the
relationship between specific figures on the
financial statements.

32. •Liquidity ratios measure an organization's ability to
generate cash.
•Profitability ratios measure an organization's ability
to generate profits.
•Debt ratios measure an organization's ability to pay
its debts.
•Activity ratios measure an organization's efficiency in
operations and use of assets.

33. Marketing controls
Marketing controls help monitor progress toward
goals for customer satisfaction with products and
services, prices, and delivery. The following are
examples of controls used to evaluate an
organization's marketing functions:

34. Market research gathers data to assess
customer needs—information critical to an
organization's success. Ongoing market research
reflects how well an organization is meeting
customers' expectations and helps anticipate
customer needs. It also helps identify competitors.

35.  Test marketing is small-scale product
marketing to assess customer acceptance.
Using surveys and focus groups, test
marketing goes beyond identifying general
requirements and looks at what (or who)
actually influences buying decisions.

36.  Marketing statistics measure performance
by compiling data and analyzing results. In most
cases, competency with a computer spreadsheet
program is all a manager needs. Managers look
at marketing ratios, which measure profitability,
activity, and market shares, as well as sales
quotas, which measure progress toward sales
goals and assist with inventory controls