Compiled by Dr Seif R.

Muba: PhD in Economics-HULL, UK; Msc BA (Fin, Bank and Insr); VU-Amsterdam, The Netherlands; BAF-TZ

ACC 5252: Management Control System

Review Questions

1. After going through the unit, what do you analyse as the characteristics of a
management control system?

MCSs core characteristic is the organizing and planning of the relationship between these
different structures and centers of responsibility.

The other core characteristic, on the other hand, is about the processes or set of activities the
organization takes in order to achieve its objectives. This part of the system refers to the
steps the organization, and especially its management, needs to perform in order to set
objectives, allocate resources to achieving these objectives, and to achieve the objective.

ANSWEAR

1. Delegate decision authority

2. Performance evaluate and measurement and systems

3. Compensation and Reward systems

2. Can you give a sketch of the formal management control process?

3. Discuss the nature and scope of the management control process making appropriate
reference in your answer to: (a) Organizational structure (b) The planning and control
function of management (c) The principle of management by objective.

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4. What is the role-played by accounting system and information handling systems in the
formal management control process?

 A strategic plan implements the organization’s goals and strategies. All available
information is used in making this plan.

 The strategic plan is converted to an annual budget that focuses on the planned
revenues and expenses for individual responsibility centres.

 Responsibility centres are also guided by a large number of rules and formal
information assigned to them and their outcomes are measured and reported.

 Actual results are compared with those in the budget. In case of satisfactory
performance, there is feedback to the responsibility centre in the form of praise or
other reward. If not, the feedback leads to corrective action in the responsibility and
possible revision of the plan.

5. One of the criticisms frequently levelled at industrial management is that although control
systems are introduced into units, these are rarely integrated with one another. Discuss the
statement in the context of goal congruence.

6. What do you analyse as the impact of the information system on the Management Control?

 Instant access use

 Multi targeted communication

 Costless communication

 Ability to display image

 Shift power and control to the individual

Helps to achieve a higher level of efficiency: Managers have the information needed to
identify a company's strengths and weaknesses.

Improves the quality of decisions: Better availability of information reduces uncertainty

and lets managers make more rational decisions based on reliable data.

Promotes better communications between departments in a workplace: When managers,

department heads and employees are sharing the same information, there is better

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communication between them to identify problem areas and find mutually agreeable
solutions.

Provides a platform to explore different scenarios for various alternatives and economic
environments: Management is able to explore various alternatives to see the possible results
before making decisions and commitments.

Improves employee productivity: Employees are more productive because they don't have
to spend time gathering the data that management wants. A well-designed MIS will gather all
the data without any more input from employees.

Strengthens a company's competitive advantage: Running a more efficient business by

reducing and eliminating weaknesses and non-performing areas increases a company's
competitive advantage over its rivals.

Reveals more data about customers: With more data about the needs of customers,
management is better able to improve customer service and design more effective marketing
and promotional campaigns.

A management information system is essential for any small business owner who is serious
about improving the performance of his company. Without a good MIS, managers are
managing by trial-and-error rather than making intelligent decisions based on a thoughtful
analysis of data.

7. How do you describe formal aspects of management control systems to include a generic
set of five mutually supportive management subsystems?

8. Examine the role played by informal control process in the development of management
control system.

9. Do you approve of disagreements about the domain of management control systems exist
between different experts in the field? Why or why not?

10. Control systems play an important role in service as well as manufacturing organizations.
Do formal and informal systems play an important role in a hospital? What steps should the
hospital management take to ensure the effective implementation of management control
system?

11. How can you relate goals and strategies? Give examples from your routine life.

12. Is there any significant difference between strategic planning and management control?

13. What is the difference between task/operational control and management control?

14. “Strategies are developed by marketing its core competencies with industry
opportunities”. Discuss the statement.

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15. Briefly explain the Formal Control Process and role played by Accounting Systems and
Information Handling System.

16. What are the tools for implementing strategy?

17. Can you trace the evolution of control system in an organisation? If yes state how and if
not state why?

18. What is a business policy and what is its relationship to the business objective? How
should a new policy be established or an existing policy altered?

19. What are the principles applicable to the formation and use of company objectives as an
essential feature of the management control process?

20a. “The essence of decentralisation is the freedom to make decisions”. Do you agree?

20b. Discuss the benefits of decentralisation.

21. What are the problems and pitfalls of decentralized organisation?

22. Profit centre is often viewed as a synonym for decentralized subunit. Do you agree? Give
reasons.

23. Explain various Managerial Styles? How many styles can be identified? How managerial
style is important to the design of Control System?

24. What do you mean by Corporate Culture? How many different types of corporate culture
can be identified? How Corporate Culture affect the design of Control System?

25. What are the Control Systems in a Functional Organisation, Business Unit Organisation
and Matrix organisation?

26. How external environment is important to the design of Control systems? In Tanzania
situation internal environment plays a more dominant role as a determinant of the emergent
structure, why?

27. What are corporate level strategies and business unit strategies? Who are involved in
framing such strategies and what are the key strategic issues?

28. Analyse the difference between reporting under responsibility accounting and budgeting.

29. List out the steps for introducing Control through Responsibility Accounting.

30. “If there are high points, then there also are loopholes in Responsibility Accounting”.
Substantiate.

31. Can control of all costs and revenues be done at some level of responsibility within the
company?

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32. Elucidate the following: (i) Responsibility Accounting for Cost Centres (ii) Responsibility
Accounting for Profit Centres (iii) Responsibility Accounting for Investment Centres

33. Describe the basic types of responsibility centres. Correlate the measurement of inputs
and outputs with reference to different types of responsibility centres.

34. Describe the merits and demerits of using profit centre and cost centre (a) as ways of
measuring management performances and (b) as an aid to planning and control at all levels.

35. How do you describe the bench marking for evaluation of performance of responsibility
centre?

36. What kind of performance is measured in profit centres? What are the criteria for
evaluating that performance?

37. Explain why a decision centres should be treated as a profit centre rather than as a cost
centre.

38. Explain briefly the elements of profit centre performance.

39. Why must profit centres be evaluated and/or ranked? What problems arise when undue
emphasis is placed on the comparison of segment profit performance?

40. Why distinction should be made between the performance of the division manager and
the performance of the division as an investment by the corporate?

41. Analyse the concept of responsibility accounting. What are the prerequisites and
limitations of responsibility accounting?

42. Why is performance measurement required in Management Control System?

43. What are the financial performance measures?

44. What are the non-financial performance measures?

45. What are the information relationships at various levels of management?

46. How can accounting based performance measure be designed?

47. How just-in-time technique influences Management Control Process?

48. How does Computer Integrated Manufacturing influence Management Control Process?

49. What is benchmarking and bench-trending? Describe the process in benchmarking.

50. Explain the Balance Score Card. Explain, why it is called a Balance Score Card and what
are its limitations?

51. How do you describe formal aspects of management control systems to include a generic
set of five mutually supportive management subsystems?

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52. What role has informal control process in the development of management control
system?

53. What role management compensation plays in a management control system?

54. What are the characteristics of incentive compensation plans?

55. What are the long-term incentive plans?

56. How is incentive for corporate officers determined, including the CEO?

57. Describe the wide range of options available to business unit managers in developing an
incentive compensation package.

58. What should be the size of bonus relative to salary?

59. In deciding incentive, what performance criteria should be considered for the
responsibility centre? How should bonus be determined?

Self-Assessment

Fill in the blanks Vs Multiple Choice

1. A .......system....................................is an aggregate of machines and people that work

toward a common objective.

2. In a management control system........……………., data/information is typically fed back

to managers of the various system phases.

3. A system is an aggregate of..... Machines................. And ......... people................ that work

toward a common objective.

4. Output is...............measured........... And.... Compare........................... against a plan.

5. Every control system has at least four elements, viz. .... a detector or sensor, an assessor, an
effector and a communication network.........................,

6. The controller’s main responsibility is to ensure that the systems throughout the
organization are .............................. and compatible with one another.

7. Information system should be properly designed and managed by the.. professionally

trained persons...........................

8. In case of ............... satisfactory.................. performance, there is feedback to the

responsibility centre in the form of praise or other reward.

9. Strategic planning occurs at ........ top management levels.................. management levels;

task control at the ........lower................ levels in the organization and management control is
in .....between...................... .

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10. Although systematic, the management control process is not........... Means mechanical; it
involves interactions among individuals, which cannot be described as mechanical. Managers
have personal as well as organizational goals.......................

11. Management control system includes both .................. and ....................... performance
measures.

12. ......................... control calls management attention to organizational developments.

13. The planning process is more important in ............................. while the control process is
more important in .............................. .

14. Management Control does not necessarily mean that actions should correspond to
a .......................... .

15. Designing of the system is to be carried out after considering the ...........................
requirements of different levels of management.

16. The strategic plan is converted to an annual budget that focuses on the planned revenues
and expenses for individual ............................... .

17. .................................... refers to the set of common beliefs, attitudes and norms that
explicitly or implicitly guide managerial actions.

18. …………….. focus on long range planning is least systematic; uses the rough
approximation of the future.

19. …………… is one of the several types of planning and control activities in an
organization.

20. …………………. is the process of deciding the goals of the organization and the
strategies for attaining these goals.

21. ………………. considerations is less important in the strategic formulation process.

22. Management control is the process by which managers influence other members of the
organization to implement the organization’s ………………… .

23. ………………. means that as far as feasible, the goals of an organization’s individual
members should be consistent with the goals of the organization itself.

24. ……………………….is transaction oriented i.e., it involves the control of individual

tasks.

25. Human beings are used in these tasks only if they are ………………than computers or
other control devices.

26. A ……………….implements the organization’s goals and strategies.

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27. The ……………..responsibility for such system is to ensure that system throughout the
organization is efficient and compatible with one another.

28. ……………is the weakest when the person perceives an incentive as being either
unattainable or too easily attainable.

29. …………..equal to a set percentage of profits.

30. ……………………….plan has the disadvantage of not making the amount available to
the executives in the year when earned.

31. A ………………..right is a right to receive cash payments based on the increase in the
value of shares from the time of the award until a specified future date.

32. Under ………………………., compensation comes first and performance comes later,
under performance-based pay, performance comes first and compensation comes later.

33. In a ………………….., where business units are highly interdependent, the manager’s
bonus is tied primarily to corporate performance, since inter-unit co-operation is critical.

34. The ……………….. Process in complex organisations tends to focus the limited time of
managers upon the issue and data that are important for strategic and operational decision
making.

35. ………………… includes base pay, benefits, recognition awards and incentives.

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Compiled by Dr Seif R. Muba: PhD in Economics-HULL, UK; Msc BA (Fin, Bank and Insr); VU-Amsterdam, The Netherlands; BAF-TZ

The Case Studies Questions:

Question1:

MCS at Little Friends Electronic Corporation

Little Friends Electronic Corporation, USA, was a defense contractor, which had dealt with
Canada’s defense department on several occasions. John Martins, president of the
corporation, went to Canada for a meeting with top authorities of the defense department. At
the meeting, the secretary of the defense department made a speech emphasizing the need for
tighter control by defense contractors, especially at a time of inflation. The secretary said that
the defense department had decided to pay more attention to the management practices of its
defense contractors, and would consider favourably only those companies which had
effective control systems.

On his return to the US, Martins briefed his Vice President (administration) on the secretary’s
speech. He asked the Vice President to install an effective control system in the company.
The Vice president turned to corporate controller asking him to make arrangements to install
an effective control system. The controller met his staff assistant and ordered him to search
for space literature that would guide them in installing an effective control system. He asked
his assistant to submit a report on his work within a week. At the end of the week, the
assistant came back to the controller saying that he was not able to find literature pertaining
to control systems although he had reviewed dozens of books and journals. The controller
was unhappy with this excuse as he had to submit a report to the vice president the next day.

Required:

1. Do you think the staff assistant’s approach to finding literature on installing a control
system is right? Support your answer with reasons.

2. If you were the staff assistant, what would your suggestions, for an effective control
system be?

Question 2:

Victor Automobiles

Victor Automobiles was established in the year 2005 and employed more than 3,000 people
in its production and operations plants. Its four plants were located at Chalinze, Newala,
Kigoma and Bukoba. The operations manager of the Kigoma plant, Mr Kiboko was
considered to be one of the toughest bosses to work with. He gave the employees stringent
deadlines and never bothered to find out if employees were having any difficulty in
completing their work. The employees felt the environment was too tense and were unhappy
that there was no career growth. There was a heavy turnover of employees at the Kigoma
plant.

Sensing that something was wrong, the top management transferred Mr Kiboko to another
branch, and appointed Mr Shwari as the operations manager of the unit. Mr Shwari had 20

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years of experience as an operations manager. His style of control was different from that of
Kiboko’s. He set strategies in consultation with the workers and designed plans to solve
problems jointly. He did not believe in blaming a particular individual for its occurrence.
When he found that an employee’s performance was moving in an undesirable direction, he
met the employee personally and looked for the reasons for this. He then developed an
appropriate solution to the problem. The reward system under Mr Shwari was not based on
one or two specific measures of performance, but on the employee’s overall performance. His
style was not to punish employees for past actions but to help them improve their
performance in the future.

He believed in the philosophy of management by walking around, and made it a point to

spend some time talking to employees and listening to their problems. He felt that such
informal communication would help boost the confidence of the employees in their
employers.

Mr Shwari held the view that through MBWA, the values and culture of the organization
could be instilled in the employees and the problems of the employees too could be sorted
out.

Requirement:

1. The managerial styles used by Kiboko and Shwari were different. What effect do these
managerial styles have on control systems?

2. The case discusses managerial styles and their impact on control systems. What are the
various factors a manager has to consider before finalizing on a particular style?

Question 3:

Nataraji Company

Nataraji Company is a highly diversified company which grants its division executives a
significant amount of authority in operating the divisions. Each division is responsible for its
own sales, pricing, production, and cost of operations and the management of accounts
receivables, inventories, accounts payables and use of existing facilities. Cash is managed by
Corporate headquarters, all cash in excess of normal operating needs of the divisions is
transferred periodically to corporate headquarters for redistributions or investment.

The division executives are responsible for presenting requests to corporate management for
investment projects. The proposals are analyzed and documented at corporate headquarters.
The final decision to commit funds to acquire equipment, to expand existing facilities, or for
other investment projects is necessitated by Nataraji’s Capital allocation policy.

The corporation evaluates the performance of division executives by the return on investment
(ROI) measures. The asset base is comprised of fixed assets employed plus working capital
exclusive of cash.

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The ROI performance of division executive is the most important appraisal factor for salary
changes. In addition, the annual performance bonus is based on the ROI results, with increase
in ROI having a significant impact on the amount of the bonus.

The Nataraji Corporation adopted the ROI performance measure and related compensation
procedures about 10 years ago. The company did so to increase the awareness of divisional
management of the importance of the profit asset relationship and to provide additional
incentive to the division executives to seek investment opportunities.

The company seems to have benefited from the program. The ROI for the corporation as a
whole increased during the first years of the program. Although the ROI has continued to
grow in each division, the corporate ROI has declined in recent years. The corporation has
accumulated a sizeable amount of cash and short – term marketable securities in the past 3
years.

The corporate management is concerned about the increase in the short-term marketable
securities. A recent article in a financial publications suggested that the use of ROI was over
emphasized by some companies, with results similar to those experienced by Nataraji.

Requirements:

1. Describe the specific actions divisions managers might have taken to cause the ROI to
grow in each division but decline for the company. Illustrate your explanation with
appropriate examples.

2. Explain using the concepts of goal congruence and motivation of division executives, how
Nataraji’s over emphasis on the use of the ROI measure might result in the recent decline in
the company’s return on investment and the increase in cash and short-term marketable
securities.

3. What changes could be made in Nataraji Company’s Corporation policy to avoid this
problem? Explain your answer.

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