Management Control Systems: Meaning and 05 Main Elements of Management Control Systems

Management Control Systems: Meaning and Elements of Management Control Systems

Management control systems (MCS)are structures that are put in place by the management of the business that compares the goals and strategies of the business organization against the actual outcomes of the business. Management control systems can be formal or informal.

In other words, it evaluates how well the organizational functions and the business organization as a whole performs in order to meet the pre-established goals and objectives. Management of the business uses this comparison between expectation and reality to make important management decisions.

Managers in different departments of the business perform different responsibilities in the production process. For the successful completion of their responsibilities, different types of data and information are necessary. The management control system should have the ability to develop, gather and communicate the relevant information to the management in the different levels and different business functions of the organization. Apart from that, MCS should provide both financial and non-financial information required by the different levels of managers.

Management control systems highlight two distinct but majorly interrelated subdivisions of control systems.

1. Organizational structure of the relationship between the organizational units, the relationship between the responsibility centers, measures of performances, and information flow among the responsibility centers.

2. Set of activities, business activities, or decisions that are taken by the organizational managers to establish purposes of the business, allocate resources for each business activities and achieve the expectations from the business.

Elements of Management Control Systems

Five elements that are related to the management control system can be identified.

1. Planning

Business organizations should clearly identify their purpose of existence. Based on this purpose, the vision, mission, goals, and objectives should be defined by the organization. these goals and objectives should be achievable with the available resources and should align with the external factors of the business.

Building and implementing strategies that are helpful in achieving the goals and strategies are important to the business.

2. Establishment of standards

When implementing business strategies and defining the business processes, the managers should establish standards that can measure the success and performance of business activities. These measurements should be realistic and achievable. In addition, these standards and measurements help the business to align its business activities with the goals and objectives of the business.

3. Monitor and evaluate actual performance

Once the performance standards are set in place, the organization should put necessary measures in place to monitor and evaluate the performance at multiple levels of the production process. It helps to identify the performance at each level of the production process and helps the management in strategic decision-making.

4. Compare actual results with the expected results

Once the performance details are obtained, those details should be compared with the expected results. This helps the business to identify the success level of their goal attainment. The comparison of actual and expected performance levels helps the business to focus more on the areas that need improvement. Apart from that, it also helps the organization to align the business activities with the set goals and objectives.

5. Rectify differences and take corrective actions

If there is a difference between the expected result and the actual result of the performance, the business should take immediate measures to rectify the cause for the difference. The reason for the difference should be identified and the corrective actions should be implemented accordingly.

This is a repetitive process throughout the life span of the business as it is highly important for the business to keep its activities aligned with the expectations from the business. Apart from that, since the business environments are changing often, it can create an impact on the business process. To avoid any negative impact on the business, it is mandatory for the business to make constant changes and improvements to survive in the business as well as to achieve competitive advantages.

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