management control system
a means of gathering and using information to aid and coordinate the process of making planning- and control decisions throughout the organisation and to guide employee behaviour. the goal is to improve the collective decisions within an organisation.
management control system levels
- total-organisation level (stock price, net income, etc.)
- customer/market level (customer satisfaction, etc.)
- individual-facility level (material costs, labour costs, etc.)
- individual-activity level (time taken for receiving and storing goods, etc.)
formal management control system
includes explicit rules, procedures, performance measures and incentive plans that guide the behaviour of its managers and employees. it consists of several systems.
informal management control system
includes aspects such as shared values, loyalties, and mutual commitments among members of the organisation and the unwritten norms about acceptable behaviour for promotion that also influence employee behaviour.
motivation
the desire to attain a selected goal (the goal-congruence aspect) combined with the resulting drive towards that goal (effort aspect).
goal congruence
exists when individuals and groups work towards the organisational goals that top management desires. so, managers working in their best interests take actions that further the overall goals of top management.
effort
the exertion towards a goal.
decentralisation
the freedom for managers at lower levels of the organisation to make decisions. total decentralisation means minimum constraints and maximum freedom for managers at the lowest levels of an organisation to make decisions.
total centralisation
means maximum constraints and minimum freedom for managers at the lowest levels.
benefits of decentralisation
- creates greater responsiveness to local needs
- leads to quicker decision-making
- increases motivation
- aids management development and learning
- sharpens the focus of managers
costs of decentralisation
- leads to suboptimal decision-making
- results in duplication of activities
- focuses managers’ attention on the subunit rather than the organisation as a whole
- increase costs of gathering information
suboptimal decision-making/incongruent decision-making
arises when a decision’s benefit to one subunit is more than offset by the costs or loss of benefits to the organisation as a whole. it may occur when (1) there’s a lack of harmony or congruence among the organisational goals, subunit goals, and the individual goals of decision-makers or (2) when no guidance is given to sub-unit managers concerning the effects of their decisions on other parts of the organisation. it is most likely to occur when sub-units are highly interdependent.
intermediate product
a product transferred from one sub-unit to another sub-unit of the same organisation. this product may be further processed and sold to an external customer.
transfer price
the price one sub-unit of an organisation charges for a product or service supplied to another sub-unit of the same organisation. it creates revenue for the selling sub-unit and a purchase cost for the buying sub-unit, affecting operating profit for both sub-units.
market-based transfer prices
upper management may choose the price of a similar product or service publicly listed or the external price that a sub-unit charges to outside customers.
cost-based transfer prices
upper management may choose a transfer price based on the costs of producing the product in question. the costs used can be actual costs or budgeted costs.
negotiated transfer prices
the sub-units are free to negotiate the price between themselves and are then to decide whether to buy and sell internally or deal with outside parties. they are often employed when the market prices are volatile and change constantly.
autonomy
the degree of freedom to make decisions.
transfer prices criteria
- promote goal congruence
- induce managers to exert a high level of effort
- help top managers evaluate the performance of individual sub-units
- preserve autonomy of subunits if top managers favour a high degree of decentralisation
criteria for optimal decisions in market-based transfer pricing
- the intermediate market is perfectly competitive
- interdependencies of sub-units is minimal
- there are no additional costs or benefits to the corporation as a whole in using the market instead of transacting internally
perfectly competitive market
exists when there is a homogenous product with equivalent buying and selling prices and no individual buyers or sellers can affect those prices by their own actions. this promotes goal congruence, management effort, and autonomy.
‘distress prices’
when a market price temporarily drops well below its historical average.
cost-based transfer prices
- full-cost base
- splitting the difference between the maximum transfer price one division is willing to pay and the minimum transfer price the other division wants on some equitable basis.
dual pricing
using two separate transfer-pricing methods to price each interdivisional transaction. eg. when the selling division receives a full cost mark-up price and the buying division pays the market price. it reduces goal congruence problems.
