Management Control Systems

Management control systems consist in the formalized information-based activities for planning, budgeting, performance evaluation, resource allocation, and employee rewards.

Management control systems are broadly defined as the formal routines, reports, and procedures that use information to maintain or alter patterns in organizational activities.

Targets are set in advance, outcomes compared to targets, and variances reported to managers for corrective action. Exhibit X1 lists four control system elements that are often considered the core of management control systems:

  1. the budget and financial reports;
  2. periodic nonfinancial statistical reports;
  3. reward systems;
  4. and quality-control systems.
SubsystemContent and Frequency
Budget, financial reportsFinancial, resource expenditures, profit and loss; monthly
Statistical reportsNonfinancial outputs; weekly or monthly, often computer-based
Reward systemsEvaluation of managers based on department goals and performance, set rewards; yearly
Quality control systemsParticipation, benchmarking guidelines, Six Sigma goals; continuous
Exhibit XI Source: Based on Richard L. Daft and Norman B. Macintosh, “The Nature and Use of Formal Control Systems for Management Control and Strategy Implementation,” Journal of Management 10 (1984), 43 – 66
  • The budget is typically used to set targets for the organization’s expenditures for the year and then report actual costs on a monthly or quarterly basis.

    As a means of control, budgets report actual as well as planned expenditures for cash, assets, raw materials, salaries, and other resources so that managers can take action to correct variances. Sometimes, the variance between budgeted and actual amounts for each line item is listed as a part of the budget. Managers also rely on a variety of other financial reports.
  • The balance sheet shows a firm’s financial position with respect to assets and liabilities at a specific point in time.
  • An income statement, sometimes called a profit and loss statement (P&L), summarizes the company’s financial performance for a given time interval, such as for the week, month, or year.

    This statement shows revenues coming into the organization from all sources and subtracts all expenses, such as cost of goods sold, interest, taxes, and depreciation.
  • The bottom line indicates the net income—profit or loss—for the given time period.

Managers use periodic statistical reports to evaluate and monitor nonfinancial performance, such as customer satisfaction, employee performance, or rate of staff turnover. For e-commerce organizations, important measurements of nonfinancial performance include metrics such as:

  • Stickiness — how much attention a site gets over time.
  • Conversion rate — the ratio of buyers to site visitors.
  • Site performance data, such as how long it takes to load a page or how long it takes to place an order.

E-commerce managers regularly review reports on conversion rates, customer drop-off, and other metrics to identify problems and improve their business. For all organizations, nonfinancial reports typically are computer based and may be available daily, weekly, or monthly.

  1. Richard L. Daft and Norman B. Macintosh, “The Nature and Use of Formal Control Systems for Management Control and Strategy Implementation,” Journal of Management 10 (1984), 43 – 66