ASSIGNMENT

MANAGEMENT CONTROL SYSTEMS

“RENDELL COMPANY”

by:

Taufik

Problem Identification

The profit growth rate of Rendell Company has been declining considerably within its 50

years of operation. There are possible events on falsified data in regard to budgeting reports,

inaccurate information and goal incongruence between manager goals and corporate controller

goals. On one side, the goal of corporate controller is to minimize budget allocation and

maximize the profit; while the goal of the division manager is to optimize the performance with

any means possible. The controller will always try to minimize what the manager is asking for,

while the manager will always try to optimize budget allocation for his/her division to function.

Another challenge faced by the company with the current controller organization was the

difficulties in introducing more modern control techniques. Rendell corporate controller thinks

that the Division Manager-Controller relationship is the main problem to be resolved, and

especially interested in the controller organization of Martex Company.

The Martex Organizational Philosophy

The basic concept of controller’s position is not only as an administrative function

concerned largely with accounting detail, also as an important position in management as it

relates to costs and profitable operation of the business as a whole. The success of Martex

controller organizations and its relations with divisional managers appear to be the result of

Managers and controllers having grown up with the arrangement and accepting it long before

they arrived at their managerial position. Other than that, Martex also implement a uniform and

centralized accounting system, having a predetermined financial objectives, and profit sharing

mechanism by Managers and Controllers.

The strength of Martex organizational control is related to the unbiased and objective

reports on division budgets and performance from division controllers to the corporate controller.

With this in mind, corporate controller is more confident in reports given by the division

controllers, able to minimized fats in expense budget, and easier to implement new control

programs. However, there are some drawbacks faced by Martex, such as the difficulty to

implement change in organizational structure in a more diversified operation, and the possibility

for division managers to isolate division controllers from the management team as they might be

seen as “spy from the front office”. Furthermore, the sudden change may lead to organizational

dysfunction and inefficiencies due to the intensified conflict between division mangers and

division controllers.

Rendell and Martex Controller Relationship

Both Rendell and Martex implement the business unit controller. The basic difference

between Rendell and Martex in regarding to controller relationship is that in Rendell, the

divisional controller works primarily for the division manager which creates asymmetrical

information between managers at division level and those at corporate level regarding to budget

and performance. Meanwhile in Martex, the divisional controller works primarily to corporate

controller that can lead to goal incongruence between divisional managers and controller.

Few Things Rendell Should Consider

The relationship between corporate controller and divisional controller should be such that

there should be no biased information provided by the divisional controller to the corporate

controller. Divisional controller should be advised that they have high loyalty to the corporate

controller and given empowerment as to maintain their operations to regard the budget well.

Corporate controller must address trust to each divisional controller to let them perform daily

tasks in an efficient manner.

However, the budget problem still needs much addressing. Currently, divisional controllers

act as staff when it comes to budgeting. They should play a more active role in budgeting in

meetings with the corporate controller. This is to further explain the requirements from the point-

of-view of the divisional controllers and quite possibly explain the causes of discrepancies in the

budget.

Recommendation

A change in organizational structure takes time and costly. However, it should be noted

also that the controller is expected not to condone or participate in the transmission of misleading

information or in the concealment of unfavorable information. Therefore, it is recommended for

Rendell Company to modify its current organizational structure and implement, implement some

of the models from Martex, and create more rigorous control systems to address the budgeting

issues. There are few things can be conducted by Rendell:

- Adopt Dotted line relationship with the corporate controller, in which the divisional

controllers report directly to division managers, but they have a functional or “dotted line”

responsibility to the corporate controller.

- Rendell can implement a uniform and centralized accounting system to provide a common

basis for all divisional financial report and analyses. This can help maintaining the bond of

confidence between division managers and controllers.

- Rendell can implement predetermined financial objectives involving divisional managers and

corporate controller. This will give both managers and controllers the common goal to be

achieved.

- Create a profit sharing mechanism that counts the compensation for divisional controllers

from business unit performance and from corporate performance.

- Divisional controller should be considered as chief financial officers of their business unit.

This will position them as the team players instead of considered as a “spy”. To protect their

existence, divisional controller can be appointed only from candidates the corporate CFO first

approves, which can also be removed only by corporate CFO or by corporate CFO’s consent.

By implementing recommendations above, divisional controller can still be considered as

member of the team in business unit, minimizing or eliminating biased and subjective reports on

division budgets and performance to the corporate controller, less fat in expense budget and

corporate controller is more confident in reports given by the division controllers.