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Segment margin for Home Made Ltd., for the year 2007-08 is
(a) Rs.730 lakhs
(b) Rs.330 lakhs
(c) Rs.230 lakhs
(d) Rs.470 lakhs mark
(e) Rs.300 lakhs. (2 s)
<Answe
78Which of the following is/are true about Market value to book value ratio? r>
.
I. It is desirable to have a market value to book value ratio greater than 1.
II. The market value to book value ratio is an indication of the organization’s contribution to
wealth creation in society.
III. This ratio measures the rate of return earned by shareholders.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above mark
(e) All (I), (II) and (III) above. (1 )
<Answe
79Which of the following provides a more realistic picture of the performance of the organization by r>
. adjusting for accounting differences and inflation?
(a) MVA
(b) EVA
(c) CFROI
(d) SPM mark
(e) NOPAT. (1 )
<Answe
80For Aligator Ltd., Profit before Interest and Taxes (PBIT) is Rs. 80 lakhs, Capital is Rs. 200 lakhs, r>
. Cost of capital is 15% and tax rate is 50%. The Economic value added for Aligator Ltd., is
(a) 10
(b) 40
(c) 42
(d) 30 mark
(e) 12. (2 s)
<Answe
81Management style plays an important role in influencing the behavior of the employees in an r>
. organization. Managers differ in their styles of managing employees. Which of the following
manager allows subordinate participation in decision-making and allows them the freedom to decide
their work pattern?
(a) Autocratic
(b) Autocratic directive
(c) Autocratic permissive
(d) Democratic permissive mark
(e) Democratic directive. (1 )
<Answe
82Results controls is among the management controls based on the object of controls. Which of the r>
. following are false regarding ‘Results’ controls?
I. Results controls are directly focused on the output of actions.
II. Costs involved in results controls are more than in action controls.
III. Results controls can be used best only in areas which are quantifiable.
IV. Results controls restrict creativity as they place limits on actions.
(a) Both (I) and (II) above
(b) Both (II) and (IV) above
(c) Both (III) and (IV) above
(d) (I), (II) and (III) above mark
(e) (II), (III) and (IV) above. (1 )
<Answe
83Traditional budgets are generally set at the beginning of every financial year and are followed till r>
. the end of the year, even if the information used becomes outdated. As a result, many organizations
have shifted their focus to rolling budgets. Which of the following is/are true about rolling
budgets?
I. Rolling budgets consider key factors like orders, sales, costs and capital expenditures, which
can be collected and collated easily.
II. Rolling budgets, when used properly, help the top management in predicting the changes that
are possible in performance beforehand and thus help them influence the expectations of the
stakeholders.
III. Rolling budgets help organizations to control inaccuracies regarding projections and in turn
minimize the discrepancies between the standards and the actuals.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (III) above mark
(e) All (I), (II) and (III) above. (1 )
<Answe
84In which of the following management audits, auditors are asked to identify the gaps between the r>
. organization’s existing policies and objectives and its actual practices?
(a) Complete management audit
(b) Compliance management audit
(c) Program management audit
(d) Functional management audit mark
(e) Efficiency audit. (1 )
<Answe
85Which of the following is/are the ethical issue(s) in Human Resource Management? r>
.
I. Lack of job security and increased risk of unemployment.
II. Excessive scrutiny and control.
III. Discrimination.
IV. Safety of employees.
(a) Only (III) above
(b) Both (I) and (II) above
(c) Both (II) and (III) above
(d) Both (III) and (IV) above mark
(e) (I), (II) and (III) above (1 )
<Answe
86Which of the following considerations are important while using financial ratios as a control r>
. mechanism?
I. Financial ratios should be analyzed from an industry perspective.
II. The use of ratios as a tool of control should not be limited to the end of the financial period or
year.
III. The analysis of financial ratios will indicate the quantum of cash being generated from
business operations.
IV. The financial ratios are calculated in order to analyze the results of the organization’s
operations over a period of time.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) Both (III) and (IV) above
(d) (I), (II) and (III) above mark
(e) All (I), (II), (III) and (IV) above. (1 )
END OF QUESTION PAPER
Suggested Answers
Management Control & Information Systems - I (MB2F3): October 2008
Answer Reason
1. D Open loop controls are said to be exist when an organization has a predetermined <
plan for achieving a set goal/objective, but does not have a system for modifications
or adjustments to its plan once the planned activities have commenced.
Hence the answer is (d).
2. E Functional organization structure is that the employees are segregated based on <
their expertise and are able to specialize in the jobs assigned to their respective
departments.
Hence the answer is (e).
3. C Economic control is not one of the types of control suggested by Geert Hofstede for <
public/non-profit organizations.
Hence the answer is (c).
5. A The occupancy level is a primary yardstick for restaurants as it will reflect the <
acceptability of the menu offerings, location effectiveness, the ambience
acceptability and the quality of the dining experience.
The secondary yardsticks are the number of repeat customers and frequency of
repeat customers.
Hence the answer is (a).
6. E Generally, the revenue centers would formulate their budgets first. This is because <
the other business units are dependent on the revenue generated in these business
units for their resources requirements..
Hence the answer is (e).
7. A [Budgeted Fixed Overhead + (Budgeted Variable Overhead Rate Direct Labor <
Hours Needed for production)].
Hence the answer is (a).
Answer Reason
8. C In Zero-based Budgeting (ZBB), the responsibility centers are called as decision <
units.
Hence the answer is (c).
9. B If the business environment is dynamic then it will exert pressure on the <
organization to emphasize innovation. In such a scenario, the approach adopted by
the top management and the flexible organizational culture will help the
organization to achieve success through a flexible/inefficient profile approach.
Hence the answer is (b).
10. B Sales Volume Variance = ∑[(Standard margin per unit) × (Actual sales- planned <
sales)]
= Rs. 10 × (40,00,000 – 35,00,000)
= Rs.10 × 5,00,000 = Rs. 50,00,000.
Hence the answer is (b).
11. D Action controls may be implemented in one or more of the following forms: <
Behavioral restrictions.
Pre-action appraisal.
Action accountability.
13. E Transnational strategy aims at achieving both cost reduction and local adaptability <
while encouraging a two-way flow of know-how between the parent organization
and subsidiary.
Hence the answer is (e).
14. C The limitation of a matrix organization structure is that it will fail if the participants <
are not mutually respectful.
Hence the answer is (c).
Answer Reason
15. B As a control tool, the performance indicators describe what is to be done to achieve <
the desired results or outcomes. Lead indicator is one of the performance indicators.
Lead indicators are performance drivers.
Hence the answer is (b).
17. D The budgeted units of production can be calculated as : the number of units sold, <
plus the desired ending finished goods inventory, minus the beginning finished
goods inventory.
Hence the answer is (d).
For period-to-period reporting, there are four types of targets, depending on the
behavior of the performance parameters. They are:
Flat line
Step
Seasonal
Growth curve
Hence the answer is (a).
21. C The key feature of Management by objectives (MBO) is setting of goals/objectives <
jointly by the supervisor and the subordinate. MBO is said to be implemented in an
organization when, top management decides on the organizational goals, while the
departmental heads decide on the functional and individual goals in discussion with
the employees. These functional and individual goals are aligned with the
organizational goals after the objectives have been decided upon, the targets are set
and revised as required.
Hence the answer is (c).
22. D A management control system may be viewed as a collection of controls that are <
used to address one or all the following situations:
Statement (II): Managers and employees have a fair idea of what is expected but do
not feel motivated.
Statement (III): In spite of knowing about the expectations and having sufficient
motivation for performance, managers and/or employees are not able to perform.
23. D A company-owned sales outlet like the Pantaloons Flagship stores is an example of <
revenue center. Such a center is devoted to increasing the net revenue and assumes
no responsibility for production. The outlet manager is responsible for the level of
revenue or output measured in monetary terms, but is not responsible for the costs
of the goods sold through the outlet.
Hence the answer is (d).
24. A Option (a): Personnel ratio = Number of employee in a particular function / Total <
number of people in the organization.
Other options are not appropriate.
Hence the answer is (a).
25. A Critical success factors are those factors which the organization cannot ignore and it <
has to control the performance to address the needs placed on it by these factors.
Although Option (II) and (IV) are factors affecting performance but they are not the
critical success factors in terms of performance.
Hence the answer is (a).
26. B Option (b) is false: Budget preparation requires the participation of managers from <
different functions/departments.
Hence the answer is (b).
28. A Cost-driven activities do not include sales commission which is an expense driven <
by the sales volume.
Hence the answer is (a).
29. A The correct sequence of steps followed in Zero-based Budgeting (ZBB) process <
are:
Decision unit identification
Decision package development
Evaluation and grading of decision packages
Resource allocation.
31. D Organizational slack refers to that capacity in an organization which is in surplus of <
what is required for normal operations. Slack may be said to exist under
circumstances which includes
Giving higher remuneration to employees than is necessary for retaining them
and
Setting targets lower than expected performance.
32. B Transfer pricing is an important technique to measure the contribution of individual <
centers to the overall organizational goals, and to ensure that performance
measurement systems are designed to be fair.
Hence the answer is (b).
33. B Statement (II) and (IV) are true about Diagnostic control systems, one of the levers <
of control. According to Robert Simon it works well if the goals are reasonable and
attainable and relieves managers of the task of constantly monitoring employees and
is very useful for detecting problems.
Hence the answer is (b).
34. A Tall structure provides closer supervision and tighter control by supervisors as there <
are only a few people reporting to a supervisor.
Hence the answer is (a).
Answer Reason
35. D The internal factors that are considered in internal business process perspective, <
which influence customer satisfaction are cycle time, quality and employee skills.
Option (IV): Increasing shareholders value is not a factor. It is the goal and internal
and external factors help to achieve this goal.
Hence the answer is (d).
36. B The following methods are used to prevent the employees from using unethical <
means to achieve targets:
Statement (II): The compensation levels should have a lower and higher
limit.
Statement (IV): Manager should define the performance measures properly.
The following statements are false:
Statement (I): The incentives should be directly linked to the set targets only
are false as it should also be linked to the means to achieve the targets.
Statement (III): If the achievement is higher than the set targets, the rewards
should exceed the upper limit is false as rewards should not exceed a certain
upper limit if unethical behavior is to be curbed.
Hence the answer is (b).
37. B While preparing the budgeted income statement in order to obtain budgeted net <
income the following calculation is done:
Combining the sales, cost of goods sold and selling and administrative
expenses and then subtracting interest, bad debts and income taxes.
Hence the answer is (b).
38. B ZBB involves identification of decision units; the manager of every decision unit <
will portray his/her own units as the most important and get higher budgets
approved for it. Therefore, ZBB can result in the creation of budgetary slack.
Hence the answer is (b).
40. A Sales mix variance = ∑[(Standard margin per unit- Standard average margin per <
unit) × (Actual sales - Actual sales at standard sales mix)]
Hence the answer is (a).
42. D Total asset turnover ratio measure the company’s effectiveness in generating <
revenue from investments in total assets.
Hence the answer is (d).
= ∑[Actual sales revenue – (Actual sales volume × Standard selling price per unit)
Actual selling price of actual sales volume of Shiny Shampoo
= 5,000 × Rs. 8 = Rs.40, 000.
Standard selling price of actual sales volume of Shiny Shampoo
= 5,000 × Rs.15 = Rs.75,000.
Therefore, the sales Price Variance for Shiny Shampoo
= Rs. 40,000 – Rs.75,000 = Rs. 35,000 (Adverse).
Hence the answer is (d).
44. D The following statements are false regarding ‘materiality’ of information: <
45. D The statutory auditor of the company has to certify that the financial statements <
have been prepared without violating accounting rules and the principles of
accounting.
Hence the answer is (d).
Control risk is the risk that a material misstatement could occur in an assertion for
an account balance or class of transactions, and would not be prevented or detected
on a timely basis by the internal control policies and procedures.
The other two statements are true about inherent risk and detection risk.
Hence the answer is (c).
47. B Sufficiency of audit evidence relates to the amount or quantum of audit evidence <
that is available.
Hence the answer is (b).
Answer Reason
48. E The following are false regarding ‘Constituency group attitudes audit’: <
Option (d): Propriety audits are conducted to examine the effects of the
management’s decisions and actions on society and the general public.
Hence the answer is (d).
50. C The inherent risk is the probability of the existence of a material misstatement : <
51. D The audit report should be prepared based on the following guidelines: <
Statement (I): The audit report should contain information on whether the financial
statements of the organization conform to the GAAP.
Statement (III): If the disclosures in the financial statements are not adequate, the
audit report should explicitly say so.
Hence the answer is (d).
52. D Comparable uncontrolled price method is the method used to price the goods and <
services an organization transfers between its profit centers at a level equal to the
prevailing open market price for those goods and services.
Hence the answer is (d).
53. C Domestic rate fluctuations is not one of the factors that multinational corporations <
must take into consideration for arriving at their transfer pricing policy.
Hence the answer is (c).
Answer Reason
55. A In Resale Price (RP) method, transfer price is determined by calculating back from <
the transaction taking place at the next level of the supply chain, by deducting a
suitable mark-up from the price at which the internal buyers sells the item to an
unrelated third party.
Hence the answer is (a).
Statement (I): Utilitarianism recommends that a course of action that achieves ‘the
greatest good for the greatest number of people is ethical.
Hence the answer is (a).
57. A The following reflect ‘conflict avoidance’ techniques: Forcing and smoothing. <
58. D The following statements are true regarding ‘Two sets of prices’ method: <
59. C Profit sharing method is applied when the transactions between units are much too <
integrated to be evaluated separately and the existence of intangibles makes it is
impossible to establish comparability with market conditions.
Hence the answer is (c).
60. C Option (c): A person who scores low on idealism and high on relativism is called as <
subjectivist.
Hence the answer is (c).
61. C Tax structure is not a position-related factor which influences ethical behavior. <
I. Incentives.
II. Bonuses.
IV. Employee stock option plans.
Option (III) is incorrect as travel allowances is not a reward based on performance
of an employee.
Hence the answer is (e).
63. C At the third level i.e., post-conventional level: Statement (III): Managers frame <
ethical principles without regard to social pressures is true.
Hence the answer is (c).
64. C 1.5 is an acceptable current ratio for most of the manufacturing companies. <
Hence the answer is (c).
65. E Option (e): Segment margin report is a tool of financial control that helps to analyze <
the performance of the business units or divisions within an organization.
Hence the answer is (e).
66. D Earning power is a measure of performance of the business which is not affected by <
tax or interest charges.
Hence the answer is (d).
68. C Statement (c): Debt service coverage ratio is a measure of the cash flow available to <
meet annual interest and principal payments on debt.
Hence the answer is (c).
Answer Reason
69. B Statement (II) and (IV) need to be considered while using financial ratios as a <
control mechanism:
The trend in the value of a ratio over time is often a better indicator of an
organization’s progress (or lack of it) on a particular dimension.
The mere calculation of the financial ratios of an organization will not reveal
much.
Hence the answer is (b).
70. C Option (c): Segregation of duties is in-built in business processes to prevent and/or <
detect errors during the regular course of business.
Hence the answer is (c).
71. B Option (b): ROCE (Return on capital employed) gives an indication of whether the <
organization is earning adequate revenues and profits through the efficient use of its
capital.
Hence the answer is (b).
74. E The purchase accounting systems aim to achieve the following financial control <
goals:
Statement (I): Keeping a close watch over the timeliness and value of cash and bank
outflows to vendors.
Statement (II): Analyzing the input costs of various responsibility centers, products
etc.
Statement (IV): Ensuring purchases are made at an optimal cost.
Hence the answer is (e).
75. A Grocery chains that sell fresh fruits and vegetables have high inventory turnover <
ratio.
Hence the answer is (a).
Answer Reason
76. C Statement (III) and (IV) are not the advantages of Economic Value Added (EVA): <
77. C <
78. The following are true about Market value to book value ratio
D <
Statement (I): It is desirable to have a market value to book value ratio greater than
1.
Statement (II) :The market value to book value ratio is an indication of the
organization’s contribution to wealth creation in society.
Hence the answer is (d).
79. C CFROI provides a more realistic picture of the performance of the organization by <
adjusting for accounting differences and inflation.
Hence the answer is (c).
80. A NOPAT = PBIT (1− Tax rate) = Rs. 80(1− 0.5) = Rs. 40 lakhs. <
Statement (II): Costs involved in results controls are more than in action controls.
Statement (IV): Results controls restrict creativity as they place limits on actions.
Hence the answer is (b).
83. E All the statements about rolling budgets are true. <
84. B In compliance management audit, auditors are asked to identify the gaps between <
the organization’s existing policies and objectives and its actual practices.
Hence the answer is (b).
85. E The following are the ethical issues in Human Resource Management: <
Statement (I): Lack of job security and increased risk of unemployment.
Statement (II); Excessive scrutiny and control.
Statement (III): Discrimination.
Hence the answer is (e).
86. A The following considerations are important while using financial ratios as a control <
mechanism:
Statement (I): Financial ratios should be analyzed from an industry perspective.
Statement (II): The use of ratios as a tool of control should not be limited to the end
of the financial period or year.
Hence the answer is (a).