1. What the concept of free cash flow?

Free cash flow is the cash flow actually available for distribution to investor after the company has made all the investment in fixed assets and working capital necessary to sustain ongoing operation. When we studied income statement in accounting the emphasis was probably on the firms net income, which is accounting profit. However the value of companys operation is determined by the stream of cash flows that the operations will generate now and in the future. To be more specific, the value of operation depends on all the future expected free cash flows, defined as after- tax operating profit minus the amount of new investment in working capital and fixed assets necessary to sustain the business. Therefore the way for managers to make their companies more valuable is to increase their free cash flow. Uses of FCF: 1. Pay interest to debt holders, keeping in mind that the net cost to the company is the after tax interest expense. 2. Repay debt holders, that is, pay off some of debt. 3. Pay dividends to shareholders. 4. Repurchase stock from shareholders. 5. Buy marketable securities or other non operating assets. 2. What is Balance Scorecard? OR Explain possible reason for failure of Balance Score Card? The balance score card is a management system (not only a measurement system) that capable organization to clarity their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balance scorecard transforms strategic planning from an academic exercise into the never center of an enterprise. Kaplan and Norton describe the innovation of the balanced scorecard: The balance scorecard retains traditional financial measures. But financial measures tell the story of the past events; an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation. The balance scorecard is an example of a performance measurement system. According to proponents of this approach, business units should be assigned goals and measured from the following four perspectives: Financial (e.g., profit margins return on assets, cash flow).

Customer (e.g., market share, customer satisfaction index) Internal business (e.g., employee retention, cycle time reduction) Innovation and learning (e.g., percentage of sales from new products) The balanced scorecard fosters a balance among different strategic measures in an effort to achieve goal congruence, thus encouraging employees to act in the organizations best interest. It is a tool that helps the companys focus, improves communication, sets organization objectives, and provides feedback on strategy. Every measure on balance scorecard addresses an aspect of companys strategy. In creating the balanced scorecard, executives must choose a mix of measurements that (1) accurately reflect the critical factors that determine the success of the companys strategy; (2) show the relationship among the individual measures in a cause-and-effect manner, indicating how nonfinancial measure affect long-term financial results; and (3) provide a board-based view of the current status of the company. Example: The API Knowledge Hub includes many examples, white papers, research reports and best practice case studies on how organizations have put the Balanced Scorecard concept into practice. Explore the white papers; case studies and articles for more in depth information on this fascinating subject. 3. What is Interactive Control? 1. Interactive control alerts management of strategic uncertainties either trouble or opportunities that become the basis for manager to adapt to a rapidly changing environments by thinking about new strategies. 2. A subset of the management control information that has a bearing on the strategic uncertainties facing the buss becomes the focal point. 3. Senior executive take such information seriously. 4. Managers at all levels of the org focus attention on the information produced by the system. 4. Briefly describe Engineered Expenses Centers and Discretionary Expenses Centers. How is Budget prepared in each and how is performance evaluated in each? OR Briefly

describe Engineered Expenses Centers and Discretionary Expenses Centers, Revenue Center, Profit Center. How is the performance of the Head of these centers evaluated? OR Describe difference in process of Engineered Expenses Centers and Discretionary Expenses Centers. Engineered expense centers: Engineered expense center have the following characteristics: Their inputs can be measured in monetary terms.

Their output can be measured in physical terms. The optimal dollar amount of input required to produce one unit of output can be established

Engineered expense center usually are found in manufacturing operations. Warehousing, distribution, trucking and similar units in the marketing organization also may be engineered expense center and so many certain responsibility center within administrative and support department. Examples are accounts receivable account payable and payroll section in the controller department personnel record and cafeteria in the human resource department shareholder record in the corporate secretary department and the company motor pool. Such units perform repetitive task for which standard cost can be developed. In an engineered expense center the output multiplied by the standard cost or each unit produced represents what the finished product should have cost. When this cost is compared to actual costs, the difference between the two represents the efficiency of the organization unit being measured. We emphasize that engineered expense centers have other important tasks not measured by cast alone. The effectiveness of these aspects of performance should be controlled. For example expenses center supervisor are responsible for the quality of good and for the volume of production in addition to their responsibility for cost efficiency. Therefore the type and amount of production is prescribed and specific quality standards are set so that manufacturing costs are not minimized at the expense of quality. Moreover manager of engineered expense center may be responsible for activities such a training that are not related to current production judgment about their performance should include an appraisal of how well they carry out these responsibilities. Discretionary expense center: The output of discretionary expenses center cannot be measured in monetary terms. They include administration and support units research and development organization and most marketing activities. The term discretionary does not mean that management judgments are capricious or haphazard. Management has decided on certain policies that should govern the operation of the company. One company may have a small headquarter staff another company of similar size and in the same industry may have a staff that is 10 time as large the management of both companies may be concerned that they made the correct decision on staff size but there is no objective way judging which decision was actually better manager are hired and paid to make such decision. After such a drastic change the level of discretionary expenses generally has a similar pattern from one year to the next. Differences in budgeting perspective of engineered and discretionary expense centre Budget preparation The decision that management make about a discretionary expense budget are different from the decisions that it makes about the budget for an engineered expense center. For the latter,

management decides whether the proposed operating budget represent the cost of performing task efficiently for the coming period. Management is not so much concerned with the magnitude of the task because this is largely determined by the actions of other responsibility centers, such as the marketing departments ability to generate sales. In formulating the budget for a dis cretionary expense center, however management principal task is to decide on the magnitude of the job that should be done. Profit center: When responsibility centers financial performance is measured in terms of profit the center is called a profit center. Profit is particularly useful performance measure since it allows senior management to use one comprehensive indicator rather than several. Advantages of profit center:1. The quality of decision may improve because they are being made by manager closest to point of decision. 2. The speed of operating decision may be increased since they do not have to be referred to headquarters. 3. Headquarters management, relived of day to day decision making can concentrates on issues 4. Manager, subject to fewer corporate restraints are free to use their imagination and initiative. 5. Profit center provides top management with readymade information on profitability of company. Revenue Center:In a revenue center, output is measured in monetary terms, but no formal attempt is made to relate input to output. Typically revenue centers are marketing/sales units that do not have authority to set selling prices and are not charged for the cost of the goods they market. Actual sales or orders booked are measured against budgets or quotas, and the manager is held accountable for the expenses incurred directly within the unit, but the primary measurement is revenue. 5. Transfer Pricing is not an accounting tool comment with an illustration Transfer pricing refer to the amount used in accounting for any transfer of goods and services between responsibility centers. This is what a narrow definition and limit the term transfer price to the value placed on a transfer of goods or services in transaction in which at least one of the two parties involved in the profit center. Such a price typically includes a profit element because an independent company normally would not transfer goods or services to another independent company at cost or less.

Therefore, the mechanism for allocating cost in an accounting system; such cost do not include a profit element. The term price as used here has the same meaning as it has when used in connection transaction between independent companies. Objective of transfer pricing Profit center are responsible for product development, manufacturing and marketing each share in the revenue generated when the product is finally sold. The transfer price should be designed so that it accomplishes the following objectives: 1. it should provide unit with the relevant information it needs to determine the optimum tradeoff between company cost and revenues 2. It should induce goal congruence decision i.e., the system should be designed so that decision that improve business unit profit will also improve company profits. 3. It should help to measure the economic performance of the individual business units. 4. The system should be simple to understand and easy to administer. Thus, from the objective, it is understandable that the Transfer price is mainly transferring of goods and services from one unit to another where much important is not given to accounting basis but also to all other effect. 6. Market Price is ideal transfer price even in limited markets. Comments OR When are Market based Transfer price most appropriate? How do we deal with the condition of limited market, Situation of excess/ Shortage of capacity? By limited market it means that the markets for buying and selling profit centers may be limited. Even in case of limited market the transfer price that is ideal or satisfies the requirement of a profit center system is the competitive price. In case if a company is not buying or selling its product in an outside market there are some ways to find the competitive price. They are as follows: If published market prices are available, they can be used to establish transfer prices. However, these should be prices actually paid in the market-place and the conditions that exist in the outside market should be consistent with those existing within the company. For example, market prices that are applicable to relatively small purchases are not valid in this case. Market prices are set by bids. This generally can be done only if the low bidder has a reasonable chance of obtaining the business. One company accomplishes this by buying about one-half of a particular group of products outside the company and one-half inside the company. He Company then puts all of the products out to bid, but selects one-half to stay inside. The company obtains valid bids, because low bidders can expect to get some of the business. By contrast, if a company requests bids solely to obtain a competitive price and does not

award the contracts to the low bidder, it will soon find that either no one bids or that the bids are of questionable value. If the production profit center sells similar products in outside markets, it is often possible to replicate a competitive price on the basis of the outside price. If the buying profit center purchases similar products from the outside market, it may be possible to replicate competitive prices for its proprietary products. This can be done by calculating the cost of the difference in design and other conditions of sale between the competitive products and the proprietary products. So we see from the above arguments that market price is ideal transfer price even in limited markets. 7. What do you understand by Goal Congruence? What are the informal factors that influence goal congruence? Impact Or importance upon management control systems. (Word Doc) This term is used when the same goals are shared by top managers and their subordinates. This is one of the many criteria used to judge the performance of an accounting system. The system can achieve its goal more effectively and perform better when organizational goals can be well aligned with the personal and group goals of subordinates and superiors. The goals of the company should be the same as the goals of the individual business segments. Corporate goals can be communicated by budgets, organization charts, and job descriptions. Goal Congruence- Meaning Individuals work in different hierarchies and handle different responsibilities & may have different goals. But they must come together as far as Companys Goal is concerned (there action must speak Cos language.) Goal Congruence Example 1 The HR manager has devised a HR training program to enhance the skills of its sales personnel, with an objective to enhance their productivity But if company is in strategic need of attaining a certain sales volume in a given quarter, it cannot do so on account of non availability of personnel. Every individual working in an organization has got his own motive to do the work. Individuals act in their own interest, based on their own motivations. And it is always not necessarily consistent with the Cos goal. In a goal congruence process, the actions the people are led to take in accordance with their perceived self interest are also in the best interest of the organization i.e. Goal congruence ensures that the action of manager taken in their best interest is also in the best interest of the organization. Informal factors that influence goal congruence: Informal Factors External factors set of attitudes of the society, work ethics of the society Internal factors (Factors within the organization)

Culture-Common beliefs, shared values, norms of behavior & assumptions Implicitly accepted and explicitly built into. Mgt. Style Informal/Formal The Communication Channels Perception and Communication e.g. Budget (meaning) strict profit. 8. Zero Based Budgeting: Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. [1] Zero-based budgeting requires the budget request be justified in complete detail by each division manager starting from the zerobase. The zero-base is indifferent to whether the total budget is increasing or decreasing. The term "zero-based budgeting" is sometimes used in personal finance to describe the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. It would be more technically correct to refer to this practice as "active-balanced budgeting". Advantages of Zero-Based Budgeting: 1. Efficient allocation of resources, as it is based on needs and benefits. 2. Drives managers to find cost effective ways to improve operations. 3. Detects inflated budgets. 4. Municipal planning departments are exempt from this budgeting practice. 5. Useful for service departments where the output is difficult to identify. 6. Increases staff motivation by providing greater initiative and responsibility in decisionmaking. 7. Increases communication and coordination within the organization. 8. Identifies and eliminates wasteful and obsolete operations. 9. Identifies opportunities for outsourcing. 10. Forces cost centers to identify their mission and their relationship to overall goals. Disadvantages of Zero-Based Budgeting: 1. Difficult to define decision units and decision packages, as it is time-consuming and exhaustive. 2. Forced to justify every detail related to expenditure. The R&D department is threatened whereas the production department benefits.

3. Necessary to train managers. Zero-based budgeting must be clearly understood by managers at various levels to be successfully implemented. 4. Difficult to administer and communicate the budgeting because more managers are involved in the process. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results. 9. How does service organization differ from a manufacturing organization? How is professional service organization differ from normal service organization? How is pricing and marketing done by professional services organization? Or Explain special characteristics of professional organizations which would have bearing upon their management control systems. Five Differences between Service and Manufacturing Organizations: Goods The key difference between service firms and manufacturers is the tangibility of their output. The output of a service firm, such as consultancy, training or maintenance, for example, is intangible. Manufacturers produce physical goods that customers can see and touch. Inventory Service firms, unlike manufacturers, do not hold inventory; they create a service when a client requires it. Manufacturers produce goods for stock, with inventory levels aligned to forecasts of market demand. Some manufacturers maintain minimum stock levels, relying on the accuracy of demand forecasts and their production capacity to meet demand on a just-in-time basis. Inventory also represents a cost for a manufacturing organization. Customers Service firms do not produce a service unless a customer requires it, although they design and develop the scope and content of services in advance of any orders. Service firms generally produce a service tailored to customers' needs, such as 12 hours of consultancy, plus 14 hours of design and 10 hours of installation. Manufacturers can produce goods without a customer order or forecast of customer demand. However, producing goods that do not meet market needs is a poor strategy. Labor A service firm recruits people with specific knowledge and skills in the service disciplines that it offers. Service delivery is labor intensive and cannot be easily automated, although knowledge management systems enable a degree of knowledge capture and sharing.

Manufacturers can automate many of their production processes to reduce their labor requirements, although some manufacturing organizations are labor intensive, particularly in countries where labor costs are low. Location Service firms do not require a physical production site. The people creating and delivering the service can be located anywhere. For example, global firms such as consultants Deloitte use communication networks to access the most appropriate service skills and knowledge from offices around the world. Manufacturers must have a physical location for their production and stock holding operations. Production does not necessarily take place on the manufacturer's own site; it can take place at any point in the supply chain. Professional Service Organizations: Goals: A dominant goal of a manufacturing company is to earn a satisfactory profit, specifically a satisfactory return on assets employed. A professional organization has relatively few tangible assets; its principal asset is the skill of its professional staff, which doesn't appear on its balance sheet. Return on assets employed, therefore, is essentially meaningless in such organizations. Their financial goal is to provide adequate compensation to the professionals. In many organizations, a related goal is to increase their size. In part, this reflects the natural tendency to associate success with large size. In part, it reflects economies of scale in using the efforts of a central personnel staff and units responsible for keeping the organization up to- date. Large public accounting firms need to have enough local offices to enable them to audit clients who have facilities located throughout the world. Professionals: Professional organizations are labor intensive, and the labor is of a special type. Many professionals prefer to work independently, rather than as part of a team. Professionals who are also managers tend to work only part time on management activities; senior partners in an accounting firm participate actively in audit engagements; senior partners in law firms have clients. Education for most professions does not include education in management, but quite naturally stresses the skills of the profession, rather than management; for this and other reasons, professionals tend to look down on managers. Professionals tend to give inadequate weight to the financial implications of their decisions; they want to do the best job they can, re- I regardless of its cost. This attitude affects the attitude of support staffs and nonprofessionals in the organization; it leads to inadequate cost control. Output and Input Measurement:

The output of a professional organization cannot be measured in physical terms, such as units, tons, or gallons. We can measure the number of hours a lawyer spends on a case, but this is a measure of input, not output. Output is the effectiveness of the lawyer's work, and this is not measured by the number of pages in a brief or the number of hours in the courtroom. We can measure the number of patients a physician treats in a day, and even classify these visits by type of complaint; but this is by no means equivalent to measuring the amount or quality of service the physician has provided. At most, what is measured is the physician's efficiency in treating patients, which is of some use in identifying slackers and hard workers. Revenues earned is one measure of output in some professional organizations, but these monetary amounts, at most, relate to the quantity of services rendered, not to their quality (although poor quality is reflected in reduced revenues in the long run). Furthermore, the work done by many professionals is non repetitive. No two consulting jobs or research and development projects are quite the same. This makes it difficult to plan the time required for a task, to set reasonable standards for task performance, and to judge how satisfactory the performance was. Some tasks are essentially repetitive: the drafting of simple wills, deeds, sales contracts, and similar documents; the taking of a physical inventory by an auditor; and certain medical and surgical procedures. The development of standards for such tasks may be worthwhile, although in using these standards, unusual circumstances that affect a specific job must be taken into account. Small Size: With a few exceptions, such as some law firms and accounting firms, professional organizations are relatively small and operate at a single location. Senior management in such organizations can personally observe what is going on and personally motivate employees. Thus, there is less need for a sophisticated management control system, with profit centers and formal performance reports. Nevertheless, even a small organization needs a budget, a regular comparison of performance against budget, and a way of relating compensation to performance. Marketing: In a manufacturing company there is a clear dividing line between marketing activities and production activities; only senior management is concerned with both. Such a clean separation does not exist in most professional organizations. In some, such as law, medicine, and accounting, the profession's ethical code limits the amount and character of overt marketing efforts by professionals (although these restrictions have been relaxed in recent years). Marketing is an essential activity in almost all organizations, however. If it can't be conducted openly, it takes the form of personal contacts, speeches, articles,

conversations on the golf course, and so on. These marketing activities are conducted by professionals, usually by professionals who spend much of their time in production workthat is, working for clients. In this situation, it is difficult to assign appropriate credit to the person responsible for "selling" a new customer. In a consulting firm, for example, a new engagement may result from a conversation between a member of the firm and an acquaintance in a company, or from the reputation of one of the firm's professionals as an outgrowth of speeches or articles. Moreover, the professional who is responsible for obtaining the engagement may not be personally involved in carrying it out. Until fairly recently, these marketing contributions were rewarded subjectively- that is, they were taken into account in promotion and compensation decisions. Some organizations now give explicit credit, perhaps as a percentage of the project's revenue, if the person who "sold" the project can be identified. Pricing: The selling price of work is set in a traditional way in many professional firms. If the profession is one in which members are accustomed to keeping track of their time, fees generally are related to professional time spent on the engagement. The hourly billing rate typically is based on the compensation of the grade of the professional, plus a loading for overhead costs and profit. In other professions, such as investment banking, the fee typically is based on the monetary size of the security issue. In still others, is a fixed price for the project Prices vary widely among professions; they are relatively low for research scientists and relatively high for accountants and physicians. 10. What is a responsibility centre? List and explain different types of Responsibility Centers with sketches. Responsibility centers: A responsibility center is an organization unit that is headed by a manager who is responsible for its activities. In a sense, a company is a collection of responsibility centers. Each of which is represented by box on the on the organization are responsibility centers for section work shifts or other small organization units. At a higher level are departments or business units that consist of several of these smaller units plus staff and management people these larger units are also responsibility center. And from the stand point of senior management and the board of directors, the whole company is responsibility center although the term is usually used to refer to unit within the company.

Types of Responsibility Centers Cost Center Cost centers are divisions that add to the cost of the organization, but only indirectly add to the profit of the company. Typical examples include Research and Development, Marketing and Customer service. Companies may choose to classify business units as cost centers, profit centers, or investment centers. There are some significant advantages to classifying simple, straightforward divisions as cost centers, since cost is easy to measure. However, cost centers create incentives for managers to underfund their units in order to benefit themselves, and this underfunding may result in adverse consequences for the company as a whole (reduced sales because of bad customer service experiences, for example). Because the cost centre has a negative impact on profit (at least on the surface) it is a likely target for rollbacks and layoffs when budgets are cut. Operational decisions in a contact centre, for example, are typically driven by cost considerations. Financial investments in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures. Business metrics are sometimes employed to quantify the benefits of a cost centre and relate costs and benefits to those of the organization as a whole. In a contact centre, for example, metrics such as average handle time, service level and cost per call are used in conjunction with other calculations to justify current or improved funding.

Profit Center A responsibility centre is called a profit centre when the manager is held responsible for both costs (inputs) and revenues (outputs) and thus for profit. Despite the name, a profit centre can exist in

nonprofits organizations (though it might not be referred to as such) when a responsibility centre receives revenues for its services. A profit centre is a big segment of activity for which both revenues and costs are accumulated: A centre, whose performance is measured in terms of both the expense it incurs and revenue it earns, is termed as a profit centre. The output of a responsibility centre may either be meant for internal consumption or for outside customers. In the latter case, the revenue is realized when the sales are made. That is, when the output is meant for outsiders, then the revenue will be measured from the price charged from customers. If the output is meant for other responsibility centre, then management takes a decision whether to treat the centre as profit centre or not. In fact, any responsibility centre can be turned into a profit centre by determining a selling price for its outputs. For instance, in case of a process industry, the output of one process may be transferred to another process at a profit by taking into account the market price. Such transfers will give some profit to that responsibility centre. Although such transfers do not increase the Companys assets, they help in management control process.

Investment Centre An investment centre goes a step further than a profit centre does. Its success is measured not only by its income but also by relating that income to its invested capital, as in a ratio of income to the value of the capital employed. In practice, the term investment centre is not widely used. Instead, the term profit centre is used indiscriminately to describe centers that are always assigned responsibility for revenues and expenses, but may or may not be assigned responsibility for the capital investment. It is defined as a responsibility centre in which inputs are measured in terms of cost / expenses and outputs are measured in terms of revenues and in which assets employed are also measured. A responsibility centre is called an investment centre, when its manager is responsible for costs and revenues as well as for the investment in assets used by his centre. He is responsible for maintaining a satisfactory return on investment i.e. asset employed in his responsibility centre. The investment centre manager has control over revenues, expenses and the amounts invested in the centres assets. The manager of an investment centre is required to earn a satisfactory return. Thus, return on investment (ROI) is used as the performance evaluation criterion in an investment centre. He also formulates the credit policy, which has a direct influence

on debt collection, and the inventory policy, which determines the investment in inventory. The Vice President (Investments) of a mutual funds company may be in charge of an Investment Centre. In the Investment Centre, the manager in charge is held responsible for the proper utilization of assets. He is expected to earn a satisfactory return on the assets employed in his responsibility centre. Measurement of assets employed poses many problems. It becomes difficult to determine the amount of assets employed in a particular responsibility centre. Some of the assets are in the physical possession of the responsibility centre while for some assets it may depend upon other responsibility centers or the Head Office of the company. This is particularly true of cash or heavy plant and equipment. Whether such assets should be included in the figure of assets employed of the responsibility centre and if included, at how much value, is a difficult question. On account of these difficulties, investment centers are generally used only for relatively large units, which have independent divisions, both manufacturing and marketing, for their individual products.

11. Explain different organizational goals. Comment on goal of shareholder value maximization in particular. Goals Although we often refer to the goals of a corporation, a corporation does not have goals; it is an artificial being with no mind or decision-making ability of its own. Corporate goals are determined by the chief executive officer (CEO) of the corporation, with the advice of other members of senior management, and they are usually ratified by the board of directors. Economic Goals Shareholder's value, Earning per share and Market value, all relate to maximizing shareholder's value, which is not a desirable goal, because what is 'maximum' is difficult to determine. Although optimizing shareholder value may be one goal, but there are other stakeholders in the business also such as customers, employees, creditors, community and so on. Again, shareholder value is usually equated with the market value of the company's stock. But market value is not an accurate measure of the worth of shareholders' investments. Besides, such value can be obtained only when the share is traded in the stock exchange.

Social Goals However, every organization has its share of responsibility towards the local community where it is situated, and the public at large. It is very difficult to incorporate in Management Control System such goals as taking pride in an organization which cares for the society and renders service to the public. Of course, any concrete structural programme indicating its operational expenses, methods of providing service, personnel involved in rendering service and the nature of the service in details can, however, be mentioned through an appropriate system. Profitability In a business, profitability is usually the most important goal. Return on investment can be found by simply dividing profit (i.e., revenues minus expenses) by in-vestment, but this method does not draw attention to the two principal components: profit margin and investment turnover. In the basic form of this equation, "investment" refers to the shareholders' investment, which consists of proceeds from the issuance of stock, plus retained earnings. "Profitability" refers to profits in the long run, rather than in the current quarter or year. Many current expenditure (e.g., amounts spent on advertising or research and development) reduce current profits but increase profits over time. Maximizing Shareholder Value This concept is that the appropriate goal of a for-profit corporation is to maximize shareholder value. Although the meaning of this term was not always clear, it probably refers to the market price of the corporation's stock. We believe, however, that achieving satisfactory profit is a better way of stating a corporation's goal, for two reasons. First, "maximizing" implies that there is a way of finding the maximum amount that a company can earn. This is not the case. In deciding between two courses of action, management usually selects the one it believes will increase profitability the most. But management rarely, if ever, identifies all the possible alternatives and their respective effects on profitability. Furthermore, profit maximization requires that marginal costs and a demand curve be calculated, and managers usually do not know what these are. If maximization were the goal, managers would spend every working hour (and many sleepless nights) thinking about endless alternatives for increasing profitability; life is generally considered to be too short to warrant such an effort. Second, although optimizing shareholder value may be a major goal, it is by no means the only goal for most organizations. Certainly a business that does not earn a profit at least equal to its cost of capital is not doing its job; unless it does so, it cannot discharge any other responsibilities. But economic performance is not the sole responsibility of a business, nor is shareholder value. Most managers want to behave ethically, and most feel an obligation to other stakeholders in the organization in addition to shareholders.

12. Explain and illustrate with one example differences between 3 forms of internal auditFinancial (Statutory), Operational & Management. Or Explain Cost Audit, Efficiency Audit. Financial Audit (Statutory) Financial Audit is a historically oriented, independent evaluation performed by internal auditor or external auditor for the purpose of attesting to the fairness, accuracy and reliability of the financial data, providing protection for the entity's assets; evaluating the adequacy and accomplishment of the system (internal control) designed, provide for the aforementioned Fairness and Protection, Financial data, while not being the only source of evidence, are the primary evidential source. The evaluation is performed on a planned basis rather than a request". Institute of Internal Auditor:Financial audit takes care of the protective aspect of the business and it does not normally carry out constructive appraisal function of the business operations. It helps in detection and prevention of fraud. It also verifies whether documentation and flow of activities arc in conformity with the internal control system introduced and developed within the organization. It helps coordinating with statutory auditor to help them in proper discharge of their function. Besides, financial audit also ensures compliance with statutory laws especially in financial and accounting matters. Objectives of Financial Audit: To see that established accounting systems and procedures have been complied with To see whether scrap, salvage and surplus materials have been properly accounted for etc. To see that internal control system has been working properly. To see that any abrupt variation in sales, purchases etc.; with respect to immediate previous year are not due to any irregularity To see that the credit control has been strictly followed.

Management Audit It is a complex task closely related with the process of management. It is highly result oriented. It requires inter/multi-disciplinary approach as it involves examination, review and appraisal of various policies and actions of management on the basis of certain norms/standards. It undertakes comprehensive and critical review of all organizational activities with wider perspective. It goes beyond conventional audit and audits the efficacy of the management itself. Definition: It's a comprehensive and constructive examination of an organization, the structure of a company, institution or branch of government or of any components thereof, such as division or department and its plans, objectives, its means of operations and its use of human and physical facilities.

Objectives:

To ascertain the provision of proper control at different levels, their effectiveness I in accomplishing management goals. To assist the management to achieve the most efficient administration of its operations. To suggest to the management the ways and means to achieve the objectives if the management of the organization itself lacks the knowledge of efficient management. It aims to achieve the efficiency of management and assess the strength and weaknesses of the organization structure, its management team and its corporate culture. To ascertain the provision of proper control at different levels, their effectiveness in accomplishing management goals.

Cost Audit: Cost Audit represents the verification of cost accounts and check on the adherence to cost accounting plan. Cost Audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with Cost Accounting principles, plans, procedures and objective. It also comprises verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data and cost technique and examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objective. Efficiency Audit: Efficiency audit is related to that whether corporate plans are effectively executed, In this auditor, investigates the reason of variances in actual performance and planned performance. It also investigates that capital resources of company are properly utilized or not. Operational Audit: An operational audit is a formal evaluation of the internal systems and procedures a company uses to produce goods or services. Made of at least four major steps, it tests how efficient and effective production operations are, which ultimately boosts revenue and profits. It also can reveal ethical issues in the business. External or internal accountants may perform the review, based on the needs of the business. This process has some disadvantages, such as potentially high cost, but it also offers advantages, such as new perspectives and increased risk awareness. 13. What is Eva? How is it different from ROI? The EVA method is based on the past performance of the corporate enterprise. The underlying economic principle in this method is to determine whether the firm is earning a higher rate of return on the entire invested funds than the cost of such funds (measured in terms of weighted average cost of capital, WACC). If the answer is positive, the firms management is adding to the

shareholders value by earning extra for them. On the contrary, if the WACC is higher than the corporate earning rate, the firms operations have eroded the existing wealth of its equity shareholders. In operational terms, the method attempts to measure economic value added (or destroyed) for equity shareholders, by the firms operations, in a given year. Since WACC takes care of the financial costs of all sources of providers of invested funds in a corporate enterprise, it is imperative that operating profits after taxes (and not net profits after taxes) should be considered to measure EVA. The accounting profits after taxes, as reported by the income statement, need adjustments for interest costs. The profit should be the net operating profit after taxes and the cost of funds will be the product of the total capital supplied (including retained earnings) and WACC EVA= [Net operating profits after taxes [Total Capital * WACC] RI (EVA) has the following advantages: It avoids suboptimal decisions as investments are not rejected merely because they lower the divisional managers ROI. It maximizes the growth of the company and increases shareholders wealth by accepting opportunities which earn a rate of return in excess of the cost of capital. The cost of capital charge on divisional investments ensures that divisional managers are aware of the opportunity cost of funds. Charging each division with the companys cost of capital ensures that decisions taken by different divisions are compatible with the interests of the organization as a whole. RI (EVA) has the following weaknesses: Like ROI it is difficult to have satisfactory definitions of divisional profits and divisional investment. It may be difficult to calculate an accurate cost of capital. Also, decision has to be taken whether to use the companys cost of capital or a specific divisional cost of capital. The former enhances divisional goal congruency and the latter reflects each divisions level of risk. Identifying controllable and uncontrollable factors at the divisional level may be difficult.

14. Discuss special challenges faced in controlling R & D activities and possible management initiatives Type of financial control: The financial control exercised in a discretionary expense center is quite different from that in engineered center the latter attempts to minimize operating cost by setting a standard and reporting actual costs against this standards. The main purpose of a discretionary expense budget on the other hand is to allow the manager to control Cost for particular in the planning. Costs are controlled primarily by deciding what task should be undertaken and what level of effort is

appropriate for each. Thus in a discretionary expense center financial control is primary exercised at the planning stage before the amount are incurred. Measurement of performance: The primary job of the manager of a discretionary expense center is to accomplish the desired output spending an amount that is on budget is satisfactory. This is in contrast with the report in an engineered expense center which helps higher management to evaluate the manger efficiency. If these two types of responsibility center are carefully distinguished management may treat the performance report for the discretionary expense center as if it were an indication of efficiency Control over spending can be exercised by requiring that the manger approved be obtain before the budget is over sometimes a certain percentage of overrun is permitted without additional approval if the budget really set forth the best estimate of actual cost there is 50 percent probability that it will overrun and this is the reason that some latitude is often permitted. Control problems: The control of R & D centers, which are also discretionary expense center is difficult for the following at least a semi tangible output reasons. Results are difficult to measure quantitatively. As contrasted with administrative activities, R&D usually has at least a semi tangible output in patent, new products, or new processes. Nevertheless, the relationship of these outputs to inputs is difficult to measure and appraise. A complete product of an R&D group may require several year of effort; consequently input as stated in an annual budget may be unrelated to outputs. Even if an output can be identified a reliable estimate of its value often cannot be made. Even if the value of the output can be calculated, it is usually not possible for management to evaluate the efficiency of the R&D effort because of its technical nature. 1. A brilliant effort may come up against an insuperable obstacle, whereas a mediocre effort may, by luck result in a bonanza. 2. The goal congruence problem in R&D center is similar to that in administrative centers. The research managers typically want to build the best research organization that money can buy, even though this is more expensive than the company can afford. A further problem is that research people often may not have sufficient knowledge of the business to determine the optimum direction of the research efforts. 3. Research and development can seldom be controlled effectively on an annual basis. A research project may take year s to reach fruition, and the organization must be built up slowly over a long time period. The principal cost is for the work force obtaining highly skilled scientific talented is often difficult, and short term fluctuation in the work force are in efficient. It is not reasonable, therefore to reduce R&D costs in years when profits are low and increase them in year when profits are high. R&D should be looked at as a long term investment not as an activity that varies with short run corporate profitability.

The R&D continuum: Activities conducted by R&D organization lie along a continuum. At one extreme is basic research; the other extreme is product testing. Basic research has two characteristics: first, it is unplanned management at most can specify the general area that is to be explored second there is often a very long time lag before basic research result in successful new product introductions. Financial control system has little value in managing basic research activities. In some companies, basic research in included as a lump sum in the research program and budget. In others, no specific allowance is made for basic research as such; there is an understanding that scientists and engineers can devote part of their time to explorations in whatever direction they find most interesting, subject only to informal agreement with their supervisor. For product testing projects, on the other hand, the time and financial requirement can be estimated, not as accurately as production activities. 15. Management control in matrix structures Or Matrix structures and controls Matrix organizational structure assigns multiple responsibilities to the functional heads. Evaluation of performance of such organizational entities is very difficult. Though they offer economies of using scares functional staff, it poses problems of casting the individual responsibility. This form of organization is very complex, from the point of view of management control system. At the end we must not forget that the management control system is for the organization and not the organization exists for management control system. One has to mold and remold the management control system to suit the given organization structure A citation by Anthony is worth noting in this regard. Usually in an advertisement agency, account supervisors are shifted from one account to another on periodic basis, this practice allows the agency to look at the account from the perspectives of different executives. However taking in to consideration the time lag of result realization in such services is quite large. And this may pose problem of performance assessment of a particular executive. This does not mean a control system designer should insist on abandoning the rotation system of the executives. Matrix structure offers advantages such as faster decision making process, efficiency and effectiveness but simultaneously it may pose problems such as added complexity in control function, assignment of responsibility and authority etc.

16. Strategy Formulation and Management Control

Characteristics a) Focus of plan b) Complexities c) Nature of information Strategy Formulation On one aspect at a time Many variables hence complex Tailor-made for the issue, more external and predictive, less accurate. Unstructured and irregular, each problem being different Relatively simple Management Control On entire organisation Less complex Integrated, more internal and historical, more accurate.

d) Structure

Rhythmic, definite pattern, set procedure Relatively difficult

e) Communication of information f) Purpose of estimates g) Persons involved h) No. of persons involved i) Mental activity j) Planning and control

Show expected results Staff and top management Small Creative, analytical Planning dominant but Some control Tends to be long Policies and precedents Extremely difficult

Lead to desired result Line and top management Large Administrative, persuasive Emphasis on both planning and control

k) Time horizon l) End result m) Appraisal of job done

Tends to be short Action within policies laid Less difficult

17. Some Distinction between Management Control and Task Control

Characteristics a) Focus of plan b) Nature of information Task Control Single task or transaction Tailor-made to operation, specific, often non- financial, real time Supervisors Follow directives or none as in case of machines or set objectives Day to day Management control On entire organisation Integrated, more internal and historical, more accurate

c) Persons involved d) Mental activity

Line and top management Administrative, persuasive

e) Time horizon f) Type of cost

Tends to be short

EngineeredExistence of Discretionary- Control is more objective standard against difficult due to subjective which actuals can be compared consideration. makes control easier.

18. Describe the factors which impact service organization OR Influence Service Organization. Factors which impact service organization: Absence of Inventory Buffer:

Goods can be held as inventory, which is a buffer that dampens the impact on production activity of fluctuations in sales volume. Services cannot be stored. The airplane seat,hotel room, hospital operating room, or the hours of lawyers, physicians, scientists, and other professionals that are not used today are gone forever. Thus, although a manufacturing company can earn revenue in the future from products that are on hand today, a service company cannot do so. It must try to minimize its unused capacity. Difficulty in Controlling Quality:

A manufacturing company can inspect its products before they are shipped to the consumer, and their quality can be measured visually or with instruments (tolerances, purity, weight, color, and so on). A service company cannot judge product quality until the moment the service is rendered, and then the judgments are often subjective. Labor Intensive:

Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs. Most service companies are labor intensive and cannot do this. Hospitals do add expensive equipment, but mostly to provide better treatment, and this increases costs. A law firm expands by adding partners and new support personnel. Multi-Unit Organizations:

Some service organizations operate many units in various locations; each unit relatively small. These organizations are fast-food restaurant chains, auto rental companies, gasoline service stations, and many others. Some of the units are owned; others operate under a franchise. The similarity of the separate units provides a common basis for analyzing budgets and evaluating performance not available to the manufacturing company. The information for each unit can be compared with system wide or regional averages, and high performers and low performers can be identified. However because units differ in the mix of services they provide, in the resources that they use, and in other ways, care must be taken in making such comparisons. 17. Explain special characteristics of professional organization which would have a bearing on their control system.7 Special Characteristics of Professional Organization: Goals: A dominant goal of a manufacturing company is to earn a satisfactory profit, specifically a satisfactory return on assets employed. A professional organization has relatively few

tangible assets; its principal asset is the skill of its professional staff, which doesn't appear on its balance sheet. Return on assets employed, therefore, is essentially meaningless in such organizations. Their financial goal is to provide adequate compensation to the professionals. In many organizations, a related goal is to increase their size. In part, this reflects the natural tendency to associate success with large size. In part, it reflects economies of scale in using the efforts of a central personnel staff and units responsible for keeping the organization up to- date. Large public accounting firms need to have enough local offices to enable them to audit clients who have facilities located throughout the world. Professionals: Professional organizations are labor intensive, and the labor is of a special type. Many professionals prefer to work independently, rather than as part of a team. Professionals who are also managers tend to work only part time on management activities; senior partners in an accounting firm participate actively in audit engagements; senior partners in law firms have clients. Education for most professions does not include education in management, but quite naturally stresses the skills of the profession, rather than management; for this and other reasons, professionals tend to look down on managers. Professionals tend to give inadequate weight to the financial implications of their decisions; they want to do the best job they can, re- I regardless of its cost. This attitude affects the attitude of support staffs and nonprofessionals in the organization; it leads to inadequate cost control. Output and Input Measurement: The output of a professional organization cannot be measured in physical terms, such as units, tons, or gallons. We can measure the number of hours a lawyer spends on a case, but this is a measure of input, not output. Output is the effectiveness of the lawyer's work, and this is not measured by the number of pages in a brief or the number of hours in the courtroom. We can measure the number of patients a physician treats in a day, and even classify these visits by type of complaint; but this is by no means equivalent to measuring the amount or quality of service the physician has provided. At most, what is measured is the physician's efficiency in treating patients, which is of some use in identifying slackers and hard workers. Revenues earned is one measure of output in some professional organizations, but these monetary amounts, at most, relate to the quantity of services rendered, not to their quality (although poor quality is reflected in reduced revenues in the long run). Small Size:

With a few exceptions, such as some law firms and accounting firms, professional organizations are relatively small and operate at a single location. Senior management in such organizations can personally observe what is going on and personally motivate employees. Thus, there is less need for a sophisticated management control system, with profit centers and formal performance reports. Nevertheless, even a small organization needs a budget, a regular comparison of performance against budget, and a way of relating compensation to performance. Marketing: In a manufacturing company there is a clear dividing line between marketing activities and production activities; only senior management is concerned with both. Such a clean separation does not exist in most professional organizations. In some, such as law, medicine, and accounting, the profession's ethical code limits the amount and character of overt marketing efforts by professionals (although these restrictions have been relaxed in recent years). Marketing is an essential activity in almost all organizations, however. If it can't be conducted openly, it takes the form of personal contacts, speeches, articles, conversations on the golf course, and so on. These marketing activities are conducted by professionals, usually by professionals who spend much of their time in production work that is, working for clients. 18. Every SBU is a profit center but every profit center is not a SBU? What are the conditions that should be fulfill for an organization unit to be converted into a profit center? What are the different ways to measure the performance of profit center? Discuss their relevant merits and demerits. Or what is Strategic Business Unit? Conditions for an organization to be converted into a profit centre: Many management decisions involve proposals to increase expenses with the expectation of an even greater increase in sales revenue. Such decisions are said to involve expense/revenue trade-offs. Additional advertising expense is an example. Before it is safe to delegate such a tradeoff decision to a lower-level manager, two conditions should exist. The manager should have access to the relevant information needed for making such a decision. There should be some way to measure the effectiveness of the trade-offs the manager has made. A major step in creating profit centers is to determine the lowest point in an organization where these two conditions prevail. All responsibility centers fit into a continuum ranging from those that clearly should be profit centers to those that clearly should not. Management must decide whether the advantages of giving profit responsibility offset the disadvantages, which are discussed below. As with all management control system design choices, there is no clear line of demarcation.

Ways to Measure Performance: There are two types of profitability measurements used in evaluating a profit center, just as there are in evaluating an organization as a whole. First, there is the measure of management performance, which focuses on how well the manager is doing. This measure is used for planning, coordinating, and controlling the profit center's day-to-day activities and as a device for providing the proper motivation for its manager. Second, there is the measure of economic performance, which focuses on how well the profit center is doing as an economic entity. The messages conveyed by these two measures may be quite different from each other. For example, the management performance report for a branch store may show that the store's manager is doing an excellent job under the circumstances, while the economic performance report may indicate that because of economic and competitive conditions in its area the store is a losing proposition and should be closed. . The necessary information for both purposes usually cannot be obtained from a single set of data. Because the management report is used frequently, while the economic report is prepared only on those occasions when economic decisions must be made, considerations relating to management performance measurement have first priority in systems design-that is, the system should be designed to measure management performance routinely, with economic information being derived from these performance reports as well as from other sources. Types of Profitability Measures A profit center's economic performance is always measured by net income (i.e., the income remaining after all costs, including a fair share of the corporate overhead, have been allocated to the profit center). The performance of the profit center manager, however, may be evaluated by five different measures of profitability: (1) contribution margin, direct profit, (3) controllable profit, (4) income before income taxes, or (5) net income Contribution Margin: Contribution margin reflects the spread between revenue and variable expenses. The principal argument in favor of using it to measure the performance of profit center managers is that since fixed expenses are beyond their control, managers should focus their attention on maximizing contribution. The problem with this argument is that its premises are inaccurate; in fact, almost all fixed expenses are at least partially controllable by the manager, and some are entirely controllable. Many expense items are discretionary; that is, they can be changed at the discretion of the profit center manager. Presumably, senior management wants the profit center to keep these discretionary expenses in line with amounts agreed on in the budget formulation process. A focus on the contribution margin tends to direct attention away from this responsibility. Further, even if an expense, such as administrative salaries, cannot be changed in the short run, the profit center manager is still responsible for controlling employees' efficiency and productivity.

Direct Profit: This measure reflects a profit center's contribution to the general overhead and profit of the corporation. It incorporates all expenses either incurred by or directly traceable to the profit center, regardless of whether or not these items are within the profit center manager's control. Expenses incurred at headquarters, however, are not included in this calculation. A weakness of the direct profit measure is that it does not recognize the motivational benefit of charging headquarters costs. Controllable Profit: Headquarters expenses can be divided into two categories: controllable and non controllable. The former category includes expenses that are controllable, at least to a degree, by the business unit manager-information technology services, for example. If these costs are included in the measurement system, profit will be what remains after the deduction of all expenses that may be influenced by the profit center manager. A major disadvantage of this measure is that because it excludes non controllable headquarters expenses it cannot be directly compared with either published data or trade association data reporting the profits of other companies in the industry. Income before Taxes: In this measure, all corporate overhead is allocated to profit centers based on the relative amount of expense each profit center incurs. There are two arguments against such allocations. First, since the costs incurred by corporate staff departments such as finance, accounting, and human resource management are not controllable by profit center managers, these managers should not be held accountable for them. Second, it may be difficult to allocate corporate staff services in a manner that would properly reflect the amount of costs incurred by each profit center. There are, however, three arguments in favor of incorporating a portion of corporate overhead into the profit centers' performance reports. First, corporate service units have a tendency to increase their power base and to enhance their own excellence without regard to their effect on the company as a whole. Allocating corporate overhead costs to profit centers increases the likelihood that profit center manager will question these costs, thus serving to keep head office spending in check. (Some companies have actually been known to sell their corporate jets because of complaints from profit center managers about the cost of these expensive items.) Second, the performance of each profit center will become more realistic and more readily comparable to the performance of competitors who pay for similar services. Finally, when managers know that their respective centers will not show a profit unless all-costs, including the allocated share of corporate overhead, are recovered, they are motivated to make optimum long-

term marketing decisions as to pricing, product mix, and so forth, that will ultimately benefit (and even ensure the viability of) the company as a whole. If profit centers are to be charged for a portion of corporate overhead, this item should be calculated on the basis of budgeted, rather than actual, costs, in which case the "budget" and "actual" columns in the profit center's performance report will show identical amounts for this particular item. This ensures that profit center managers will not complain about either the arbitrariness of the allocation or their lack of control over these costs, since their performance reports will show no variance in the overhead allocation. Instead, such variances would appear in the reports of the responsibility center that actually incurred these costs. . Net Income: Here, companies measure the performance of domestic profit centers according to the bottom line, the amount of net income after income tax. There are two principal arguments against using this measure: (1) after tax income is often a constant percentage of the pretax income, in which case there would be no advantage in incorporating income taxes, and (2) since many of the decisions that affect income taxes are made at headquarters, it is not appropriate to judge profit center managers on the consequences of these decisions. There are situations, however, in which the effective income tax rate does vary among profit centers. For example, foreign subsidiaries or business units with foreign operations may have different effective income tax rates. In other cases, profit centers may influence income taxes through their installment credit policies, their decisions on acquiring or disposing of equipment, and their use of other generally accepted accounting procedures to distinguish gross income from taxable income. In these situations, it may be desirable to allocate income tax expenses to profit centers not only to measure their economic profitability but also to motivate managers to minimize tax liability. Merits: The quality of decisions may improve because they are being made by managers closest to the point of decision. The speed of operating decisions may be increased since they do not have to be referred to corporate headquarters. . Headquarters management, relieved of day-to-day decision making, can concentrate on broader issues. Managers, subject to fewer corporate restraints, are freer to use their imagination and initiative. Because profit centers are similar to independent companies, they provide an excellent training ground for general management. Their managers gain experience in managing all functional areas, and upper management gains the opportunity to evaluate their potential for higher-level jobs. Profit consciousness is enhanced since managers who are responsible' for profits will constantly seek ways to increase them. (A manager responsible for marketing activities,

for example, will tend to authorize promotion expenditures that increase sales, whereas a manager responsible for profits will be motivated to make promotion expenditures that increase profits.). Profit centers provide top management with ready-made information on the profitability of the company's individual components. Because their output is so readily measured, profit centers are particularly responsive to pressures to improve their competitive performance. Demerits: Decentralized decision making will force top management to rely more on management control reports than on personal knowledge of an operation, entailing some loss of control.

If headquarters management is more capable or better informed than the average profit center manager, the quality of decisions made at the unit level may be reduced.

Friction may increase because of arguments over the appropriate transfer price, the assignment of common costs, and the credit for revenues that were formerly generated jointly by two or more business units working together.

Organization units that once cooperated as functional units may now be in competition with one another. An increase in profits for one manager may mean a decrease for another. In such situations, a manager may fail to refer sales leads to another business unit better qualified to pursue them; may hoard personnel or equipment that, from the overall company standpoint, would be better off used in another unit; or may make production decisions that have undesirable cost consequences for other units.

Divisionalization may impose additional costs because of the additional management, staff personnel, and record keeping required, and may lead to task redundancies at each profit center.

Strategic Business Unit:A strategic business unit (SBU) is a profit centre which focuses on product offering and market segment. SBUs typically have a discrete marketing plan, analysis of competition, and marketing campaign, even though they may be part of a larger business entity. An SBU may be a business unit within a larger corporation, or it may be a business unto itself or a branch. Corporations may be composed of multiple SBUs, each of which is responsible for its own profitability. General Electric is an example of a company with this sort of business organization. SBUs are able to affect most factors which influence their performance. Managed as separate businesses, they are responsible to a parent corporation. General electric has 49 SBUs.

There are three factors that are generally seen as determining the success of an SBU 1.the degree of autonomy given to each SBU manager, 2.the degree to which an SBU shares functional programs and facilities with other SBUs, and 3.the manner in which the corporation is because of new changes in market. 19. What is a Non - Profit Organization? How is the performance of this organization evaluated? Introduction A nonprofit organization, as defined by law, is an organization that cannot distribute assets or income to, or for the benefit of, its members, officers, or directors. The organization can, of course, compensate its employees, including officers and members, for services rendered and for goods supplied. This definition does not prohibit an organization from earning a profit; it prohibits only the distribution of profits. A nonprofit organization needs to earn a modest profit, on average, to provide funds for working capital and for possible rainy days. Performance evaluation of nonprofit organization For any organization, the most important reasons to measure performance are to improve effectiveness and to acquire information that will allow the organization to drive its agenda forward. If the motivation for doing evaluation remains outside an organization, the evaluation will have limited impact. To do performance assessment effectively, an organization must commit to adopting a culture of measurement, because acceptance must come from senior management, staff, funders, and board members alike. Board self-evaluation Members of the Board of Directors should regularly evaluate the quality of their activities on a regular basis. Activities might include staffing the Board with new members, developing the members into well-trained and resourced members, discussing and debating topics to make wise decisions, and supervising the CEO. Probably the biggest problem with Board self-evaluation is that it does not occur frequently enough. As a result, Board members have no clear impression of how they are performing as members of a governing Board. Poor Board operations, when undetected, can adversely affect the entire organization. Staff and volunteer (individual) performance evaluation Most of us are familiar with employee performance appraisals, which evaluate the quality of an individuals performance in their position in the organization. Ideally, those appraisals reference the individuals written job description and performance goals to assess the quality of the individuals progress toward achieving the desired results described in those documents. Continued problems in individual performance often are the results of poor strategic planning, program planning and staff development. If overall planning is not done effectively, individuals can experience continued frustration, stress and low morale, resulting in their poor overall

performance. Experienced leaders have learned that continued problems in performance are not always the result of a poor work ethic the recurring problems may be the result of larger, more systemic problems in the organizations. Program evaluation Program evaluations have become much more common, particularly because donors demand them to ensure that their investments are making a difference in their communities. Program evaluations are typically focused on the quality of the programs process, goals or outcomes. An ineffective program evaluation process often is the result of poor program planning programs should be designed so they can be evaluated. It can also be the result of improper training about evaluation. Sometimes, leaders do not realize that they have the responsibility to verify to the public that the nonprofit is indeed making a positive impact in the community. When program evaluations are not performed well, or at all, there is little feedback to the strategic and program planning activities When strategic and program planning are done poorly, the entire organization is adversely effected. Evaluation of cross-functional processes Cross-functional processes are those that span several systems, such as programs, functions and projects. Common examples of major processes include information technology systems and quality management of services. Because these cross-functional processes span so many areas of the organization, problems in these processes can be the result of any type of ineffective planning, development and operating activities. Organizational evaluation Ongoing evaluation of the entire organization is a major responsibility of all leaders in the organization. Leaders sometimes do not recognize the ongoing activities of management to actually include organizational evaluations but they do. The activities of organizational evaluation occur every day. However, those evaluations usually are not done systematically. As a result, useful evaluation information is not provided to the strategic and program planning processes. Consequently, both processes can be ineffective because they do not focus on improving the quality of operations in the workplace. 20. What are the different methods to evaluate the performance of an investment centre? Discuss the merits and demerits of each? Which method would you recommend? The following techniques are useful in evaluating the performance of an investment centre: 1. Return on investment (ROI): The rate of return on investment is determined by dividing net profit or income by the capital employed or investment made to achieve that profit.

ROI = Profit / Invested capital * 100

ROI consists of two components viz. Profit margin Investment turnover

ROI = Net profit / Investment

= (Net profit / Sales) * (Sales / Investment in assets)

It will be seen from the above formula that ROI can be improved by increasing one or both of its components viz. the profit margin and the investment turnover in any of the following ways:

Increasing the profit margin Increasing the investment turnover Increasing both profit margin and investment turnover Capital employed is taken to be the total of shareholders funds, loans etc The profit figure used is in calculating ROI is usually taken from the profit and loss account, profit arising out of the normal activities of the company should only be taken. Merits: Return on investment analysis provides a strong incentive for optimum utilization of the assets of the company. This encourages managers to obtain assets that will provide a satisfactory return on investment and to dispose off assets that are not providing an acceptable return. In selecting amongst alternative long-term investment proposals, ROI provides a suitable measure for assessment of profitability of each proposal. Demerits: ROI analysis is not very suitable for short-term projects and performances. In the initial stages a new investment may yield a small ROI which may mislead the management. Most likely the rate would improve in course of time when the initial difficulties are overcome. The book value of assets decline due to depreciation, the investment base will continuously decrease in value, causing the rate of return to increase.

2. Residual income: Residual income can be defined as the operating profit (or income) of the company less the imputed interest on the assets used by the company. In other words, interest on the capital invested in the company is treated as a cost and any surplus is the residual income. Residual income is profit minus notional interest charge on capital employed.

Residual income is affected by the size of the organization and therefore will not provide a basis for evaluation of organizational performance. This is probably the main reason why the management continues to make use of ROI which is relative measure. Not all projects start off with positive or sufficiently large positive profits in the early years of a project to produce a positive increment to residual income. It has been argued that a more suitable measure of performance for investment centers, which could encourage managers to be more willing to undertake marginally profitable projects, is residual income. We recommend RI as a method of evaluating performance of an investment centre. Because when RI is adopted for evaluation purposes, emphasis is placed on marginal profit amount above the cost of capital rather than on the rate itself. 21. Management control in matrix structures Or Matrix structure and controls Matrix organizational structure assigns multiple responsibilities to the functional heads. Evaluation of performance of such organizational entities is very difficult. Though they offer economies of using scares functional staff, it poses problems of casting the individual responsibility. This form of organization is very complex, from the point of view of management control system. At the end we must not forget that the management control system is for the organization and not the organization exists for management control system. One has to mold and remold the management control system to suit the given organization structure A citation by Anthony is worth noting in this regard. Usually in an advertisement agency, account supervisors are shifted from one account to another on periodic basis, this practice allows the agency to look at the account from the perspectives of different executives. However taking in to consideration the time lag of result realization in such services is quite large. And this may pose problem of performance assessment of a particular executive. This does not mean a control system designer should insist on abandoning the rotation system of the executives. Matrix structure offers advantages such as faster decision making process, efficiency and effectiveness but simultaneously it may pose problems such as added complexity in control function, assignment of responsibility and authority etc. 22. The Formal control system:Rules We use the word rules as shorthand for all types of formal instructions and controls, including: standing instructions, job descriptions, standard operating procedures, manuals, and ethical guidelines. Rules range from the most trivial (e.g., paper clips will be issued only on the basis of a signed requisition) to the most important):e.g., capital expenditures of over $5 million must be approved by the board' of directors). Some rules are guides; that is, organization members are permitted, and indeed expected, to depart from them, either under specified circumstances or when their own best judgment indicates that a

departure would be in the best interests of the organization. Some rules are positive requirements that certain actions be taken (e.g., fire drills at prescribed intervals). Others are prohibitions against unethical, illegal, or other undesirable actions. Finally, there are rules that should never be broken under any circumstances: a rule prohibiting the payment of bribes, for example, or a rule that airline pilots must never take off without permission from the air traffic controller. Some specific types of rules are listed below: Physical Controls Security guards, locked storerooms, vaults, computer passwords, television surveillance, and other physical controls may be part of the control structure. Manuals Much judgment is involved in deciding which rules should be written into a manual, which should be considered to be guidelines rather than fiats, how much discretion should be allowed, and a host of other considerations. Manuals in bureaucratic organizations are more detailed than are those in other organizations; large organizations have more manuals and rules than small ones; centralized organizations have more than decentralized ones; and organizations with geographically dispersed units performing similar functions (such as fast-food restaurant chains) have more than do single-site organizations System Safeguards Various safeguards are built into the information processing system to ensure that the information flowing through the system is accurate, and to prevent (or at least minimize) fraud of every sort. These include: cross-checking totals with details, requiring signatures and other evidence that a transaction has been authorized, separating duties, counting cash and other portable assets frequently, and a number of other procedures described in texts on auditing. 23. What are objectives of a transfer pricing? What are different methods to arrive at transfer price? Discuss the appropriateness of each method? Explain with examples. Transfer Pricing: Transfers of goods and services between business units are more frequent in singleindustry and related diversified firms than in conglomerates. The usual transfer pricing policy in a conglomerate is to give sourcing flexibility to business units and use arm's-length market prices. However, in a single-industry or a related diversified firm, synergies may be important, and business units may not be given the freedom to make sourcing decisions.

Objective of transfer pricing Profit center are responsible for product development, manufacturing and marketing each share in the revenue generated when the product is finally sold. The transfer price should be designed so that it accomplishes the following objectives: 1. It should provide unit with the relevant information it needs to determine the optimum trade-off between company cost and revenues 2. It should induce goal congruence decision i.e., the system should be designed so that that improve business unit profit will also improve company profits. 3. It should help to measure the economic performance of the individual business units. 4. The system should be simple to understand and easy to administer. Thus, from the objective, it is understandable that the Transfer price is mainly transferring of goods and services from one unit to another where much important is not given to accounting basis but also to all other effect. 24. Organizations with Business Divisions (Profit Centre) format have observed that Divisional Controllers experience divided loyalty in carrying out their functions, causing a possible dysfunction. How could such a situation be resolved? Define role of controller which suits your suggestion. To the extent the decision are decentralized top management may lose some control. Relying on control reports is not as effective as personal knowledge of an operation. With profit center, top management must change its approach to control. Instead of personal direction senior management must rely to a considerable extent on management control reports. Competent units that were once cooperating as functional units may now compete with one another dis advantageously. An increase in one managers profit may decrease those of another. This decrease in cooperation may manifest itself in a manager unwillingness to refer sales lead to another business unit, even though that unit is better qualified to follow up on the lead in production decision that have undesirable cost consequence on other units or in the hoarding of personnel or equipment that from the overall company standpoint would be better off used in another units. There may be too much emphasis on short run profitability at the expense of long run profitability. In the desire to report high current profits, the profit center manager may skip on R&D, training, maintenance. This tendency is especially prevalent when the turnover of profit center managers is relatively high. In these circumstances, manager may have good reason to believe that their action may not affect profitability until after they have moved to other job. There is no complete satisfactory system for ensuring that each profit center by optimizing its own profit will optimize company profits. decision

If headquarter management is more capable or has better information then the average profit center manager the quality of some of the decision may be reduced. Divisionalization may cause additional cost because it may require additional management staff personnel and recordkeeping and may lead to redundant at each profit center. Business units as profit centers: Business units are usually set up at profit centers. Business unit managers tend to control product development, manufacturing, and marketing resources. They are in a position to influence revenue and cost and as such can be held accountable for the bottom line. However as pointed out in the next section a business unit manager authority may be constrained such constrained should be incorporated in designing and operating profit center.

Constraint on business unit authority To realize fully the advantage of the profit center concept the business unit manger would have to be as autonomous as the president of the independent company. As a practical matter however such autonomy is not feasible. If a company were divided into completely independent units the organization would be giving up the advantage of size and synergism. Also senior management authority that a board of director gives to the chief executive. Consequently business unit structure represents tradeoff between business unit autonomy and corporate constraint. The effectiveness of a business units organization is largely dependent on how well these trade off are made. The performance of a profit center is appraised by comparing actual results for one or more or of these measures with budgeting amounts. In addition, data on competitors and the industry provide a good cross check on the appropriate of the budget. Data for individual companies are available from the Securities and Exchange Commission for about key business ratios; standard & poor computer services, Inc; Robert Morris associates annual statement studies; and annual survey published in fortune, business week, and Forbes. Trade associations publish data for the companies in their industries. Revenues: choosing the appropriate revenue recognition method is important. Should revenue be recognized at the time as order is received, at the time an order is shipped, or at the time cash is received? In addition to that decision, issues related to common revenues may need to be considered. There are some situations in which two or more profit centers participate in the sales effort that results in a sale; ideally, each should be given appropriate credit for its part in this transaction. Many companies have not given much attention to the solution of these common revenue problems. They take the position that the identification of price responsibility for revenue generation is too complicated to be practical and that sale personnel must recognize they are

working not only for their own profit center but also for the overall good of the company. They for example, may credit the business unit that takes an order for a product handled by the another unit with the equivalent of a brokerage commission or a finder fee. In the case of a bank the branch performing a service may be given explicit credit for that service even though the customer account is maintained in another branch. Role of controller It should analyze reported performance against budget, interprets the result, and prepares summary report for senior management. It should coordinate the work of budget departments in lower echelons It should administer the process of making budget revision during the year. It should provide assistance to budgetees in the preparation of their budget. It should publish procedure and forms for the preparation of the budget.