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Q1) Explain briefly the various stages of management control process citing salient features of each.
Answer:
1). Programming
Programming is defined as making programs by top/ senior management in terms of organizational goals and strategies and
deciding the funds and resources needed to accomplish the programs. Programs can be made about development of new
products, research and development of activities merger, takeover and other activities that are not related much with the existing
product lines. In service organizations such as hotel chain management may draw programs for each hotel or each region where
hotels are to be set up.
Programming is long range plan, covering period of approximately five future years. The reason is that it programming is made
for shorter period, the results and benefits of programming can not be realized within this period. some organization like public
utilities prepare long range plans for even a period of twenty years .because of the relatively long time plan, only rough
estimates are possible revenues ,expenses and capital expenditure.
Programming is time consuming and expensive. The most significant expense is the time devoted to it by management, but it
also involves a special programming staff and considerable paperwork. A formal programming process is not worthwhile in
some organization. it is desirable in organization that have the following characteristics
Its top management is convinced that programming is important .otherwise programming is likely to be or to become, a staff
exercise that has little impact on actual decision making.
It is relatively large and complex in small, simple organizations, an informal understanding of the organizations future
directions for making decision about resource allocations, which is principal purpose of preparing programs.
If the future is so uncertain that reasonably estimates cannot be made preparation of a formal program is a waste of time.
2). Budgeting
“Budget is formal financial plan for each year .a budget ,known as shorter angel plans ,is a technique of expressing revenues
,expenses ,physical targets like production and sales ,profit ,assets and liabilities usually for a period of one future year” .
1. Budget has the functions of motivating managers, coordinating activities, communicating to persons within organization,
providing standards for judging actual performance s and acting as control tool.
2. Budgeting involves operating managers as well as senior manager. Staff personnel have considerable input to the
programming process, but relatively less input to the budgeting process
3. The program structure consists of program and major project. It includes both capital expenditure and operating items and it
covers a period of several years. The budged is structured by responsibility centre (which may or may not cut across program)
the focus is on operating revenues and expenses and it typically is for a single year.
4. Budget preparation is done under greater time pressure and is more hectic than programming
5. A program is abroad brush sketch of the future. A budget has more details both because it is a fairly specific guide to
operating decisions and also because it will be used subsequently to evaluate the performance of individual manager.
6. Programming decision can have consequences of great magnitude. Budgeting decision are typically much less significant,
because they are made within the context of the current level of operating activities, except as those activities will be affected by
program decision.
7. Behavioral consideration is much more important in the budget preparation process than in the programming process. The
approved project is a bilateral commitment; the program is not a commitment, because the budget will be used to evaluate
performance.
3. Executing:-
After the budget preparation, budgeting is used as a tool for coordinating the actions of individual and department within the
organization. In fact within the execution phase task control is done to ensure that actions and performance match with the
planned or desired result. While performing the mangers goal is to achieve budgeted targets. However compliance to budget is
not necessary if the plans given in the budget are found as not the best way of achieving the objective.
After execution actual performance and result are compared with the budgeted plans and targets and variance reports are
prepared which highlight the variance between the 2 and the causes for such variances. Variance reports should separate
controllable item from non-controllable item, determine the effects of changes in volume on revenues and cost and if possible,
should mention changes in other circumstances affecting the variances
4. Evaluation:-
Management control Process ends with the evaluation phase in which the performances of managers are evaluated. Since it is
an after- event exercise, the evaluation does not affect what has happened. However, evaluation phase acts like a powerful
stimulus as employees know that their performances will be subsequently evaluated. Also on the basis of performance
evaluation, the future budget and plans are revised.
Q2) What is Responsibility Centre? List and explain different types of responsibility centers with sketches.
Answer:-
(A) Responsibility Centre
An organization is composed of a number of financial responsibility centres. These responsibility centres are created by
management based on the needs of the business enterprise.
A responsibility centres may be define as an organizational unit which is headed by a responsible person namely a manager. He
is responsible for the activities of the unit. The responsibility centres is responsible for performing some function which is its
output. In performing these functions, it uses resources or ‘inputs’. The costs assigned to a responsibility centre are intended to
measure the input that it consumes in a specific period of time, such as a week or a month.
(B) Types of Responsibility Centres:
(i) Expenses Centre
(ii) Revenue Centre
(iii) Profit Centre
(iv) Investment Centre
(i) Expenses Centre:-
Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not. There are
two types of expense centers.
A. Engineered Expense centers – It has following characteristics
a. Their inputs can be measured in monetary terms.
b. Their output can be measured in physical terms.
c. The optimum rupee value of input required to produce one unit of output can be determined.
Engineered Expense Centers
Optimal relationship
can be established
Inputs Outputs
Output
Inputs
s
Rupee
s PROCESS Physical
(ii) Revenue
Centres:
Revenue is a
monetary measure of
output. Where the
output of responsibility centre is measured in terms of money, we have what is known as revenue centres. According to
Anthony, “in a revenue centre, outputs are measured in monetary terms, but no formal attempt is made to relate inputs (i.e.
expense or cost) to outputs”. Examples of revenue centres are marketing organization where no responsibility for profit exists.
Orders booked and sales are compared with the budget to measures their performance.
The primary yard stick for judging the efficency of revenue centres is revenue earned vis a vis the budget. However, the head of
the revenue centre is held responsible for expenses incurred by his responsibility centre. Generally, revenue centre managers do
not have responsibility for estabilishing selling prices. Thus, in a revenue centre, there is no relationship between inputs and
outputs. Following figures shows the features of revenue centres.
Revenue Centers
Inputs Outputs
Profit Centers
Inputs Outputs
Investment Centers
Inputs Outputs
Q.3 Every SBU is a profit center but every profit center is not a SBU? What are the conditions that should be
fulfilled for an organization unit to be converted into a profit center? What are the different ways to measure the
performance of profit centers? Discuss their relative merit & demerits.
Answer:
(A) Every SBU is a profit centre but every profit centre is not a SBU
Business units are suitable candidate for being establish as profit centres. Head of such units have control over production,
marketing, development of new product etc and are in a position to exercise control over costs & revenues.
However to gain maximum advantage from profit centre, the head of such a unit should have complete autonomy as the CEO of
an independent ccompany. This is practically not feasiable as the organization would be losing the advantage of size and
synergy, moreover, it would lead to the abdication of top management responsibility.
Most business units are created as profit centers since managers in charge of such units typically control product development,
manufacturing & marketing resources. these managers are in a position to influence revenues and costs and as such can be held
accountable for the “bottom line.” However, a business unit manager’s authority may be constrained in various ways, which
ought to be reflected in a profit center’s design and operation.
(B) Conditions that should be fulfilled for an organization to be converted into a profit centre
Functional organization is one which each principal manufacturing or marketing function is performed by a separate
organization unit. when such an organization is converted to one in which each major unit is responsible for both the
manufacture and marketing ,the process is termed divisionalization. As a rule, companies create business units because they
have decided to delegate more authority to operating managers. Although the degree of delegation may differ
From company to company, complete authority for generating profits is never delegated to a single segment of the business.
Many management decisions involve proposals to increase expenses with the expectation of am even greater increase in sales
revenue. such decisions are said to involve expense/revenue trade offs .additional advertising expense is an example. However
three condition given below must be fulfilled before such a trade off decision or decision involving specialized knowledge and
skills can be delegated safely to a manager lower down in the organizational hierarchy:
1. Relevant information must be available with the manager for making trade-offs between expenses & revenue.
2. It is not possible to manufacture and market the product in the absence of specialized manufacturing aand marketing
knowledge and skills and the knowledge & skills should be available with the manager.
3. It is possible to measure the effectiveness with which the manager is carrying out these Trade-offs and decision involving
specialized knowledge and skills.
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.
(C) Different ways to measure the performance of profit centre and there relative merits & demerits
Particulars Amount
(Rs.000)
Sales 500
Less: Marginal cost 200
Contribution 300
Less: Fixed Cost 100
Direct profit 200
Particulars Amount
(Rs.000)
Sales 500
Less: Marginal cost 200
Contribution 300
(iii) Income Before Income Tax:-
Particulars Amount (Rs.000)
Income before tax represents the excess of sales
Sales 500
revenue over the cost of sales. It is computed by
Less: Marginal cost 200
deducting from the sales value the following expenses:
Contribution 300
(a) Managerial cost of sales
Less: Fixed Cost ( Incurred in Profit centre) 100
(b) Fixed cost of the profit centre
Direct profit 200
(c) Controllable corporate charges
Less: Controllable corporate charges 50
(d) other controllable allocated overheads
Controllable Profit 150
Less: Other allocated corporate overheads 30
Merits:-
Income Before Income Tax 120
(a) Act as motivational tool for responsibility centre
manager
(b) It reflects as true performance of the entity and facilitates interim comparisons.
(c) Allocation of corporate overheads helps to keep in check head office expenditure as they would be subject to question
by profit centre managers.
Demerits:-
(a) Suitable methods of allocating corporate overheads to profit centre are difficult to find.
(b) It is not possible to control the costs incurred by corporate service entities like legal, human resource development,
finance & accounts etc.
Q4) (a) “Transfer Pricing is not an Accounting Tool”. Comment with illustrations.
Answer:
1. Some companies use the term “TP” to refer to the amount used in accounting , for transfer of goods & services between
responsibility centres. But in MCS, “TP” is used to the value placed on transfer of goods and services in transaction where
at least one of the two parties is a profit centre.
2. Transfer price involves a profit since an independent company would not transfer goods & services to another independent
company at the cost or less, hence we exclude the mechanics of allocating cost in a cost accounting system since such costs
do not include the profit element.
3. Transfer price in MCS is to be used in the same way as in transaction between independent companies.
4. The fundamental principal is that, the transfer price should be similar to the price that would be charged if the product was
sold externally or purchase from outside vendors.
5. The profit included in transfer price is a notional profit, but in pure accounting it is a real profit since it includes
transactions with external perties.
6. Transfer price is more of an internal mechanism of allocating profit as compared to accounting which is more of an
external mechanism of real profit.
7. Transfer price depends upon the accounting profit sice all future decisions would be based on the current profit of the
company.
Hence Transfer pricing is not an Accounting Tool.
Q4) (b) Market price is ideal transfer price even in limited market. Comment
Answer:-
Transfer price can be very simple or complex depending on the business. Ideally we need a proper negotiation system,
a proper arbitration system, a proper conflict resolution system, a proper product classification system, competitive managers,
good atmosphere, available market price, freedom to source and full information. All of these have to be present for a market
price based transfer price system to induce goal congruence. Ideally, the buying and selling profit centre manager should be free
to source but it may be unfeasible by company policy.
Limited market: Market for buying & selling profit centres may be limited due to:
(i) The existence of internal capacity might limit the development of external sales. Most of the large companies in an
industry are highly integrated hence production capacity for an intermediate product is limited. These profit centres
can handle only a limited amount of demand. When internal capacity become tight, the market is flooded with
demand for the intermediate product. Even though outside capacity exists it may be unavailable to the integrated
company unless used on a regular basis or it may have trouble getting it externally when capacity is limited.
(ii) If the company is a sole producer of a differential product then no external source exists.
(iii) If a comaapy has invested in facilities, it is likely to use external sources, unless the external selling price is equal
to variable cost which is unusual. Hence the produced products are captive.
Integrated Oil companies send crude oil from the production unit to the refining unit even if there is an external market for the
crude oil.
Even in the case of limited markets, the best transfer price satisfying all requirement of a profit centre is the “Competitive
Price”. If internal capacity is unavailable the company will buy from outside at the “Competitive Price”. The difference between
the “Competitive Price” and the internal cost is money saved by producing rather then buying.
Q5) XYZ Ltd. has two division : A and B. Return on Investment for both divisions is 15%. There details are given
below:
Particulars Division A (Rs.) Division B (Rs.)
Divisional Sales 40,00,000 96,00,000
Divisional Investment 20,00,000 32,00,000
Profit 3,00,000 4,80,000
Analyze and comment on divisional performance of each with respect to Operational Excellence & Marketing Effectiveness.
Solution:
Table showing evaluation of Divisional Performance
Particulars Division A Division B
Divisional Sales 40,00,000 96,00,000
Divisional Investment 20,00,000 32,00,000
Profit 3,00,000 4,80,000
Profit Margin 7.5% 5%
Assets Turnover 2 times 3 times
ROI 15% 15%
Comments:
(a) The ROI for both Divisions is the same at 15%
(b) The profitability of Division A is higher at 7.5% with respect to the Profitability of Division B of 5%.
(c) The assets turnover ratio of Division B is better at 3 times rather then Division A which is 2 times
(d) Division B has earned greater profit of Rs. 480000 as compare to Division A which earned only Rs.300000.
(e) Sales in absolute terms of Division B Rs.9600000 were greater then sales of Division A Rs.4000000.
(f) Assets invested in Division B were Rs.3200000 as compared to Division A which had only Rs.2000000.
(g) The division would be better evaluated if they were measured on the basis of EVA rather then ROI
Thus From the above Division A performance is good. As with same ROI i.e. 15% it provides high profit margin the Division
B. The profit margin of division B is lower because any of the following reasons like:
• Due to inefficency
• Due to excess input cost.
This profit margin can be improved by following actions:
• Keeping same sales and reduce cost
• Increase sales keeping same cost
• Increase sales and reduce cost.
Q7) Organizations with Business Division format have observed that Divisional Controller 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.
Answer:- In a business unit form of organization, the finance and accounting function is headed by a business unit controller.
The business unit controller reports to the business unit manager. He also reports to the corporate controller. This create what is
known as divided loyalty.
While dealing with organization structures we have come across what is known as dotted line relationships.
In some organization, business unit controller reports directly to corporate controller and have a dotted line
relationship with business unit managers. This indicates that the corporate controller is the business unit controller immediate
boss.
In sharp contrast to above, we have companies where business unit controller reports directly to business unit manager and have
what is known as dotted line relationship with the corporate controller.
In India, the business unit manager generally report directly to the business unit manager and has a dotted relationship with the
corporate controller.The reporting relation described above has its own merits & demerits. In case the business unit controller
reports directly to the corporate controller, the business unit manager may view him with suspicious and as a result may not
repose his trust and confidence in him. On the contrary, if the business unit controller reports directly to the business unit
manager, the former may not be in a position to discharge his responsibility in a faithful manner to the company.
Q8) What you understand by Goal Congruence? What are the informal factors that influence the Goal Congruence?
Answer:- 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 Company’s Goal is concerned (there action must speak Co’s
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 can not
do so on account of non availability of personnel.
Example 2– The marketing department has planned an impressive advertising campaign, which promises good returns, But say
due to cash crunch Company’s current financial position may not let to lose the strings
Example 3 – Production Manager may get a good applause for reducing cycle time; But at what cost? Building up the high
inventory i.e. higher investment in current assets. While doing so he just overlooked the financial interest of the company. •
After completing the given activity in more efficient manner the concerned manager scores the point/s on his score card. •
Whether his actions are leading to scoring of points on the organization’s score card too? if it is so then only one can say the
organization is marching towards a common goal.
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 Co’s 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.
It can also be calculated by taking operating cash flow and subtracting capital expenditures.
Free Cash Flow of the Firm is calculated as follows:-
A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses,
taxes and changes in net working capital and investments.
Calculated as:
This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used
to compare and analyze financial health.
A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate
that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should
dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems.
(iii) MCS in the Matrix Organization:
The matrix form of organization is a combination of the functional and divisional structures. While product lines are arranged
along one arm of the matrix, across the other arm could be arranged either functional or geographical division.
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
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.
The matrix form of organization have drawbacks too. It is difficult to manage the structure easily. The configuration dilutes
priorities and creates conflicts product lines and functional lines over the allocation of resources. Firms that follow this structure
are TCS, Shell etc.