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MCS University Paper 2002
Group No. 09
Deepika Punjabi 42Nandita Rai 43
Anish Rajput 44
Rakesh Ramwani 45Jeetu Sachdev 46
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1. Impact of Management Style on
Management Control� Usually, subordinates attitude reflects that
what they perceive their superiors attitude
ultimately stem them from the CEO.
� Managers come in all shapes and sizes. Some
are charismatic and outgoing, others are less
ebullient. Some spend much time looking and
talking to people, others rely more heavily on
written reports.
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2. Free Cash Flow
� FCF represents the cash that a company is
able to generate after laying out money to
maintain or expand its asset base.
� A measure of companys financial
performance.
� Calculated as-
FCF= Net Income + Depreciation Net
changes in working Cap. Capital Exp.
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3. Management Control Process
� Such system consists of following activities:
� Strategic Planning
� Budget Preparation� Execution
� Evaluation of performance
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4. Implication of Differentiated
Strategies on Controls
� Any organization, however well aligned its
structures is to the chosen strategy, can not
effectively implement its strategies without a
consistent management control system. While
organization structure defines the reporting
relationship and responsibilities and
authorities of different managers, it neededan appropriately designed control system to
the function effectively.
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Q 2.) Under which conditions
management is better advised not tocreate profit center. Explain the
advantage of creation of profit
center.
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� Three types of decisions are to be made:� Product decision
� Marketing decision
� Procurement or sourcing decision
In general, greater the degree of integration
within a company,more difficult it becomes toassign responsibility to a single profit centerfor all three activities.
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Advantages of Profit Centers
� Q uality of decision may improve.
� Speed of operating decision may increase as it
may not need to be referred to headquarters.� Headqarters,get free from day-today decision
making and hence,may concentrate on other
issues.
� Profit center provides top management the
information on profitability.
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Q.4 What is a responsibility center? List and
explain different types of Responsibility
Centres in organizations.
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What is a responsibility center?
� In simple words: an organizational unit for
which a manager is made responsible.
�
Examples: A specific store in a chain of grocerystores.
� A work-station in a production line
manufacturing automobile batteries.
� The payroll data processing center within a
firm.
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Types of Responsibility Centers
� Revenue Centers
� Cost Centers or Expense Centers
�Profit Centers and
� Investment Centers
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Revenue Centers
� Responsibility Centers whose members
control revenues but,
�
Not the manufacturing or acquisition cost of the products or service they sell, or
� The level of investment in the responsibility
center.
� In other words, you cannot link the input to
the output.
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Revenue Centers (continued)
� Most revenue centers may not set selling prices
� They definitely have no control over the costs of inputacquired
� These centers are generally not allocated costs of thegoods that they market. Manager is responsible onlyfor costs directly incurred by his/her unit.
� They are evaluated on the basis of actual sales ororders booked against budgets or quotas and
� Example: a unit of a chain store in a mall.
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Expense/Cost Centers
� Responsibility centers whose employees control costs, but
� Do not control their revenues or investment level.
� Examples: Production department in a manufacturing unit, a
dry cleaning business� Two types of costs:
± Engineered: those costs that can be reasonably associated with a cost
center direct labor, direct materials, telephone/electricity consumed,
office supplies.
± Discretionary: where a direct relationship between a cost unit andexpenses cannot be reasonably made; Management allocates them
on a discretionary basis (e.g. depreciation expenses for machines
utilized).
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Profit Centers
� Managers of profit centers control both the
revenues and costs of the product or service they
deliver.
� It is like an independent business except it is part
of a larger organization (e.g. departmental stores
of larger chains Wal Mart, restaurants,
corporate hotels such as Hilton, Holiday Inn).� The store manager would have responsibility for
pricing, product selection, and promotion.
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Profit Centers (continued)
� Cost for these units vary depending on ability tocontrol labor, waste, and hours.
� Revenues also will vary depending on the units servicelevel, location, etc.
� In other words, local discretion would affect revenuesand costs.
� Therefore, profits represent a broader index of bothcorporate and local decisions.
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Profit Centers (continued)
� If performance is poor, it may reflect poorconditions that no one in the organizationcould control local conditions.
� For this reason, organizations should notevaluate performance only based on costs andprofits, but
�
Perform detailed evaluations that includequality, material use, labor use, and servicemeasures that the local unit can control.
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Investment Centers
� Responsibility centers whose managers and
employees control revenues, costs, and the
level of investment.
� It is also like an independent business
(common when an organization acquires
another organization e.g. Sears financial
centers).
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Q.3. (b) Explain the problems faced in pricing
corporate services furnished by corporate
services staff to business units in the
company. Assume profit centers
decentralization.
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Problems associated with charging
business units
� There are some of the problems associated withcharging business units for services furnished bycorporate staff units.
� Central accounting, public relations, administrationthese are the costs of central service staff units overwhich business units have no control
� if these costs are charged at all, they are allocated, andthe allocations do not include a profit component.
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Cont.
� There are two types of transfers:
�For central services that the receiving unitmust accept but can at least partially control
the amount used.
� For central services that the business unit can
decide whether or not to use.
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Control over amount of service
� Business units may be required to usecompany staffs for services such asinformation technology and research and
development.
In these situations, the business unit manager
cannot control the efficiency with which theseactivities are performed but can control theamount of the service received.
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Optional use of Services
� In some cases management may decide that business unitscan choose whether to use central service units.
� Business units may procure the service from outside,
develop their own capability, or choose not to use theservice at all.
� This type of arrangement is most often found for suchactivities as information technology, internal consulting
groups, and maintenance work.
� These service centers are independent.
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Q.3 (a) Describe the features of cost based
and market price based transfer pricing
methods?
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Transfer pricing
Transfer Price is:the internal price charged by one segment of a firm for a
product or service supplied to another segment of the same
firmSuch as:
� Internal charge paid by final assembly division for
components produced by other divisions
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Market-Based Transfer Prices
� Top management chooses to use the price of a
similar product or service that is publicly
available. Sources of prices include trade
associations, competitors, etc.
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Market-Based Transfer Prices
� Lead to optimal decision making when threeconditions are satisfied:
1. The market for the intermediate product is
perfectly competitive2. Interdependencies of subunits are minimal
3. There are no additional costs or benefits to thecompany as a whole from buying or selling in the
external market instead of transacting internally
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Market-Based Transfer Prices
� A perfectly competitive market exists when there is a
homogeneous product with buying prices equal to selling
prices and no individual buyer or seller can affect those
prices by their own actions� Allows a firm to achieve goal congruence, motivating
management effort.
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Cost-Based Transfer Prices
� Top management chooses a transfer price based on the
costs of producing the intermediate product. Examples
include:
±
Variable Production Costs ± Variable and Fixed Production Costs
± One of the above, plus some markup
� Useful when market prices are unavailable,
inappropriate, or too costly to obtain
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Cost-Based Transfer Prices
� Top management chooses a transfer price based on the
costs of producing the intermediate product. Examples
include:
±
Variable Production Costs ± Variable and Fixed Production Costs
± One of the above, plus some markup
� Useful when market prices are unavailable,
inappropriate, or too costly to obtain
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Q7 What is goal Congruence and factors influencing
it?
Senior management wants the organization toattain the organizations goals. But the individual
members of the organizations have their own
personal goals, and they are not necessarily
consistent with those of the organization. The central
purpose of a management control system is to
ensure a high level of what is called GOAL
CONGRUENCE
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Factors influencing Goal Congruence:
� External Factors
�
Internal Factors ±Culture
±Management style
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Q5) What are interactive controls?
� Interactive control is a subset of the management
control information that has a bearing on thestrategic uncertainties facing the businessbecomes the focal point.
� Industries subject to very rapid environmental
changes, management control information canalso provide the basis for thinking about newstrategies.
� Learning organization refers to the ability of organization employees to learn to cope with
environmental changes on an ongoing basis. � To facilitate the creation of a learning
organization.
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� Interactive control has the followingcharacteristics:
± A subset of the management control information thathas a bearing on the strategic uncertainties facing thebusiness becomes the focal point.
± Senior executives take such information seriously.
±
Managers at all levels of the organization focusattention on the information produced by the system.
± Superiors, subordinates and peers meet face-to-faceto interpret and discuss the implications of theinformation for future strategic
± The face-to-face meetings take the form of debate andchallenge of the underlying data, assumptions, andappropriate actions.
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� Q. 5 b Discuss the features of management
control system in nonprofit organization.
� Ans: A nonprofit organization was define by
law, is an organization that cannot distribute
assets or income to, or for the benefit of, its
member, its officers, directors. � The organization can, of course, compensate
its employees, including officers and
members, for services rendered and for goodssupplied.
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� Characteristics of nonprofit organization
� Absence of the Profit Measure
�
Contributed capital� Fund Accounting
� Governance
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� Management control System and its features
in nonprofit organization
± Product Pricing
± Strategic planning and budget Preparation
± Operation and Evaluation
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� Q.6 (A) Explain the concept of ROI. What are
its advantages?� Return on investment (ROI) is the ratio of
profit before tax to the gross investment.
ROI is calculated with the help of the followingformula:
ROI = (Pre-Tax Profit/Sales) X (Sales/Net
Assets) or (Pre-Tax Profits/Net Assets)
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� Advantages of ROI
1.ROI relates return to the level of investmentand not sales as the rate of return is more
realistic.
2.ROI can be decomposed into other variablesas shown. These variables have tremendous
analytical value.
3.ROI is an effective tool for inter-firm
comparison
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Q9) Investment base used in performance
evaluation of investment centres consists of various elements. Explain general practices
used in organisation in treatment of each
element and the likely response induced by
the treatment of each of these elements in
managers.
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� PERFORMANCE MEASURES FOR INVESTMENT
CENTERS
� Rate of Return on Investment (ROI)
ROI = (Pre-Tax Profit/Sales) X (Sales/Net
Assets) or (Pre-Tax Profits/Net Assets)
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� Advantages:
1) ROI allows management to assess both
profitability and efficiency in using assets.2) Divisions of unequal size can be com-pared.
3) Management is provided with information tomake decisions on where to invest
additional company funds. The company knowswhere it is getting "the most bangfor its buck."
Disadvantage:
If a manager is evaluated based on ROI, he or shewill not invest in any project that will lower thedivision's ROI, even if it would increase thecompany's profitability.
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� Residual Income
The amount of income that an individual has
after all personal debts, including the
mortgage, have been paid. This calculation is
usually made on a monthly basis, after the
monthly bills and debts are paid. Also, when amortgage has been paid off in its entirety, the
income that individual had been putting
toward the mortgage becomes residual
income.
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� Advantages:
1) It considers a company's minimum rate of
return.
2) Any project that increases residual income
will be pursued by division management.
� Disadvantage:
The relative size of the divisions is not
considered.
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� The balanced scorecard is a set of financial
and nonfinancial measures that reflect
multiple performance dimensions of a
business.
� EVA
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� Transfer Pricing
It is the Price at which Divisions of a company
transact with each other. Transactions may
include the trade of supplies or labor between
departments. Transfer prices are used when
individual entities of a larger multi-entity firm are
treated and measured as separately run entities.
Also known as transfer cost
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� Benefits of transfer pricing
1. Divisions can be evaluated as profit or
investment centers.
2. Divisions are forced to control costs and
operate competitively.
3. If divisions are permitted to buy component
parts wherever they can find the best price
(either internally or externally), transfer
pricing will allow a company to maximize itsprofits.
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� Few other Non - financial Performance
Measurement Tool
1.Measures of product quality
2.Customer complaints and warranty experience
3.Customer satisfaction and retention rates
4.Product availability and on-time performance
5.New product time to market and market share
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Q.10. Year and information about two expense
centres in an organization
Providing services is tabulated below to be used for
review and performance appraisal. All figures are in
Rs. : -
CentreB
udget ActualO
verB
udget UnderBudget
A 13,30,893 13,85,154 54,261 -
B 11,76,302 11,30,073 - 46,229
Total 25,07,195 25,15,227
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� Number of personnel:
� A 46 46 - -� B 26 24 - 2
Manager to whom the heads of these two centers
report is not clear on how to use the availableinformation for evaluation. Assuming that any
further information requested would be
available ( on proper justification), assistant
Manager in his task of evaluation.
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� Solution:
Center B = 11,76,302/26 = 45,242.38 per person
45,242.38* (actual employee) 24 = 1,085,817.12
This should have been the actual base in the budget.
Actual amount spent is = 1130073-1085817.12
= 44,255.88
1130073/24 = 47086.375- per person actual expense.1176302/26 = 45242.38- per person actual expense.
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47086.375-45242.38 =1843.995= 1844
Verification = 1844*24
= 44256 (Which is same as actual to be spent asper budget.)
44265 over spent
For A budget = 1330893/46 = 28932.45
Actual = 1385154/46 = 30112.04
30112.04-28932.45 = 1179.59.
Therefore verification = 1179.59*46
= Rs. 54261(over budget)