SlideShare una empresa de Scribd logo
1 de 112
Descargar para leer sin conexión
Punjab Technical University 
World over distance Education is fast growing mode of education because of the unique benefits 
it provides to the learners. Universities are now able to reach the community which has for so 
long been deprived or higher education due to various reasons including social, economic and 
geographical considerations. Distance Education provides them a second chance to upgrade their 
technical skills and qualifications. 
Some of the important considerations in initiating distance education in a country like India, has 
been the concern of the government in increasing access and reach of higher education to a larger 
student community. As such, only 6-8% of students in India take up higher education and more 
than 92% drop out before reaching 10+2 level. Further, avenues for upgrading qualifications, 
while at work, is limited and also modular programs for gaining latest skills through continuing 
education programs is extremely poor. In such a system, distance education programs provide 
the much needed avenue for: 
z Increasing access and reach of higher education: 
z Equity and affordability of higher education to weaker and disadvantaged sections of the 
society; 
z Increased opportunity for upgrading, retraining and personal enrichment of latest 
knowledge and know-how; 
z Capacity building for national interests. 
One of use important aspects of any distance education program is the learning resources. 
Learning material provided to the learner must be innovative, thought provoking, 
comprehensive and must be tailor-made for self-learning. It has been a continuous process for the 
University in improving the quality of the learning material through well designed course 
materials in the SIM format (self-instructional material). While designing the material, the 
university has researched the methods and process of some of the best institutions in the world 
imparting distance education. 
About the University 
Punjab Technical University (PTU) was set up by the Government of Punjab in 1997 through a 
state Legislative ACT. PTU started with a modest beginning in 1997, when University had only 
nine Engineering and thirteen Management colleges affiliated to it. PTU now has affiliated 43
Engineering colleges, 56 colleges imparting Management and Computer Application courses, 20 
institutions imparting pharmacy education, 6 Architecture institutions, 2 Hotel Management and 
12 Regional Centres for imparting M. Tech and Ph. D Programs in different branches of 
Engineering and Management. During a short span of nine years, the University has undertaken 
many innovative programs. The major development during this period is that University has 
restructured its degree program and upgraded syllabi of the course in such a way as to increase 
the employability of the student and also to make them self-reliant by imparting Higher 
Technical Education. We at Punjab Technical University are propelled by the vision and wisdom 
of our leaders and are striving hard to discharge our duties for the overall improvement of 
quality of education that we provide. 
During a short span of nine years, the University has faced various challenges but has always 
kept the interest of students as the paramount concern. During the past couple of years, the 
University has undertaken many new initiatives to revitalize the educational programs imparted 
with the colleges and Regional centers. 
Though knowledge and skills are the key factors in increasing the employability and competitive 
edge of students in the emerging global environment, an environment of economic growth and 
opportunity is necessary to promote the demand for such trained and professional manpower. 
The University is participating in the process of technological growth and development in 
shaping the human resource for economic development of the nation. 
Keeping the above facts in mind Punjab Technical University, initiated the distance education 
program and started offering various job oriented technical courses in disciplines like information 
technology, management, Hotel Management, paramedical, Media Technologies and Fashion 
Technology since July 2001. The program was initiated with the aim of fulfilling the mandate of 
the ACT for providing continuing education to the disadvantaged economically backward 
sections of society as well as working professionals for skill up-gradation. 
The University has over the years initiated various quality improvement initiatives in running its 
distance education program to deliver quality education with a flexible approach of education 
delivery. This program also takes care of the overall personality development of the students. 
Presently, PTU has more than 60 courses under distance education stream in more than 700 
learning centers across the country.
About Distance Education Program of PTU 
Over the past few years, the distance education program of PTU has gained wide publicity and 
acceptance due to certain quality features which were introduced to increase the effectiveness of 
learning methodologies. The last comprehensive syllabus review was carried out in the year 2004- 
05 and the new revised syllabus was implemented from September 2005. The syllabus once 
reviewed is frozen for a period of 3 years and changes, if any, shall be taken up in the year 2008. 
Various innovative initiatives have been taken, which has increased the popularity of the 
program. Some of these initiatives are enumerated below: 
1. Making a pyramid system for almost all courses, in which a student gets flexibility of 
continuing higher education in his own pace and per his convenience. Suitable credits are 
imparted for courses taken during re-entry into the pyramid as a lateral entry student. 
2. Relaxed entry qualifications ensure that students get enough freedom to choose their 
course and the basics necessary for completing the course is taught at the first semester 
level. 
3. A comprehensive course on „Communications and Soft Skills‰ is compulsory for all 
students, which ensures that students learn some basic skills for increasing their 
employability and competing in the globalized environment. 
4. Learning materials and books have been remodeled in the self-Instructional Material 
format, which ensures easy dissemination of skills and self-learning. These SIMs are given 
in addition to the class notes, work modules and weekly quizzes. 
5. Students are allowed to take a minimum of 240 hours of instruction during the semester, 
which includes small group interaction with faculty and teaching practical skills in a 
personalized manner. 
6. Minimum standards have been laid out for the learning centers, and a full time counselor 
and core faculty is available to help the student anytime. 
7. There is a wide network of Regional Learning and Facilitation Centers (RLFC) catering to 
each zone, which is available for student queries, placement support, examination related 
queries and day-to-day logistic support. Students need not visit the University for any of 
their problems and they can approach the RLFC for taking care of their needs. 
8. Various facilities like Free Waiver for physically challenged students, Scholarship scheme 
by the government for SC/ST candidates, free bus passes for PRTC buses are available to 
students of the University. 
The university continuously aims for higher objectives to achieve and the success always gears us 
for achieving the improbable. The PTU distance education fraternity has grown more than 200% 
during the past two years and the students have now started moving all across the country and 
abroad after completing their skill training with us. 
We wish you a marvelous learning experience in the next few years of association with us! 
DR. R. P. SINGH 
Dean 
Distance Education
Dr. S. K. Salwan 
Vice Chancellor 
Dr. S. K. Salwan is an eminent scientist, visionary and an experienced administrator. He is a 
doctorate in mechanical engineering from the IIT, Mumbai. Dr. Salwan brings with him 14 years 
of teaching and research experience. He is credited with establishing the Department of Design 
Engineering at the institute of Armament Technology, Pune. He was the founder-member of the 
integrated guided missile programme of defence research under His Excellency Honorable Dr. 
A.P.J. Abdul Kalam. He also established the high technology missile center, RCI at Hyderabad. 
He has been instrumental in implementing the Rs 1000-crore National Range for Testing Missiles 
and Weapon Systems at Chandipore, Balance in a record time of three years. He was director of 
the Armament Research and Development Establishment, Pune. Dr. Salwan has been part of 
many high level defence delegations to various countries. He was Advisor (Strategic project) and 
Emeritus Scientist at the DRDO. Dr. Salwan has won various awards, including the Scientist of 
the Year 1994; the Rajiv Ratan Award, 1995, and a Vashisht Sewa Medal 1996, the Technology 
Assimilation and Transfer Trophy, 1997 and the Punj Pani Award in Punjab for 2006. 
Dr. R.P. Singh 
Dean, Distance Education 
Dr. R.P. Singh is a doctorate in physics from Canada and has been a gold medallist of Banaras 
Hindu University in M.Sc. Dr. Singh took over the Department of Distance Education in 
November 2004 and since then the University has embarked on various innovations in Distance 
Education. 
Due to combined efforts of the department, the RLFCÊs and Centers, and with active support of 
the Distance Education Council headed by Dr. O.P. Bajpai, Director University College of 
Engineering Kurukshetra University the distance education program of PTU is now a structured 
system which empowers the learner with requisite skills and knowledge which can enhance their 
employability in the global market. Dr. R. P. Singh is promoting distance education at the 
national level also and is a founder member of Education Promotion Society of India and is 
member of various committees which explores innovative ways of learning for the disadvantages 
sections of society. The basic aim of the distance education programs has been to assimilate all 
sections of society including women by increasing the access. Reach, equity and affordability of 
higher education in the country.
MANAGEMENT CONTROL 
SYSTEM 
MBA – 518 
This SIM has been prepared exclusively under the guidance of Punjab Technical University (PTU) 
and reviewed by experts and approved by the concerned statutory Board of Studies (BOS). It 
conforms to the syllabi and contents as approved by the BOS of PTU.
Copyright © Ravindhar Vadapalli, 2008 
No part of this publication which is material protected by this copyright notice may be 
reproduced or transmitted or utilized or stored in any form or by any means now known or 
hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, 
recording or by any information storage or retrieval system, without prior written permission 
from the publisher. 
Information contained in this book has been published by Excel Books Pvt. Ltd. and has been 
obtained by its authors from sources believed to be reliable and are correct to the best of their 
knowledge. However, the publisher and its author shall in no event be liable for any errors, 
omissions or damages arising out of use of this information and specifically disclaim any implied 
warranties or merchantability or fitness for any particular use. 
Published by Anurag Jain for Excel Books Pvt. Ltd., A-45, Naraina, Phase-I, New Delhi-110 028 
Tel: 25795793, 25795794 email: eb@excelbooks.com
PTU DEP SYLLABI-BOOK MAPPING TABLE 
MBA – 518 MANAGEMENT CONTROL SYSTEM 
Syllabi Mapping in Book 
Section I 
Management Control System: Basic concepts, nature and scope. 
Control environment – Concept of goals and strategies. 
Behavioral considerations. 
Responsibility Centers: Revenue and expense centers, Profit 
centers, Investment centers. 
Section II 
Transfer Pricing: Objectives and methods. 
Budgeting: Budget preparation, Types of budgets. Behavioral 
aspects of budgets. 
Section III 
Variance analysis and reporting. Performance analysis and 
measurement. Impact on management compensation. 
Modern Control Methods: JIT, TQM and DSS. Control in service 
organisations. 
Unit 1: Introduction to 
Management Control System 
(Page 3-14) 
Unit 2: Responsibility Centres 
(Page 15-29) 
Unit 3: Transfer Pricing 
(Page 33-37) 
Unit 4: Budgeting 
(Page 39-68) 
Unit 5: Variance Analysis 
and Reporting 
(Page 71-92) 
Unit 6: Modern 
Control Methods 
(Page 93-105)
Mba 518
Contents 
Section-I 
UNIT 1 INTRODUCTION TO MANAGEMENT CONTROL SYSTEM 3 
Introduction 
Basic Concepts 
Characteristics of a Management Control System (MCS) 
Nature of Management Control 
Scope of MCS 
Control Environment 
Behavioural Considerations 
Summary 
Keywords 
Review Questions 
Further Readings 
UNIT 2 RESPONSIBILITY CENTRES 15 
Introduction 
Expense Centre 
Cost Centre 
Profit Centres 
Investment Centre 
Residual Income (RI) 
Summary 
Keywords 
Review Questions 
Further Readings 
Section-II 
UNIT 3 TRANSFER PRICING 33 
Introduction 
Objectives of Transfer Pricing 
Methods of Transfer Pricing 
Summary 
Keywords 
Review Questions 
Further Readings 
UNIT 4 BUDGETING 39 
Introduction 
Process of Budget Preparation 
Classification of Budget 
Sales Budget
Sales Overhead Budget 
Cash Budget 
Factory Overheads Budget 
Flexible Budget 
Zero-base Budgeting 
Behavioural Aspects of Budgeting 
Summary 
Keywords 
Review Questions 
Further Readings 
Section-III 
UNIT 5 VARIANCE ANALYSIS AND REPORTING 71 
Introduction 
Variance Analysis 
Material Cost Variance (MCV) 
Material Price Variance 
Overhead Variance 
Sales Variance 
Reporting 
The Budget 
Summary 
Keywords 
Review Questions 
Further Readings 
UNIT 6 MODERN CONTROL METHODS 93 
Introduction 
JIT 
Total Quality Management 
Decision Support System (DSS) 
Summary 
Keywords 
Review Questions 
Further Readings
SECTION-I 
Unit 1 
Introduction to Management Control System 
Unit 2 
Responsibility Centres
Introduction to 
Management Control System 
Notes 
Punjab Technical University 3 
Unit 1 Introduction to 
Management 
Control System 
Unit Structure 
• Introduction 
• Basic Concepts 
• Characteristics of a Management Control System (MCS) 
• Nature of Management Control 
• Scope of MCS 
• Control Environment 
• Behavioural Considerations 
• Summary 
• Keywords 
• Review Questions 
• Further Readings 
Learning Objectives 
At the conclusion of this unit you should be able to: 
• Define management control system. 
• Describe features, nature and areas of management control 
• Know what are the goals and strategies of effective control system 
• Discuss the behavioural aspects of management control system 
Introduction 
Management controls are used daily by managers and employees to accomplish the 
identified objectives of an organization. Simply put, management controls are the 
operational methods that enable work to proceed as expected. Most controls can be 
classified as preventive or detective. Preventive controls are designed to discourage 
errors or irregularities. For example: 
z A manager's review of purchases prior to approval prevents inappropriate 
expenditures of office funds. 
z A computer program which asks for a password prevents unauthorized 
access to information. 
Detective controls are designed to identify an error or irregularity after it has 
occurred. Examples include the following: 
z An exception report that detects and lists incorrect or incomplete transactions. 
z A manager's review of long distance telephone charges will detect improper 
or personal calls that should not have been charged to the account. 
Often, management controls are documented in terms of policies and procedures. 
However, sometimes as an organization undergoes structural and functional changes,
Management Control System 
Notes 
4 Self-Instructional Material 
people within the organization create or adopt ways of ensuring that work proceeds 
normally. Many times, these methods (controls) are not documented. The purpose of 
a Management Control Review (MCR) is to evaluate the entire system or management 
controls to help your unit operate more efficiently and effectively, and to provide a 
reasonable level of assurance that the process and products for which you are 
responsible are adequately protected. 
A MCR provides a variety of benefits which promote sound management, including 
the following: 
z Ensuring that administrative, financial, and programmatic risks have been 
adequately addressed. 
z Eliminating excessive controls that may have accumulated over the years, 
allowing for more efficient operations. 
z Increased confidence that responsibilities are being carried out according to 
plan. 
Basic Concepts 
Management Control is a process of assuming that resources are obtained and used 
effectively and efficiently in the accomplishment of the organisationÊs objectives. 
Some leading definitions of managing control are as follows: 
„Management Control seeks to compel events to conform to plans.‰ 
·Billy, E. Goaz 
„Some sort of systematic effort to compare current performance to a predetermined plan or 
objective, presumably in order to take any remedial action required.‰ 
·William Travers Jerome 
Control, in its managerial sense, can be defined as, „the presence of that force in a business 
which guides it to a predetermined objective by means of predetermined policies and 
decisions.‰ 
·Mc Farland, D.E. 
„Control is that function of the system which provides direction in conformance to the plans.‰ 
·Rosen, J.K. 
The above definitions indicate very clearly that management control has to do with 
the outgoing operation of the business. Control is a fundamental necessity for the 
success of a business. It is the function of the management that helps realisation of the 
business objectives. From time to time current performance of the various operations 
is compared to a predetermined standards or ideal performance and in case of 
variance remedial measures are adopted to conform operations to the set plan or 
policy. 
Characteristics of a Management Control System 
(MCS) 
The main characteristics of Management Control are the following: 
1. A Total System: Management Control System is a total system as it covers all 
aspects of the companyÊs operations. It is an overall process of the enterprise 
to fit together the separate plans for various segments so as to assure that 
each harmonises with one another and that the aggregate effect of all of them 
on the whole enterprise is satisfactory.
Introduction to 
Management Control System 
Notes 
Punjab Technical University 5 
2. Monetary Standards: Barring some exceptions, the MCS is built around a 
financial structure and all the resources and outputs are expressed in terms of 
money. The results of each responsibility centre, in respect to production and 
resources, are expressed in terms of the common denominator of money. 
3. Definite Pattern: The management control process follows a definite pattern 
and timetable. The whole operational activity is regular and rhythmic. It is a 
continuous process even if the plans are changed in the light of experience or 
change in technology. 
4. Coordinated System: Management Control System is fully coordinated and 
integrated system. For instance, if the information for one purpose varies 
from that collected for another purpose, the data reconcile with one another. 
It is, therefore, more feasible to consider the interlocking sub-processes as a 
single set for achieving the objectives of the enterprise. 
5. Line Managers: Figures themselves are nothing more than marks on pieces of 
paper. Anything that the business accomplishes is the result of the actions of 
the people. Information collected from various sources has to be properly 
organised. The line managers are the focal points in management control 
system who alone can influence others to improve the performance. Business 
budgets are prepared on their advice and suggestion. They can encourage 
persons to work efficiently in the interests of the enterprise as to achieve the 
objectives set forth. 
6. Emphasis: Management control emphasises on search for planning as well as 
control. Both should go hand in hand to achieve the best results. It has an 
organisational aspect also inasmuch as lines of communication are required 
for the collection and transmission of control information. 
Nature of Management Control 
It is through control that the management assures itself that what the organisation 
does conform to management plans and policies. Accounting information is used in 
control as a means of communication of motivation and of appraisal. It is not 
managementÊs job to work personally but it sees to it that the work gets done by 
others. Control is an important element of the process of managing. In managerial 
terminology, control is ensuring work accomplishment according to plans. It is the 
process that guides and controls operations towards some predetermined goods. 
According to Prof. R.N. Anthony „Management control is the process by which 
managers assure that resources are obtained and used effectively and efficiently in the 
accomplishment of an organisationÊs objectives.‰ It seeks to compel events to conform 
to plans. It is a process by which the people in the organisation are made to work 
properly and most efficiently with a view to attain the best results. It is concerned 
with measuring and evaluating performance so as to secure the best results under the 
circumstances. An effort is made to compare the current performance to a 
predetermined objective or plan. Thus control is a fundamental function of the 
management to ensure work accomplishment according to predetermined plans and 
standards. 
Other Characteristics of control are as follows: 
1. Control is an essential function of every manager: Managers at every level 
have to focus attention towards future operational and accounting data taking 
into consideration past performance, present trends and anticipated economic 
and technological changes. The nature, scope and level of control will be 
governed by the level of manager exercising it.
Management Control System 
Notes 
6 Self-Instructional Material 
2. Control implies the existence of goals and plans: Without predetermined 
goals and plans management control is not possible. These two provide a link 
between such future anticipations and actual performance, as the future gets 
converted into present and past with the passage of time. Managers quantify 
their hopes and ambitions of the future on a realistic basis and to use them 
later as standards for measurement of actual performance. In the absence of 
objections and goals the results are likely to be different from what desired. 
Plans complement objectives which can be attained on the basis of proper 
plans. Policy sets the intention while control looks and ascertains how far the 
objectives are attained. 
3. Control is forward looking: Planning is the process of deciding what action 
should be taken in the future. One cannot change the events that have 
happened in the past. The nature of managerial control is forward looking. It 
is on the basis of evaluation of past performance that the future plans or 
guidelines can be laid down. Management control involves managing the 
overall activity of the enterprise for the future. It prevents deviations in 
operational goals. 
4. Management Control a continuous process: Control is a continuous process 
over the human and material resources. It demands eternal vigilance of every 
step. Regulating the activities of people associated in the common task of 
attaining the objectives of the organisation is the primary aim of management 
control which requires strict and careful vigilance. Success can be achieved 
only when the management controls the men and circumstances around him 
on a regular basis. Business conditions are always changing so management 
must be always adapting itself to the changed circumstances. Therefore, 
management control is a continuing activity. 
5. People oriented: Management control is significant to internal control system 
as its approach is people oriented. People assume a new role, attitudes, and 
motivations under a sound management. Control is attained through people 
and not lifeless materials. It is the managers, engineers and operators who 
implement the ideas and objectives of the management. It is people who 
make or mar a thing. The coordination of the main divisions of a concern 
makes for smoother operation and less friction which results in the 
achievement of predetermined objectives. 
Scope of MCS 
Managerial Control, as we know, is an important process in which accounting 
information is used as to accomplish the organisationÊs objectives. Therefore, the 
scope of control is very wide that covers a broad range of management activities. 
According to Holden, Fish and Smith the main areas of control are as follows: 
1. Policies Control: The success of a business hangs on formulation of sound 
policies and their proper implementation. There is a great need of control 
over policies. 
2. Control over Organisation: For the control over organisation the 
management uses organisationÊs manual and organisational chart. Designing 
and organising various departments for the smooth running of the business is 
very essential. If any problem or conflict arises the management control 
attempts to remove the causes of such frictions and rationalise the 
organisational structure as to ensure its efficient working. 
3. Control over Personnel: Anything that the business accomplishes is the result 
of the action of those people who work in the organisation. It is the people,
Introduction to 
Management Control System 
Notes 
Punjab Technical University 7 
not figures, that get things done. The personnel manager is responsible to 
draw a control plan for having control over the personnel of the concern. 
4. Control over Wages and Salaries: Control over wages and salaries is 
sometimes assigned to the personnel department or a specially constituted 
wage and salary committee. 
5. Control over Costs: The cost accountant who is responsible to control costs 
sets cost standards, labour material and overheads. He makes comparisons of 
actual cost data with standard cost. Cost control is a delicate task and is 
supplemented by budgetary control systems. 
6. Control over Techniques: It implies the use of best methods and techniques so 
as to eliminate all wastage in time, energy and material. The task is 
accomplished by periodic analysis and checking of activities of each 
department with a view to avoid and eliminate all non-essential motions, 
functions and methods. 
7. Control over Capital Expenditure: Various projects entailing huge amounts 
require control. This is exercised through a system of evaluation of projects in 
terms of capital. Capital budget is prepared for the whole concern. Every 
project is evaluated in terms of the advantages accruing to the firm. For this 
purpose capital budgeting, project analysis, breakeven analysis, study of cost 
of capital etc. are carried on extensively. 
8. Production Control: The function of production control is to plan, organise, 
direct and control the necessary activities to provide products and services. 
Once the production system is designed and activated the problems arise in 
the areas of production, planning and control. Market needs and attitudes of 
consumers are studied minutely for revision in product lines and their 
rationalising. Routing, scheduling, dispatching, follow up, Inventory control, 
Quality control are the various techniques of production control. 
9. Overall Control: A master plan is prepared for overall control and all the 
concerned departments are made to involve in this procedure. 
10. Control over External Relations: Public relations department should always 
be alert in improving external relations. It may also prescribe norms and 
measures for other operating departments to insist on cordial relations with 
all the parties. 
11. Control over Research and Development: Research activities, being technical 
in nature, cannot be controlled directly. But it should be seen that all facilities 
are provided to the research staff to improve their ability and keeping in 
touch with the up-to-date techniques and devices. Training facilities should 
also be provided by having a research budget in the business. 
Process of Control 
1. Well-defined Objectives and Goals: The objectives and goals of the 
organisation should be crystal clear and well-defined in the process of 
control. The organisational goals should be split into sub-goals at 
departmental level. The operation of the various functions and their 
coordination should be vested in the hands of the executives who are armed 
with sufficient authority or power to fulfil their responsibility. The planned 
goals of the enterprise or of a particular department serve as a standard for 
performance measurement. 
2. Determination of Strategic Point of Control: The responsibility centres and 
strategic points of control should be selected and fixed. To make the control
Management Control System 
Notes 
8 Self-Instructional Material 
process effective, the management should concentrate upon strategic points 
only. 
3. Establishment of Control Standards: These standards are established criteria 
against which actual performance can be compared and measured in terms of 
money, time, physical units or some other index. The object of predetermined 
standards is that comparison between actual performance and targets 
performance is made possible. Continuous comparison is very necessary. This 
requires tabulating the targets framed, collecting and collating data regarding 
actual performance and reporting variations periodically to the controlling 
authorities. It is obvious that control is not possible unless actual performance 
and the standard against which it is being measured are comparable. 
4. Determination of Controllable Costs and Control Period: Optimum control 
does not mean excessive control. Sometimes good results are achieved only if 
critical points are identified. Secret of good control is to establish strategic 
points where corrective actions will be the cheapest and most effective. 
5. Strengthening the Organisation: The complete framework of control is aimed 
at strengthening the organisation. Planning is a prerequisite. Control should 
be tailored to fit the organisation. There should be a system of checks on the 
managerial activity of subordinates. The organisation should be strengthened 
first to overcome the weaknesses of deviations. Controls should incorporate 
sufficient flexibility in them so as to remain effective despite the failure of 
plan. 
6. Measurement of Performance: It is not only a process of comparison of actual 
performance with the objectives, but to initiate steps to achieve the objective. 
This is done without encroaching upon the authority and scope of authority 
of the manager concerned. The evaluation of performance is very necessary. It 
involves the measurement of performance in respect of work and in terms of 
control standards. In the opinion of Peter F. Drucker, the measurement of 
performance must be clear, simple, rational, relevant and reliable. The 
effectiveness of a control system depends upon the prompt reporting of past 
results to the persons who have power to produce changes. The next step is to 
compare the performance with the planned standards. It is important to 
determine the limits within which the variations can be held and still to be 
regarded within control when performance is measured accurately. The 
management is not only required to find out the extent of variations but the 
causes of variations must also be ascertained correctly. The manager should 
be able to distinguish between minor and unimportant variation and 
variations indicating need for immediate correction. To assess whether actual 
performance is in accordance with the target comparison with the standard 
has to be made and the variation is properly analysed to understand the 
reason for the variation. The comparison should be done at frequent intervals 
so that immediate corrective action could be taken. 
7. Control Period: The proper control period is the shortest period of time in 
which management can usefully intervene and in which significant changes 
in performance are likely. The period is different for different responsibility 
centres and for different items within responsibility centres. Spoilage rates in 
a production operation may be measured hourly or often. The key cost 
element of the centre may be measured daily. Reports on overall 
performance, particularly those going to the levels of management are often 
on a monthly basis and sometimes for quarterly or longer intervals, since top 
management does not have either the time or the inclination to explore the 
local temporary problems.
Introduction to 
Management Control System 
Notes 
Punjab Technical University 9 
Adequate or Effective Control System 
Management control is that function of the managers, next in line to top level, by 
which they ensure that the objectives of the organisation are achieved. It is not only a 
process of comparison of actual performance with the objectives but to initiate steps 
to achieve the object, if not achieved. This is done without encroaching upon the 
autonomy and scope of authority of the manager concerned. This involves the 
assessment of a managerÊs performance in quantitative terms and at the same time 
not to lay too much emphasis on quantitative data. In fact, some of the objectives 
themselves cannot be exactly quantified, for instance, objectives in respect of research 
and development, industrial relations etc. Thus management control is the process by 
which managers assume that resources are obtained and used effectively, and 
efficiently in the accomplishment of organisationÊs objectives. 
„Since Management control involves the behaviour of human beings, the relevant 
principles are those drawn from such disciplines as social psychology and 
organisational behaviour rather than from Economics, Mathematics or any 
discipline.‰ The following are important requirements for making any control system 
effective in application : 
1. Control by Objectives: The control must be goal-oriented and by objectives. 
As objectives classify the expected results in meaningful and realistic terms, 
they provide the control standards by which actual performance can be 
measured. The control system should be according to the nature and needs of 
organisation. 
2. Direct Control: Control should be exercised on people who work on 
machines and materials. Thus, it should be employee-oriented rather than 
work-oriented. It is people who resent control and not the inanimate articles. 
It is, therefore, necessary to alter the attitude of personnel who oppose control 
measures. An attempt should be made to understand the attitude of the 
people by proper education. 
3. Forward Looking Control: Control should always be forward looking. It 
should bring out the deviation in light as soon as possible. It must focus on 
strategic points with exception. 
4. Managerial Self-Control: Control should be enforced through managerial 
positions in the organisational structure. Each Manager must be vested with 
adequate authority for exercising control and taking decisions. Alleviation of 
duties and responsibilities goes a long way towards securing effective control 
in the organisation. 
5. Simple and Balanced Control: To be effective control must be simple and 
well-balanced. Any control device which is not intelligible cannot be put in 
practice. So, control lines must-be simple and intelligible both to the controller 
and the controlled. 
6. Flexibility: There should be nothing like rigidity in control. Even the best 
plans and other predetermined criteria need to be charged from time to time 
to meet a particular situation. However, an effective control system should 
retain its basic structure. 
7. Economy: A simple control system is bound to be economical. It should not be 
cumbersome and expensive. Economy is the basic requirement of any good 
control system. 
8. Feedback: Feedback is the process of adjusting future actions based upon 
information about past performance. Recently this concept of feedback has
Management Control System 
Notes 
10 Self-Instructional Material 
received considerable attention. It proves the worth and utility of control 
process. 
Control should not be negative. It should be positive, constructive and helpful. 
Control is not a command; it is guidance. The system is really concerned with 
arrangements for implementing the decisions made in strategic planning. 
Control Environment 
The COSO framework describes the control environment as setting the tone of an 
organization and influencing the control consciousness of its people. An effective 
control environment supports and strengthens the other control elements, whereas a 
weak control environment undermines the other elements, rendering them useless. In 
an effective control environment, employees know that doing the right thing is 
expected and will be supported by upper level management, even if it hurts the 
bottom line. In a weak environment, control procedures are frequently overridden or 
ignored, providing an opportunity for fraud. 
Traditionally, auditors' assessments of the control environment have included issuing 
a questionnaire to senior management to determine whether management policies 
and procedures, such as a code of ethics, have been implemented. The problem with 
this approach is that it measures management's efforts to create a sound environment, 
not its effectiveness in doing so. A more direct method of evaluating whether 
management has created an environment in which ethical behavior is encouraged is 
for internal auditors to survey the people who work in that environment. The focus of 
the assessment should not be on the message management thinks it is sending, but on 
the message employees are actually receiving. 
The control environment is one of the key components of an entity's internal control; 
it sets the tone of an entity, influences the control consciousness of people within all 
organization and is the foundation for all other components of the internal control 
system. 
Management is responsible for evaluating and reporting on a company's controls. The 
external auditors are responsible for auditing management's assertion and 
independently coming to their own conclusions about the company's internal control 
effectiveness. They must evaluate management's assessment and also perform their 
own, independent tests in many areas, including the control environment. 
z The control environment has a pervasive structure that affects many business 
process activities. It includes elements such as management's integrity and 
ethical values, operating philosophy and commitment to organizational 
competence. 
z Adding to the difficulty of the task is the fact that the control environment is 
not transaction-oriented. Tests of controls that auditors are accustomed to 
performing, such as walk-through or the re-performance of the control for a 
sample of items, will not be possible. And focusing solely on activity-level 
controls is inappropriate. 
z Tests of the Control Environment will consist of a combination of procedures, 
including a review of relevant documentation of the design, inquiries of 
management and employees and direct observation. 
z Auditors will have to probe for understanding and awareness and try to 
understand the company's attitude toward internal control over financial 
reporting. They also should ask management for a self-assessment.
Introduction to 
Management Control System 
Notes 
Punjab Technical University 11 
Practical Tips to Remember 
z Don't focus your internal control tests exclusively on activity-level controls. 
You have to evaluate and test the control environment, too. 
z Establish a benchmark, such as the internal control reliability model, that will 
be used to gauge internal control effectiveness. Use this model to design your 
tests of the control environment. 
z Use several different testing techniques to gather information about the 
control environment from a broad range of entity personnel. 
Student Activity 
„Environmental surveillance on an ongoing basis, for understanding the nature 
and implications of the emerging developments and their implications for the 
effective control system, is imperative.‰ Describe the statement with suitable 
examples. 
Concept of Goals and Strategy 
A strategy invariably indicates the long-term goals toward which all efforts are 
directed. For example, long-term goals might be to Âdominate the market, to be the 
technology leader or to be the premium quality firmÊ. Such enduring goals help 
employees give their best in a unified manner and enable the firm to specify its 
competitive position very clearly to its rivals. 
Strategy is the overall plan of a firm deploying its resources to establish a favourable 
position and compete successfully against its rivals. Strategy describes a framework 
for charting a course of action. It explicates an approach for the company that builds 
on its strengths and is a good fit with the firmÊs external environment. It is basically 
intended to help firms achieve competitive advantage. Competitive advantage allows 
a firm to gain an edge over rivals when competing. Competitive advantage comes 
from a firmÊs unique ability to perform activities more distinctively and more 
effectively than rivals. A firmÊs distinctive competence or unique ability here implies, 
those special capabilities, skills, technologies or resources that enable a firm to 
distinguish itself from its rivals and create competitive advantage (such as superior 
quality, design skills, low-cost manufacturing, superior distribution etc.). The term 
ÂterrainÊ is highly relevant in explaining the concept of strategy more clearly. From a 
business sense, terrain refers to markets, segments and products used to win over 
customers. The essence of strategy is to match strengths and distinctive competence 
with terrain in such a way that oneÊs own business enjoys a competitive advantage 
over rivals competing in the same terrain. The basic premise of strategy, as things 
stand now, is that an adversary can defeat a rival–even a larger, more powerful one–if 
it can maneuver a battle or engagement onto a terrain favourable to its own 
capabilities. The term ÂcapabilityÊ refers to the ability or capacity of a bundle of 
resources deployed by a firm to perform an activity (Pitts and Lie). 
Elements of a Strategy 
Any coherent strategy (as the above expert opinions reveal) should have four 
important elements (Saloner et al): 
a. Goals: A strategy invariably indicates the long-term goals toward which all 
efforts are directed. For example long-term goals might be to Âdominate the 
market, to be the technology leader or to be the premium quality firmÊ. Such 
enduring goals help employees give their best in a unified manner and enable 
the firm to specify its competitive position very clearly to its rivals. A recent
Management Control System 
Notes 
12 Self-Instructional Material 
advertisement from Maruti Suzuki for example, claims: „we donÊt just sell 
more cars than No.2. We sell more cars than the entire competition put 
together‰. MarutiÊs commitment to being number one (sales, distribution 
network, lowest cost producer, highest resale value, one stop solution 
provider etc) or two in the markets it serves, sends clear signals to its rivals in 
more than one way. 
b. Scope: A strategy defines the scope of the firm that is, the kind of products the 
firm will offer, the markets (geographies, technologies, processes) it will 
pursue and the broad areas of activity it will undertake. It will, at the same 
time, throw light on the activities the firm will not undertake. 
c. Competitive Advantage: A strategy also contains a clear statement of what 
competitive advantages the firm will pursue and sustain. Competitive 
advantage arises when a firm is able to perform an activity that is distinct or 
different from that of its rivals. Firms build competitive advantage when they 
take steps that help them gain an edge over their rivals in attracting buyers. 
These steps vary, for example, making the highest quality product, offering 
the best customer service, producing at the lowest cost or focusing resources 
on a specific segment or niche of the industry. 
d. Logic: This is the most important element of strategy. For example, a firmÊs 
strategy is to dominate the market for inexpensive detergents by being the 
low-cost, mass-market producer. Here the goal is to dominate the detergent 
market. The scope is to produce low-cost detergent powder for the Indian 
mass market. The competitive advantage is the firmÊs low cost. Yet this 
example does not explain why this strategy will work. Why the firm will get 
ahead of others by limiting its scope and by being the low cost producer 
(competitive advantage) in the detergent industry. The ÂwhyÊ is the logic of 
the strategy. To see how logic is the core of a strategy, consider the following 
expanded version of a strategy: Âour strategy is to dominate the Indian market 
for inexpensive detergent powder by being the low cost producer selling 
through mass-market channels. Our low price will generate high volumes. 
This, in turn, will makes us a high volume, low-cost producer. The economies 
of scale would help us improve our bottom-line even with a low price‰. 
Student Activity 
„The purpose of strategy is to define the nature of relationship between a firm and 
its environment.‰ Critically examine the statement. 
Behavioural Considerations 
A control system is necessary in any organization in which the activities of different 
divisions, departments, sections, and so on need to be coordinated and controlled. 
Most control systems are past-action-oriented and consequently are inefficient or fail. 
For example, there is little an employee can do today to correct the results of actions 
completed two weeks ago. 
Steering controls, on the other hand, are future-oriented and allow adjustments to be 
made to get back on course before the control period ends. They therefore establish a 
more motivating climate for the employee. 
What's more, although many standards or controls are simply estimates of what 
should occur if certain assumptions are correct, they take on a precision in today's 
control systems that leaves little or no margin for error. Managers would be better off 
establishing a range rather than a precise number and changing standards as time 
passes and assumptions prove erroneous. This would be fairer and would positively
Introduction to 
Management Control System 
Notes 
Punjab Technical University 13 
motivate employees. There are three fundamental beliefs underlying most successful 
control systems. 
z First, planning and control are the two most closely interrelated management 
functions. 
z Second, the human side of the control process needs to be stressed as much 
as, if not more than, the tasks or 'numbers crunching' side. 
z Finally, evaluating, coaching, and rewarding are more effective in the long 
term than measuring, comparing, and pressuring or penalizing. 
This is perhaps because the task side of control is noticed and the behavioral or 
human side is largely overlooked. But as previously noted, managers should carefully 
consider the behavioral aspects of the process when designing a control system if 
employees are to be motivated to accomplish assigned tasks. 
The evaluate focus of most organizational control systems is on the management of 
the institutionÊs financial resources. However, controlling on only one aspect of 
institutional performance often results in dysfunctional decisions [Caplan, 1971; 
Dalton and Lawrence, 1917]. Therefore, important managerial accounting problems 
found in both are private and public sectors are (1) how to select non-monetary 
performance measures and (2) how to integrate them into the organizational control 
system. 
Conceptually, the problems are straightforward. The accountant must select one of 
the established financial accounting systems and modify it so that submit 
performance as it affects non-financial performance evaluation also is reflected in the 
financial accounting system. A financial accounting system available for such 
modification is the cost allocation system, in particular the allocation of joint costs. 
The accountant may view cost allocation from the standpoint of providing 
management control data and/or expense measurement [Vatter, 1945]. These 
perspectives may conflict. As a consequence, selection of cost allocation criteria and, 
hence, selection of the based by which costs may be allocated should be approached 
with concern for the motivational dimension present in any allocation which affects 
financial performance. 
Behavioral accounting is the application of social science concepts to some areas of 
accounting research such as budgeting, decision making, control and finance 
reporting. The newly emerging sub-discipline attempts to focus on the "human 
element" in what has essentially been a quantitative subject area. 
Summary 
Management control system primarily deals with the outgoing operations of the 
business. It is concerned with all types of forecasts. It is a continuous exercise and 
even as the work proceeds, plans are changed in the light of the experience gained. 
One of the basic concepts of management control system is that it works on the basis 
of continuously collected information. Because large number of people are involved 
in collecting the information, therefore, the flow of information has to be properly 
organised and channelled. Thus, management control is that function through which 
it has been ensured that resources are obtained and used effectively to achieve the 
organisationÊs objects. The control system emphasises simultaneously on both 
planning and control. 
Keywords 
Management Control System: It is the process of comparing actual performance with 
standards and taking any necessary corrective action.
Management Control System 
Notes 
14 Self-Instructional Material 
Control Environment: It is one of the key component of an entity is internal control; it 
sets the tone of an entity, influences the control consciousness of people within all 
organization and is the foundation for all other components of the internal control 
system. 
Strategy: It is the overall plan of a firm deploying its resources to establish a 
favourable position and complete successfully against its rivals. 
Review Questions 
1. Discuss the concept of Management Control. Give the essential elements of a 
Management Control System. 
2. Explain the concept of Management Control and discuss the necessity of such 
control. 
3. „Control is a fundamental management function that ensures work 
accomplishment according to plans.‰ Analyse the statement describing the 
importance of control and the steps involved in the control function. 
4. What are the elements of an adequate or effective control system? 
Further Readings 
D.K. Sinha, Management Control System, Excel Books, 2008 
Ravindhra Vadapalli, Management Control System, Excel Books, 2008 
Rober N. Anthony and V. Govindarajan, Management Control Systems, McGraw 
Hill/Irwin, 2000 
Keneth Merchant, Wim Van der Stede, Management Control Systems, Pearson 
Education, 2007
Responsibility Centres 
Notes 
Punjab Technical University 15 
Unit 2 Responsibility 
Centres 
Unit Structure 
• Introduction 
• Expense Centre 
• Cost Centre 
• Profit Centres 
• Investment Centre 
• Residual Income (RI) 
• Summary 
• Keywords 
• Review Questions 
• Further Readings 
Learning Objectives 
At the conclusion of this unit you should be able to: 
• Describe meaning and features of responsibility centres 
• Discuss revenue and expense centres 
• Point out the advantages of profit centres 
• Distinguish between different types of profit centres 
• Know the meaning, features and performance management of investment centres 
Introduction 
The entire organization should be divided into various responsibility centres. Each 
responsibility centre is led by a manager or the head of the centre who has been 
assigned the responsibility. 
Organisation 
Marketing Finance R & D Production HRD 
Marketing 
Manager 
Finance 
Manager 
R&D 
Manager 
Production 
Manager 
HRD 
Manager 
Marketing 
Budget 
Finance 
Budget 
R&D 
Budget 
Production 
Budget 
HRD 
Budget
Management Control System 
Notes 
16 Self-Instructional Material 
From the given Diagram, it is clearly understood that every organization is normally 
classified into various responsibility centres to the tune of different functions viz. 
Marketing, Finance, Research & Development, Production and Human Resources. 
These responsibility centres are headed by the responsibility managers. 
The responsibility centre is the department, which is headed by the responsible 
person i.e. the manager of that particular function. It is a part of the organization, 
through which information is processed and communicated at every position. The 
decision of the responsibility centre is taken by the head, by considering the positional 
responsibilities. The responsibility centre is classified into various categories: 
Revenue and Expense Centre, Profit Centre, Investment Centre, etc. 
Student Activity 
Highlight the corporate examples in fixing the responsibility on the managerial 
positions. 
Expense Centre 
The responsibility centre which incurs only expenses, and measures them, is known 
as expense centre. The expense centres of the organization are mostly the service 
centres which only usually incur expenses. 
The contribution of service department and office & administration department to the 
company cannot be denominated in monetary terms, but instead in terms of quality of 
services to assist the entire organization. 
The output of the sales/production departments are denominated in monetary terms 
unlike others. 
Cost Centre 
Cost centres 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 centres, profit centres, or 
investment centres. There are some significant advantages to classifying simple, 
straightforward divisions as cost centres, since cost is easy to measure. However, cost 
centres create incentives for managers to under fund their units in order to benefit 
themselves, and this under funding 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. 
When the manager is held accountable only for costs incurred in a responsibility 
centre, it is called a cost centre. More precisely, it is the inputs and not outputs that are 
measured in terms of money. In a cost centre of responsibility, the accounting system
Responsibility Centres 
Notes 
Punjab Technical University 17 
records only costs incurred by the centre/unit/division, but the revenues earned 
(output) are excluded from the purview. This only means that a cost centre is a 
segment whose financial performance is measured in terms of cost. The costs are the 
planning and control data in cost centres, since managers are not made responsible 
for profits and investments in assets. The performance of the managers is evaluated 
by comparing the costs incurred with the budgeted costs. The management focuses on 
the cost variances for ensuring proper control. The performance of a cost centre is 
measured by cost alone, without taking into consideration, its attainments in terms of 
„output‰. 
A cost centre does not serve the purpose of measuring the performance of the 
responsibility centre, since it ignores the output (revenues) measured in terms of 
money. 
Profit Centres 
Situational Requirements for Successful Implementation 
When profit is used to express expectations for a responsibility unit and for 
evaluating its performance, that responsibility unit is known as a profit centre and its 
manager has the responsibility for attaining a certain level of profit. If he or she is to 
be evaluated on the basis of profit performance, the profit centre manager must have 
sufficient authority to make whatever decisions are necessary to ensure an adequate 
profit. Joel Dean details three situational characteristics of profit centres as follows 
(Dean, 1955, p. 67): 
1. Operational Independence: Each profit centre manager must have the 
authority to make most if not all of the key operating decisions that affect his 
profits, subject to broad policy directions from the top. The areas where 
independence cannot exist should properly be considered to be service 
centres. 
2. Access to sources and markets: The profit centre manager must have control 
over all source and market decisions and be free to buy and sell in alternative 
markets. This freedom to trade dissolves alibis and helps establish 
responsibility. 
3. Quantifiable costs and revenues: A profit centre must be able to identify its 
true costs and establish a reasonable price for its product. Otherwise, 
measurement by profit is questionable. 
The characteristics necessary for effective operation of a profit centre indicate that 
before a responsibility unit can be considered to be a profit centre, its manager must 
have the power to generate revenues and control sources of supply and other costs. 
Identifying a responsibility unit whose revenues and costs can both be controlled by 
the manager is not sufficient to conclude that the unit can be planned and controlled 
as a profit centre. At least three additional conditions must also be present. 
1. Top management must be committed to decentralization: A profit centre 
system must have the wholehearted commitment of top management. They 
must be willing to relinquish some of their intimate knowledge of day-to-day 
operations and also some of their authority to subordinates. Top management 
must allow the profit centre manager to make the key operating decisions. 
Although it may be difficult especially in a company with only one major 
business but they must do so if the system is to work effectively. 
2. Adequate staff and information systems: The cost of implementing a profit 
centre system may be quite high. Most likely a new management information
Management Control System 
Notes 
18 Self-Instructional Material 
system will be necessary in order to provide top management with the data it 
needs to control decentralized operations. Further, each profit centre manager 
will now need information to make decisions. Accounting reports will be the 
primary source of information about a unitÊs performance, so top 
management must provide these reports and must also know how to use 
them. 
3. Capable profit centre managers: A company using a profit centre system must 
have managers capable of heading them. The implementation of profit centres 
requires a great deal of education to train managers up and down the line to 
understand and think in terms of profits. They must be made to understand 
that their performance is now being measured by their contribution to 
company profits and that they must now make decisions based on profit 
contribution. Each profit centre manager must be made aware of the key 
variables of the organization as a whole, the managerÊs strategic variables, 
and the relationship between these, so that he or she will not make decisions 
to maximize his or her own welfare at the expense of the organization as a 
whole. 
The Benefits of Profit Centres 
Treating responsibility units as profit centres is one way to realize the benefits of 
decentralization. Successful decentralization brings with it the following benefits: 
A way of managing large entities: In large organizations it is difficult for one manager 
or a small group of managers to understand every aspect of the business. Sheer size 
prohibits management by face-to-face contact and informal or interpersonal methods. 
Large organizations must, therefore, forego some of the benefits of integration by 
decomposing themselves into more manageable operating units. 
Better decisions: When a large organization is divided into smaller, more manageable 
units it achieves many of the advantages of a small company. Because the decision-makers 
responsible for each unit are closer to the problems in their environment, they 
are better able to make the relevant revenue/costs decisions. Because decision making 
can also be speeded up, a decentralized organization can be more responsive to 
environmental change. Furthermore, because they are held responsible for all their 
activities, managers are far more aware of their ultimate impact and are extremely 
sensitive to what they are doing for the company. 
Motivation: If responsibility is motivating, and monetary measures are one means of 
establishing responsibility, then the manager who is responsible for revenues and 
revenue/cost trade-offs will probably be more committed than a manager who is 
responsible for costs alone. Profit measures allow managers to focus on a familiar, 
well-understood goal, and give them the feeling of being in business for themselves. 
Frees Top Management: By definition, decentralization frees top management. When 
profit centres are established, top management no longer needs to get involved in the 
day-to-day operations of each unit. Top management can devote its time to more 
important issues, such as strategic planning or coordinating the efforts of a number of 
profit centres. Because they do not have to concentrate on all elements of their 
business, they can practice management by attending to those areas where a strong 
influence will be most beneficial. If one profit centre begins to experience difficulty, 
management can then spend its time helping this centre to correct its problems. 
Thus it appears that management can achieve many of the benefits of decentralization 
through profit centres. When decentralized operating units are made into profit 
centres, each manager has a common goal·profit. Decentralized units can be planned 
and controlled according to their contribution to organizational profitability. 
Complete responsibility can be assigned because profit is a comprehensive measure of
Responsibility Centres 
Notes 
Punjab Technical University 19 
all activity, and each manager can then be judged on his or her ability to manage a 
complete operating unit as a separate and distinct business. 
At the same time, central management can realize the benefits of a large 
organizationÊs economies by maintaining central staff functions such as economic 
planning, forecasting, technical analysis, accounting, and perhaps management 
information systems. These services can be provided to the profit centres on a charge 
basis to ensure that they are used efficiently. 
Types of Profit Centres 
An effective planning and control system for managers is one that motivates them to 
act in their best interests while simultaneously achieving what is best for the 
organization as a whole. Using this as the criterion for evaluation, let us examine two 
types of profit centres in order to determine the effectiveness of the profit measure as 
a basis for planning and control. 
Independent (natural) profit centres: If a responsibility unit operates independently of 
the other units in the organization, that is, if it is effectively in its own business, then a 
manager who maximizes his or her own profits is also automatically maximizing the 
profits of the organization as a whole. The manager has discretion over sourcing of 
inputs and revenues to be charged. Decisions can be based on meaningful values 
derived from market-based, armÊs-length transactions. Profit is a clear measure of 
efficiency and performance. 
This type of responsibility unit is termed a natural or independent profit centre. 
Interdependent (artificial) profit centres: Many organizational structures do not lend 
themselves to decomposition into natural profit centres. Because of their size, 
however, these organizations may still require some form of decentralization and may 
want to realize the benefits of a profit centre system. For example, in a functionally 
organized automobile company (e.g., Ford, Case 4.1) the engine division or the chassis 
division may transfer parts to the assembly division. In an integrated oil company, the 
exploration and production division discovers oil and transports it to the 
manufacturing division which, in turn, ships it to marketing for disposal to the 
consumer market. But to be a profit centre an organizational unit must act both as a 
seller, with the discretion to set prices and output volumes, and as a buyer, with 
discretion on how much to consume at various price levels. It must also be able to 
choose whether to deal with a unit inside the company or with one outside. 
Organizations such as the automobile and oil companies described above do not meet 
the criteria for profit centre systems. Can units within the same organization that deal 
with each other regularly nevertheless be decentralized as profit centres? Many 
organizations do just this. Artificial or interdependent profit centres are responsibility 
units which are considered to be profit centres, even though they do not satisfy the 
usual criteria. The automobile assembly division is a good example. It can be 
considered to buy components from other divisions, assemble the car, and then sell it 
to a sales division. But clearly the assembly division manager is not free to buy and 
sell at will. In the absence of a free market, how his prices are going to be determined? 
Two Styles of Profit Centre Management 
One way is to establish specific performance expectations and to enforce firm 
commitment to their accomplishment. Alternatively, initially formulated expectations 
may serve only as guidelines; performance is later evaluated in light of the actual 
conditions and constraints in effect at the time of performance.
Management Control System 
Notes 
20 Self-Instructional Material 
Profit as a Specific Performance Objective 
Establishing a specific profit goal and attempting to obtain rigid commitment to this 
goal can have many dysfunctional consequences. Yet the benefits of ensuring that 
managers are sensitive to the effect of their activities on profits still makes the profit 
measure extremely useful. How, then, can its potentially dysfunctional consequences 
be averted? 
One way is to adopt a management by objectives approach to commitment and 
evaluation and to apply this approach over short time spans of discretion. First, a 
level of profit is negotiated and agreed upon, and a short performance evaluation 
interval is set. The profit centre manager also agrees to discuss all major decisions 
affecting profits with top management before they are finalized. 
Frequent communication and short evaluation periods may seem strange 
prescriptions for a profit centre system, since they appear to negate the benefits of 
decentralization. However, when considered in the overall management by objective 
approach, whose aims are to achieve initial commitment, periodically review 
performance, and coach the subordinate to achieve the objectives he or she has 
specified, these methods can help overcome the adverse effects of performance 
evaluation. Evaluation is not merely a period-based measure of profitability; rather, it 
is an ongoing process that examines the quality of the decisions reached as well as 
their eventual results. The strength of this method is involvement and 
communication; if it is properly applied, it can achieve many of the motivational 
benefits of a management by objectives system. 
Profit as a Guiding Objective 
A second approach to profit centre management is to use profit expectations merely 
as general objectives or guidelines. In this approach expectations are used for 
planning and orientation and are considered to be initial targets only. They are the 
best estimates that can be made at the time, and can be revised radically later on if 
necessary. This approach lessens the pressure on a profit centre manager to maximize 
short-term performance. It permits him or her a greater amount of discretion. 
However, appropriate time spans for evaluation must still be established; too long a 
time interval also carries with it the risks and costs of inappropriate behaviour. 
If profit is used only as a general guide and performance is evaluated over a longer 
period of time, the following conditions must also apply. First, each profit centre must 
be supported by an adequate information system. Detailed analyses and 
reconciliations of past performance to expectation must be continually provided to 
top management to demonstrate that the profit centre manager understands what is 
going on. This reporting keeps top management aware of the quality of decision-making 
and performance. But any formal information system, regardless of how 
efficiently computerized it is, is still too slow to perform an early warning function for 
management. Continual communication between profit centre managers and 
corporate staff is necessary. Hence, the second requirement of this approach is that an 
appropriate climate for free and open communication be established. 
This style of management may require the involvement of advisory staff groups, 
top-management committees, and perhaps a group vice president. Informal channels 
of communication are the real key to predicting problems in a profit centre and its 
ability to handle them. 
Student Activity 
Discuss the organisational structures and/or types of responsibility centre that are 
most likely to be planned and controlled as profit centre.
Responsibility Centres 
Notes 
Punjab Technical University 21 
Investment Centre 
It is the responsibility centre at which the manager is responsible for the effective 
utility of assets in order to earn the best rate of return out of the investments or assets 
employed. The exact volume of assets employed cannot be easily assessed for single 
department or responsibility centre. The difficulty in the assessment on the volume of 
assets is only due to the utility of the assets, which is not only in one responsibility 
centre but also in more than one. 
When the manager is held responsibility for costs and revenues as well as for the 
investment in assets of a responsibility centre, it is called an Investment Centre. In an 
investment centre, the performance is measured not by profit alone, but it is related to 
investments effected, since the manager of an investment centre is always interested 
to earn a satisfactory return. The return on investment which is usually referred to as 
ROI, serves as a criterion for the performance evaluation of the manager of an 
investment centre. Viewed from this angle, investment centres may be considered as 
separate entities wherein the managers are entrusted with the overall responsibility of 
managing inputs, outputs and investment. This only represents an extension of the 
responsibility idea. 
Return on Investment (ROI) 
A company is decentralized with respect to profit responsibility when each 
responsibility unit manager is accountable for achieving some level of profit. The 
assets employed in generating this profit form the asset base of the unit. 
Responsibility unit managers who are responsible for their investment base as well as 
their profitability are known as investment centre managers. The most commonly 
used investment-based measure of performance is return on investment (ROI), the 
ratio of profit to investment. 
The use of ROI for financial planning and control of decentralized units, originated by 
the Du Pont Corporation, grew from its need to plan and evaluate the performance of 
the independent entities making up its diversified operations. The use of ROI solved 
the problem of motivating managers, ensuring consistent decision-making, and 
controlling decentralized divisions. 
As used by Du Pont, return on investment is the quotient of the accounted profit 
earned by a unit divided by the investment assigned to the unit. The investment is 
made up of both fixed assets, such as machinery and equipment, and working capital 
items, such as inventory, receivables, and cash. ROI allows the measurement and 
evaluation of each responsibility centre manager according to how productively he or 
she uses the assets entrusted to him or her. It allows managers the latitude to make 
trade-off decisions between investments, revenues, and operating costs, and then to 
be evaluated on these decisions by one comprehensive performance figure. Planning 
and controlling the operations of decentralized investment centres by ROI have all the 
benefits of a profit centre approach, and in addition can be used to measure the 
productivity of the assets employed. 
Calculation of the Investment Base 
Two critical procedures in the computation of ROI are specifying the investment base 
to be used for productivity measurements, and separating it into its controllable and 
non-controllable components for evaluation. In discussion of alternative methods of 
measuring an investment base, Solomon (1968) raises the following questions: 
1. Should investment be interpreted to mean all assets, net assets (total assets-liabilities), 
or fixed assets plus net current assets?
Management Control System 
Notes 
22 Self-Instructional Material 
2. How investment is defined and how should it be measured? Should fixed 
assets be included at cost, net book value (i.e., deducting accumulated 
depreciation), or at appraised value? 
3. How should assets which are either shared or controlled centrally be 
computed in the return on investment? That is, when a responsibility unit 
does not hold separate cash balances or if it does not control its own 
receivables, how should these be allocated? 
4. When inventories are valued on a LIFO basis, is any adjustment necessary 
when the investment base is computed? 
5. When should the investment base be measured·at the beginning or at the 
end of the period, or should the average over the period be used? 
After an extensive analysis of the implications of each of these alternatives, Solomon 
concludes that for calculating returns and for evaluating performance, investment 
should be defined as follows: 
1. Total investment is best defined as total assets. Measures of productivity 
should be based on the total amount of capital committed, irrespective of how 
it was financed, because differences in financing strategies are irrelevant to 
the way assets are used, and also because financing decisions are usually 
made centrally rather than by the investment centre manager. However, to 
determine controllable investment, a deduction should be made for 
controllable liabilities. Changing these also changes net controllable 
investment, which should be the basis of the ROI figure used for evaluation. 
2. Fixed assets should be included at gross cost. No deduction should be made 
for accumulated depreciation because such arbitrary deductions, and the 
resulting net book values, may bear no relationship to the productivity of the 
assets involved. ROI, based on net book value, increases as accumulated 
depreciation increases and net book value decreases. To negate the effects of 
changing price levels and to establish a basis of comparison between 
investment centres acquiring assets at different times, index number 
adjustments may be used. 
3. Fixed assets held under corporate control (e.g., a research laboratory or 
computer centre) should be allocated to investment centres only if there exists 
a reasonable basis to do so. An alternative is to rely on a charge for services 
rendered, although this method involves all the difficulties of a transfer 
pricing scheme. The allocation of centrally controlled working capital is 
appropriate if a basis can be found that reflects incremental demands for such 
capital; for example, centrally held bank balances can be allocated on the basis 
of incremental cash demands while receivables can be allocated on the basis 
of sales. Allocated assets form part of a divisionÊs total investment, but not 
part of its controllable investment. 
4. Investment in inventory is generally controllable and should be valued on a 
FIFO basis to approximate replacement cost on the balance sheet and avoid 
the distortions of LIFO. 
5. The point in time at which the investment base should be measured depends 
on the length of the period considered and the time it takes for changes in 
assets to have an effect on profits. In calculating the rate of return for a period 
shorter than a quarter, the investment at the beginning of the period is a 
suitable base. For a longer interval, however, average investment should be 
used. 
The five questions cited above are not an exhaustive coverage of all aspects of 
investment-based measurement, but they do demonstrate the types of choices to be
Responsibility Centres 
Notes 
Punjab Technical University 23 
made. A review of SolomonÊs recommendations and his underlying reasoning reveals 
how arbitrary these measurements of the investment base really are. In considering 
the alternatives, Solomons appears to have assessed the implications of each kind of 
measurement according to what appears most „correct‰ from the standpoint of 
economic productivity and performance. There is, therefore, a significant amount of 
subjectivity in his choices. One could argue that productivity measures would be 
better based on the appraised value of assets, not historical costs, or that index 
number adjustments to only a part of a companyÊs assets produce misleading 
information. But debates on the „correctness‰ of alternative investment-based 
measurements could (and probably will) go on forever. As in many other accounting-related 
areas of contention, there are no „right‰ answers. 
In deciding among alternative ways to compute an investment base, a system 
designer must consider how these measures are to be used. If their purpose is to 
motivate the investment centre manager to behave in certain desired ways (e.g., to 
keep minimal levels of inventory), then they should stress the controllable 
components of investment. If, on the other hand, the measures are to be used as aids 
for decision-making, they should stress economic reality. In sum, like most 
components of a planning and control system, how the components of an investment 
base should be measured depends on the characteristics of the situation and on the 
behaviour that the measures are intended to influence. 
Advantages of ROI 
In addition to all the benefits of profit measures, ROI has two more advantages. The 
first and foremost of these is that it provides a single, comprehensive, financial 
measure of performance. It not only reflects the increment to wealth, such as the profit 
measure, but it also relates profit to the assets employed in generating it. Second, 
because it is expressed as a ratio, ROI is an excellent way of comparing operations of 
different sizes and types. 
Disadvantages of ROI 
When ROI was first introduced by Du Pont to control its decentralized operations, it 
was far superior to other methods. Since then, however, numerous flaws have been 
uncovered in the ROI measure. Return on investment was originally intended to 
guide the planning and decision-making of unit managers and to give top 
management a basis by which to control and evaluate performance. However, from 
both of these perspectives ROI has several defects. 
First, ROI suffers from all the defects of conventional accounting measures, it suffers 
even more from the arbitrariness of accounting conventions. For example, many 
expenditures which benefit the firm for more than a single accounting period, are 
expensed rather than capitalized, such as research and development expenditures and 
advertising outlays. And the historical costs at which assets are measured do not 
reflect their true economic value at any time subsequent to initial acquisition. 
Depreciation reduces book values and so increases ROI artificially. Book values are 
not adjusted for the changing value of the dollar, so that in times of inflation a 
substantial part of the reported profits may actually result from holding and using 
older assets while pricing products at current market levels, rather than from normal 
operations. 
A second set of problems results from using ROI as a performance measure. As such, 
it should be controllable by the unit manager. However, many if not all of the assets 
entrusted to him are acquired through a host of past decisions outside his control. 
Nevertheless, these decisions are almost unavoidably reflected in any measure of 
performance, so that the use of ROI for evaluation may lead to distortion after all. As
Management Control System 
Notes 
24 Self-Instructional Material 
a measure of performance, ROI suffers not only from all the dysfunctional 
consequences associated with improper use of the profit measure, but it may 
encourage other undesirable behavior as well. Assume that the objective of an 
investment centre manager is to maximize or at least to maintain his or her current 
ROI level. The manager may do so not only by improving profit performance, but also 
by minimizing his or her investment. For instance, minimizing assets by leasing, as 
opposed to buying, will have an immediate effect on ROI performance. 
Pressure to achieve a specific ROI level may lead to incongruent decisions about asset 
replacement and disposal. In ROI performance measurement, asset replacement 
decisions are a function of the book value of an asset, not salvage values. 
Furthermore, ROI can be increased by scrapping assets which are earning less than 
the current ROI, thereby increasing the overall average. Scrapping unused assets 
increases ROI because these assets no longer are depreciated, nor do they appear in 
the asset base. Therefore, retaining idle assets is entirely undesirable. Also, because 
ROI is an overall measure of the use of assets, in some cases it can be increased by any 
action that reduces the asset base; and such decisions, while productive in the short 
run, may not be so in the long run. 
Because ROI increases simply with the passage of time and depreciation (especially 
accelerated depreciation), it may also discourage new investments. The older the asset 
base of an organization, the higher is its ROI, and therefore, the higher is the return 
required on new investments in order to maintain or improve this average. Thus there 
may be a tendency to keep older equipment operating as long as possible in order to 
show high ROI rates, even when replacement would be better in the long run. 
It is important to recognize that ROI is simply the quotient of profit over investment, 
and may differ from an organizationÊs cost of capital. It is also a single-year 
measurement, not a rate of return computed over the life cycle of an entire project. 
Hence while it may provide an appropriate criterion for short-term current operating 
decisions, it is certainly no guide for capital investments. ROI is based on current 
performance using existing assets, and does not reflect the cost of financing additional 
investments. Thus it is improper to use ROI as a decision criterion or hurdle rate 
against which to evaluate new investment proposals. 
Investments should be made if their return exceeds the cost of making them. It is well 
known that different types of financing have different costs. For example, cash can be 
borrowed from a bank, acquired through the issuance of securities, or obtained by 
liquidating fixed assets. Each source of an organizationÊs financing, be it debt or 
equity, carries a separate implicit or explicit cost. The weighted average of an 
organizationÊs financing costs is known as its cost of capital. It provides the decision 
criteria that the organization should use. If a new investment earns an amount greater 
than its costs, there is a net positive increment to the organizationÊs overall worth. 
Therefore, if an organizationÊs objective is to maximize the net present value of its 
current shareholders, then it is in the shareholdersÊ best interest to undertake any 
investment whose return exceeds the organizationÊs current cost of capital. 
It is important to recognize that ROI does not measure the cost of resources to an 
organization; it measures only the rate currently being earned on the money already 
invested. And so, investment opportunities which earn less than the organizationÊs 
ROI rate but more than the organizationÊs cost of capital may be rejected because they 
reduce average ROI. This sort of behaviour is undesirable because it foregoes 
potential increments to shareholderÊs wealth. Yet once a responsibility centre manager 
has committed himself to a specific ROI rate, it is unreasonable to expect him to 
propose a capital investment that will earn a lesser rate of return. 
Thus it can be seen that the use of ROI as a criterion for investment decisions may 
lead a manager to make decisions which are incongruent with and inappropriate for
Responsibility Centres 
Notes 
Punjab Technical University 25 
overall organizational objectives. The use of ROI may not always motivate the 
manager to behave in a way that benefits himself while simultaneously benefiting the 
organization as a whole·the criterion for an effective planning and control system. 
Residual Income (RI) 
Residual income is another asset-based measure of financial performance. It is used in 
an attempt to overcome some of the weaknesses of ROI and to move closer toward the 
net present value notion of financial decision-making. The RI of an investment centre 
is its current operating profit (revenues – operating expenses) minus a capital charge 
for the assets employed in generating this profit. A capital charge is simply the cost to 
the firm of each particular type of asset it uses. RI is thus the net income of a 
responsibility unit after the cost of the capital used in its operations has been 
deducted. 
Advantages of RI 
One strength of RI is that it counters the need to maintain at least an average rate of 
ROI in considering new investment decisions. If an investment has a positive residual 
income, it will be undertaken even if its ROI is lower than the current average ROI. 
With an RI decision criterion, all investments will be accepted as long as they earn 
more than their capital costs. RI, therefore, encourages congruent investment 
decision-making, so that each responsibility centre is able to contribute to overall 
shareholder welfare by increasing the net present worth of the firm. 
A second strength of RI is its use of capital charges in weighing assets. Because RI 
employs capital charges, each separate class of assets can be treated in a different 
manner, as appropriate. Assets which are more liquid and involve less risk to the firm 
or which are more readily available may be costed at rates substantially different from 
those which are hard to obtain or especially expensive. Assets which must be 
irretrievably committed to a project, and hence involve high risk, may be priced 
differently from those that can be recovered easily at full value. By pricing assets 
appropriately, an RI system can motivate managers to use assets in the proportions 
deemed most suitable from the standpoint of the organization as a whole. 
Disadvantages of RI 
The residual income measure shares many of the problems of ROI, however. The 
same problem of measuring fixed assets still exists, since the capital charges have to 
be applied against specific asset amounts and must be classified into controllable and 
non-controllable components. Furthermore, RI is measured in absolute dollars, not as 
a ratio, making it more difficult to compare responsibility units of different sizes. Like 
ROI, RI is a comprehensive financial measurement of performance. But it cannot 
include non-financial factors, of course, so many relevant key variables may be 
ignored. And finally, although many of the limitations of conventional accounting can 
be partly ameliorated, management usually cannot or will not use accounting 
techniques such as annuity depreciation and replacement cost accounting that would 
make the use of RI more realistic. 
Therefore, although residual income is a more helpful formula than ROI for making 
decisions about asset acquisitions, it does not overcome the dysfunctional temptation 
to reduce assets (so as to minimize capital charges, in this case). In short, although it is 
perhaps superior to ROI in some ways, it still must be applied with the greatest of 
care.
Management Control System 
Notes 
26 Self-Instructional Material 
Effective Use of Investment-Based Performance 
Measures 
The best information available on the use of RI and ROI comes from a survey 
conducted more than a decade ago. Mauriel and Anthony (1966) surveyed 3,525 U.S. 
companies with sales of over $20 million. Of the 2,658 companies that responded to 
the questionnaire, 60% used either ROI or RI or some combination of both in their 
planning and control of decentralized units. Only 3.8% of the total surveyed used 
residual income only. A follow-up study conducted by the same researchers revealed 
that 60% of their 981 respondents relied solely on ROI as a measure of responsibility 
centre performance. The responses indicated that most companies use accounting-based 
measures for computing their asset base. Of the companies responding, 93% 
measured divisional performance on the basis of either gross book value (18.5%), net 
book value (73.2%), or a combination of these two (1.6%). Hence, in spite of the many 
deficiencies associated with the use of both ROI and RI, it appears that investment-based 
performance measurements are widely used in management practice today. 
Investment-based performance measurements present the designer of any planning 
and control system with a dilemma. On the one hand it is recognized that both ROI 
and RI have many of the drawbacks of a single performance measurement. They do 
not lead to correct investment decisions because they fail to mediate effectively 
between the short and the long term, and to reflect both the qualitative and 
quantitative aspects of any business operation. Furthermore, many non-financial key 
variables and intangible considerations (e.g., services) are not reflected in a unitÊs 
investment base, and therefore, cannot be accommodated by these types of 
measurement. But on the other hand, as the above surveys reveal, these investment-based 
performance measurements are in wide use today; and their acceptance by 
management is so widespread that it is unrealistic to assume that they will be done 
away with in the near future. So ways must be found to use these measures 
successfully. This means that if an organization relies heavily on a single performance 
measurement, its use ought to be accompanied both by a sharp awareness of the 
strengths and weaknesses of the measure, and also by an appropriate management 
style. 
Both ROI and RI must emphasize trust and open communication if they are to be 
effective. They require the specification of appropriate key variables, the 
establishment of expectations in terms of these key variables, and finally, a consistent 
evaluation of the performance of each responsibility centre manager. These 
requirements also hold true when investment-based performance measures are used 
in the planning and control system. 
If an investment-based criterion is used as a firm measure of expected performance, 
the determinants selected for the asset base must motivate the manager to make use 
of his or her assets appropriately. Clearly, residual income is superior to ROI in this 
respect; if each individual class of assets is properly priced, the encouragement of cost 
minimization will automatically ensure congruent actions. As before, performance 
can be controlled by establishing firm expectations and then having managers report 
to top management at short-time intervals. The constant involvement of top 
management will help to avoid the dysfunctional behaviours associated with 
investment-based performance measures. 
If investment-based performance measures are established simply as guidelines, ROI 
or RI measures will serve not as a basis for evaluation but as a diagnostic tool. They 
are monitored to detect changes over time and to suggest potential improvements. To 
make them more useful for this purpose, accounting practices should be modified as 
needed. For example, modifying depreciation schedules and capitalizing 
expenditures such as advertising and research and development may be appropriate
Responsibility Centres 
Notes 
Punjab Technical University 27 
for internal accounting purposes, although not for external reporting. With this 
approach, return on investment must be regarded simply as one of many key 
variables that affect performance. 
An Alternative Approach to Planning and Controlling 
Investment Centres 
The use of RI and ROI as measures of investment centre performance implies the 
validity of two assumptions: (1) that a single measure combining both profits and 
assets can describe efficient and effective behaviour, and (2) that a single-period 
measure of performance can guide appropriate behaviour. If these two assumptions 
are not valid, an organization must devise alternative means of planning and 
controlling investment centres. Specifically, it must answer the following questions: 
1. What criteria should be used in making short-run operating decisions? 
2. How should expenditures related to managed or discretionary short-run 
capacity costs (costs which cannot be associated with output) be planned and 
controlled? 
3. How should an organization make capital investment decisions, and then 
evaluate the productivity of these investments? 
To understand the role of investment-based performance measurements in the 
planning and control of any decentralized responsibility unit, it is essential to 
recognize that three types of decision-making occur. Two of these relate to short-run 
decisions and performance evaluation and the third to long-run expenditures. 
The first type, current operating decisions, is concerned with the net contribution of 
any decision to the organizationÊs profit and overhead. The key criterion of these 
decisions is whether or not the benefits exceed the cost over the short run. These 
decisions are based solely on differential (incremental) revenues and costs; i.e., 
revenues as well as variable costs and other costs that will differ according to the 
alternative selected. All other costs, such as committed or sunk costs, are irrelevant to 
these decisions and their inclusion will only confuse the issue at hand. Furthermore, 
because of the short interval of time covered the time value of money can be ignored 
in these decisions. The cost-volume and contribution margin decision-making 
procedures familiar to any student of management accounting are the applicable 
techniques. The effective control of operating decision-making is essentially the same 
as the process involved in profit budgeting. 
The second set of short-run decisions relates to the capacity to carry out business in 
the short run. These are the costs needed to do business and involve the fixed or 
committed costs needed to support current operations. Many components of these 
costs are independent of operating outputs and hence must be managed; i.e., their 
amounts are subject to the discretion of management rather than to an input-output 
relationship with volume of activity. Managed cost budgets, together with allocation 
schemes such as zero-base budgeting and interpersonal schemes such as management 
by objectives, are some techniques that will ensure the effective and efficient 
allocation of managed resources. 
The third type of decision making and performance evaluation for investment centres 
relates to long-term expenditures. Capital expenditure decisions must reflect an 
organizationÊs cost of capital as well as other decision criteria that reflect a time period 
greater than one year, such as payout period, and the relative risk in the project over 
its full life cycle. Capital expenditure analysis is the primary means by which an 
organization approves acquisition of new assets, major changes from existing 
operations, and also the divestment of capital assets. It is the means by which an
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518
Mba 518

Más contenido relacionado

La actualidad más candente

Ignou value addition courses for employment skills
Ignou value addition courses for employment skillsIgnou value addition courses for employment skills
Ignou value addition courses for employment skillsskishoredr1
 
Recent Innovations in Educational Technology in India for the Delivery of Lif...
Recent Innovations in Educational Technology in India for the Delivery of Lif...Recent Innovations in Educational Technology in India for the Delivery of Lif...
Recent Innovations in Educational Technology in India for the Delivery of Lif...Anup Kumar Das
 
Vocationalization of General Education in Pakistan
Vocationalization of General Education in PakistanVocationalization of General Education in Pakistan
Vocationalization of General Education in PakistanDr Masroor Ahmed Shaikh
 
638 1913-1-pb[1]
638 1913-1-pb[1]638 1913-1-pb[1]
638 1913-1-pb[1]ayeayemondr
 
Sangam university Bhilwara - One Year Young
Sangam university Bhilwara - One Year YoungSangam university Bhilwara - One Year Young
Sangam university Bhilwara - One Year Youngsangamuniversity
 
1 self study report of abc college , pratap nagar, pratap pradesh qlm only ...
1 self study report of abc college , pratap nagar,  pratap pradesh  qlm only ...1 self study report of abc college , pratap nagar,  pratap pradesh  qlm only ...
1 self study report of abc college , pratap nagar, pratap pradesh qlm only ...utpalbhattacharjee
 
IGNOU value addition courses for Employment Skills
IGNOU value addition courses for Employment SkillsIGNOU value addition courses for Employment Skills
IGNOU value addition courses for Employment Skillsskishoredr1
 
Vocationalisation of secondary education and career development
Vocationalisation of secondary education and career developmentVocationalisation of secondary education and career development
Vocationalisation of secondary education and career developmentUttam Sharma
 
Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...
Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...
Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...Paul Woods
 
Final dual-mode-university-manual-7feb2020
Final dual-mode-university-manual-7feb2020Final dual-mode-university-manual-7feb2020
Final dual-mode-university-manual-7feb2020utpalbhattacharjee
 
Placement Brochure ,School of Management Studies,UoH 2014-15
Placement Brochure ,School of Management Studies,UoH 2014-15Placement Brochure ,School of Management Studies,UoH 2014-15
Placement Brochure ,School of Management Studies,UoH 2014-15smsuohyd
 
7 day fdp abstract book 22072020 updated 10112021 211110 123446
7 day fdp abstract book 22072020 updated 10112021 211110 1234467 day fdp abstract book 22072020 updated 10112021 211110 123446
7 day fdp abstract book 22072020 updated 10112021 211110 123446PARAMASIVANCHELLIAH
 
Indian Institute of Technology - [IITBBS], Bhubaneshwar
Indian Institute of Technology - [IITBBS], BhubaneshwarIndian Institute of Technology - [IITBBS], Bhubaneshwar
Indian Institute of Technology - [IITBBS], Bhubaneshwarchegg india
 
The ladderized education program
The ladderized education programThe ladderized education program
The ladderized education programMarites Hugo
 
Advanced policy and equivalency program
Advanced policy and equivalency programAdvanced policy and equivalency program
Advanced policy and equivalency programmichael guese
 
The Hec Story Nov 2011
The Hec Story Nov 2011The Hec Story Nov 2011
The Hec Story Nov 2011Sohail Naqvi
 

La actualidad más candente (19)

Ignou value addition courses for employment skills
Ignou value addition courses for employment skillsIgnou value addition courses for employment skills
Ignou value addition courses for employment skills
 
Recent Innovations in Educational Technology in India for the Delivery of Lif...
Recent Innovations in Educational Technology in India for the Delivery of Lif...Recent Innovations in Educational Technology in India for the Delivery of Lif...
Recent Innovations in Educational Technology in India for the Delivery of Lif...
 
2015 trends in education-pn rao
2015 trends in education-pn rao2015 trends in education-pn rao
2015 trends in education-pn rao
 
Vocationalization of General Education in Pakistan
Vocationalization of General Education in PakistanVocationalization of General Education in Pakistan
Vocationalization of General Education in Pakistan
 
638 1913-1-pb[1]
638 1913-1-pb[1]638 1913-1-pb[1]
638 1913-1-pb[1]
 
Sangam university Bhilwara - One Year Young
Sangam university Bhilwara - One Year YoungSangam university Bhilwara - One Year Young
Sangam university Bhilwara - One Year Young
 
1 self study report of abc college , pratap nagar, pratap pradesh qlm only ...
1 self study report of abc college , pratap nagar,  pratap pradesh  qlm only ...1 self study report of abc college , pratap nagar,  pratap pradesh  qlm only ...
1 self study report of abc college , pratap nagar, pratap pradesh qlm only ...
 
IGNOU value addition courses for Employment Skills
IGNOU value addition courses for Employment SkillsIGNOU value addition courses for Employment Skills
IGNOU value addition courses for Employment Skills
 
Vocationalisation of secondary education and career development
Vocationalisation of secondary education and career developmentVocationalisation of secondary education and career development
Vocationalisation of secondary education and career development
 
Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...
Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...
Quality Assurance in Efl for TVET in Colleges of Excellence in Saudi Arabia: ...
 
Final dual-mode-university-manual-7feb2020
Final dual-mode-university-manual-7feb2020Final dual-mode-university-manual-7feb2020
Final dual-mode-university-manual-7feb2020
 
Bu ministry of consumer affairs
Bu ministry of consumer affairsBu ministry of consumer affairs
Bu ministry of consumer affairs
 
Placement Brochure ,School of Management Studies,UoH 2014-15
Placement Brochure ,School of Management Studies,UoH 2014-15Placement Brochure ,School of Management Studies,UoH 2014-15
Placement Brochure ,School of Management Studies,UoH 2014-15
 
7 day fdp abstract book 22072020 updated 10112021 211110 123446
7 day fdp abstract book 22072020 updated 10112021 211110 1234467 day fdp abstract book 22072020 updated 10112021 211110 123446
7 day fdp abstract book 22072020 updated 10112021 211110 123446
 
Broucher fdtp (1)
Broucher fdtp (1)Broucher fdtp (1)
Broucher fdtp (1)
 
Indian Institute of Technology - [IITBBS], Bhubaneshwar
Indian Institute of Technology - [IITBBS], BhubaneshwarIndian Institute of Technology - [IITBBS], Bhubaneshwar
Indian Institute of Technology - [IITBBS], Bhubaneshwar
 
The ladderized education program
The ladderized education programThe ladderized education program
The ladderized education program
 
Advanced policy and equivalency program
Advanced policy and equivalency programAdvanced policy and equivalency program
Advanced policy and equivalency program
 
The Hec Story Nov 2011
The Hec Story Nov 2011The Hec Story Nov 2011
The Hec Story Nov 2011
 

Destacado

Management Control Systems
Management Control SystemsManagement Control Systems
Management Control SystemsPaulino Silva
 
Responsibility accounting
Responsibility accountingResponsibility accounting
Responsibility accountingAnanya Jain
 
Management control system
Management control systemManagement control system
Management control systemOnline
 
Management control system
Management control systemManagement control system
Management control systemAnkur Thakur
 

Destacado (8)

Responsibility accounting
Responsibility accountingResponsibility accounting
Responsibility accounting
 
Responsibility Accounting
Responsibility AccountingResponsibility Accounting
Responsibility Accounting
 
Management Control Systems
Management Control SystemsManagement Control Systems
Management Control Systems
 
Responsibility accounting
Responsibility accountingResponsibility accounting
Responsibility accounting
 
Resposibility accounting
Resposibility accountingResposibility accounting
Resposibility accounting
 
Management control system
Management control systemManagement control system
Management control system
 
Controlling ppt
Controlling pptControlling ppt
Controlling ppt
 
Management control system
Management control systemManagement control system
Management control system
 

Similar a Mba 518

Evaluation_on_Entrepreneurship_Module_in_Community (1).pdf
Evaluation_on_Entrepreneurship_Module_in_Community (1).pdfEvaluation_on_Entrepreneurship_Module_in_Community (1).pdf
Evaluation_on_Entrepreneurship_Module_in_Community (1).pdfTewodrosKassaye2
 
Evaluation_on_Entrepreneurship_Module_in_Community.pdf
Evaluation_on_Entrepreneurship_Module_in_Community.pdfEvaluation_on_Entrepreneurship_Module_in_Community.pdf
Evaluation_on_Entrepreneurship_Module_in_Community.pdfTewodrosKassaye2
 
MA Economics handbook Jan 2022.pdf
MA Economics handbook Jan 2022.pdfMA Economics handbook Jan 2022.pdf
MA Economics handbook Jan 2022.pdfsumansourav35
 
Profile 5 lsis award for efficiency through effective use of technology in ...
Profile 5   lsis award for efficiency through effective use of technology in ...Profile 5   lsis award for efficiency through effective use of technology in ...
Profile 5 lsis award for efficiency through effective use of technology in ...Association of Colleges
 
unit 3 - 829 by Mujeeb ur Rahimaiou.pptx
unit 3 - 829 by Mujeeb ur Rahimaiou.pptxunit 3 - 829 by Mujeeb ur Rahimaiou.pptx
unit 3 - 829 by Mujeeb ur Rahimaiou.pptxMuhammadBoota15
 
Management education through distance mode of learning
Management education through distance mode of learningManagement education through distance mode of learning
Management education through distance mode of learningAngga Debby Frayudha
 
Development of Teacher Education in Pakistan-Unit 03- 8626
Development of Teacher Education in Pakistan-Unit 03- 8626Development of Teacher Education in Pakistan-Unit 03- 8626
Development of Teacher Education in Pakistan-Unit 03- 8626Ek ra
 
TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN - UNIT 3 - ...
TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN  - UNIT 3 - ...TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN  - UNIT 3 - ...
TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN - UNIT 3 - ...EqraBaig
 
Chandigarh university distance mca
Chandigarh university distance mcaChandigarh university distance mca
Chandigarh university distance mcavijaykhera5
 
Unit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptx
Unit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptxUnit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptx
Unit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptxraheemkhan95959
 
Ty cse syllabus booklet pdf 2020 21 (1)
Ty cse syllabus booklet pdf 2020 21 (1)Ty cse syllabus booklet pdf 2020 21 (1)
Ty cse syllabus booklet pdf 2020 21 (1)OMKARMUJUMDAR4
 
Distance_Unit_V.pptx
Distance_Unit_V.pptxDistance_Unit_V.pptx
Distance_Unit_V.pptxSasi Kumar
 
Commerce_may_2022-1.pdf
Commerce_may_2022-1.pdfCommerce_may_2022-1.pdf
Commerce_may_2022-1.pdfkrunal soni
 
Development of distance education programs at the university of nebraska–linc...
Development of distance education programs at the university of nebraska–linc...Development of distance education programs at the university of nebraska–linc...
Development of distance education programs at the university of nebraska–linc...Dillard University Library
 
Conventional methods of training to teacher and its impact in higher education
Conventional methods of training to teacher and its impact in higher educationConventional methods of training to teacher and its impact in higher education
Conventional methods of training to teacher and its impact in higher educationRAVICHANDIRANG
 
2017 otc-bangla- syllabus - final
2017 otc-bangla- syllabus - final2017 otc-bangla- syllabus - final
2017 otc-bangla- syllabus - finalJanardhanan Thulasi
 
Conventional methods-of-training-to-teacher-and-its-impact-in-higher-education
Conventional methods-of-training-to-teacher-and-its-impact-in-higher-educationConventional methods-of-training-to-teacher-and-its-impact-in-higher-education
Conventional methods-of-training-to-teacher-and-its-impact-in-higher-educationchelliah paramasivan
 

Similar a Mba 518 (20)

Evaluation_on_Entrepreneurship_Module_in_Community (1).pdf
Evaluation_on_Entrepreneurship_Module_in_Community (1).pdfEvaluation_on_Entrepreneurship_Module_in_Community (1).pdf
Evaluation_on_Entrepreneurship_Module_in_Community (1).pdf
 
Evaluation_on_Entrepreneurship_Module_in_Community.pdf
Evaluation_on_Entrepreneurship_Module_in_Community.pdfEvaluation_on_Entrepreneurship_Module_in_Community.pdf
Evaluation_on_Entrepreneurship_Module_in_Community.pdf
 
MA Economics handbook Jan 2022.pdf
MA Economics handbook Jan 2022.pdfMA Economics handbook Jan 2022.pdf
MA Economics handbook Jan 2022.pdf
 
Profile 5 lsis award for efficiency through effective use of technology in ...
Profile 5   lsis award for efficiency through effective use of technology in ...Profile 5   lsis award for efficiency through effective use of technology in ...
Profile 5 lsis award for efficiency through effective use of technology in ...
 
unit 3 - 829 by Mujeeb ur Rahimaiou.pptx
unit 3 - 829 by Mujeeb ur Rahimaiou.pptxunit 3 - 829 by Mujeeb ur Rahimaiou.pptx
unit 3 - 829 by Mujeeb ur Rahimaiou.pptx
 
Management education through distance mode of learning
Management education through distance mode of learningManagement education through distance mode of learning
Management education through distance mode of learning
 
Development of Teacher Education in Pakistan-Unit 03- 8626
Development of Teacher Education in Pakistan-Unit 03- 8626Development of Teacher Education in Pakistan-Unit 03- 8626
Development of Teacher Education in Pakistan-Unit 03- 8626
 
TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN - UNIT 3 - ...
TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN  - UNIT 3 - ...TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN  - UNIT 3 - ...
TEACHER EDUCATION - DEVELOPMENT OF TEACHER EDUCATION IN PAKISTAN - UNIT 3 - ...
 
Chandigarh university distance mca
Chandigarh university distance mcaChandigarh university distance mca
Chandigarh university distance mca
 
Unit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptx
Unit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptxUnit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptx
Unit 3 - 8626 chthdhfghgxzdbjkcfdgv.pptx
 
Ty cse syllabus booklet pdf 2020 21 (1)
Ty cse syllabus booklet pdf 2020 21 (1)Ty cse syllabus booklet pdf 2020 21 (1)
Ty cse syllabus booklet pdf 2020 21 (1)
 
Distance_Unit_V.pptx
Distance_Unit_V.pptxDistance_Unit_V.pptx
Distance_Unit_V.pptx
 
Commerce_may_2022-1.pdf
Commerce_may_2022-1.pdfCommerce_may_2022-1.pdf
Commerce_may_2022-1.pdf
 
Development of distance education programs at the university of nebraska–linc...
Development of distance education programs at the university of nebraska–linc...Development of distance education programs at the university of nebraska–linc...
Development of distance education programs at the university of nebraska–linc...
 
Dr. alajab
Dr. alajabDr. alajab
Dr. alajab
 
ssr-bharathiyar.pdf
ssr-bharathiyar.pdfssr-bharathiyar.pdf
ssr-bharathiyar.pdf
 
Conventional methods of training to teacher and its impact in higher education
Conventional methods of training to teacher and its impact in higher educationConventional methods of training to teacher and its impact in higher education
Conventional methods of training to teacher and its impact in higher education
 
2017 otc-bangla- syllabus - final
2017 otc-bangla- syllabus - final2017 otc-bangla- syllabus - final
2017 otc-bangla- syllabus - final
 
Ignou
IgnouIgnou
Ignou
 
Conventional methods-of-training-to-teacher-and-its-impact-in-higher-education
Conventional methods-of-training-to-teacher-and-its-impact-in-higher-educationConventional methods-of-training-to-teacher-and-its-impact-in-higher-education
Conventional methods-of-training-to-teacher-and-its-impact-in-higher-education
 

Último

Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Commonwealth
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESKumarJayaraman3
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfMichael Silva
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfMichael Silva
 
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoRWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoCoinGecko
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxsonamyadav7097
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfMichael Silva
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismBrian Lin
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent PreferencesGRAPE
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Guillaume Ⓥ Sarlat
 
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.KumarJayaraman3
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklosbeduinpower135
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptxFinTech Belgium
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources PresentationAdnet Communications
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneurabcisahunter
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI360factors
 

Último (20)

Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdf
 
Effects & Policies Of Bank Consolidation
Effects & Policies Of Bank ConsolidationEffects & Policies Of Bank Consolidation
Effects & Policies Of Bank Consolidation
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdf
 
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoRWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
 
Monthly Economic Monitoring of Ukraine No.230, March 2024
Monthly Economic Monitoring of Ukraine No.230, March 2024Monthly Economic Monitoring of Ukraine No.230, March 2024
Monthly Economic Monitoring of Ukraine No.230, March 2024
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptx
 
Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdf
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent Preferences
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024
 
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklos
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptx
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
 
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI
 

Mba 518

  • 1. Punjab Technical University World over distance Education is fast growing mode of education because of the unique benefits it provides to the learners. Universities are now able to reach the community which has for so long been deprived or higher education due to various reasons including social, economic and geographical considerations. Distance Education provides them a second chance to upgrade their technical skills and qualifications. Some of the important considerations in initiating distance education in a country like India, has been the concern of the government in increasing access and reach of higher education to a larger student community. As such, only 6-8% of students in India take up higher education and more than 92% drop out before reaching 10+2 level. Further, avenues for upgrading qualifications, while at work, is limited and also modular programs for gaining latest skills through continuing education programs is extremely poor. In such a system, distance education programs provide the much needed avenue for: z Increasing access and reach of higher education: z Equity and affordability of higher education to weaker and disadvantaged sections of the society; z Increased opportunity for upgrading, retraining and personal enrichment of latest knowledge and know-how; z Capacity building for national interests. One of use important aspects of any distance education program is the learning resources. Learning material provided to the learner must be innovative, thought provoking, comprehensive and must be tailor-made for self-learning. It has been a continuous process for the University in improving the quality of the learning material through well designed course materials in the SIM format (self-instructional material). While designing the material, the university has researched the methods and process of some of the best institutions in the world imparting distance education. About the University Punjab Technical University (PTU) was set up by the Government of Punjab in 1997 through a state Legislative ACT. PTU started with a modest beginning in 1997, when University had only nine Engineering and thirteen Management colleges affiliated to it. PTU now has affiliated 43
  • 2. Engineering colleges, 56 colleges imparting Management and Computer Application courses, 20 institutions imparting pharmacy education, 6 Architecture institutions, 2 Hotel Management and 12 Regional Centres for imparting M. Tech and Ph. D Programs in different branches of Engineering and Management. During a short span of nine years, the University has undertaken many innovative programs. The major development during this period is that University has restructured its degree program and upgraded syllabi of the course in such a way as to increase the employability of the student and also to make them self-reliant by imparting Higher Technical Education. We at Punjab Technical University are propelled by the vision and wisdom of our leaders and are striving hard to discharge our duties for the overall improvement of quality of education that we provide. During a short span of nine years, the University has faced various challenges but has always kept the interest of students as the paramount concern. During the past couple of years, the University has undertaken many new initiatives to revitalize the educational programs imparted with the colleges and Regional centers. Though knowledge and skills are the key factors in increasing the employability and competitive edge of students in the emerging global environment, an environment of economic growth and opportunity is necessary to promote the demand for such trained and professional manpower. The University is participating in the process of technological growth and development in shaping the human resource for economic development of the nation. Keeping the above facts in mind Punjab Technical University, initiated the distance education program and started offering various job oriented technical courses in disciplines like information technology, management, Hotel Management, paramedical, Media Technologies and Fashion Technology since July 2001. The program was initiated with the aim of fulfilling the mandate of the ACT for providing continuing education to the disadvantaged economically backward sections of society as well as working professionals for skill up-gradation. The University has over the years initiated various quality improvement initiatives in running its distance education program to deliver quality education with a flexible approach of education delivery. This program also takes care of the overall personality development of the students. Presently, PTU has more than 60 courses under distance education stream in more than 700 learning centers across the country.
  • 3. About Distance Education Program of PTU Over the past few years, the distance education program of PTU has gained wide publicity and acceptance due to certain quality features which were introduced to increase the effectiveness of learning methodologies. The last comprehensive syllabus review was carried out in the year 2004- 05 and the new revised syllabus was implemented from September 2005. The syllabus once reviewed is frozen for a period of 3 years and changes, if any, shall be taken up in the year 2008. Various innovative initiatives have been taken, which has increased the popularity of the program. Some of these initiatives are enumerated below: 1. Making a pyramid system for almost all courses, in which a student gets flexibility of continuing higher education in his own pace and per his convenience. Suitable credits are imparted for courses taken during re-entry into the pyramid as a lateral entry student. 2. Relaxed entry qualifications ensure that students get enough freedom to choose their course and the basics necessary for completing the course is taught at the first semester level. 3. A comprehensive course on „Communications and Soft Skills‰ is compulsory for all students, which ensures that students learn some basic skills for increasing their employability and competing in the globalized environment. 4. Learning materials and books have been remodeled in the self-Instructional Material format, which ensures easy dissemination of skills and self-learning. These SIMs are given in addition to the class notes, work modules and weekly quizzes. 5. Students are allowed to take a minimum of 240 hours of instruction during the semester, which includes small group interaction with faculty and teaching practical skills in a personalized manner. 6. Minimum standards have been laid out for the learning centers, and a full time counselor and core faculty is available to help the student anytime. 7. There is a wide network of Regional Learning and Facilitation Centers (RLFC) catering to each zone, which is available for student queries, placement support, examination related queries and day-to-day logistic support. Students need not visit the University for any of their problems and they can approach the RLFC for taking care of their needs. 8. Various facilities like Free Waiver for physically challenged students, Scholarship scheme by the government for SC/ST candidates, free bus passes for PRTC buses are available to students of the University. The university continuously aims for higher objectives to achieve and the success always gears us for achieving the improbable. The PTU distance education fraternity has grown more than 200% during the past two years and the students have now started moving all across the country and abroad after completing their skill training with us. We wish you a marvelous learning experience in the next few years of association with us! DR. R. P. SINGH Dean Distance Education
  • 4. Dr. S. K. Salwan Vice Chancellor Dr. S. K. Salwan is an eminent scientist, visionary and an experienced administrator. He is a doctorate in mechanical engineering from the IIT, Mumbai. Dr. Salwan brings with him 14 years of teaching and research experience. He is credited with establishing the Department of Design Engineering at the institute of Armament Technology, Pune. He was the founder-member of the integrated guided missile programme of defence research under His Excellency Honorable Dr. A.P.J. Abdul Kalam. He also established the high technology missile center, RCI at Hyderabad. He has been instrumental in implementing the Rs 1000-crore National Range for Testing Missiles and Weapon Systems at Chandipore, Balance in a record time of three years. He was director of the Armament Research and Development Establishment, Pune. Dr. Salwan has been part of many high level defence delegations to various countries. He was Advisor (Strategic project) and Emeritus Scientist at the DRDO. Dr. Salwan has won various awards, including the Scientist of the Year 1994; the Rajiv Ratan Award, 1995, and a Vashisht Sewa Medal 1996, the Technology Assimilation and Transfer Trophy, 1997 and the Punj Pani Award in Punjab for 2006. Dr. R.P. Singh Dean, Distance Education Dr. R.P. Singh is a doctorate in physics from Canada and has been a gold medallist of Banaras Hindu University in M.Sc. Dr. Singh took over the Department of Distance Education in November 2004 and since then the University has embarked on various innovations in Distance Education. Due to combined efforts of the department, the RLFCÊs and Centers, and with active support of the Distance Education Council headed by Dr. O.P. Bajpai, Director University College of Engineering Kurukshetra University the distance education program of PTU is now a structured system which empowers the learner with requisite skills and knowledge which can enhance their employability in the global market. Dr. R. P. Singh is promoting distance education at the national level also and is a founder member of Education Promotion Society of India and is member of various committees which explores innovative ways of learning for the disadvantages sections of society. The basic aim of the distance education programs has been to assimilate all sections of society including women by increasing the access. Reach, equity and affordability of higher education in the country.
  • 5. MANAGEMENT CONTROL SYSTEM MBA – 518 This SIM has been prepared exclusively under the guidance of Punjab Technical University (PTU) and reviewed by experts and approved by the concerned statutory Board of Studies (BOS). It conforms to the syllabi and contents as approved by the BOS of PTU.
  • 6. Copyright © Ravindhar Vadapalli, 2008 No part of this publication which is material protected by this copyright notice may be reproduced or transmitted or utilized or stored in any form or by any means now known or hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recording or by any information storage or retrieval system, without prior written permission from the publisher. Information contained in this book has been published by Excel Books Pvt. Ltd. and has been obtained by its authors from sources believed to be reliable and are correct to the best of their knowledge. However, the publisher and its author shall in no event be liable for any errors, omissions or damages arising out of use of this information and specifically disclaim any implied warranties or merchantability or fitness for any particular use. Published by Anurag Jain for Excel Books Pvt. Ltd., A-45, Naraina, Phase-I, New Delhi-110 028 Tel: 25795793, 25795794 email: eb@excelbooks.com
  • 7. PTU DEP SYLLABI-BOOK MAPPING TABLE MBA – 518 MANAGEMENT CONTROL SYSTEM Syllabi Mapping in Book Section I Management Control System: Basic concepts, nature and scope. Control environment – Concept of goals and strategies. Behavioral considerations. Responsibility Centers: Revenue and expense centers, Profit centers, Investment centers. Section II Transfer Pricing: Objectives and methods. Budgeting: Budget preparation, Types of budgets. Behavioral aspects of budgets. Section III Variance analysis and reporting. Performance analysis and measurement. Impact on management compensation. Modern Control Methods: JIT, TQM and DSS. Control in service organisations. Unit 1: Introduction to Management Control System (Page 3-14) Unit 2: Responsibility Centres (Page 15-29) Unit 3: Transfer Pricing (Page 33-37) Unit 4: Budgeting (Page 39-68) Unit 5: Variance Analysis and Reporting (Page 71-92) Unit 6: Modern Control Methods (Page 93-105)
  • 9. Contents Section-I UNIT 1 INTRODUCTION TO MANAGEMENT CONTROL SYSTEM 3 Introduction Basic Concepts Characteristics of a Management Control System (MCS) Nature of Management Control Scope of MCS Control Environment Behavioural Considerations Summary Keywords Review Questions Further Readings UNIT 2 RESPONSIBILITY CENTRES 15 Introduction Expense Centre Cost Centre Profit Centres Investment Centre Residual Income (RI) Summary Keywords Review Questions Further Readings Section-II UNIT 3 TRANSFER PRICING 33 Introduction Objectives of Transfer Pricing Methods of Transfer Pricing Summary Keywords Review Questions Further Readings UNIT 4 BUDGETING 39 Introduction Process of Budget Preparation Classification of Budget Sales Budget
  • 10. Sales Overhead Budget Cash Budget Factory Overheads Budget Flexible Budget Zero-base Budgeting Behavioural Aspects of Budgeting Summary Keywords Review Questions Further Readings Section-III UNIT 5 VARIANCE ANALYSIS AND REPORTING 71 Introduction Variance Analysis Material Cost Variance (MCV) Material Price Variance Overhead Variance Sales Variance Reporting The Budget Summary Keywords Review Questions Further Readings UNIT 6 MODERN CONTROL METHODS 93 Introduction JIT Total Quality Management Decision Support System (DSS) Summary Keywords Review Questions Further Readings
  • 11. SECTION-I Unit 1 Introduction to Management Control System Unit 2 Responsibility Centres
  • 12. Introduction to Management Control System Notes Punjab Technical University 3 Unit 1 Introduction to Management Control System Unit Structure • Introduction • Basic Concepts • Characteristics of a Management Control System (MCS) • Nature of Management Control • Scope of MCS • Control Environment • Behavioural Considerations • Summary • Keywords • Review Questions • Further Readings Learning Objectives At the conclusion of this unit you should be able to: • Define management control system. • Describe features, nature and areas of management control • Know what are the goals and strategies of effective control system • Discuss the behavioural aspects of management control system Introduction Management controls are used daily by managers and employees to accomplish the identified objectives of an organization. Simply put, management controls are the operational methods that enable work to proceed as expected. Most controls can be classified as preventive or detective. Preventive controls are designed to discourage errors or irregularities. For example: z A manager's review of purchases prior to approval prevents inappropriate expenditures of office funds. z A computer program which asks for a password prevents unauthorized access to information. Detective controls are designed to identify an error or irregularity after it has occurred. Examples include the following: z An exception report that detects and lists incorrect or incomplete transactions. z A manager's review of long distance telephone charges will detect improper or personal calls that should not have been charged to the account. Often, management controls are documented in terms of policies and procedures. However, sometimes as an organization undergoes structural and functional changes,
  • 13. Management Control System Notes 4 Self-Instructional Material people within the organization create or adopt ways of ensuring that work proceeds normally. Many times, these methods (controls) are not documented. The purpose of a Management Control Review (MCR) is to evaluate the entire system or management controls to help your unit operate more efficiently and effectively, and to provide a reasonable level of assurance that the process and products for which you are responsible are adequately protected. A MCR provides a variety of benefits which promote sound management, including the following: z Ensuring that administrative, financial, and programmatic risks have been adequately addressed. z Eliminating excessive controls that may have accumulated over the years, allowing for more efficient operations. z Increased confidence that responsibilities are being carried out according to plan. Basic Concepts Management Control is a process of assuming that resources are obtained and used effectively and efficiently in the accomplishment of the organisationÊs objectives. Some leading definitions of managing control are as follows: „Management Control seeks to compel events to conform to plans.‰ ·Billy, E. Goaz „Some sort of systematic effort to compare current performance to a predetermined plan or objective, presumably in order to take any remedial action required.‰ ·William Travers Jerome Control, in its managerial sense, can be defined as, „the presence of that force in a business which guides it to a predetermined objective by means of predetermined policies and decisions.‰ ·Mc Farland, D.E. „Control is that function of the system which provides direction in conformance to the plans.‰ ·Rosen, J.K. The above definitions indicate very clearly that management control has to do with the outgoing operation of the business. Control is a fundamental necessity for the success of a business. It is the function of the management that helps realisation of the business objectives. From time to time current performance of the various operations is compared to a predetermined standards or ideal performance and in case of variance remedial measures are adopted to conform operations to the set plan or policy. Characteristics of a Management Control System (MCS) The main characteristics of Management Control are the following: 1. A Total System: Management Control System is a total system as it covers all aspects of the companyÊs operations. It is an overall process of the enterprise to fit together the separate plans for various segments so as to assure that each harmonises with one another and that the aggregate effect of all of them on the whole enterprise is satisfactory.
  • 14. Introduction to Management Control System Notes Punjab Technical University 5 2. Monetary Standards: Barring some exceptions, the MCS is built around a financial structure and all the resources and outputs are expressed in terms of money. The results of each responsibility centre, in respect to production and resources, are expressed in terms of the common denominator of money. 3. Definite Pattern: The management control process follows a definite pattern and timetable. The whole operational activity is regular and rhythmic. It is a continuous process even if the plans are changed in the light of experience or change in technology. 4. Coordinated System: Management Control System is fully coordinated and integrated system. For instance, if the information for one purpose varies from that collected for another purpose, the data reconcile with one another. It is, therefore, more feasible to consider the interlocking sub-processes as a single set for achieving the objectives of the enterprise. 5. Line Managers: Figures themselves are nothing more than marks on pieces of paper. Anything that the business accomplishes is the result of the actions of the people. Information collected from various sources has to be properly organised. The line managers are the focal points in management control system who alone can influence others to improve the performance. Business budgets are prepared on their advice and suggestion. They can encourage persons to work efficiently in the interests of the enterprise as to achieve the objectives set forth. 6. Emphasis: Management control emphasises on search for planning as well as control. Both should go hand in hand to achieve the best results. It has an organisational aspect also inasmuch as lines of communication are required for the collection and transmission of control information. Nature of Management Control It is through control that the management assures itself that what the organisation does conform to management plans and policies. Accounting information is used in control as a means of communication of motivation and of appraisal. It is not managementÊs job to work personally but it sees to it that the work gets done by others. Control is an important element of the process of managing. In managerial terminology, control is ensuring work accomplishment according to plans. It is the process that guides and controls operations towards some predetermined goods. According to Prof. R.N. Anthony „Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of an organisationÊs objectives.‰ It seeks to compel events to conform to plans. It is a process by which the people in the organisation are made to work properly and most efficiently with a view to attain the best results. It is concerned with measuring and evaluating performance so as to secure the best results under the circumstances. An effort is made to compare the current performance to a predetermined objective or plan. Thus control is a fundamental function of the management to ensure work accomplishment according to predetermined plans and standards. Other Characteristics of control are as follows: 1. Control is an essential function of every manager: Managers at every level have to focus attention towards future operational and accounting data taking into consideration past performance, present trends and anticipated economic and technological changes. The nature, scope and level of control will be governed by the level of manager exercising it.
  • 15. Management Control System Notes 6 Self-Instructional Material 2. Control implies the existence of goals and plans: Without predetermined goals and plans management control is not possible. These two provide a link between such future anticipations and actual performance, as the future gets converted into present and past with the passage of time. Managers quantify their hopes and ambitions of the future on a realistic basis and to use them later as standards for measurement of actual performance. In the absence of objections and goals the results are likely to be different from what desired. Plans complement objectives which can be attained on the basis of proper plans. Policy sets the intention while control looks and ascertains how far the objectives are attained. 3. Control is forward looking: Planning is the process of deciding what action should be taken in the future. One cannot change the events that have happened in the past. The nature of managerial control is forward looking. It is on the basis of evaluation of past performance that the future plans or guidelines can be laid down. Management control involves managing the overall activity of the enterprise for the future. It prevents deviations in operational goals. 4. Management Control a continuous process: Control is a continuous process over the human and material resources. It demands eternal vigilance of every step. Regulating the activities of people associated in the common task of attaining the objectives of the organisation is the primary aim of management control which requires strict and careful vigilance. Success can be achieved only when the management controls the men and circumstances around him on a regular basis. Business conditions are always changing so management must be always adapting itself to the changed circumstances. Therefore, management control is a continuing activity. 5. People oriented: Management control is significant to internal control system as its approach is people oriented. People assume a new role, attitudes, and motivations under a sound management. Control is attained through people and not lifeless materials. It is the managers, engineers and operators who implement the ideas and objectives of the management. It is people who make or mar a thing. The coordination of the main divisions of a concern makes for smoother operation and less friction which results in the achievement of predetermined objectives. Scope of MCS Managerial Control, as we know, is an important process in which accounting information is used as to accomplish the organisationÊs objectives. Therefore, the scope of control is very wide that covers a broad range of management activities. According to Holden, Fish and Smith the main areas of control are as follows: 1. Policies Control: The success of a business hangs on formulation of sound policies and their proper implementation. There is a great need of control over policies. 2. Control over Organisation: For the control over organisation the management uses organisationÊs manual and organisational chart. Designing and organising various departments for the smooth running of the business is very essential. If any problem or conflict arises the management control attempts to remove the causes of such frictions and rationalise the organisational structure as to ensure its efficient working. 3. Control over Personnel: Anything that the business accomplishes is the result of the action of those people who work in the organisation. It is the people,
  • 16. Introduction to Management Control System Notes Punjab Technical University 7 not figures, that get things done. The personnel manager is responsible to draw a control plan for having control over the personnel of the concern. 4. Control over Wages and Salaries: Control over wages and salaries is sometimes assigned to the personnel department or a specially constituted wage and salary committee. 5. Control over Costs: The cost accountant who is responsible to control costs sets cost standards, labour material and overheads. He makes comparisons of actual cost data with standard cost. Cost control is a delicate task and is supplemented by budgetary control systems. 6. Control over Techniques: It implies the use of best methods and techniques so as to eliminate all wastage in time, energy and material. The task is accomplished by periodic analysis and checking of activities of each department with a view to avoid and eliminate all non-essential motions, functions and methods. 7. Control over Capital Expenditure: Various projects entailing huge amounts require control. This is exercised through a system of evaluation of projects in terms of capital. Capital budget is prepared for the whole concern. Every project is evaluated in terms of the advantages accruing to the firm. For this purpose capital budgeting, project analysis, breakeven analysis, study of cost of capital etc. are carried on extensively. 8. Production Control: The function of production control is to plan, organise, direct and control the necessary activities to provide products and services. Once the production system is designed and activated the problems arise in the areas of production, planning and control. Market needs and attitudes of consumers are studied minutely for revision in product lines and their rationalising. Routing, scheduling, dispatching, follow up, Inventory control, Quality control are the various techniques of production control. 9. Overall Control: A master plan is prepared for overall control and all the concerned departments are made to involve in this procedure. 10. Control over External Relations: Public relations department should always be alert in improving external relations. It may also prescribe norms and measures for other operating departments to insist on cordial relations with all the parties. 11. Control over Research and Development: Research activities, being technical in nature, cannot be controlled directly. But it should be seen that all facilities are provided to the research staff to improve their ability and keeping in touch with the up-to-date techniques and devices. Training facilities should also be provided by having a research budget in the business. Process of Control 1. Well-defined Objectives and Goals: The objectives and goals of the organisation should be crystal clear and well-defined in the process of control. The organisational goals should be split into sub-goals at departmental level. The operation of the various functions and their coordination should be vested in the hands of the executives who are armed with sufficient authority or power to fulfil their responsibility. The planned goals of the enterprise or of a particular department serve as a standard for performance measurement. 2. Determination of Strategic Point of Control: The responsibility centres and strategic points of control should be selected and fixed. To make the control
  • 17. Management Control System Notes 8 Self-Instructional Material process effective, the management should concentrate upon strategic points only. 3. Establishment of Control Standards: These standards are established criteria against which actual performance can be compared and measured in terms of money, time, physical units or some other index. The object of predetermined standards is that comparison between actual performance and targets performance is made possible. Continuous comparison is very necessary. This requires tabulating the targets framed, collecting and collating data regarding actual performance and reporting variations periodically to the controlling authorities. It is obvious that control is not possible unless actual performance and the standard against which it is being measured are comparable. 4. Determination of Controllable Costs and Control Period: Optimum control does not mean excessive control. Sometimes good results are achieved only if critical points are identified. Secret of good control is to establish strategic points where corrective actions will be the cheapest and most effective. 5. Strengthening the Organisation: The complete framework of control is aimed at strengthening the organisation. Planning is a prerequisite. Control should be tailored to fit the organisation. There should be a system of checks on the managerial activity of subordinates. The organisation should be strengthened first to overcome the weaknesses of deviations. Controls should incorporate sufficient flexibility in them so as to remain effective despite the failure of plan. 6. Measurement of Performance: It is not only a process of comparison of actual performance with the objectives, but to initiate steps to achieve the objective. This is done without encroaching upon the authority and scope of authority of the manager concerned. The evaluation of performance is very necessary. It involves the measurement of performance in respect of work and in terms of control standards. In the opinion of Peter F. Drucker, the measurement of performance must be clear, simple, rational, relevant and reliable. The effectiveness of a control system depends upon the prompt reporting of past results to the persons who have power to produce changes. The next step is to compare the performance with the planned standards. It is important to determine the limits within which the variations can be held and still to be regarded within control when performance is measured accurately. The management is not only required to find out the extent of variations but the causes of variations must also be ascertained correctly. The manager should be able to distinguish between minor and unimportant variation and variations indicating need for immediate correction. To assess whether actual performance is in accordance with the target comparison with the standard has to be made and the variation is properly analysed to understand the reason for the variation. The comparison should be done at frequent intervals so that immediate corrective action could be taken. 7. Control Period: The proper control period is the shortest period of time in which management can usefully intervene and in which significant changes in performance are likely. The period is different for different responsibility centres and for different items within responsibility centres. Spoilage rates in a production operation may be measured hourly or often. The key cost element of the centre may be measured daily. Reports on overall performance, particularly those going to the levels of management are often on a monthly basis and sometimes for quarterly or longer intervals, since top management does not have either the time or the inclination to explore the local temporary problems.
  • 18. Introduction to Management Control System Notes Punjab Technical University 9 Adequate or Effective Control System Management control is that function of the managers, next in line to top level, by which they ensure that the objectives of the organisation are achieved. It is not only a process of comparison of actual performance with the objectives but to initiate steps to achieve the object, if not achieved. This is done without encroaching upon the autonomy and scope of authority of the manager concerned. This involves the assessment of a managerÊs performance in quantitative terms and at the same time not to lay too much emphasis on quantitative data. In fact, some of the objectives themselves cannot be exactly quantified, for instance, objectives in respect of research and development, industrial relations etc. Thus management control is the process by which managers assume that resources are obtained and used effectively, and efficiently in the accomplishment of organisationÊs objectives. „Since Management control involves the behaviour of human beings, the relevant principles are those drawn from such disciplines as social psychology and organisational behaviour rather than from Economics, Mathematics or any discipline.‰ The following are important requirements for making any control system effective in application : 1. Control by Objectives: The control must be goal-oriented and by objectives. As objectives classify the expected results in meaningful and realistic terms, they provide the control standards by which actual performance can be measured. The control system should be according to the nature and needs of organisation. 2. Direct Control: Control should be exercised on people who work on machines and materials. Thus, it should be employee-oriented rather than work-oriented. It is people who resent control and not the inanimate articles. It is, therefore, necessary to alter the attitude of personnel who oppose control measures. An attempt should be made to understand the attitude of the people by proper education. 3. Forward Looking Control: Control should always be forward looking. It should bring out the deviation in light as soon as possible. It must focus on strategic points with exception. 4. Managerial Self-Control: Control should be enforced through managerial positions in the organisational structure. Each Manager must be vested with adequate authority for exercising control and taking decisions. Alleviation of duties and responsibilities goes a long way towards securing effective control in the organisation. 5. Simple and Balanced Control: To be effective control must be simple and well-balanced. Any control device which is not intelligible cannot be put in practice. So, control lines must-be simple and intelligible both to the controller and the controlled. 6. Flexibility: There should be nothing like rigidity in control. Even the best plans and other predetermined criteria need to be charged from time to time to meet a particular situation. However, an effective control system should retain its basic structure. 7. Economy: A simple control system is bound to be economical. It should not be cumbersome and expensive. Economy is the basic requirement of any good control system. 8. Feedback: Feedback is the process of adjusting future actions based upon information about past performance. Recently this concept of feedback has
  • 19. Management Control System Notes 10 Self-Instructional Material received considerable attention. It proves the worth and utility of control process. Control should not be negative. It should be positive, constructive and helpful. Control is not a command; it is guidance. The system is really concerned with arrangements for implementing the decisions made in strategic planning. Control Environment The COSO framework describes the control environment as setting the tone of an organization and influencing the control consciousness of its people. An effective control environment supports and strengthens the other control elements, whereas a weak control environment undermines the other elements, rendering them useless. In an effective control environment, employees know that doing the right thing is expected and will be supported by upper level management, even if it hurts the bottom line. In a weak environment, control procedures are frequently overridden or ignored, providing an opportunity for fraud. Traditionally, auditors' assessments of the control environment have included issuing a questionnaire to senior management to determine whether management policies and procedures, such as a code of ethics, have been implemented. The problem with this approach is that it measures management's efforts to create a sound environment, not its effectiveness in doing so. A more direct method of evaluating whether management has created an environment in which ethical behavior is encouraged is for internal auditors to survey the people who work in that environment. The focus of the assessment should not be on the message management thinks it is sending, but on the message employees are actually receiving. The control environment is one of the key components of an entity's internal control; it sets the tone of an entity, influences the control consciousness of people within all organization and is the foundation for all other components of the internal control system. Management is responsible for evaluating and reporting on a company's controls. The external auditors are responsible for auditing management's assertion and independently coming to their own conclusions about the company's internal control effectiveness. They must evaluate management's assessment and also perform their own, independent tests in many areas, including the control environment. z The control environment has a pervasive structure that affects many business process activities. It includes elements such as management's integrity and ethical values, operating philosophy and commitment to organizational competence. z Adding to the difficulty of the task is the fact that the control environment is not transaction-oriented. Tests of controls that auditors are accustomed to performing, such as walk-through or the re-performance of the control for a sample of items, will not be possible. And focusing solely on activity-level controls is inappropriate. z Tests of the Control Environment will consist of a combination of procedures, including a review of relevant documentation of the design, inquiries of management and employees and direct observation. z Auditors will have to probe for understanding and awareness and try to understand the company's attitude toward internal control over financial reporting. They also should ask management for a self-assessment.
  • 20. Introduction to Management Control System Notes Punjab Technical University 11 Practical Tips to Remember z Don't focus your internal control tests exclusively on activity-level controls. You have to evaluate and test the control environment, too. z Establish a benchmark, such as the internal control reliability model, that will be used to gauge internal control effectiveness. Use this model to design your tests of the control environment. z Use several different testing techniques to gather information about the control environment from a broad range of entity personnel. Student Activity „Environmental surveillance on an ongoing basis, for understanding the nature and implications of the emerging developments and their implications for the effective control system, is imperative.‰ Describe the statement with suitable examples. Concept of Goals and Strategy A strategy invariably indicates the long-term goals toward which all efforts are directed. For example, long-term goals might be to Âdominate the market, to be the technology leader or to be the premium quality firmÊ. Such enduring goals help employees give their best in a unified manner and enable the firm to specify its competitive position very clearly to its rivals. Strategy is the overall plan of a firm deploying its resources to establish a favourable position and compete successfully against its rivals. Strategy describes a framework for charting a course of action. It explicates an approach for the company that builds on its strengths and is a good fit with the firmÊs external environment. It is basically intended to help firms achieve competitive advantage. Competitive advantage allows a firm to gain an edge over rivals when competing. Competitive advantage comes from a firmÊs unique ability to perform activities more distinctively and more effectively than rivals. A firmÊs distinctive competence or unique ability here implies, those special capabilities, skills, technologies or resources that enable a firm to distinguish itself from its rivals and create competitive advantage (such as superior quality, design skills, low-cost manufacturing, superior distribution etc.). The term ÂterrainÊ is highly relevant in explaining the concept of strategy more clearly. From a business sense, terrain refers to markets, segments and products used to win over customers. The essence of strategy is to match strengths and distinctive competence with terrain in such a way that oneÊs own business enjoys a competitive advantage over rivals competing in the same terrain. The basic premise of strategy, as things stand now, is that an adversary can defeat a rival–even a larger, more powerful one–if it can maneuver a battle or engagement onto a terrain favourable to its own capabilities. The term ÂcapabilityÊ refers to the ability or capacity of a bundle of resources deployed by a firm to perform an activity (Pitts and Lie). Elements of a Strategy Any coherent strategy (as the above expert opinions reveal) should have four important elements (Saloner et al): a. Goals: A strategy invariably indicates the long-term goals toward which all efforts are directed. For example long-term goals might be to Âdominate the market, to be the technology leader or to be the premium quality firmÊ. Such enduring goals help employees give their best in a unified manner and enable the firm to specify its competitive position very clearly to its rivals. A recent
  • 21. Management Control System Notes 12 Self-Instructional Material advertisement from Maruti Suzuki for example, claims: „we donÊt just sell more cars than No.2. We sell more cars than the entire competition put together‰. MarutiÊs commitment to being number one (sales, distribution network, lowest cost producer, highest resale value, one stop solution provider etc) or two in the markets it serves, sends clear signals to its rivals in more than one way. b. Scope: A strategy defines the scope of the firm that is, the kind of products the firm will offer, the markets (geographies, technologies, processes) it will pursue and the broad areas of activity it will undertake. It will, at the same time, throw light on the activities the firm will not undertake. c. Competitive Advantage: A strategy also contains a clear statement of what competitive advantages the firm will pursue and sustain. Competitive advantage arises when a firm is able to perform an activity that is distinct or different from that of its rivals. Firms build competitive advantage when they take steps that help them gain an edge over their rivals in attracting buyers. These steps vary, for example, making the highest quality product, offering the best customer service, producing at the lowest cost or focusing resources on a specific segment or niche of the industry. d. Logic: This is the most important element of strategy. For example, a firmÊs strategy is to dominate the market for inexpensive detergents by being the low-cost, mass-market producer. Here the goal is to dominate the detergent market. The scope is to produce low-cost detergent powder for the Indian mass market. The competitive advantage is the firmÊs low cost. Yet this example does not explain why this strategy will work. Why the firm will get ahead of others by limiting its scope and by being the low cost producer (competitive advantage) in the detergent industry. The ÂwhyÊ is the logic of the strategy. To see how logic is the core of a strategy, consider the following expanded version of a strategy: Âour strategy is to dominate the Indian market for inexpensive detergent powder by being the low cost producer selling through mass-market channels. Our low price will generate high volumes. This, in turn, will makes us a high volume, low-cost producer. The economies of scale would help us improve our bottom-line even with a low price‰. Student Activity „The purpose of strategy is to define the nature of relationship between a firm and its environment.‰ Critically examine the statement. Behavioural Considerations A control system is necessary in any organization in which the activities of different divisions, departments, sections, and so on need to be coordinated and controlled. Most control systems are past-action-oriented and consequently are inefficient or fail. For example, there is little an employee can do today to correct the results of actions completed two weeks ago. Steering controls, on the other hand, are future-oriented and allow adjustments to be made to get back on course before the control period ends. They therefore establish a more motivating climate for the employee. What's more, although many standards or controls are simply estimates of what should occur if certain assumptions are correct, they take on a precision in today's control systems that leaves little or no margin for error. Managers would be better off establishing a range rather than a precise number and changing standards as time passes and assumptions prove erroneous. This would be fairer and would positively
  • 22. Introduction to Management Control System Notes Punjab Technical University 13 motivate employees. There are three fundamental beliefs underlying most successful control systems. z First, planning and control are the two most closely interrelated management functions. z Second, the human side of the control process needs to be stressed as much as, if not more than, the tasks or 'numbers crunching' side. z Finally, evaluating, coaching, and rewarding are more effective in the long term than measuring, comparing, and pressuring or penalizing. This is perhaps because the task side of control is noticed and the behavioral or human side is largely overlooked. But as previously noted, managers should carefully consider the behavioral aspects of the process when designing a control system if employees are to be motivated to accomplish assigned tasks. The evaluate focus of most organizational control systems is on the management of the institutionÊs financial resources. However, controlling on only one aspect of institutional performance often results in dysfunctional decisions [Caplan, 1971; Dalton and Lawrence, 1917]. Therefore, important managerial accounting problems found in both are private and public sectors are (1) how to select non-monetary performance measures and (2) how to integrate them into the organizational control system. Conceptually, the problems are straightforward. The accountant must select one of the established financial accounting systems and modify it so that submit performance as it affects non-financial performance evaluation also is reflected in the financial accounting system. A financial accounting system available for such modification is the cost allocation system, in particular the allocation of joint costs. The accountant may view cost allocation from the standpoint of providing management control data and/or expense measurement [Vatter, 1945]. These perspectives may conflict. As a consequence, selection of cost allocation criteria and, hence, selection of the based by which costs may be allocated should be approached with concern for the motivational dimension present in any allocation which affects financial performance. Behavioral accounting is the application of social science concepts to some areas of accounting research such as budgeting, decision making, control and finance reporting. The newly emerging sub-discipline attempts to focus on the "human element" in what has essentially been a quantitative subject area. Summary Management control system primarily deals with the outgoing operations of the business. It is concerned with all types of forecasts. It is a continuous exercise and even as the work proceeds, plans are changed in the light of the experience gained. One of the basic concepts of management control system is that it works on the basis of continuously collected information. Because large number of people are involved in collecting the information, therefore, the flow of information has to be properly organised and channelled. Thus, management control is that function through which it has been ensured that resources are obtained and used effectively to achieve the organisationÊs objects. The control system emphasises simultaneously on both planning and control. Keywords Management Control System: It is the process of comparing actual performance with standards and taking any necessary corrective action.
  • 23. Management Control System Notes 14 Self-Instructional Material Control Environment: It is one of the key component of an entity is internal control; it sets the tone of an entity, influences the control consciousness of people within all organization and is the foundation for all other components of the internal control system. Strategy: It is the overall plan of a firm deploying its resources to establish a favourable position and complete successfully against its rivals. Review Questions 1. Discuss the concept of Management Control. Give the essential elements of a Management Control System. 2. Explain the concept of Management Control and discuss the necessity of such control. 3. „Control is a fundamental management function that ensures work accomplishment according to plans.‰ Analyse the statement describing the importance of control and the steps involved in the control function. 4. What are the elements of an adequate or effective control system? Further Readings D.K. Sinha, Management Control System, Excel Books, 2008 Ravindhra Vadapalli, Management Control System, Excel Books, 2008 Rober N. Anthony and V. Govindarajan, Management Control Systems, McGraw Hill/Irwin, 2000 Keneth Merchant, Wim Van der Stede, Management Control Systems, Pearson Education, 2007
  • 24. Responsibility Centres Notes Punjab Technical University 15 Unit 2 Responsibility Centres Unit Structure • Introduction • Expense Centre • Cost Centre • Profit Centres • Investment Centre • Residual Income (RI) • Summary • Keywords • Review Questions • Further Readings Learning Objectives At the conclusion of this unit you should be able to: • Describe meaning and features of responsibility centres • Discuss revenue and expense centres • Point out the advantages of profit centres • Distinguish between different types of profit centres • Know the meaning, features and performance management of investment centres Introduction The entire organization should be divided into various responsibility centres. Each responsibility centre is led by a manager or the head of the centre who has been assigned the responsibility. Organisation Marketing Finance R & D Production HRD Marketing Manager Finance Manager R&D Manager Production Manager HRD Manager Marketing Budget Finance Budget R&D Budget Production Budget HRD Budget
  • 25. Management Control System Notes 16 Self-Instructional Material From the given Diagram, it is clearly understood that every organization is normally classified into various responsibility centres to the tune of different functions viz. Marketing, Finance, Research & Development, Production and Human Resources. These responsibility centres are headed by the responsibility managers. The responsibility centre is the department, which is headed by the responsible person i.e. the manager of that particular function. It is a part of the organization, through which information is processed and communicated at every position. The decision of the responsibility centre is taken by the head, by considering the positional responsibilities. The responsibility centre is classified into various categories: Revenue and Expense Centre, Profit Centre, Investment Centre, etc. Student Activity Highlight the corporate examples in fixing the responsibility on the managerial positions. Expense Centre The responsibility centre which incurs only expenses, and measures them, is known as expense centre. The expense centres of the organization are mostly the service centres which only usually incur expenses. The contribution of service department and office & administration department to the company cannot be denominated in monetary terms, but instead in terms of quality of services to assist the entire organization. The output of the sales/production departments are denominated in monetary terms unlike others. Cost Centre Cost centres 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 centres, profit centres, or investment centres. There are some significant advantages to classifying simple, straightforward divisions as cost centres, since cost is easy to measure. However, cost centres create incentives for managers to under fund their units in order to benefit themselves, and this under funding 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. When the manager is held accountable only for costs incurred in a responsibility centre, it is called a cost centre. More precisely, it is the inputs and not outputs that are measured in terms of money. In a cost centre of responsibility, the accounting system
  • 26. Responsibility Centres Notes Punjab Technical University 17 records only costs incurred by the centre/unit/division, but the revenues earned (output) are excluded from the purview. This only means that a cost centre is a segment whose financial performance is measured in terms of cost. The costs are the planning and control data in cost centres, since managers are not made responsible for profits and investments in assets. The performance of the managers is evaluated by comparing the costs incurred with the budgeted costs. The management focuses on the cost variances for ensuring proper control. The performance of a cost centre is measured by cost alone, without taking into consideration, its attainments in terms of „output‰. A cost centre does not serve the purpose of measuring the performance of the responsibility centre, since it ignores the output (revenues) measured in terms of money. Profit Centres Situational Requirements for Successful Implementation When profit is used to express expectations for a responsibility unit and for evaluating its performance, that responsibility unit is known as a profit centre and its manager has the responsibility for attaining a certain level of profit. If he or she is to be evaluated on the basis of profit performance, the profit centre manager must have sufficient authority to make whatever decisions are necessary to ensure an adequate profit. Joel Dean details three situational characteristics of profit centres as follows (Dean, 1955, p. 67): 1. Operational Independence: Each profit centre manager must have the authority to make most if not all of the key operating decisions that affect his profits, subject to broad policy directions from the top. The areas where independence cannot exist should properly be considered to be service centres. 2. Access to sources and markets: The profit centre manager must have control over all source and market decisions and be free to buy and sell in alternative markets. This freedom to trade dissolves alibis and helps establish responsibility. 3. Quantifiable costs and revenues: A profit centre must be able to identify its true costs and establish a reasonable price for its product. Otherwise, measurement by profit is questionable. The characteristics necessary for effective operation of a profit centre indicate that before a responsibility unit can be considered to be a profit centre, its manager must have the power to generate revenues and control sources of supply and other costs. Identifying a responsibility unit whose revenues and costs can both be controlled by the manager is not sufficient to conclude that the unit can be planned and controlled as a profit centre. At least three additional conditions must also be present. 1. Top management must be committed to decentralization: A profit centre system must have the wholehearted commitment of top management. They must be willing to relinquish some of their intimate knowledge of day-to-day operations and also some of their authority to subordinates. Top management must allow the profit centre manager to make the key operating decisions. Although it may be difficult especially in a company with only one major business but they must do so if the system is to work effectively. 2. Adequate staff and information systems: The cost of implementing a profit centre system may be quite high. Most likely a new management information
  • 27. Management Control System Notes 18 Self-Instructional Material system will be necessary in order to provide top management with the data it needs to control decentralized operations. Further, each profit centre manager will now need information to make decisions. Accounting reports will be the primary source of information about a unitÊs performance, so top management must provide these reports and must also know how to use them. 3. Capable profit centre managers: A company using a profit centre system must have managers capable of heading them. The implementation of profit centres requires a great deal of education to train managers up and down the line to understand and think in terms of profits. They must be made to understand that their performance is now being measured by their contribution to company profits and that they must now make decisions based on profit contribution. Each profit centre manager must be made aware of the key variables of the organization as a whole, the managerÊs strategic variables, and the relationship between these, so that he or she will not make decisions to maximize his or her own welfare at the expense of the organization as a whole. The Benefits of Profit Centres Treating responsibility units as profit centres is one way to realize the benefits of decentralization. Successful decentralization brings with it the following benefits: A way of managing large entities: In large organizations it is difficult for one manager or a small group of managers to understand every aspect of the business. Sheer size prohibits management by face-to-face contact and informal or interpersonal methods. Large organizations must, therefore, forego some of the benefits of integration by decomposing themselves into more manageable operating units. Better decisions: When a large organization is divided into smaller, more manageable units it achieves many of the advantages of a small company. Because the decision-makers responsible for each unit are closer to the problems in their environment, they are better able to make the relevant revenue/costs decisions. Because decision making can also be speeded up, a decentralized organization can be more responsive to environmental change. Furthermore, because they are held responsible for all their activities, managers are far more aware of their ultimate impact and are extremely sensitive to what they are doing for the company. Motivation: If responsibility is motivating, and monetary measures are one means of establishing responsibility, then the manager who is responsible for revenues and revenue/cost trade-offs will probably be more committed than a manager who is responsible for costs alone. Profit measures allow managers to focus on a familiar, well-understood goal, and give them the feeling of being in business for themselves. Frees Top Management: By definition, decentralization frees top management. When profit centres are established, top management no longer needs to get involved in the day-to-day operations of each unit. Top management can devote its time to more important issues, such as strategic planning or coordinating the efforts of a number of profit centres. Because they do not have to concentrate on all elements of their business, they can practice management by attending to those areas where a strong influence will be most beneficial. If one profit centre begins to experience difficulty, management can then spend its time helping this centre to correct its problems. Thus it appears that management can achieve many of the benefits of decentralization through profit centres. When decentralized operating units are made into profit centres, each manager has a common goal·profit. Decentralized units can be planned and controlled according to their contribution to organizational profitability. Complete responsibility can be assigned because profit is a comprehensive measure of
  • 28. Responsibility Centres Notes Punjab Technical University 19 all activity, and each manager can then be judged on his or her ability to manage a complete operating unit as a separate and distinct business. At the same time, central management can realize the benefits of a large organizationÊs economies by maintaining central staff functions such as economic planning, forecasting, technical analysis, accounting, and perhaps management information systems. These services can be provided to the profit centres on a charge basis to ensure that they are used efficiently. Types of Profit Centres An effective planning and control system for managers is one that motivates them to act in their best interests while simultaneously achieving what is best for the organization as a whole. Using this as the criterion for evaluation, let us examine two types of profit centres in order to determine the effectiveness of the profit measure as a basis for planning and control. Independent (natural) profit centres: If a responsibility unit operates independently of the other units in the organization, that is, if it is effectively in its own business, then a manager who maximizes his or her own profits is also automatically maximizing the profits of the organization as a whole. The manager has discretion over sourcing of inputs and revenues to be charged. Decisions can be based on meaningful values derived from market-based, armÊs-length transactions. Profit is a clear measure of efficiency and performance. This type of responsibility unit is termed a natural or independent profit centre. Interdependent (artificial) profit centres: Many organizational structures do not lend themselves to decomposition into natural profit centres. Because of their size, however, these organizations may still require some form of decentralization and may want to realize the benefits of a profit centre system. For example, in a functionally organized automobile company (e.g., Ford, Case 4.1) the engine division or the chassis division may transfer parts to the assembly division. In an integrated oil company, the exploration and production division discovers oil and transports it to the manufacturing division which, in turn, ships it to marketing for disposal to the consumer market. But to be a profit centre an organizational unit must act both as a seller, with the discretion to set prices and output volumes, and as a buyer, with discretion on how much to consume at various price levels. It must also be able to choose whether to deal with a unit inside the company or with one outside. Organizations such as the automobile and oil companies described above do not meet the criteria for profit centre systems. Can units within the same organization that deal with each other regularly nevertheless be decentralized as profit centres? Many organizations do just this. Artificial or interdependent profit centres are responsibility units which are considered to be profit centres, even though they do not satisfy the usual criteria. The automobile assembly division is a good example. It can be considered to buy components from other divisions, assemble the car, and then sell it to a sales division. But clearly the assembly division manager is not free to buy and sell at will. In the absence of a free market, how his prices are going to be determined? Two Styles of Profit Centre Management One way is to establish specific performance expectations and to enforce firm commitment to their accomplishment. Alternatively, initially formulated expectations may serve only as guidelines; performance is later evaluated in light of the actual conditions and constraints in effect at the time of performance.
  • 29. Management Control System Notes 20 Self-Instructional Material Profit as a Specific Performance Objective Establishing a specific profit goal and attempting to obtain rigid commitment to this goal can have many dysfunctional consequences. Yet the benefits of ensuring that managers are sensitive to the effect of their activities on profits still makes the profit measure extremely useful. How, then, can its potentially dysfunctional consequences be averted? One way is to adopt a management by objectives approach to commitment and evaluation and to apply this approach over short time spans of discretion. First, a level of profit is negotiated and agreed upon, and a short performance evaluation interval is set. The profit centre manager also agrees to discuss all major decisions affecting profits with top management before they are finalized. Frequent communication and short evaluation periods may seem strange prescriptions for a profit centre system, since they appear to negate the benefits of decentralization. However, when considered in the overall management by objective approach, whose aims are to achieve initial commitment, periodically review performance, and coach the subordinate to achieve the objectives he or she has specified, these methods can help overcome the adverse effects of performance evaluation. Evaluation is not merely a period-based measure of profitability; rather, it is an ongoing process that examines the quality of the decisions reached as well as their eventual results. The strength of this method is involvement and communication; if it is properly applied, it can achieve many of the motivational benefits of a management by objectives system. Profit as a Guiding Objective A second approach to profit centre management is to use profit expectations merely as general objectives or guidelines. In this approach expectations are used for planning and orientation and are considered to be initial targets only. They are the best estimates that can be made at the time, and can be revised radically later on if necessary. This approach lessens the pressure on a profit centre manager to maximize short-term performance. It permits him or her a greater amount of discretion. However, appropriate time spans for evaluation must still be established; too long a time interval also carries with it the risks and costs of inappropriate behaviour. If profit is used only as a general guide and performance is evaluated over a longer period of time, the following conditions must also apply. First, each profit centre must be supported by an adequate information system. Detailed analyses and reconciliations of past performance to expectation must be continually provided to top management to demonstrate that the profit centre manager understands what is going on. This reporting keeps top management aware of the quality of decision-making and performance. But any formal information system, regardless of how efficiently computerized it is, is still too slow to perform an early warning function for management. Continual communication between profit centre managers and corporate staff is necessary. Hence, the second requirement of this approach is that an appropriate climate for free and open communication be established. This style of management may require the involvement of advisory staff groups, top-management committees, and perhaps a group vice president. Informal channels of communication are the real key to predicting problems in a profit centre and its ability to handle them. Student Activity Discuss the organisational structures and/or types of responsibility centre that are most likely to be planned and controlled as profit centre.
  • 30. Responsibility Centres Notes Punjab Technical University 21 Investment Centre It is the responsibility centre at which the manager is responsible for the effective utility of assets in order to earn the best rate of return out of the investments or assets employed. The exact volume of assets employed cannot be easily assessed for single department or responsibility centre. The difficulty in the assessment on the volume of assets is only due to the utility of the assets, which is not only in one responsibility centre but also in more than one. When the manager is held responsibility for costs and revenues as well as for the investment in assets of a responsibility centre, it is called an Investment Centre. In an investment centre, the performance is measured not by profit alone, but it is related to investments effected, since the manager of an investment centre is always interested to earn a satisfactory return. The return on investment which is usually referred to as ROI, serves as a criterion for the performance evaluation of the manager of an investment centre. Viewed from this angle, investment centres may be considered as separate entities wherein the managers are entrusted with the overall responsibility of managing inputs, outputs and investment. This only represents an extension of the responsibility idea. Return on Investment (ROI) A company is decentralized with respect to profit responsibility when each responsibility unit manager is accountable for achieving some level of profit. The assets employed in generating this profit form the asset base of the unit. Responsibility unit managers who are responsible for their investment base as well as their profitability are known as investment centre managers. The most commonly used investment-based measure of performance is return on investment (ROI), the ratio of profit to investment. The use of ROI for financial planning and control of decentralized units, originated by the Du Pont Corporation, grew from its need to plan and evaluate the performance of the independent entities making up its diversified operations. The use of ROI solved the problem of motivating managers, ensuring consistent decision-making, and controlling decentralized divisions. As used by Du Pont, return on investment is the quotient of the accounted profit earned by a unit divided by the investment assigned to the unit. The investment is made up of both fixed assets, such as machinery and equipment, and working capital items, such as inventory, receivables, and cash. ROI allows the measurement and evaluation of each responsibility centre manager according to how productively he or she uses the assets entrusted to him or her. It allows managers the latitude to make trade-off decisions between investments, revenues, and operating costs, and then to be evaluated on these decisions by one comprehensive performance figure. Planning and controlling the operations of decentralized investment centres by ROI have all the benefits of a profit centre approach, and in addition can be used to measure the productivity of the assets employed. Calculation of the Investment Base Two critical procedures in the computation of ROI are specifying the investment base to be used for productivity measurements, and separating it into its controllable and non-controllable components for evaluation. In discussion of alternative methods of measuring an investment base, Solomon (1968) raises the following questions: 1. Should investment be interpreted to mean all assets, net assets (total assets-liabilities), or fixed assets plus net current assets?
  • 31. Management Control System Notes 22 Self-Instructional Material 2. How investment is defined and how should it be measured? Should fixed assets be included at cost, net book value (i.e., deducting accumulated depreciation), or at appraised value? 3. How should assets which are either shared or controlled centrally be computed in the return on investment? That is, when a responsibility unit does not hold separate cash balances or if it does not control its own receivables, how should these be allocated? 4. When inventories are valued on a LIFO basis, is any adjustment necessary when the investment base is computed? 5. When should the investment base be measured·at the beginning or at the end of the period, or should the average over the period be used? After an extensive analysis of the implications of each of these alternatives, Solomon concludes that for calculating returns and for evaluating performance, investment should be defined as follows: 1. Total investment is best defined as total assets. Measures of productivity should be based on the total amount of capital committed, irrespective of how it was financed, because differences in financing strategies are irrelevant to the way assets are used, and also because financing decisions are usually made centrally rather than by the investment centre manager. However, to determine controllable investment, a deduction should be made for controllable liabilities. Changing these also changes net controllable investment, which should be the basis of the ROI figure used for evaluation. 2. Fixed assets should be included at gross cost. No deduction should be made for accumulated depreciation because such arbitrary deductions, and the resulting net book values, may bear no relationship to the productivity of the assets involved. ROI, based on net book value, increases as accumulated depreciation increases and net book value decreases. To negate the effects of changing price levels and to establish a basis of comparison between investment centres acquiring assets at different times, index number adjustments may be used. 3. Fixed assets held under corporate control (e.g., a research laboratory or computer centre) should be allocated to investment centres only if there exists a reasonable basis to do so. An alternative is to rely on a charge for services rendered, although this method involves all the difficulties of a transfer pricing scheme. The allocation of centrally controlled working capital is appropriate if a basis can be found that reflects incremental demands for such capital; for example, centrally held bank balances can be allocated on the basis of incremental cash demands while receivables can be allocated on the basis of sales. Allocated assets form part of a divisionÊs total investment, but not part of its controllable investment. 4. Investment in inventory is generally controllable and should be valued on a FIFO basis to approximate replacement cost on the balance sheet and avoid the distortions of LIFO. 5. The point in time at which the investment base should be measured depends on the length of the period considered and the time it takes for changes in assets to have an effect on profits. In calculating the rate of return for a period shorter than a quarter, the investment at the beginning of the period is a suitable base. For a longer interval, however, average investment should be used. The five questions cited above are not an exhaustive coverage of all aspects of investment-based measurement, but they do demonstrate the types of choices to be
  • 32. Responsibility Centres Notes Punjab Technical University 23 made. A review of SolomonÊs recommendations and his underlying reasoning reveals how arbitrary these measurements of the investment base really are. In considering the alternatives, Solomons appears to have assessed the implications of each kind of measurement according to what appears most „correct‰ from the standpoint of economic productivity and performance. There is, therefore, a significant amount of subjectivity in his choices. One could argue that productivity measures would be better based on the appraised value of assets, not historical costs, or that index number adjustments to only a part of a companyÊs assets produce misleading information. But debates on the „correctness‰ of alternative investment-based measurements could (and probably will) go on forever. As in many other accounting-related areas of contention, there are no „right‰ answers. In deciding among alternative ways to compute an investment base, a system designer must consider how these measures are to be used. If their purpose is to motivate the investment centre manager to behave in certain desired ways (e.g., to keep minimal levels of inventory), then they should stress the controllable components of investment. If, on the other hand, the measures are to be used as aids for decision-making, they should stress economic reality. In sum, like most components of a planning and control system, how the components of an investment base should be measured depends on the characteristics of the situation and on the behaviour that the measures are intended to influence. Advantages of ROI In addition to all the benefits of profit measures, ROI has two more advantages. The first and foremost of these is that it provides a single, comprehensive, financial measure of performance. It not only reflects the increment to wealth, such as the profit measure, but it also relates profit to the assets employed in generating it. Second, because it is expressed as a ratio, ROI is an excellent way of comparing operations of different sizes and types. Disadvantages of ROI When ROI was first introduced by Du Pont to control its decentralized operations, it was far superior to other methods. Since then, however, numerous flaws have been uncovered in the ROI measure. Return on investment was originally intended to guide the planning and decision-making of unit managers and to give top management a basis by which to control and evaluate performance. However, from both of these perspectives ROI has several defects. First, ROI suffers from all the defects of conventional accounting measures, it suffers even more from the arbitrariness of accounting conventions. For example, many expenditures which benefit the firm for more than a single accounting period, are expensed rather than capitalized, such as research and development expenditures and advertising outlays. And the historical costs at which assets are measured do not reflect their true economic value at any time subsequent to initial acquisition. Depreciation reduces book values and so increases ROI artificially. Book values are not adjusted for the changing value of the dollar, so that in times of inflation a substantial part of the reported profits may actually result from holding and using older assets while pricing products at current market levels, rather than from normal operations. A second set of problems results from using ROI as a performance measure. As such, it should be controllable by the unit manager. However, many if not all of the assets entrusted to him are acquired through a host of past decisions outside his control. Nevertheless, these decisions are almost unavoidably reflected in any measure of performance, so that the use of ROI for evaluation may lead to distortion after all. As
  • 33. Management Control System Notes 24 Self-Instructional Material a measure of performance, ROI suffers not only from all the dysfunctional consequences associated with improper use of the profit measure, but it may encourage other undesirable behavior as well. Assume that the objective of an investment centre manager is to maximize or at least to maintain his or her current ROI level. The manager may do so not only by improving profit performance, but also by minimizing his or her investment. For instance, minimizing assets by leasing, as opposed to buying, will have an immediate effect on ROI performance. Pressure to achieve a specific ROI level may lead to incongruent decisions about asset replacement and disposal. In ROI performance measurement, asset replacement decisions are a function of the book value of an asset, not salvage values. Furthermore, ROI can be increased by scrapping assets which are earning less than the current ROI, thereby increasing the overall average. Scrapping unused assets increases ROI because these assets no longer are depreciated, nor do they appear in the asset base. Therefore, retaining idle assets is entirely undesirable. Also, because ROI is an overall measure of the use of assets, in some cases it can be increased by any action that reduces the asset base; and such decisions, while productive in the short run, may not be so in the long run. Because ROI increases simply with the passage of time and depreciation (especially accelerated depreciation), it may also discourage new investments. The older the asset base of an organization, the higher is its ROI, and therefore, the higher is the return required on new investments in order to maintain or improve this average. Thus there may be a tendency to keep older equipment operating as long as possible in order to show high ROI rates, even when replacement would be better in the long run. It is important to recognize that ROI is simply the quotient of profit over investment, and may differ from an organizationÊs cost of capital. It is also a single-year measurement, not a rate of return computed over the life cycle of an entire project. Hence while it may provide an appropriate criterion for short-term current operating decisions, it is certainly no guide for capital investments. ROI is based on current performance using existing assets, and does not reflect the cost of financing additional investments. Thus it is improper to use ROI as a decision criterion or hurdle rate against which to evaluate new investment proposals. Investments should be made if their return exceeds the cost of making them. It is well known that different types of financing have different costs. For example, cash can be borrowed from a bank, acquired through the issuance of securities, or obtained by liquidating fixed assets. Each source of an organizationÊs financing, be it debt or equity, carries a separate implicit or explicit cost. The weighted average of an organizationÊs financing costs is known as its cost of capital. It provides the decision criteria that the organization should use. If a new investment earns an amount greater than its costs, there is a net positive increment to the organizationÊs overall worth. Therefore, if an organizationÊs objective is to maximize the net present value of its current shareholders, then it is in the shareholdersÊ best interest to undertake any investment whose return exceeds the organizationÊs current cost of capital. It is important to recognize that ROI does not measure the cost of resources to an organization; it measures only the rate currently being earned on the money already invested. And so, investment opportunities which earn less than the organizationÊs ROI rate but more than the organizationÊs cost of capital may be rejected because they reduce average ROI. This sort of behaviour is undesirable because it foregoes potential increments to shareholderÊs wealth. Yet once a responsibility centre manager has committed himself to a specific ROI rate, it is unreasonable to expect him to propose a capital investment that will earn a lesser rate of return. Thus it can be seen that the use of ROI as a criterion for investment decisions may lead a manager to make decisions which are incongruent with and inappropriate for
  • 34. Responsibility Centres Notes Punjab Technical University 25 overall organizational objectives. The use of ROI may not always motivate the manager to behave in a way that benefits himself while simultaneously benefiting the organization as a whole·the criterion for an effective planning and control system. Residual Income (RI) Residual income is another asset-based measure of financial performance. It is used in an attempt to overcome some of the weaknesses of ROI and to move closer toward the net present value notion of financial decision-making. The RI of an investment centre is its current operating profit (revenues – operating expenses) minus a capital charge for the assets employed in generating this profit. A capital charge is simply the cost to the firm of each particular type of asset it uses. RI is thus the net income of a responsibility unit after the cost of the capital used in its operations has been deducted. Advantages of RI One strength of RI is that it counters the need to maintain at least an average rate of ROI in considering new investment decisions. If an investment has a positive residual income, it will be undertaken even if its ROI is lower than the current average ROI. With an RI decision criterion, all investments will be accepted as long as they earn more than their capital costs. RI, therefore, encourages congruent investment decision-making, so that each responsibility centre is able to contribute to overall shareholder welfare by increasing the net present worth of the firm. A second strength of RI is its use of capital charges in weighing assets. Because RI employs capital charges, each separate class of assets can be treated in a different manner, as appropriate. Assets which are more liquid and involve less risk to the firm or which are more readily available may be costed at rates substantially different from those which are hard to obtain or especially expensive. Assets which must be irretrievably committed to a project, and hence involve high risk, may be priced differently from those that can be recovered easily at full value. By pricing assets appropriately, an RI system can motivate managers to use assets in the proportions deemed most suitable from the standpoint of the organization as a whole. Disadvantages of RI The residual income measure shares many of the problems of ROI, however. The same problem of measuring fixed assets still exists, since the capital charges have to be applied against specific asset amounts and must be classified into controllable and non-controllable components. Furthermore, RI is measured in absolute dollars, not as a ratio, making it more difficult to compare responsibility units of different sizes. Like ROI, RI is a comprehensive financial measurement of performance. But it cannot include non-financial factors, of course, so many relevant key variables may be ignored. And finally, although many of the limitations of conventional accounting can be partly ameliorated, management usually cannot or will not use accounting techniques such as annuity depreciation and replacement cost accounting that would make the use of RI more realistic. Therefore, although residual income is a more helpful formula than ROI for making decisions about asset acquisitions, it does not overcome the dysfunctional temptation to reduce assets (so as to minimize capital charges, in this case). In short, although it is perhaps superior to ROI in some ways, it still must be applied with the greatest of care.
  • 35. Management Control System Notes 26 Self-Instructional Material Effective Use of Investment-Based Performance Measures The best information available on the use of RI and ROI comes from a survey conducted more than a decade ago. Mauriel and Anthony (1966) surveyed 3,525 U.S. companies with sales of over $20 million. Of the 2,658 companies that responded to the questionnaire, 60% used either ROI or RI or some combination of both in their planning and control of decentralized units. Only 3.8% of the total surveyed used residual income only. A follow-up study conducted by the same researchers revealed that 60% of their 981 respondents relied solely on ROI as a measure of responsibility centre performance. The responses indicated that most companies use accounting-based measures for computing their asset base. Of the companies responding, 93% measured divisional performance on the basis of either gross book value (18.5%), net book value (73.2%), or a combination of these two (1.6%). Hence, in spite of the many deficiencies associated with the use of both ROI and RI, it appears that investment-based performance measurements are widely used in management practice today. Investment-based performance measurements present the designer of any planning and control system with a dilemma. On the one hand it is recognized that both ROI and RI have many of the drawbacks of a single performance measurement. They do not lead to correct investment decisions because they fail to mediate effectively between the short and the long term, and to reflect both the qualitative and quantitative aspects of any business operation. Furthermore, many non-financial key variables and intangible considerations (e.g., services) are not reflected in a unitÊs investment base, and therefore, cannot be accommodated by these types of measurement. But on the other hand, as the above surveys reveal, these investment-based performance measurements are in wide use today; and their acceptance by management is so widespread that it is unrealistic to assume that they will be done away with in the near future. So ways must be found to use these measures successfully. This means that if an organization relies heavily on a single performance measurement, its use ought to be accompanied both by a sharp awareness of the strengths and weaknesses of the measure, and also by an appropriate management style. Both ROI and RI must emphasize trust and open communication if they are to be effective. They require the specification of appropriate key variables, the establishment of expectations in terms of these key variables, and finally, a consistent evaluation of the performance of each responsibility centre manager. These requirements also hold true when investment-based performance measures are used in the planning and control system. If an investment-based criterion is used as a firm measure of expected performance, the determinants selected for the asset base must motivate the manager to make use of his or her assets appropriately. Clearly, residual income is superior to ROI in this respect; if each individual class of assets is properly priced, the encouragement of cost minimization will automatically ensure congruent actions. As before, performance can be controlled by establishing firm expectations and then having managers report to top management at short-time intervals. The constant involvement of top management will help to avoid the dysfunctional behaviours associated with investment-based performance measures. If investment-based performance measures are established simply as guidelines, ROI or RI measures will serve not as a basis for evaluation but as a diagnostic tool. They are monitored to detect changes over time and to suggest potential improvements. To make them more useful for this purpose, accounting practices should be modified as needed. For example, modifying depreciation schedules and capitalizing expenditures such as advertising and research and development may be appropriate
  • 36. Responsibility Centres Notes Punjab Technical University 27 for internal accounting purposes, although not for external reporting. With this approach, return on investment must be regarded simply as one of many key variables that affect performance. An Alternative Approach to Planning and Controlling Investment Centres The use of RI and ROI as measures of investment centre performance implies the validity of two assumptions: (1) that a single measure combining both profits and assets can describe efficient and effective behaviour, and (2) that a single-period measure of performance can guide appropriate behaviour. If these two assumptions are not valid, an organization must devise alternative means of planning and controlling investment centres. Specifically, it must answer the following questions: 1. What criteria should be used in making short-run operating decisions? 2. How should expenditures related to managed or discretionary short-run capacity costs (costs which cannot be associated with output) be planned and controlled? 3. How should an organization make capital investment decisions, and then evaluate the productivity of these investments? To understand the role of investment-based performance measurements in the planning and control of any decentralized responsibility unit, it is essential to recognize that three types of decision-making occur. Two of these relate to short-run decisions and performance evaluation and the third to long-run expenditures. The first type, current operating decisions, is concerned with the net contribution of any decision to the organizationÊs profit and overhead. The key criterion of these decisions is whether or not the benefits exceed the cost over the short run. These decisions are based solely on differential (incremental) revenues and costs; i.e., revenues as well as variable costs and other costs that will differ according to the alternative selected. All other costs, such as committed or sunk costs, are irrelevant to these decisions and their inclusion will only confuse the issue at hand. Furthermore, because of the short interval of time covered the time value of money can be ignored in these decisions. The cost-volume and contribution margin decision-making procedures familiar to any student of management accounting are the applicable techniques. The effective control of operating decision-making is essentially the same as the process involved in profit budgeting. The second set of short-run decisions relates to the capacity to carry out business in the short run. These are the costs needed to do business and involve the fixed or committed costs needed to support current operations. Many components of these costs are independent of operating outputs and hence must be managed; i.e., their amounts are subject to the discretion of management rather than to an input-output relationship with volume of activity. Managed cost budgets, together with allocation schemes such as zero-base budgeting and interpersonal schemes such as management by objectives, are some techniques that will ensure the effective and efficient allocation of managed resources. The third type of decision making and performance evaluation for investment centres relates to long-term expenditures. Capital expenditure decisions must reflect an organizationÊs cost of capital as well as other decision criteria that reflect a time period greater than one year, such as payout period, and the relative risk in the project over its full life cycle. Capital expenditure analysis is the primary means by which an organization approves acquisition of new assets, major changes from existing operations, and also the divestment of capital assets. It is the means by which an