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MCS: Pitfalls of balanced scorecard
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Q.2 d. Free Cash Flow: A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:
It can also be calculated by taking operating cash flow and subtracting capital expenditures. Free Cash Flow of the Firm is calculated as follows:A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.
Calculated as:
This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health. A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems. Q.3.(a) What are the pitfalls of Balance Scorecard ? Ans : The balance scorecard is a management system (not only a measurement system) that enables organizations to clarity their vision and strategy and translate the into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic planning performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve centre of an enterprise Kaplan and Norton describe the innovation of the balance scorecard as follows. “ The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long- term capabilities and customer relationships were not critical for success. The financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers employees, processes, technology and innovation”. 1
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! The balanced scorecard suggests that we view the organization from four perspectives and to develop matrics collect data and analyze it relative to each of these perspective The Learning and Growth Perspective The Business Process Perspective The Customer Perspective The financial Perspective The Learning and Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people- the only repository of knowledge- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Government agencies often find themselves unable to hire new technical worker and at the same time is showing a decline in a training of existing employees. This is a leading indicato of brain drain that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge- worker organization. Kaplan and Norton emphasize that ‘learning’ is more than ‘training’, it also includes things like ‘nentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call “high performance work systems “ One of these, the Intranet, will be examined in detail later in this document. The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators : if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. The Business Process Perspective. This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running and whether its products and services conform to customer requirements (the mission). These metrics have tobe carefully designed by those who know these processes most intimately, within our unique missions these are not something that can be developed by outside customers. In addition to the strategic management process, two kinds of business processes may be identified a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government officers, and many unique problems are encountered in these processes. This support processes are more repetitive in nature. The Financial Perspective 2
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data, will always be a priority and managers will do whatever necessary to provide it. In fact often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralizeeed and automated. But the point is that the current emphasis on financials leads to the ”unbalanced” situation with regard to other perspective. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category. Q.3 (b) Which factors need to be borne in mind by the management in controlling activities of Research and Development? Ans.: The control of research and development centres presents its own characteristic difficulties, in particular, difficulty in relating results to inputs and lack of goal congruence Difficulty in Relating Results to Inputs : The results of research and development activates are difficult to measure quantitatively. In contrast to administrative activates, R&D. usually has at least a semi tangible output in the form of patents, new products, or new processes; but the relationship of output to input is difficult to appraise on an annual basis because the completed “product” of an R&D group may involve several years of effort. Thus, inputs as stated in an annual budget may be unrelated to ouputs. Further more even when such a relationship can be established it may not be possible to reliably estimate the value of the output. And even when such an evaluation can be made, the technical nature of the value of the output. And even when such an evaluation can be made, the technical nature of the R&D function may defeat management’s attempt to measure efficiency. A brilliant effort may against an insuperable obstacle, whereas a mediocre effort may, by luck, result in a bonanza. Luck of Goal Congruence : The goal congruence problem in R&D centers is similar to that in administrative centre. The research manager typically wants to build the best research organization money can buy, even though that may be more expensive than the company can afford. A further problem is that research people often do ot have sufficient knowledge of (or interest in ) the business in determine the optimum direction of the research.
Q7 . Explain briefly the various stages of organizational management process citing the critically of each? (2003) Ans. Organizational management process includes following different stages 1). Programming Programming is defined as making programs by top/ senior management in terms of organizational goals and strategies and deciding the funds and resources needed to accomplish the programs. Programs can be made about development of new products, research and development of activities merger, takeover and other activities that are not related much with the existing product lines. In service organizations such as hotel chain management may drow programs for each hotel or each region where hotels are to be set up. Programming is long range plan, covering period of approximately five future years. The reason is that it programming is made for shorter period ,the results and benefits of 3
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! programming can not be realized within this period . some organization like public utilities prepare long range plans for even a period of twenty years .because of the relatively long time plan, only rough estimates are possible revenues ,expenses and capital expenditure. Programming is time consuming and expensive. The most significant expense is the time devoted to it by management, but it also involves a special programming staff and considerable paperwork. A formal programming process is not worthwhile in some organization. it is desirable in organization that have the following characteristics Its top management is convinced that programming is important .otherwise programming is likely to be or to become, a staff exercise that has little impact on actual decision making. It is relatively large and complex in small, simple organizations, an informal understanding of the organizations future directions for making decision about resource allocations, which is principal purpose of preparing programs. If the future is so uncertain that reasonably estimates cannot be made preparation of a formal program is a waste of time. In summary, a formal programming process is not needed in small, relatively Stable organizations whose top management does not prefer to manage in this fashion. 2). Budgeting Budget is formal financial plan for each year .a budget ,known as shorter angel plans ,is a technique of expressing revenues ,expenses ,physical targets like production and sales ,profit ,assets and liabilities usually for a period of one future year . Budget has the functions of motivating managers, coordinating activities, communicating to persons within organization, providing standards for judging actual performance s and acting as control tool. Budgeting involves operating managers as well as senior manager. Staff personnel have considerable input to the programming process, but relatively less input to the budgeting proces3. The program structure consists of program and major project. It includes both capital expenditure and operating items and it covers a period of several years. The budged is structured by responsibility centre (which may or may not cut across program) the focus is on operating revenues and expenses and it typically is for a single year. 4. Budget preparation is done under greater time pressure and is more hectic than programming 5. A program is abroad brush sketch of the future. A budget has more details both because it is a fairly specific guide to operating decisions and also because it will be used subsequently to evaluate the performance of individual manager. 6. Programming decision can have consequences of great magnitude. Budgeting decision are typically much less significant, because they are made within the context of the current level of operating activities, except as those activities will be affected by program decision. 7. Behavioral consideration is much more important in the budget preparation process than in the programming process. The approved project is a bilateral commitment; the program is not a commitment, because the budget will be used to evaluate performance. 3. Executing:After the budget preparation, budgeting is used as a tool for coordinating the actions of individual and department within the organization. In fact within the execution phase task control is done to ensure that actions and performance match with the planned or desired result. While performing the mangers goal is to achieve budgeted targets. However compliance to budget is not necessary if the plans given in the budget are found as not the best way of achieving the objective. 4
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! After execution actual performance and result are compared with the budgeted plans and targets and variance reports are prepared which highlight the variance between the 2 and the causes for such variances. Variance reports should separate controllable item from noncontrollable item, determine the effects of changes in volume on revenues and cost and if possible, should mention changes in other circumstances affecting the variances 4. Evaluation:Management control Process ends with the evaluation phase in which the performances of managers are evaluated. Since it is an after- event exercise, the evaluation does not affect what has happened. However, evaluation phase acts like a powerful stimulus as employees know that their performances will be subsequently evaluated. Also on the basis of performance evaluation, the future budget and plans are revised. Q8. For an engineered (standard) expense center, zero based budgets is not necessary”- Comment in detail?(2003) Engineered expenses centre is place or centre where value of input measured in monitory term. In engineered expenses centre we measure the performance of each input in relation with there output, in zero budget review also we measure the performance of input through the review of each expense centre. In engineered expense centre output multiplied by the standard cost of each unit produced measure what the finished product should have costs. The difference between the theoretical cost and actual cost represents the efficiency of the expenses centre. In zero budget review also the further review of performance analyses In Engineered Expense centre the manager of centre is responsible for maintaining the based quality of product .In zero based review the further the quality of the product analyzed .It does not require any further analysis if the manager in expense centre maintain or do there job properly there is no requirement of any further review In expense centre the manager is responsible for timely delivery of product ,training and development of his employee. In zero based review the review is made to check should the function be performed in right way or not. In zero based review the review attempt to ascertain move that is from scratch the resources actually required to carry out each activity. This analysts established anew base the annual budget simply tries to keep the cash in line with this new base .engineered expenses centre are usually found in manufacturing operations .warehousing /distribution ,trucking and similar units within the marketing organization may also be engineered .Expense centre AS may certain responsibility centers within administrative and support departments for instance account receivable accounts payable and payroll sections in the controller department personnel records and cafeteria in the human resource department shareholders records in the corporate secretary department and the company motor pool. Such units perform repetitive tasks for which standard costs can be developed these expense centre are usually located within departments they are discretionary expense centre. Q.9 a. Briefly explain the nature of the information needed by managers to carryout control activities. Ans. Introduction Management control is a must I any organization that practices decentralization. One view argues that management control system must fit the firm’s strategy. This implies the strategy is first developed through a formal and rational process, and this strategy then 5
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! dictates the design of the firm’s management systems. An alternative perspective is that strategies emerge through experimentation, which are influenced by the firm’s management systems. In this view, management control system can effect the development of strategies. We will consider both points of view, as well as their implications in terms of the design and operation of management control systems. When firms operate in industry contexts where environmental changes are predictable, they can use a formal and rational process to develop the strategy first and then design management control systems to execute that strategy. Defination Management control is the process by which managers influence other members of the organization to implement the organizations strategies. Control Press the accelerator and your car go faster rotate the steering wheel, and it changes direction. Press the break pedal, and the car slows or stops. With these devices, you control speed and direction; if any of the inoperative the car does not do what you want it to. In other words it is out of control. An organization must also be controlled; that is, devices must be in place to ensure that its strategic intentions are achieved. But controlling an organization is much more complicated than controlling a car. We will begin by describing the control process in simpler systems. Information needed by managers to carryout control activities To carryout control activities the manager needed some information which is based on the following elements of a control system. Every Control system has at least four elements;
Elements of control
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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Process Control device Assessor, comparison with standard
Detector. Information about what is happening
Effector Behavior alteration, if needed
Entity being controlled
A detector or sensor – a device that measures what is actually happening in the process being controlled. An assessor – a device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. An effector – a device (often called ‘feedback’) that alters behavior if the assessor indicates the need to d so. A communications network – devices that transmit information between he detector and the assessor and between the assessor and effector. These four basic elements of any control system are described their functioning by giving following examples Thermostat The components of the thermostat are (1) a thermometer (the detector), which measures the current temperature of a room; which compares the current temperature of a room; (2) an assessor, which compares the current temperature with the accepted standard for what the temperature should be; (3) an effector, which prompts a furnace to emit heat ( if the actual temperature is lower than the standard ) or activates an air conditioner (if the actual temperature is higher than the standard) and which also shuts off these appliances when the temperature reaches the standard level; and (4) a communications network, which transmits information from the thermometer to the assessor and from the assessor to the heating or cooling elements.
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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Q 9 b. Briefly explain with suitable diagrammatic representation, key differences between a functionally structured and profit center decentralized company. Explain two major advantages and disadvantages of each. Ans. Functionally Structured Company: Functionally structured company is co. in which each manager is responsible for a specific function such as production or marketing. The rational for the functional form of organization involves the notion of a manager who brings specialized knowledge to bear on decisions related to a specific function as contracted with general purpose manager who lacks specialized knowledge. A skilled marketing manager and a skilled production manager are likely to make better decisions in their respective fields than would a manager responsible for both functions. Moreover the skilled specialist should be able to supervise workers in same function better than the generalist would; just as skilled higher level managers should be able to provide better supervision of lower level managers in same or similar function. Thus a important advantage of a functional structure is efficiency. Functional Organization
Chief Executive
Staff
Marketing Manager
Marketing Manager
Staff
Staff
Manager Plant 1
Manager Plant 2
Manager Plant 3
Manager Region A
Manager Region B
Manager Region C
Profit Center Decentralized Company: When a responsibility center’s financial performance is measured in terms of profit (i.e., by the difference between the revenues and expenses), the center is called a Profit center. Profit is a particularly useful performance measure since it allows senior management to use one comprehensive indicator rather than several (some of which may be pointing in different directions). 8
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Functional Units Multibusiness companies are typically divided into business units, each of which is treated as an independent profit-generating unit. The subunit within these business units, however, may be functionally organized. It is sometimes desirable to constitute one or more of the functional units – e.g., marketing, manufacturing, and service operations – as profit centers. There is no guiding principle declaring that certain types of units are inherently profit centers and others are not. Management’s decision as to whether a given unit should be a profit center is based on the amount of influence (even if not total control) the unit’s manager exercise over the activities that affect the bottom line. Marketing A marketing activity can be turned into a profit center by charging it with the cost of the products sold. This transfer price provides the marketing manager with the relevant information to make the optimum revenue/cost trade-offs, and the standard practice of measuring a profit center’s manager by the center’s profitability provides a check on how well these trade – offs have been made. The transfer price charged to the profit center should be based on the standard cost, rather than the actual cost, of the products being sold. Using a standard cost base separates the marketing cost performance from that of the manufacturing cost performance, which is affected by changes in the level of efficiency that are beyond the control of the marketing manager. Manufacturing The manufacturing activity is usually an expense center, with the management being judged on performance versus standard costs and overhead budgets. This measure can cause problems, however, since it does not necessarily indicate how well the manager is performing all aspects of his job. For example, A manager may skip on quality control, shipping products of inferior quality in order to obtain standard cost credit. A manager may be reluctant to interrupt production schedules in order to produce a rush order to accommodate a customer. A manager who is measured against standard may lack the incentive to manufacture products that are difficult to produce – or to improve the standard themselves. Service and support units Units for maintenance, information technology, transportation, engineering, consulting, customer service, and similar support activities can all be made into profit centers. These may operate out of headquarters and service corporate divisions, or they may fulfill similar functions within business units. They charge customer for service rendered, with the financial objective of generating enough business so that their revenues equal their expenses. Usually, the units receiving these services have the option of procuring them from on outside vendor instead, provided the vendor can offer services of equal quality at a lower price. Advantages & Disadvantages of Functionally Structured Company Advantages Smooth Functioning : The rational for the functional form of organization involves the notion of a manager who brings specialized knowledge to bear on decisions related to a specific function, as contrasted with the general – purpose manager who lacks that specialized knowledge. A skilled marketing manager and skilled production manager are 9
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! likely to make better decisions in their respective fields than would a manager responsible for both functions. A skilled manager helps for the smooth functioning of the business activities. Efficiency : The skilled specialist should be able to supervise workers in the same function better than the generalist would, just as skilled higher – level managers should be able to provide better supervision of lower – level managers in the same or similar function. Which helps to increase the efficiency of the labour. Disadvantages No unambiguous way of determining the effectiveness: In a functional organization there is no unambiguous way of determining the effectiveness of the separate functional managers (e.g., the managers of marketing and of production) because each function contributes jointly to the organization’s final output. Therefore there is no way of measuring what fraction of profit was contributed by each. Similarly at lower levels in the organization there is no way of determining how much of the profit was earned respectively by the several production departments, the product engineering department, and the sales office. If the organization consist of managers in one function who report to higher – level managers in the same function, who, in turn, report to still higher – level managers in that function, then a dispute between managers of different functions can be resolved only at the top, even though it may have originated at a much lower organizational level. Advantages & Disadvantages of Profit center Company Advantages The quality of decisions may improve because they are being made by managers closest to the point of decision. The speed of operating decisions may be increased since they do not have to be referred to corporate headquarters. Headquarter management, relieved of day-to-day decision making, can concentrate on broader issues. Manager, subject to fewer corporate restraints, are freer to use their imagination and initiative. Disadvantages Decentralized decision making will force top management to rely more on management control reports than on personal knowledge of an operation, entailing some loss of control. If headquarter management is, more capable or better informed than the average profit center manager, the quality of decisions made at the unit level may be reduced. All the above are the advantages and disadvantages of the Functionally structured organization and profit center decentralized organization.
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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Q.12 (Volume at 2000) Div A Div B Sales 35 x 2000 = 70,000 (-)variable 11 x 2,000 = 22,000 48,000 (-)Fixed cost 60,000 EBIT -12,000 (Volume at 3,000) Sales 35 x 3,000 = 1,05,000 (-)variable 11 x 3,000 = 33,000 72,000 (-)Fixed cost 60,000 EBIT 12,000 (Volume at 6,000) Sales 35 x 6000 = 2,10,000 (-)variable 11 x 6,000 = 66,000 1,44,000 (-)Fixed cost 60,000 EBIT 84,000 (Volume at 2000) 90 x 2,000 = 1,80,000 42 x 2,000 = 84,000 96,000 9,000 6,000 (Volume at 3,000) 80 x 3,000 = 2,40,000 42 x 3,000 = 1,26,000 1,14,000 90,000 24,000 (Volume at 6,000) 50 x 6,000 = 3,00,000 42 x 600 = 2,52,000 48,000 90,000 - 42000
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MCS: Pitfalls of balanced scorecard
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Q.2 d. Free Cash Flow: A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:
It can also be calculated by taking operating cash flow and subtracting capital expenditures. Free Cash Flow of the Firm is calculated as follows:A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.
Calculated as:
This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health. A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems. Q.3.(a) What are the pitfalls of Balance Scorecard ? Ans : The balance scorecard is a management system (not only a measurement system) that enables organizations to clarity their vision and strategy and translate the into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic planning performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve centre of an enterprise Kaplan and Norton describe the innovation of the balance scorecard as follows. “ The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long- term capabilities and customer relationships were not critical for success. The financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers employees, processes, technology and innovation”. 1
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! The balanced scorecard suggests that we view the organization from four perspectives and to develop matrics collect data and analyze it relative to each of these perspective The Learning and Growth Perspective The Business Process Perspective The Customer Perspective The financial Perspective The Learning and Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people- the only repository of knowledge- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Government agencies often find themselves unable to hire new technical worker and at the same time is showing a decline in a training of existing employees. This is a leading indicato of brain drain that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge- worker organization. Kaplan and Norton emphasize that ‘learning’ is more than ‘training’, it also includes things like ‘nentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call “high performance work systems “ One of these, the Intranet, will be examined in detail later in this document. The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators : if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. The Business Process Perspective. This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running and whether its products and services conform to customer requirements (the mission). These metrics have tobe carefully designed by those who know these processes most intimately, within our unique missions these are not something that can be developed by outside customers. In addition to the strategic management process, two kinds of business processes may be identified a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government officers, and many unique problems are encountered in these processes. This support processes are more repetitive in nature. The Financial Perspective 2
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data, will always be a priority and managers will do whatever necessary to provide it. In fact often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralizeeed and automated. But the point is that the current emphasis on financials leads to the ”unbalanced” situation with regard to other perspective. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category. Q.3 (b) Which factors need to be borne in mind by the management in controlling activities of Research and Development? Ans.: The control of research and development centres presents its own characteristic difficulties, in particular, difficulty in relating results to inputs and lack of goal congruence Difficulty in Relating Results to Inputs : The results of research and development activates are difficult to measure quantitatively. In contrast to administrative activates, R&D. usually has at least a semi tangible output in the form of patents, new products, or new processes; but the relationship of output to input is difficult to appraise on an annual basis because the completed “product” of an R&D group may involve several years of effort. Thus, inputs as stated in an annual budget may be unrelated to ouputs. Further more even when such a relationship can be established it may not be possible to reliably estimate the value of the output. And even when such an evaluation can be made, the technical nature of the value of the output. And even when such an evaluation can be made, the technical nature of the R&D function may defeat management’s attempt to measure efficiency. A brilliant effort may against an insuperable obstacle, whereas a mediocre effort may, by luck, result in a bonanza. Luck of Goal Congruence : The goal congruence problem in R&D centers is similar to that in administrative centre. The research manager typically wants to build the best research organization money can buy, even though that may be more expensive than the company can afford. A further problem is that research people often do ot have sufficient knowledge of (or interest in ) the business in determine the optimum direction of the research.
Q7 . Explain briefly the various stages of organizational management process citing the critically of each? (2003) Ans. Organizational management process includes following different stages 1). Programming Programming is defined as making programs by top/ senior management in terms of organizational goals and strategies and deciding the funds and resources needed to accomplish the programs. Programs can be made about development of new products, research and development of activities merger, takeover and other activities that are not related much with the existing product lines. In service organizations such as hotel chain management may drow programs for each hotel or each region where hotels are to be set up. Programming is long range plan, covering period of approximately five future years. The reason is that it programming is made for shorter period ,the results and benefits of 3
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! programming can not be realized within this period . some organization like public utilities prepare long range plans for even a period of twenty years .because of the relatively long time plan, only rough estimates are possible revenues ,expenses and capital expenditure. Programming is time consuming and expensive. The most significant expense is the time devoted to it by management, but it also involves a special programming staff and considerable paperwork. A formal programming process is not worthwhile in some organization. it is desirable in organization that have the following characteristics Its top management is convinced that programming is important .otherwise programming is likely to be or to become, a staff exercise that has little impact on actual decision making. It is relatively large and complex in small, simple organizations, an informal understanding of the organizations future directions for making decision about resource allocations, which is principal purpose of preparing programs. If the future is so uncertain that reasonably estimates cannot be made preparation of a formal program is a waste of time. In summary, a formal programming process is not needed in small, relatively Stable organizations whose top management does not prefer to manage in this fashion. 2). Budgeting Budget is formal financial plan for each year .a budget ,known as shorter angel plans ,is a technique of expressing revenues ,expenses ,physical targets like production and sales ,profit ,assets and liabilities usually for a period of one future year . Budget has the functions of motivating managers, coordinating activities, communicating to persons within organization, providing standards for judging actual performance s and acting as control tool. Budgeting involves operating managers as well as senior manager. Staff personnel have considerable input to the programming process, but relatively less input to the budgeting proces3. The program structure consists of program and major project. It includes both capital expenditure and operating items and it covers a period of several years. The budged is structured by responsibility centre (which may or may not cut across program) the focus is on operating revenues and expenses and it typically is for a single year. 4. Budget preparation is done under greater time pressure and is more hectic than programming 5. A program is abroad brush sketch of the future. A budget has more details both because it is a fairly specific guide to operating decisions and also because it will be used subsequently to evaluate the performance of individual manager. 6. Programming decision can have consequences of great magnitude. Budgeting decision are typically much less significant, because they are made within the context of the current level of operating activities, except as those activities will be affected by program decision. 7. Behavioral consideration is much more important in the budget preparation process than in the programming process. The approved project is a bilateral commitment; the program is not a commitment, because the budget will be used to evaluate performance. 3. Executing:After the budget preparation, budgeting is used as a tool for coordinating the actions of individual and department within the organization. In fact within the execution phase task control is done to ensure that actions and performance match with the planned or desired result. While performing the mangers goal is to achieve budgeted targets. However compliance to budget is not necessary if the plans given in the budget are found as not the best way of achieving the objective. 4
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! After execution actual performance and result are compared with the budgeted plans and targets and variance reports are prepared which highlight the variance between the 2 and the causes for such variances. Variance reports should separate controllable item from noncontrollable item, determine the effects of changes in volume on revenues and cost and if possible, should mention changes in other circumstances affecting the variances 4. Evaluation:Management control Process ends with the evaluation phase in which the performances of managers are evaluated. Since it is an after- event exercise, the evaluation does not affect what has happened. However, evaluation phase acts like a powerful stimulus as employees know that their performances will be subsequently evaluated. Also on the basis of performance evaluation, the future budget and plans are revised. Q8. For an engineered (standard) expense center, zero based budgets is not necessary”- Comment in detail?(2003) Engineered expenses centre is place or centre where value of input measured in monitory term. In engineered expenses centre we measure the performance of each input in relation with there output, in zero budget review also we measure the performance of input through the review of each expense centre. In engineered expense centre output multiplied by the standard cost of each unit produced measure what the finished product should have costs. The difference between the theoretical cost and actual cost represents the efficiency of the expenses centre. In zero budget review also the further review of performance analyses In Engineered Expense centre the manager of centre is responsible for maintaining the based quality of product .In zero based review the further the quality of the product analyzed .It does not require any further analysis if the manager in expense centre maintain or do there job properly there is no requirement of any further review In expense centre the manager is responsible for timely delivery of product ,training and development of his employee. In zero based review the review is made to check should the function be performed in right way or not. In zero based review the review attempt to ascertain move that is from scratch the resources actually required to carry out each activity. This analysts established anew base the annual budget simply tries to keep the cash in line with this new base .engineered expenses centre are usually found in manufacturing operations .warehousing /distribution ,trucking and similar units within the marketing organization may also be engineered .Expense centre AS may certain responsibility centers within administrative and support departments for instance account receivable accounts payable and payroll sections in the controller department personnel records and cafeteria in the human resource department shareholders records in the corporate secretary department and the company motor pool. Such units perform repetitive tasks for which standard costs can be developed these expense centre are usually located within departments they are discretionary expense centre. Q.9 a. Briefly explain the nature of the information needed by managers to carryout control activities. Ans. Introduction Management control is a must I any organization that practices decentralization. One view argues that management control system must fit the firm’s strategy. This implies the strategy is first developed through a formal and rational process, and this strategy then 5
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! dictates the design of the firm’s management systems. An alternative perspective is that strategies emerge through experimentation, which are influenced by the firm’s management systems. In this view, management control system can effect the development of strategies. We will consider both points of view, as well as their implications in terms of the design and operation of management control systems. When firms operate in industry contexts where environmental changes are predictable, they can use a formal and rational process to develop the strategy first and then design management control systems to execute that strategy. Defination Management control is the process by which managers influence other members of the organization to implement the organizations strategies. Control Press the accelerator and your car go faster rotate the steering wheel, and it changes direction. Press the break pedal, and the car slows or stops. With these devices, you control speed and direction; if any of the inoperative the car does not do what you want it to. In other words it is out of control. An organization must also be controlled; that is, devices must be in place to ensure that its strategic intentions are achieved. But controlling an organization is much more complicated than controlling a car. We will begin by describing the control process in simpler systems. Information needed by managers to carryout control activities To carryout control activities the manager needed some information which is based on the following elements of a control system. Every Control system has at least four elements;
Elements of control
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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Process Control device Assessor, comparison with standard
Detector. Information about what is happening
Effector Behavior alteration, if needed
Entity being controlled
A detector or sensor – a device that measures what is actually happening in the process being controlled. An assessor – a device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. An effector – a device (often called ‘feedback’) that alters behavior if the assessor indicates the need to d so. A communications network – devices that transmit information between he detector and the assessor and between the assessor and effector. These four basic elements of any control system are described their functioning by giving following examples Thermostat The components of the thermostat are (1) a thermometer (the detector), which measures the current temperature of a room; which compares the current temperature of a room; (2) an assessor, which compares the current temperature with the accepted standard for what the temperature should be; (3) an effector, which prompts a furnace to emit heat ( if the actual temperature is lower than the standard ) or activates an air conditioner (if the actual temperature is higher than the standard) and which also shuts off these appliances when the temperature reaches the standard level; and (4) a communications network, which transmits information from the thermometer to the assessor and from the assessor to the heating or cooling elements.
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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Q 9 b. Briefly explain with suitable diagrammatic representation, key differences between a functionally structured and profit center decentralized company. Explain two major advantages and disadvantages of each. Ans. Functionally Structured Company: Functionally structured company is co. in which each manager is responsible for a specific function such as production or marketing. The rational for the functional form of organization involves the notion of a manager who brings specialized knowledge to bear on decisions related to a specific function as contracted with general purpose manager who lacks specialized knowledge. A skilled marketing manager and a skilled production manager are likely to make better decisions in their respective fields than would a manager responsible for both functions. Moreover the skilled specialist should be able to supervise workers in same function better than the generalist would; just as skilled higher level managers should be able to provide better supervision of lower level managers in same or similar function. Thus a important advantage of a functional structure is efficiency. Functional Organization
Chief Executive
Staff
Marketing Manager
Marketing Manager
Staff
Staff
Manager Plant 1
Manager Plant 2
Manager Plant 3
Manager Region A
Manager Region B
Manager Region C
Profit Center Decentralized Company: When a responsibility center’s financial performance is measured in terms of profit (i.e., by the difference between the revenues and expenses), the center is called a Profit center. Profit is a particularly useful performance measure since it allows senior management to use one comprehensive indicator rather than several (some of which may be pointing in different directions). 8
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Functional Units Multibusiness companies are typically divided into business units, each of which is treated as an independent profit-generating unit. The subunit within these business units, however, may be functionally organized. It is sometimes desirable to constitute one or more of the functional units – e.g., marketing, manufacturing, and service operations – as profit centers. There is no guiding principle declaring that certain types of units are inherently profit centers and others are not. Management’s decision as to whether a given unit should be a profit center is based on the amount of influence (even if not total control) the unit’s manager exercise over the activities that affect the bottom line. Marketing A marketing activity can be turned into a profit center by charging it with the cost of the products sold. This transfer price provides the marketing manager with the relevant information to make the optimum revenue/cost trade-offs, and the standard practice of measuring a profit center’s manager by the center’s profitability provides a check on how well these trade – offs have been made. The transfer price charged to the profit center should be based on the standard cost, rather than the actual cost, of the products being sold. Using a standard cost base separates the marketing cost performance from that of the manufacturing cost performance, which is affected by changes in the level of efficiency that are beyond the control of the marketing manager. Manufacturing The manufacturing activity is usually an expense center, with the management being judged on performance versus standard costs and overhead budgets. This measure can cause problems, however, since it does not necessarily indicate how well the manager is performing all aspects of his job. For example, A manager may skip on quality control, shipping products of inferior quality in order to obtain standard cost credit. A manager may be reluctant to interrupt production schedules in order to produce a rush order to accommodate a customer. A manager who is measured against standard may lack the incentive to manufacture products that are difficult to produce – or to improve the standard themselves. Service and support units Units for maintenance, information technology, transportation, engineering, consulting, customer service, and similar support activities can all be made into profit centers. These may operate out of headquarters and service corporate divisions, or they may fulfill similar functions within business units. They charge customer for service rendered, with the financial objective of generating enough business so that their revenues equal their expenses. Usually, the units receiving these services have the option of procuring them from on outside vendor instead, provided the vendor can offer services of equal quality at a lower price. Advantages & Disadvantages of Functionally Structured Company Advantages Smooth Functioning : The rational for the functional form of organization involves the notion of a manager who brings specialized knowledge to bear on decisions related to a specific function, as contrasted with the general – purpose manager who lacks that specialized knowledge. A skilled marketing manager and skilled production manager are 9
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! likely to make better decisions in their respective fields than would a manager responsible for both functions. A skilled manager helps for the smooth functioning of the business activities. Efficiency : The skilled specialist should be able to supervise workers in the same function better than the generalist would, just as skilled higher – level managers should be able to provide better supervision of lower – level managers in the same or similar function. Which helps to increase the efficiency of the labour. Disadvantages No unambiguous way of determining the effectiveness: In a functional organization there is no unambiguous way of determining the effectiveness of the separate functional managers (e.g., the managers of marketing and of production) because each function contributes jointly to the organization’s final output. Therefore there is no way of measuring what fraction of profit was contributed by each. Similarly at lower levels in the organization there is no way of determining how much of the profit was earned respectively by the several production departments, the product engineering department, and the sales office. If the organization consist of managers in one function who report to higher – level managers in the same function, who, in turn, report to still higher – level managers in that function, then a dispute between managers of different functions can be resolved only at the top, even though it may have originated at a much lower organizational level. Advantages & Disadvantages of Profit center Company Advantages The quality of decisions may improve because they are being made by managers closest to the point of decision. The speed of operating decisions may be increased since they do not have to be referred to corporate headquarters. Headquarter management, relieved of day-to-day decision making, can concentrate on broader issues. Manager, subject to fewer corporate restraints, are freer to use their imagination and initiative. Disadvantages Decentralized decision making will force top management to rely more on management control reports than on personal knowledge of an operation, entailing some loss of control. If headquarter management is, more capable or better informed than the average profit center manager, the quality of decisions made at the unit level may be reduced. All the above are the advantages and disadvantages of the Functionally structured organization and profit center decentralized organization.
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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, please register! Q.12 (Volume at 2000) Div A Div B Sales 35 x 2000 = 70,000 (-)variable 11 x 2,000 = 22,000 48,000 (-)Fixed cost 60,000 EBIT -12,000 (Volume at 3,000) Sales 35 x 3,000 = 1,05,000 (-)variable 11 x 3,000 = 33,000 72,000 (-)Fixed cost 60,000 EBIT 12,000 (Volume at 6,000) Sales 35 x 6000 = 2,10,000 (-)variable 11 x 6,000 = 66,000 1,44,000 (-)Fixed cost 60,000 EBIT 84,000 (Volume at 2000) 90 x 2,000 = 1,80,000 42 x 2,000 = 84,000 96,000 9,000 6,000 (Volume at 3,000) 80 x 3,000 = 2,40,000 42 x 3,000 = 1,26,000 1,14,000 90,000 24,000 (Volume at 6,000) 50 x 6,000 = 3,00,000 42 x 600 = 2,52,000 48,000 90,000 - 42000
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