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Question PaperManagement Control and Information Systems (MB281) : April 2003

Part A : Basic Concepts (30 Points)

This part consists of questions with serial number 1 - 30.

Answer allquestions.

Each question carries one point.

Maximum time for answering Part A is 30 Minutes.

1. Which of the following is falseabout Management Control Systems?

a. They ensure that the right strategies are carried out to obtain the organizations goalsb. They anticipate future conditionsc. They are self-regulating in natured. They bring unity out of diverse activities of an organizatione. They help management in decision-making.

< Answer >

2. Which of the following points is not correct with respect to implementation of ProcessQuality Teaming in a manufacturing unit?

a. Management selects a unit, such as a manufacturing department, whose output as wellas the input are to be improved

b. A team is formed which includes people from all key functions that have an impact onthe success of the unit

c. The responsibilities of each function are assigned to the individual, and thedepartmental head is made responsible for the quality and value of the output

d. The team tries to find out specific customer requirements, desires and needse. Cause and effect analysis is performed for the major problems and a specific corrective

action is determined.

< Answer >

3. Focusing on people who participate actively in the planning process and thereby helpingmanagement in cost-control through budgeting process is the feature of

a. Financial Accountingb. Cost Accountingc. Control Accountingd. Decision Accountinge. Responsibility Accounting.

< Answer >

4. Which of the following statements about Non-Financial Audit is not true?

a. It relies primarily on standards set internally on the basis of customer and competitorinformation

b. The focus is on exceeding standards set internally or by industry competitorsc. Standards are essentially the same from audit to auditd. It is conducted, on an average, every 18 to 24 monthse. It focuses on a broad range of functions that contribute to the success or failure of a

particular process.

< Answer >

5. Which of the following statements is false with regard to key success variables?

a. They are those variables in the external environment to which goals, objectives andstrategies of managers, are most sensitive

b. They are also referred to as key success factorsc. The top management should continuously analyze the reasons for significant changes in

them

d. They are only quantitative in naturee. They indicate to the management, the necessity for prompt action.

< Answer >

6. Which of the following Audit Tools is the most rigid?

a. Surveyb. Questionnairec. Focus Groupd. Interviewe. Direct Observation.

< Answer >

7. Which of the following creates cushion against the variability of the environment andprovides resources for innovation and adaptation in various stakeholders areas?

a. Managerial Styleb. Organizational Culture

c. Organizational Slackd. Organizational Growthe. Organizational Ethics.

< Answer >

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g

8. When the librarian asked his assistant to find out the most popular book, he identified it onthe basis of its dirty or well-used pages. This is an example of

a. Accretion datab. Erosion datac. Archival datad. Participant observatione. Field observation.

< Answer >

9. A renowned cycle manufacturing company makes use of a managerial style whichemphasizes authorized control systems, formal measurement and evaluations wherein onlythe top executives maintain decision-making mechanism, with the help of informationgathered at lower levels of organization. This is an example of

a. External Control Styleb. Internal Control Stylec. Mixed Control Styled. Democratic Stylee. Participative Style.

< Answer >

10. In which of the following Audit Tools, the researchers have little control over content ofresponse?

a. Surveyb. Questionnairec. Interviewd. Focus Groupe. Both (a) and (d) above.

< Answer >

11. A business organization holds review meetings for performance appraisal of responsibilitycentre which focus on identifying the facilitating and inhibiting factors in the achievement ornon-achievement of targets so that necessary remedial actions can be taken after thoroughanalysis of the reasons for non-achievement. This is an example of:

a. SWOT Analysisb. Force Field Analysisc. ABC Analysisd. Cost-Benefit Analysise. Value Chain Analysis

< Answer >

12. Which of the following activities an Audit cannotdo?

a. Identify outdated strategiesb. Measure performance improvements

c. Change mind-setd. Mobilize people to actione. Increase managements ability to address concerns.

< Answer >

13. Which of the following statements is falseregarding ethical principle of fairness in the designof control systems?

a. The concept of fairness is stressed to achieve the environment which is conducive toethical behaviour

b. Managerial controls that do not incorporate the concept of fairness tend to create stressand resentment among the employees

c. The ethics administrator should maintain disciplinary records to ensure that the ethicsprogram is perceived as fair by the organizational participants

d. The concept of fairness need only be confined to the employees of the organization, andnot extended to the activities of the stakeholders

e. Fair wages and salaries should be paid to the employees to provide opportunities forgrowth.

< Answer >

14. Which of the following have to be approved by the shareholders, as required by corporate by-laws and securities regulators?

a. Salariesb. Wagesc. Benefitsd. Pensionse. Incentives

< Answer >

15. The concepts of Engineered Costs and Discretionary Costs play an important role in theperformance evaluation of which of the following responsibility centres?

a. Revenue Centreb. Investment Centrec. Expense Centre

< Answer >

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d. Profit Centree. Both (a) and (b) above.

16. Which of the following Incentive Plans ensures that the managers receive an award equal tothe market value of the stock since the date of a reward?

a. Stock Optionb. Stock Appreciation Rightc. Performance Shared. Phantom Sharee. Bonus.

< Answer >

17. Which of the following is nota feature of Management By Objectives (MBO)?

a. It is a process of joint setting of goals by the superiors and the subordinates

b. It imposes self-control upon managersc. It has its roots in behavioral scienced. It emphasizes quantitative performance onlye. It has proved to be a powerful management tool.

< Answer >

18. When the principal has insufficient information about the activities of the agents, he cannotascertain the agents contribution to the firms results. This is a situation of

a. Work Aversionb. Shirkingc. Information Asymmetryd. Private Informatione. Moral Hazard.

< Answer >

19. The measure of performance which compares the output with the corresponding achievement

of corporate objectives is generally calleda. Efficiency Measureb. Process Measurec. Effectiveness Measured. Both (a) and (b) abovee. None of the above.

< Answer >

20. Which of the following information systems attempts to guard the managers againstinappropriate assumptions and is used by the managers before making a decision?

a. External Information Systemb. Systematic Information Systemc. Social Information Systemd. Continuing Information System

e. Executive Information System.

< Answer >

21. IBM wants to consolidate its age-old product. viz., mainframe computer, to remain a market-leader globally. This is an example of which of the following types of corporate mission?

a. Buildb. Holdc. Harvestd. Diveste. None of the above.

< Answer >

22. Management Information System (MIS) is commonly used in which of the followingmethods of monitoring of Development Programs?

a. Indicator based monitoringb. Monitoring by beneficiaries

c. Monitoring by legislatord. Monitoring by mediae. Monitoring through field visit.

< Answer >

23. Which of the following is nota characteristic of Strategic Planning?

a. It is regular in nature. i.e., it takes place at regular intervals of timeb. It is a complex processc. The information necessary for strategic planning is derived from the external

environmentd. Strategic Planning consists of two aspects goal setting and strategy formulatione. It is a creative and analytical process.

< Answer >

24. Which of the following statements is falseregarding a Non-profit organization?

a. An organization that is chartered by the state to operate in the interests of the society, isknown as a Non-profit organization

b. The primary objective is to render the best possible service to customers

< Answer >

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c. A Non-profit organization receives contributed capital which can be divided into twoprincipal categories: plant and endowment

d. In a Non-profit organization, there is restraint on distribution of profits as well as onearning profits

e. A Non-profit organization does not pay enough attention to its pricing policy.

25. As per Bowers model, the authority of designing the Programming Process vests with the

a. Top Managementb. Middle Managementc. Lower Level of Managementd. Both (a) and (b) abovee. All (a), (b) and (c) above.

< Answer >

26. Which of the following is notcorrect about Transfer Price(s)?

a. Transfer Price is the value placed on the transfer of goods or services among two ormore profit centers of same organization

b. Accounts are prepared on the basis of transfer price for transactions that are carried outamong the business units

c. Transfer Prices also refer to the expenses incurred by corporate office which arecharged to the business units

d. The concept of Transfer Price is basically aimed at simulating the external marketconditions within the organization

e. Transfer Prices should induce goal congruent decisions.

< Answer >

27. The term mission organization is used to refer to

a. Professional organizationb. Financial Services organization

c. Non-profit organizationd. Merchandizing organizatione. Manufacturing organization

< Answer >

28. In which of the following types of exposure, is the subsidiary manager held responsible forthe dependence effects of exchange rates?

a. Translation Exposureb. Transaction Exposurec. Economic Exposured. Both (a) and (b) abovee. All (a), (b) and (c) above.

< Answer >

29. Procurement, payroll, storage are examples of

a. Informal Informationb. Private Informationc. Non-financial Informationd. Task Control Informatione. None of the above.

< Answer >

30. In case of management control of projects, which of the following controls does notrecognize gradations of quality?

a. External Controlb. Internal Controlc. Cybernetic Controld. Go / No-go Controle. Post Control.

< Answer >

END OF PART A

Part B : Problems/Caselets (50 Points)

This part consists of questions with serial number 1 - 7


Points are indicated against each question.

Detailed workings should form part of your answer.

Do not spend more than 110 - 120 minutes on Part B.

1. Sakarina Ltd. has furnished the following information pertaining to sales for the quarter ending December31, 2002:

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You are requiredto compute the following:

a. Total sales variance

b. Sales price variance

c. Sales volume variance

d. Sales mix variance

e. Sales quantity variance

(2 + 2 + 2 + 2 + 2 = 10 points) < Answer >

2. Sanath Engineering Ltd., an engineering conglomerate, is growing at the rate of about 200% every year.The company has two divisions namely Division C and Division Y. Division C assembles an intermediateproduct for which there is no external market. Division Y is using this intermediate product to make thefinal product.

The demand schedule for the final product produced by Division Y is given below:

The costs of each division are:

The transfer price for the intermediate product is Rs.17.50, which is determined on full cost basis.

You are requiredto:

a. Prepare a statement showing contribution for each division and the company as a whole at variousselling prices.

b. Find the selling price which maximizes the contribution of Division Y and the company as a whole.

c. Compute the transfer price that will maximize the profit of the company under the divisional

organization when there is no market for the intermediate product and the supplying division has nocapacity constraints.

d. Determine the output to be produced by Division C that will maximize the companys profit, if there isno market for the intermediate product and the supplying division has no capacity constraints.

(6 + 1 + 2 + 3 = 12 points) < Answer >

Caselet 1

Read the following caselet carefully and answer the following questions:

3. Discuss the Management Control System you would recommend for OReilley Associates.

(7 points) < Answer >

4. Managements early assessment of the products chances of succeeding was critical to the profitability ofOReilley Associates. Comment.


In 1990, O Reilley Associates was one of the largest advertising agencies in the United States. Billings for thead industry were over $260 billion on a worldwide basis that year, compared to $125billion in 1984. he 20largest firms accounted for nearly 35 percent of world wide billings in 1990. Fourteen of these were independentagency networks and six were advertising groups. Most of the firms were based in the US or UK.

Companies of all sizes retained advertising agencies to create and execute marketing plans, advertisingstrategies, and campaigns. The agencies ranged from those that provided only traditional advertising services toothers with extensive marketing research and consulting capabilities.

Advertising agencies were compensated by their clients in one of two ways. Traditionally, an ad agency receiveda 15 percent commission on advertisement placed in television, radio or print. The client would be billed the fullamount, and 15 percent would be kicked back to the agency from the medium. Creative work and campaigndevelopment were not charged to the client.

With the increased use of non-advertising services, a fee-based system was introduced. These services includeddesign, graphics, market research, sales promotion, direct mail campaigns, merchandising, event planning, andpublic relations. For these nontraditional services, clients were charged billable hours plus expenditures. For

Products Budget Actual

Units Selling price per unit (Rs.) Units Selling price per unit (Rs.)

A 10,000 40 11,000 42B 7,000 60 6,500 58

C 5,000 50 5,200 55

Selling Price (Rs.) Quantity sold (Units)

50 1,000

45 1,50040 2,000

35 2,50030 3,000

25 3,500

Particulars Division C (Rs.) Division Y (Rs.)

Variable cost per unit 5.50 3.50

Fixed cost per annum 30,000 45,000

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production of campaign, the client was billed cost plus 15 percent. This fee structure was necessary because thekickback scheme no longer was feasible with the new services and different media.

O Reilley Associates was organized into six divisions, namely, Account management, Creative management,Information management, Media management, Administrative management and Production management. Theaccount executive ultimately was responsible for managing the client account, including coordinating thecreative, marketing, and media strategies within the agency.

New client decisions

One of the senior managements most critical roles was deciding which new clients to accept. Potential clientswhose products competed with an existing clients products were not even considered. Aside from this, OReilley Associates considered any new client that (1) had a solid business reputation, (2) was in good standing inthe community, and (3) whose product met a consumer need.

New product Introduction

The information management division began by conducting marketing studies and using focus groups todetermine if there was a consumer need. If a need existed, the consumer benefit was identified. Once aconsumer need was identified, a creative strategy, based primarily on the consumer benefit, was developed.When the agency finished test marketing, it gave recommendations to the client about the probable outcome of afull-scale product launch. Only after the client decided to proceed would the agency generate any significantrevenue from the assignment.

Existing Product Support

A new campaign for an existing product began when the previous campaigns run period ended. The decision todevelop a new campaign required both the clients and the agencys judgement. A drop in a products marketshare was a definite sign that a new campaign should be considered.

Account Profitability

The most profitable accounts were those that advertised frequently with same copy. A client who required aconstant stream of new copy was far less profitable than the one who used the same copy repeatedly. A clientssize frequently affected its profitability. In large client organizations, the advertising plan had to be cleared at

numerous levels, which involved a great deal of time and effort on the agencys part.Personnel Costs

Personnel constituted much of the cost associated with servicing an account. Payroll accounted for 60 to 65percent of OReilley Associates gross revenues. All employees except administrative staff filed time sheets thatrecorded the number of hours they worked, broken down by the client account. Approximately 85 percent of thepayroll was accountable to the individual clients. Since 65 percent of revenues covered payroll and 85 percent ofpayroll was accountable, 55 percent of revenues were direct personnel expenses. At OReilly Associates, ifdirect payroll associated with an account was less than 55 percent of the revenues, the account was consideredprofitable.

Caselet 2

Read the following caselet carefully and answer the following questions:

5. According to you, what are the reasons for the success of Ayala Conglomerate in such adverse Businessenvironment?


6. Comment on the Management Control System followed by Ayala.


7. What benefit was Ayala deriving from the mixed business model of family owned and public companies?


The Philippines would seem to be an unlikely place to find perspectives on management and governance. Hithard by the 1997 Asian crisis, the country endured two years of fiscal mismanagement and economic declineunder the administration of President Joseph Estrada, who was removed from office in January 2001; a heavydepreciation of the currency; and a global slowdown. Most companies in the Philippines have sufferedaccordingly.

Survivors of such economic volatility can offer valuable lessons. Ayala Corporation has come through the pastfive years with its businesses and reputation untarnished, which is more than many other conglomerates in Asia,one can say. Founded as a distillery in 1834, the company soon expanded into trading and agriculture, and it nowoperates business ranging from land to water, light-rail to auto retail, and telephones to banking. Ayalacompanies currently represent some 25 percent of the market capitalization of the Philippine Stock Exchange.

Ayala Corporation is the holding company with 58.2% stake held by Zobel de Ayala family, 19.1% byMitsubishi, 4.4% by Shoemart and rest by public investors. Ayala group of companies are Ayala InternationalPte, with 100% holding, Ayala Land with 70% holding, Bank of Philippine Islands with 35% holding and GlobeTelecom with 32% holding. Apart from these under the umbrella of AC Capital, which is a division of the AyalaCorporation, there are several subsidiaries with interests in agriculture, insurance, auto assembly, electronics andinfrastructure. Among these companies AL, BPI and GT are publicly listed companies.

Ayala has put its faith in this conglomerate model because of limited market size and its willingness to be part ofthe infrastructure needs of the country. They have entered into businesses varying from construction of roads,supply for drinking water, railways and real estate. Their telecom business, Globe, was launched in early 1990s,when Government was seeking to liberalize the economy. ITT, the largest investor in Globe at that time decidedto sell all of its telecom holding around the world. Rather than sell out with ITT, they opted to take a majority

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stake, bring in a strategic partner, and build up the companys franchise. They believed a revolution was aboutto take place and they did not want to miss it.

A major shift in its organizational thinking occurred in 1991. Rather than just have a real-estate company thatwas increasingly diversifying into other fields, they spun the real-estate operations off into a separate companyand left Ayala Corporation as the holding company of that and all its other businesses. Since then, they havefollowed the strategic logic of an investment company. They enter into businesses that have potential for growthand for which they have a value-adding proposition, and manage them to grow into leadership positionsdomestically.

Their division AC Capital, which is responsible for all of Ayala Corporations domestic non-listed businesses has venture capital disciplines. Over the years, they have become involved in a number of smaller businesses,looking to build them up to leadership positions during ten-year time frame. Now they have started focusingtheir noncore holdings into AC Capital, where they can give them a stricter financial focus. More clearlydefined financial discipline will better identify the winners and weed out the rest. In the past they evaluated theirsubsidiaries on the equity, operating margins, net income, and the like. During the past year, they have beenturning toward the concept of economic value added; a metric that instills greater capital discipline and betterreflects the value their managers are creating.

They are great believers in the combination of stable family and partner interests, on the one hand, and theinstitutional investors of a public company, on the other. They feel that between these two extremes lies themost sustainable model. There is an ever-increasing tension between the institutional investors focus onquarterly results and the need for long-term strategy and stability. Widely held public companies are seeing adramatic rise in their CEO turnover, often because there is no single large institution willing to tell the CEO,Look, hang in there. Lets agree on our long-term strategy. Even if it takes a short-term hit, you know wellback you up. CEOs have to roll the dice in a bigger and bigger way, and chances are that theyll failoccasionally.

END OF PART B

Part C : Applied Theory (20 Points)

This part consists of questions with serial number 8 - 10.


Points are indicated against each question.

Do not spend more than 25 -30 minutes on Part C.

8. In addition to examining costs incurred, the auditors call attention to management actions that they believeare substandard. Explain the role of project auditing in an on-going project


9. What is a cooperative society? How are they operated?


10. Budgets are not merely accounting documents, they are blue prints for managerial action during a budgetperiod. Elucidate.


END OF PART C

END OF QUESTION PAPER

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Suggested AnswersManagement Control and Information Systems (MB281) : April 2003

Part A : Basic Concepts

1. Answer :(c) < TOP >

Reason : The purpose of a management control system is to assist management in the coordination of theactivities of the organization and in the steering of those activities toward the achievement of thefirms overall purposes, goals and objectives. Management control systems anticipate future

conditions. They are not self-regulating in nature.Managers usually operate in situations ofuncertainty and the control systems ensure that proper actions are taken whenever needed, inspite of the uncertainty.

All other options are true regarding Management control systems.


Reason : Process Quality Teaming combines several successful total quality techniques into acybernetic control system with cybernetic features like feedback loops, action plans, andenvironment scanning. While implementing Process Quality Teaming in a manufacturing unit,the responsibilities of each function are assigned to the individual, and each person should bemade responsible for the quality and value of the output he/she makes, rather than only thedepartmental head.

All other options are correct with respect to implementation of Process Quality Teaming in amanufacturing unit.

3. Answer :(e) < TOP >

Reason : Responsibility Accountinghelps managers to trace costs, revenues and profits in order toenable them to arrive at right decisions. It focuses on people who participate actively in theplanning process and thereby help management in cost-control through budgeting process.

Financial Accounting is concerned with the preparation of an income statement and balancesheet which describe the financial position of the firm on a given date.

Cost Accounting aims to provide prompt cost data for managerial planning, controlling anddecision making.

Control Accounting analyzes the success of the organization in achieving its goals.

Decision Accounting helps the management to arrive at right decisions. The focus is oneconomic analysis that is essential to arrive at the right decision.


Reason : Non-Financial Audit relies primarily on standards set internally on the basis of customer andcompetitor information. Standards should change as performance improves and should notbe the same from audit to audit.

All other options are true regarding Non-Financial Audit.

5. Answer :(d) < TOP >

Reason : Key success variablesare those variables in the external environment to which the goals,objectives and strategies of managers, are most sensitive. They are also referred to as key successfactors as they help in explaining the success or failure of the organization. They are qualitative

and their measurement is subjective in nature. However, they should not be omitted from thecontrol system because they are qualitative.

All other options are true regarding Key success variables.

6. Answer :(a) < TOP >

Reason : Survey is an inexpensive and consistent means of gathering and aggregating large amounts ofdata. It consists of written survey and telephone survey and is the most rigid of the tools,without much flexibility.

Questionnaire is used in the absence of enough resources for either a full-fledged survey or forinterviewing a sizeable number of respondents. It provides more flexibility than survey.

A Focus Group is a group of people who jointly participate in an interview that does not use astructured question-and-answer method to obtain information from these people.

Interview is a technique to gather data from the conversation between two people, and is ahighly flexible research tool.

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In Direct Observation, the researcher gathers data by directly observing the relevant actors andsettings.


Reason : In terms of management control systems, Organizational Slack creates cushion against thevariability of the environment and it provides resources for innovation and adaptation in variousstakeholders areas.

Managerial Style is the term associated with individual managers and refers to the managementstyle adopted by them in controlling the various activities of the organization.

Organizational Culture consists of shared values, beliefs and norms which grow over time. Theculture of an organization is greatly influenced by the environment in which it operates.

Organizational Growth is a very broad term which refers to improved market share, increasedprofitability, increased revenue, better HR Practices, better work environment, bettercorporate governance and others.

Organizational Ethics is concerned with the moral justification of the organizations structuresand practices.

8. Answer :(b) < TOP >

Reason : Erosion data is used to measure wear on a place or object. Therefore, the given example is anexample of Erosion data.

Accretion data is used to examine the residue or evidence left by a certain process in order toestimate its use or popularity.

Archival data consists of written records which are used to measure process performance.

Participant observation involves the full participation of the researcher in an activity, whomakes mental notes of the dynamics and feelings involved with participating.

In Field observation, the interviewer watches the interaction of a group without getting directlyinvolved.


Reason : External Control Style emphasizes authorized control system, formal measurements andevaluations wherein the top executive maintains decision-making mechanism, with the help ofinformation that is gathered at the lower levels of the organization. Hence, the given example isthat of External Control Style.

Internal Control Style focuses upon the human aspects of the organization. It is participative innature and puts emphasis on the motivation of the subordinates such as social esteem, selfactualization and others.

Mixed Control Style includes characteristics of both External Control Style and InternalControl Style. It is based upon both objective and subjective measures.

Democratic Style is the one in which policies, strategies and standards are determined by theentire group of people who are expected to achieve them. A democratic leader ensures thateverybody understands the overall goals, objectives and plans.

Participative Style is nothing but Democratic Style.


Reason : Interviewis a technique to gather data from the conversation between two people, and is ahighly flexible research tool. The researchers have little control over content of the response.

Surveyis an inexpensive and consistent means of gathering and aggregating large amounts ofdata. It consists of written survey and telephone survey and is the most rigid of the tools, without

much flexibility.The researchers have high control over content of the response.Questionnaire is used in the absence of enough resources for either a full-fledged survey or for

interviewing a sizeable number of respondents. It provides more flexibility than survey. Theresearchers have lesser control over content of the response compared to a survey.

A Focus Group is a group of people who jointly participate in an interview that does not use astructured question-and-answer method to obtain information from these people. In this casealso, the researchers have high control over content of the response as there is a skilledfacilitator, who is responsible for guiding the group and managing group dynamics, and aneffective moderator guide who targets the information needed from the session.


Reason : Force Field Analysis was developed by Kurt Lewin. According to him, there are certainfacilitating factors(driving forces) and certain inhibiting factors(restraining forces) for every

situation faced by an individual. This concept is applicable to management control systems inorganizations too. In an organization these two factors are first identified through reviewmeetings for performance appraisal of responsibility centers. After identification, these factors

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are further divided into factors that are within the control of the manager of the responsibility center and thosebeyond his control. The reasons for non-achievement are analysed and a remedial action plan isdrawn up.

SWOT Analysis is a strategic planning tool that is used by the management to assess

organizations strengths (S) and weaknesses (W), as well as environmental opportunities (O)and threats (T).

Activity Based Costing (ABC) Analysis is generally used to estimate the internal cost structureof an organization during the Development Phase of Target Costing. According to this approach,all the activities till the product is sold, are identified and costs are estimated using multiple costdrivers.

In Cost-Benefit Analysis, total costs are weighed against the total benefits to find out thefeasibility of doing a particular task.

Value Chain Analysis is an analysis of the value chain of a firm. The value chain of any firm isthe linked set of value-creating activities of which it is a part, from acquiring the basic rawmaterials for component suppliers to making the ultimate end- use product and delivering it tothe final customers.


Reason : An Auditis a tool used to monitor a companys financial performance as well as non-financialperformance. Audit is only a monitoring or evaluation tool to check compliance with arequirement or standard and cannot mobilize people to action.

All the other activities stated can be done by Audit.


Reason : The concept of fairness should not be confined only to the employees of the organization,but should be extended to the activities of the stakeholders too.

For example, a customer is a stakeholder and fairness to the customer can be maintained bytruthful advertising, to help the customer to make wise decisions.

All other options are true regarding ethical principle of fairness in the design of controlsystems.

14. Answer :(e) < TOP >

Reason : Incentives are more related to the management control function. It is the duty of the seniormanagement to devise the best incentive plan possible. The incentives must be approved bythe shareholders, as required by corporate by-laws and securities regulators. Incentiveplans should be approved by the board of directors before they are implemented.

Wages are the remunerations paid by the employer for the services of hourly, daily, weekly and

fortnightly employees. They also refer to the remunerations paid to production and maintenanceemployees (blue-collar workers).

Salaries refer to the remunerations paid to clerical, professional and managerial employees(white-collar workers).

Benefits help employees to deal with certain contingencies and to meet certain socialobligations. They satisfy an employees economic, social and psychological needs.

Pensions are a part of benefits. They are usually given to government employees afterretirement.


Reason : Expense Center is the responsibility center in which inputs or expenses, rather than outputs, aremeasured in monetary terms. Control of expenses incurred by the responsibility center is the

focus of managerial attention. Costs are classified into two broad categories, namely, engineeredcostsand discretionary costs.

Revenue Center is the responsibility center in which outputs are measured in monetary termsand the focus of managements efforts is on the revenue generated by the unit.

Investment Center is the responsibility center whose performance is evaluated in terms ofprofit, and assets employed in earning the profit.

Profit Center is the responsibility center whose performance is measured in terms of profits.


Reason : Phantom Share is a long-term incentive plan which ensures that the managers receive an awardequal to the market value of the stock since the date of a reward.

Stock Option offers long-term benefits and gives managers the right to buy a number of shares

of stock at a given date in the future.Stock Appreciation Right gives managers the right to receive cash payments based on the

increase in the value of stock from the time of the award until a specified future date.

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p

Performance Share is an incentive plan which awards managers a specified number of shareswhen they meet specific long-term goals.


Reason : Management By Objectives (MBO) is a joint setting of goals/objectives by the superior andthe subordinate, and clarifying on the objectives itself. Although the process employed is similarto the process used in budgetary control, MBO is a much broader concept. It not only emphasizesquantitative performance but also qualitative performance.

All other options are features of Management By Objectives.


Reason : Information Asymmetry is the situation in which the principal has insufficient informationabout the activities of the agents, and he cannot ascertain the agents contribution to the firmsresults.

Work Aversion is the preference for leisure over effort by some agents.

Shirking is the situation in which agents deliberately hold their efforts.

Private Information is the added information that the agent may have about the task assigned tohim than the principal.

Moral Hazard is the situation in which the agent misinterprets Private Information.


Reason : Effectiveness Measure measures performance of output in an organization.

Efficiency Measure measures performance of inputs over a specified period of time for a given

level of output.Process Measure measures the production process.


Reason : Systematic Information System is used to appraise the decisions made by the managers. Theviews of the managers are tested under the assumptions that he made the decisions. These areused by the managers before making a decision and this system attempts to guard the managersagainst inappropriate assumptions.

External Information System enables an organization to systematically scan the environment toidentify threats and opportunities. A market intelligence system provides information aboutchanging patterns of consumer preferences, performance of various competing brands in terms ofmarket share, and so on. The information that is collected from the external environment shouldbe passed on to the person concerned.

Social Information System is typically based on social indicators, which indicate socialconditions. For example, the government initiates a program to uplift a target population abovethe poverty line. The design of this program is based on an important social indicator thepeople living below the poverty line.

Continuing Information System is the system in which information is collected scientificallyand systematically on a continuing basis over a sufficiently long period of time.

Executive Information System gives top management immediate and easy access toinformation about a firms Critical Success Factors (CSFs), in accomplishing the organizationsstrategic objectives. Information is presented in a tailor-made form according to the preferencesof executives using them.


Reason : Hold Mission implies objective of protection of market share and the competitive position. Theobjective of IBM stated here implies Hold Mission.

Build Mission implies objective of increased market share, at the expense of short-termearnings and cash flow.

Harvest Mission implies objective of maximizing short-term earnings and cash flow, at theexpense of market share.

Divest Mission implies objective to withdraw from the business either through a process ofslow liquidation or out-right sale.


Reason : In Indicator based monitoring, the appropriate Management Information System (MIS)highlights the key parameters of performance. These key parameters are used as indicators. Thedeviations for each indicator are recorded and suitable follow-up action is taken as per thedeviations.

Monitoring by beneficiaries is a method of monitoring, where the beneficiaries are directly

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questioned about the usefulness of the program. Suggestions from the beneficiaries about how to make moreeffective program are welcomed.

Monitoring by legislator is done on behalf of the development organization. Whenever there isa controversy, the government nominates a member who is an expert in that subject to monitorthe program. The person does the entire monitoring job and submits his report to thegovernment.

Monitoring is also carried out by the press and other media, who disseminate information aboutthe status of programs. The government allocates lot of funds for public welfare programs, andthe media plays the role of a watch dog in ensuring that the people at large are appraised of theway the money is being spent by the officials.

Monitoring through field visit is carried out either through periodic monitoring or throughsurprise checks. Observations made during the field visits are recorded and a report is sent to theofficers. Then the officers may suggest necessary recommendations or improvement of the

program.


Reason : Strategic Planning is the process of deciding on the goals of the organization, on changes inthese goals, and on the resources used to attain these goals. It is a long term planning and iscarried out at the top level of management. It is irregular in nature.i.e., problems, opportunitiesand solutions do not rise at regular intervals. They are dealt with whenever they are perceived.So option (a) is not a characteristic of Strategic Planning.

All other options are characteristics of Strategic Planning.


Reason : A Non-profit organization isdefined as an organization in which the assets or income cannot

be distributed to, for the benefit of, its members, officers, or directors. A Non-profit organizationcan, of course, compensate its employees, including officers and members, for services renderedor for goods supplied by them. In a Non-profit organization, there is a restraint only on thedistribution of profits, not on earning profits.On an average, a modest profit needs to beearned by a Non-profit organization in order to provide working capital and for possible rainydays.

Therefore, option (d) is false.

All other options are true regarding Non-profit organization.


Reason : Bowers model suggests that ideas, proposals, and approval of projects come from the lowerlevels of management. However, the authority for designing the programming process vestswith the Top Management.


Reason : Transfer Priceisthevalue placed on the transfer of goods or services among two or more profitcenters of same organization. However, the expenses incurred by corporate office which arecharged to the business units are not called Transfer Prices.

All other options are correct regarding Transfer Price.


Reason : Non-profit organization is also referred to as mission organizationbecause such anorganization is primarily driven by its mission, which denotes its purpose.

Others are not known as mission organizations.


Reason : Economic Exposure implies the exchange rate exposure of the firms cash flows to changes inthe real exchange rate. Under this type of exposure, it would be appropriate for the controlsystem to evaluate the manager on decisions that would have enabled the subsidiary to respondto changes in the real exchange rate. Hence, the subsidiary manager should be heldresponsible for the dependence effects of exchange rates resulting fromEconomicExposure.

Translation Exposure to exchange rates is the income statement and balance sheet exposure ofMultinational Enterprises (MNEs) to changes in the nominal exchange rates and results from thefact that MNEs must consolidate their accounts in a single currency in spite of their cash flowsbeing denominated in multiple currencies.

Transaction Exposure indicates the exchange rate exposure that the firm has in its cross-bordertransactions, when such transactions are entered into today, but payments to settle thetransactions are made at some future date.

29. Answer :

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(d) < TOP >

Reason : Task Control Information constitutes most of the formal information that flows through anorganization in its daily operations. Procurement, payroll, storage are examples ofTaskControl Information.

Informal Information is the information obtained through observation, face-to-faceconversations, and meetings, in contrast to information obtained from formal reports.

The added information that the agent may have about the task assigned to him than theprincipal is known as Private Information.

Management control systems in order to be effective, should be concerned with the ends aswell as with the process and means. While knowledge of the ends is provided by financialinformation, non-financial informationprovides insights relating to the means. Non-financialinformationisalsoknown as Key Variableor Key Success Factor.


Reason : Go/No-go Control is the most frequent type of control exercised on projects. Project teamperformance is the primary focus of control rather than specific items performed by individuals.Go/No-go Control does not recognize gradations of quality.

External Control uses an authorized control system wherein the top executive maintainsdecision-making mechanism, with the help of information that is gathered at the lower levels ofthe organization.

Internal Control focuses upon the human aspects of the organization. It is participative in natureand puts emphasis on the motivation of the subordinates such as social esteem, self actualizationand others.

Cybernetics is defined as the science of communication and control in machine or animal. Thebasic principle of cybernetics is that it mainly deals with the negative aspects of thought process.

Cybernetic Control is mainly used in the control of projects.

Post Control is exercised after completion of project. It serves as a basis for reward orpunishment.

Part B : Problems

1. Sakarina Ltd.

a. Total sales variance = Standard sales ~ Actual sales

= Rs.10,70,000 ~ Rs.11,25,000 = Rs.55,000(F)

b. Sales price variance = Actual quantity of sales (Standard price ~ Actual price)

A = 11,000units (Rs.40 ~ Rs.42) = Rs.22,000 (F)

B = 6,500units (Rs.60 ~ Rs.58) = Rs.13,000 (A)

C = 5,200units (Rs.50 ~ Rs.55) = Rs.26,000 (F)

Rs.35,000 (F)

c. Sales volume variance = Standard sale price (Standardquantity ~ Actual quantity)

A = Rs.40 (10,000units ~ 11,000units) = Rs.40,000 (F)

B = Rs.60 ( 7,000units ~ 6,500units) = Rs.30,000 (A)

C = Rs.50 ( 5,000units ~ 5,200units) = Rs.10,000 (F)

Rs.20,000 (F)d. Sales mix variance = Standard sale price (Revised standard quantity ~ Actual quantity)

Product

Standard sales

Units

Revised Standard

salesQuantity

Actual sales

Units

A 10,000 x Rs.40=

Rs. 4,00,000

10,318

11,000 x Rs.42=

Rs. 4,62,000

B 7,000 x Rs.60=

Rs. 4,20,000

7,223

6,500 x Rs.58=

Rs. 3,77,000

C 5,000 x Rs.50=

Rs. 2,50,000

5,159

5,200 x Rs.55=

Rs. 2,86,000

22,000 Rs.10,70,000 22,700 22,700 Rs.11,25,000

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B = Rs.60 (7,223units ~ 6,500units) = Rs.43,380 (A)

C = Rs.50 (5,159units ~ 5,200units) = Rs. 2,050 (F)

Rs.14,050 (A)

e. Sales quantity variance = Standard sale price (Revised standardquantity ~ Standard quantity)


B = Rs.60 (7,223units ~ 7,000units) = Rs.13,380 (F)

C = Rs.50 (5,159units ~ 5,000units) = Rs. 7,950 (F)

Rs.34,050 (F)

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2. The contribution for each division and the company as a whole for the various selling prices are as follows:Division C

Division Y

Company

b. Based on the information given in (a), the selling price of Rs.40 will maximize the contribution ofdivision Y (i.e. Rs.38,000) and the selling price of Rs.35 will maximize the contribution of thecompany as a whole.

c. Where there is no market for the intermediate product and the supplying division has no capacityconstraints, the correct transfer price is the marginal cost of supplying division for that output at whichthe sum of marginal cost of both the supplying division and the receivers division equals thereceiving divisions marginal revenues from sale of such finished product. When variable cost per unitis constant and fixed cost remains unchanged this rule will result in a transfer price, which will beequal to the supplying divisions unit variable cost. Therefore the transfer price will be set at Rs.5.5.

d. There are different levels of units at which sales can be made at the given selling prices. The optimumoutput, at which the companys profit is maximum, is the output level immediately preceding theoutput at which the sum of the marginal cost of both the supplying division and the receiving divisionwill exceed the marginal revenue for the first time.

The marginal cost and marginal revenue at different levels of output is as follows:

Output level(a)

Total revenue

(b) = (a) 17.50

Variable cost

(c) = (a) Rs.5.50Total contribution

(b)-(c)

Rs. Rs. Rs. Rs.

1,000 17,500 5,500 12,000

1,500 26,250 8,250 18,000

2,000 35,000 11,000 24,000

2,500 43,750 13,750 30,000

3,000 52,500 16,500 36,000

3,500 61,250 19,250 42,000

Output level Total revenueRs.

Variable costRs.

Transfer costRs.

Total contributionRs.

(a) (b) (c) = (a) Rs.3.50

(d) (b)-(c)-(d)

1,000 50,000 3,500 17,500 29,000

1,500 67,500 5,250 26,250 36,000

2,000 80,000 7,000 35,000 38,000

2,500 87,500 8,750 43,750 35,000

3,000 90,000 10,500 52,500 27,000

3,500 87,500 12,250 61,250 14,000

Output level Total revenueRs.

Variable costRs.

Total contributionRs.

(a) (b) (c) = (a) Rs.9 (b)-(c)

1,000 50,000 9,000 41,000

1,500 67,500 13,500 54,000

2,000 80,000 18,000 62,000

2,500 87,500 22,500 65,000

3,000 90,000 27,000 63,000

3,500 87,500 31,500 56,000

Output in units Marginal costRs.

Marginal RevenueRs.

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*Assuming fixed cost is to be incurred even if no output is produced.

The output level of 2,500 is the level immediately preceding the level at which marginal cost (4,500)exceeded marginal revenue (2,500) for the first time.

Thus the supplying division has to produce 2,500 units to maximize the profit.

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Caselet 1

3. We can devise a good Management Control System for OReilley Associates in following ways:

Pricing: With a shift from pure advertisement to non-advertisement services, the company should shift fromcommission based revenue system to fee based revenue system. The fee structure should be based onprofessional time spent on the engagement. The hourly billing rate should be based on the compensation ofthe grade of professionals plus a loading for overhead costs and profit.

Profit Centers and Transfer Pricing: As the size of the organization increases, controlling becomesdifficult. If the organization is divided into profit centers and cost centers, it becomes easy to monitor andcontrol. Support units, such as Information Processing, Transportation, Telecom, Printing and Procurementshould charge consuming unit for their services.

Control of operations: Attention should be given to scheduling the time of professionals. The billed time

ratio, which is the ratio of hours billed to professional hours available, should be watched closely. Whenproject teams do the work, control should be done by comparing the actual performance to the plannedperformance.

Performance Measurement and Appraisals: The performance of the executives should be done by MBOmethod. Performance of the creative executives can be assessed with the help of market performance oftheir work. By and large assessment of an individual should include feedback evaluated by superiors, peers,subordinate and the clients. But as we know professional work is very qualitative in nature, so the appraisalshould be qualitative in nature.

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4. OReilley has to apply its past experience to assess the profit potential of new account. It should use costdata from the current accounts to estimate the cost of servicing new accounts. It should also estimate thespending necessary to build up a product to desired market share. Typically, a products cost includes anallowance for advertising cost. If the advertising allowance could cover the expected cost of building

market share and maintaining the product, it can be taken as sufficient evidence for accepting theassignment.

Before a new product was actually launched, there was exhaustive market research conducted for the productand its campaign was tested through focused groups. First the need for the product was evaluated, andcustomer acceptance was studied. The test marketing for the new product was done in a selected market.Only after it gains success in the test market was it taken up for actual launch. The client was informed aboutthe outcome of the full-scale launch at this stage. It was only after that client agreed to proceed further; itwas taken for full-scale launch. The revenue was the function of the advertising budget needed to support thefull scale product launch and had to cover all expenses up to that time. Hence it was very critical for themanagers to assess early the success of the new product.

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Caselet 2

5. The reasons for success of Ayala Conglomerate can be explained as follows:

a. They are the best example of an adaptive organization. They could adapt themselves with the changingbusiness environment. They first built their core business for initial years and once saturation wasreached, they diversified into unrelated area to reap the maximum benefit from emerging market.

b. They had an optimal organization structure .They followed the conglomerate model where the holdingcompany had stakes in its group companies. The group company was a totally independent entity as faras decision making was concerned. They have segregated their core and non-core businesses and useddifferent criteria for investing or divesting the present businesses.

c. Ayala believed in the decision they took and stuck with it, as in the case of telecom business they couldsee the revolution that was coming in telecom. The business prudence and visionary leadership is a keyto successful organization.

< TOP >

6. The kind of Management Control System Ayala is following can be defined as having effective

1,000 9,000* 50,0001,500 4,500 17,500

2,000 4,500 12,5002,500 4,500 7,500

3,000 4,500 2,5003,500 4,500 (2,500)

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organization structure and strict financial control. The holding company Ayala Corporation followed investmentcompany logic. They invested in the company where they thought they could add value, and divested fromloss making companies.

They also managed their relationship with their partners well and maintained their brand equity high even inbad times. They were bringing better financial discipline in their business by switching from earlier model ofROE, net income, operating margin to economic value added. This is a better method of evaluating howmuch value the managers are creating.

The organization structure that Ayala is following provides the financial and operational independence to thedifferent group companies and at the same time enjoy the brand value that Ayala has built over the years.The right mix of family ownership and public companies allows them to back their managers to pursue longterm goals at the cost of immediate pressure on performance.

< TOP >

7. There have been big debates on the issue of family owned and public companies as two extremes. Ayalahas chosen a right mix of these two models. The public owned companies have more pressure to showquarterly performance and their CEOs are always under pressure and they tend to overlook long termstrategy. Ayala has divided their business interests in two parts, one containing companies operating inmatured industry while other companies operating in growing market have been clustered under onedivision, AC Capital.

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Part C: Applied Theory

8. A project audit is a formal and systematic verification of the performance of an ongoing project. It is anactivity of measurement against predefined and relevant standards. It must take place as the work is beingdone. Otherwise the defective work on individual work packages may be covered by the subsequent work.For example, the quality of a plumbing work in a construction project cannot be checked after ceilings havebeen finished.

A project audit is designed to be a practical, cost effective, independent and reliable source of informationabout the project. This is intended to serve as a support to, and a basis for management decision making.Therefore, it is by nature a critical activity which is primarily concerned with identifying actual andpotential deficiencies related to projects execution, and only secondarily with identifying and reportingexceptional strengths and accomplishments.

Levels of project audit: Three different levels of project audits have been defined which differaccording to the effort required, the time taken, and the results expected.

The overview audit obtains a well founded opinion as to whether or not a project is in trouble. Anadministrative audit is a thorough examination of a project covering all aspects except detailedexamination of technical quality. Third is technical audit which is concerned with specific technical issues

and problems within a project.

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9. Cooperative societies are those that are owned and controlled by the producers of the basic commodity.The producers not only supply the basic commodity, they are also the shareholders of the company. Thebasic objective of cooperative societies is to maximize the returns to the producer members. The electedrepresentatives of the producers organizations generally take care of the control process.

These societies follow 3-tier structure. The village level society procures the basic commodity, e.g., milk,from the producers at a fixed price. The district level union adds value to the commodity by processing theraw material and converting it into intermediate, finished products such as butter, ghee, cheese etc. The

district union uses modern technology and professional management. The state level body undertakes themarketing activities on behalf of the district unions. It also provides certain centralized services such aspurchase of new equipment, and other important materials for the entire society.

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10. It is true that budgets are not merely accounting documents, they are blue pints for managerial actionsduring the budget period. Budgets are effective tools for short-term planning and control in organizations.Budget is essentially a future plan of action. It is considered as a guide of desired future expectations. Itreduces uncertainty and forces executives to map out future courses of action clearly. This helps theorganization to face the future challenges with confidence.

Budgeting is the national plan that is needed to control all aspects of an organization for definite period oftime. Budgets help in finding out how the alternatives are progressing. They are used to measure andcompare actual results and anticipated results. Necessary corrective actions are taken if any differences are

noticed.

Budgetary control presents an overall managerial view point of all the activities within an organizational

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structure which is essential to management success. Organizations need budgeting to enable management tomake an early study of problems and outlined ways of tackling the same.

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< TOP OF THE DOCUMENT >

0304_MCIS-I__MB281_

Documents

answer allquestions

following statements

following points

following audit tools

key success variables

key success factorsc

key functions

control accountingd