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MANAGEMENT CONTROL SYSTEMS (MCS) KEYUR DVASAVA..

Module 1.Introduction to Management Control Systems and the

Environment of Management Control.

1. INTRODUCTION TO MANAGEMENT CONTROL SYSTEMS

A management control systems (MCS) is a system which gathers

and uses information to evaluate the performance of different

organizational resources like human, physical, financial and

also the organization as a whole considering the organizational

strategies. Finally, MCS influences the behavior of organizational

resources to implement organizational strategies. MCS might be formal

or informal

Management Control is the process by which managers influence other

members of the organization to implement the organizations

strategies. Management control systems are tools to aid management

for steering an organization toward its strategic objectives and

competitive advantage. Management controls are only one of the tools

which managers use in implementing desired strategies. However

strategies get implemented through management controls,

organizational structure, human resources management and culture.

Management control is concerned with coordination, resource

allocation, motivation, and performance measurement. The

practice of management control and the design of management control

systems draw upon a number of academic disciplines. Management


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control involves extensive measurement and it is therefore related to

and requires contributions from accounting especially management

accounting. Second, it involves resource allocation decisions and is

therefore related to and requires contribution from economics

especially managerial economics. Third, it involves communication,and motivation which means it is related to and must draw

contributions from social psychology especially organizational

behavior

Management control systems use many techniques such as

Balanced scorecard

Total quality management (TQM) Kaizen (Continuous Improvement)

Activity-based costing

Target costing

Benchmarking and Bench trending

JIT

Budgeting

Capital budgeting

Program management techniques, etc.
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THE MANAGEMENT CONTROL SYSTEMS (MCS)

In the management parlance , control traditionally refers to the

activities of establishing standards of performance, evaluating actualperformance against these standards, and implementing corrective

actions to accomplish organizational objectives

The nature of MCS

The central focus of MCS is Business Strategy Implementation.

MCS provides knowledge , insight, and analytical skills related to how

a corporations senior executive design and implement the on goingmanagement systems that are used to plan and control the firms

performance


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The elements of MCS

Elements of MCS include

Strategic Planning,

Budgeting, Resource Allocation ,

Performance Measurement,

Evaluation, And Rewards,

Responsibility Centers, Transfer Pricing

Concepts of MCS

The MCS builds on concepts from

Business Strategy, Organizational Behavior,

Human Resource and

Financial & Managerial Accounting.

Elements of Control System

Every control system has at least four elements

1. Detector or Sensor a device that measures what is actuallyhappening in the process being controlled.

2. An Assessor a device that determines the significance of what isactually happening by comparing it with some standard or expectation of

what should happen

3. An effectors a device that alters behavior if the assessor indicates theneed to do so.

4. A communications network a device that transmit informationbetween the detector and the assessor and between the assessor and theeffectors


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The Three examples of CS

1. Thermostat2. Body Temperature

3. Driver of an automobile

Thermostat

1. Thermometer which measures the current temperature of a room

(detector)2. An Assessor which compares the current temperature with the accepted

standard for what the temperature should be.3. An effectors which prompts a furnace to emit heat or activates an air

conditioner which also shuts off these appliances when the temperature

reaches the standard levels4. A communication network, which transmit information from thermometer

to the assessor and from the assessor to the heating or cooling element

Body temperature

1. The sensory nerves scattered through the body

2. The Hypothalamus center in the brain, which compares informationreceived from detectors with the 98.6 f standard.

3. The muscles and organs (effectors) that reduce the temperature when

it exceeds the standard and raise the temperature when it falls below

the standard4. 4. The overall communications system of nerves is self regulating. If

the system is functioning properly, it automatically corrects for

deviations from the standards without requiring conscious effort.

Automobile Driver

Assume you are driving on a high way where the legal speed 65 kmph.

Your control system acts as the following.

1. Your eyes measures actual speed by observing the speedometer.2. your brain compares the actual speed with desired speed, and, upon detecting adeviation from the standard.3. Directors your foot to ease up or press down on the accelerator.4. As in body temperature regulation your nerves form the communication systemthat transmits information from eyes to brain and brain to foot.


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Management

An organization consist of a group of people who work together to achievecertain common goals. The CEO decides on the overall strategies that willenable the organization to meet its goals.

Subject to the approval of the CEO , the various business unit mangers formulateadditional strategies that will enable their respective units to further these goals

The management control process is the process by which managers at all levels

ensure that the people they supervise implement their intended strategies.

Systems

A system is a prescribed and usually repetitious way of carrying out an

activity or a set of activities. Systems are characterized more or less

rhythmic, coordinated, and recurring series of steps intended to

accomplish a specified purpose.

Control

Management control is the process by which managers influence other

members of the organization to implement the organizations

strategies. It includes

Planning

Coordinating

Communicating

Evaluating

Deciding


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Influencing

: FACTORS INFLUENCING MANAGEMENT CONTROL

The nature and purpose of the organization,

Organization structure and size

National culture

Strategic mission and competitive strategy

Corporate strategy and

organizational diversification

Competitive strategy

Managerial styles

Organizational slack

Stakeholders expectations and controls

2. THE ENVIRONMENTOF MANAGEMENT CONTROL- STRATEGIESOFDIFFERENTLEVELS

STRATEGY OPERATESATDIFFERENTLEVELS;

Corporate level

Business level Functional level

There are basically two categories of companies; one, which have different businesses

organized as different directions or product groups known as profit centres or strategic business
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units (SBUs) and other, which consists of companies which are single product companies. Eg.

Reliance Industries and Ashok Leyland Limited.

The SBU concept was introduced by General Electric Company (GEC) of USA to manage

product business. The fundamental concept in the SBU is the identification of dicreteindependent product/market segments served by the organization. Because of the different

environments served by each product, a SBU is created for each independent product/segment.

Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it

is serving.

Each SBU has a clearly defined product/market segment and strategy. It develops its strategy

according to its own capabilities and needs with overall organizations capabilities and needs.

Each SBU allocates resources according to its individual requirements for the achievement of

organizational objectives. As against the multi product organizations, the single productorganizations have single strategic business unit. In these organizations, corporate level

strategy serves the whole business. The strategy is implanted at the next lower level by

functional strategies. In multiple product company, a strategy is formulated for each SBU

(known as business level strategy) and such strategies lie between corporate and functional

level strategies.

The three levels of strategy are explained as follows;

Corporate level strategy:

At the corporate level, strategies are formulated according to organization wise policies. These

are value oriented, conceptual and less concrete than decisions at the other two levels. These

are characterized by greater risk, cost and profit potential as well as flexibility. Mostly, corporate

level strategies are futuristic, innovative and pervasive in nature. They occupy the highest level

of strategic decision making and cover the actions dealing with the objectives of the

organization. Such decisions are made by top management of the firm. The examples of such

strategies include acquisition strategies, diversification, structural redesigning, etc. The board of

directors and chief executive officer are the primary groups involved in this level of strategy

making. In small and family owned businesses, the entrepreneur is both the general manager

and the chief strategic manager

Business Level Strategy:


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The strategies formulated by each SBU to make best use of its resources given the environment

it faces, come under the gamut of business level strategies. At such a level, strategy is a

comprehensive plan providing objectives for SBUs, allocation of resources among functional

areas and coordination between them for achievement of corporate level objectives. These

strategies operate within the overall organizational strategies i.e within the broad constraintsand policies and long term objectives set by the corporate strategy. The SBU managers are

involved in this level of strategy. The strategies are related with a unit within the organization.

The SBU operates within the defined scope of operations by the corporate level strategy and is

limited by the assignment of resources by the corporate level. However, corporate strategy is

not the sum total of business strategies of the organization. Business strategy relates with the

how and the corporate strategy relates with the what. Business strategy defines the choice of

product or service and market of individual business within the firm. The corporate strategy has

impact on business strategy.

Functional level Strategy:

This strategy relates to single functional operation and the activities involved therein. This level

is at the operating end of the organization. The decisions at this level within the organization are

described as tactical. The strategies are concerned with how different functions of the enterprise

like marketing, finance, manufacturing, etc contribute to the strategy of other levels. Functional

strategy deals with a relatively restricted plan providing objectives for specific function,

allocation of resources among different operations within the functional area and coordinationbetween them for achievement of SBU and corporate level objectives

Sometimes a fourth level of strategy also exists. This level is known as the operating level. It

comes below the functional level strategy and involves actions relating to various sub functions

of the major function. For example, the functional level strategy of marketing function is divided

into operating levels such as marketing research, sales promotion, etc

OR

INTRODUCTION: - To understand the process of strategic management the conceptshould be understood and controlled. The term strategy is derived from the Greek word

STRATEGOS

Definition:William Glueck, a Management Professor defined it as A unified,comprehensive and integrated plan designed to assure that the basic objectives ofthe enterprise are achieved. Alfred Chandler defined Strategy as:- The

determination of the basic long term goals and objectives of an enterprise and theadoption of the courses of action and the allocation of resources necessary for

carrying out these goals. Thus strategy is: - a. A plan / course of action leading to


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a direction. b. It is related to companys activities. c. It deals with uncertain future.d. It depends on vision / mission of the company to reach its current position.

STRATEGY:1. Before making a decision managers have to look into the course of deciding since

Strategy involves situations like: -

a) How to face the competition. b) Whether to undertake expansions/diversification c)

To be focused/ broad based d) How to chart a turn around e) Ensuringstability/should we go in for disinvestments etc

2. An establishment and successful company would start to face new threats in the

environment. This is due to its success and emergence of new competitors. It has torethink the course of action it has been following. This is called strategy.

3. With such rethinking and environment analysis, new opportunities may emerge andbe identified.

4. To make use of these opportunities, the company might fundamentally rethink andreason the ways and means, the actions it had been following in the past. These are

called strategies .

5. For a company to survive and to be successful strategy is one of the most significantconcepts to emerge in the field of management. According to Alfred chandler the

determination of basic long-term goals and objectives of an enterprise and theadoption of the course of action and the allocation of resources for carrying out these

goals. William Glueck defines strategy as a unified, comprehension and integratedplan designed to assure that the basic objectives of the enterprises are achieved.

6. Michael Porter views strategy as the core of general management is strategy.Managers must make companies flexible, respond rapidly, benchmark the bestpractices, outsource aggressively, develop core competencies; in fact should know

how to play new roles every day. Hyper competition is a common phenomenon thatrivals copy very fast.

7. Companies can outperform rivals only if it can establish a difference it can preserveand deliver greater value at a reasonable cost.

8. Strategy rests on unique activities The essence of strategy is in the activities choosing to perform things differently and to perform different activities than rivals.


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9. Strategy is long term. If company focus is only on operational effectiveness. It canbecome good and not better. Overemphasis on growth leads to the dilutions of

strategy. Growth is achieved by deepening strategy.

10.Strategy is the future plan of action, which relates to the companys activities and itsmission/vision i.e. when it would like to reach from its current position.

11.It is concerned with the resource available today and those that will be required forthe future plan of action. It is about the tradeoff between its different activities and

creating a fit among these activities.

LEVELS OF STRATEGY:

1. When a company performs different business/ has portfolio of products, the companywill organize itself in the form of strategic business units (SBUs).

2. In order to segregate different units each performing a common set of activities,

many companies are organized on the basis of operating divisions/decisions. Theseare known as strategic business units.

CORPORATE LEVELFUNCTIONAL LEVEL STRTEGIES [CORPORATE]

SBU1 SBU2 SBU3 (SBU LEVEL)FUNCTIONAL LEVEL STRATEGIES

3) Strategies are looked at corporate level SBU level

4) There exists a difference at functional levels like marketing, finance, productions etc.

Functional level strategies exist at both corporate and SBU level. It has to be aligned and

integrated.

5) CORPORATE LEVEL STRATEGY: Its a broad level strategy and all its plan of actions is at

corporate level i.e. what the company as a whole. It covers the various strategiesperformed by different SBUs. Strategies needs should be in align with the company

objective.

6) Resources should be allocated to each SBU and broad level functional strategies. Toensure things there would need to have co-ordination of different business of the SBUs.

7) For most companies strategies plans are made at 3 levels.

a) FUNCTIONAL STRATEGY b) SOCIETAL STRATEGY c) OPERATIONAL STRATEGY

FUNCTIONAL STRATEGY:


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As the SBU level deals with a relatively. Smaller area that provides objectives for a specificfunction in that SBU environment are marketing, finance, production, operation etc.

SOCIETAL STRATEGY:

Larger Companies like conglomerates with multiple business in different countries needs

larger level strategy.

1) A relatively smaller company may require a strategy at a level higher than corporate

level.

2) Its how the company perceives itself in its role towards the society/ even countries

in terms of vision/ mission statement/ a set of needs that strives to fulfill corporatelevel strategies are then derived from the societal strategy.

OPERATIONAL LEVEL STRATEGY:

In the dynamic environment & due to the complexities of business strategies are needed tobe set at lower levels i.e. one step down the functional level, operational level strategies.

There are more specific & has a defined scope. E.g. Marketing Strategy could be subdividedinto sales Strategies for different segments & markets, pricing, distribution etc. Some of

them may be common & some unique to the target markets. It should contribute to thefunctional objectives of marketing function. These are interlinked with other strategies at

functional level like those of finance, production etc

MISSION/VISION LEVELCORPORATE LEVEL

FUNCTIONAL LEVEL STRTEGIES [CORPORATE]SBU1 SBU2 SBU3 (SBU LEVEL)

FUNCTIONAL LEVEL STRATEGIESOPERATIONAL LEVEL

Corporate level is divided from the societal level strategy of a corporation S.B.U Level are

put in to action under the corporate level strategy. Functional Strategies operate under SBU

Level. Operational Level is derived from functional level strategies

Conclusion:These are the levels at which strategies are formulated. Strategy is a plan or an action

leading to a particular direction. We have corporate level Strategy and Strategic Business

Unit level to fulfill the objectives of the company.

OR

Strategy at Different Levels of a Business


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Strategies exist at several levels in any organisation - ranging from the overall business (orgroup of businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the businessto meet stakeholder expectations. This is a crucial level since it is heavily influenced byinvestors in the business and acts to guide strategic decision-making throughout the business.Corporate strategy is often stated explicitly in a "mission statement".

Business Unit Strategy- is concerned more with how a business competessuccessfully in a particular market. It concerns strategic decisions about choice of products,meeting needs of customers, gaining advantage over competitors, exploiting or creating newopportunities etc.

Operational Strategy - is concerned with how each part of the business is organisedto deliver the corporate and business-unit level strategic direction. Operational strategytherefore focuses on issues of resources, processes, people etc.

OR

HIERARCHICAL LEVELSOF STRATEGY

Strategy can be formulated on three different levels:

corporate level

business unit level Functional or departmental level.

While strategy may be about competing and surviving as a firm, one can argue thatproducts, not corporations compete, and products are developed by business units. Therole of the corporation then is to manage its business units and products so that each iscompetitive and so that each contributes to corporate purposes.

Consider Textron, Inc., a successful conglomerate corporation that pursues profitsthrough a range of businesses in unrelated industries. Textron has four core businesssegments:

Aircraft - 32% of revenues Automotive - 25% of revenues Industrial - 39% of revenues Finance - 4% of revenues.

While the corporation must manage its portfolio of businesses to grow and survive, thesuccess of a diversified firm depends upon its ability to manage each of its product


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lines. While there is no single competitor to Textron, we can talk about the competitorsand strategy of each of its business units. In the finance business segment, forexample, the chief rivals are major banks providing commercial financing. Manymanagers consider the business level to be the proper focus for strategic planning.

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses inwhich the company should compete and with the development and coordination of thatportfolio of businesses.

Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might

include identifying the overall goals of the corporation, the types of businesses inwhich the corporation should be involved, and the way in which businesses willbe integrated and managed.

Competitive Contact - defining where in the corporation competition is to belocalized. Take the case of insurance: In the mid-1990's, Aetna as a corporationwas clearly identified with its commercial and property casualty insuranceproducts. The conglomerate Textron was not. For Textron, competition in theinsurance markets took place specifically at the business unit level, through itssubsidiary, Paul Revere. (Textron divested itself of The Paul Revere Corporationin 1997.)

Managing Activities and Business Interrelationships - Corporate strategy seeks to

develop synergies by sharing and coordinating staff and other resources acrossbusiness units, investing financial resources across business units, and usingbusiness units to complement other corporate business activities. Igor Ansoffintroduced the concept of synergy to corporate strategy.

Management Practices - Corporations decide how business units are to begoverned: through direct corporate intervention (centralization) or through moreor less autonomous government (decentralization) that relies on persuasion andrewards.

Corporations are responsible for creating value through their businesses. They do so bymanaging their portfolio of businesses, ensuring that the businesses are successful

over the long-term, developing business units, and sometimes ensuring that eachbusiness is compatible with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that canbe planned independently from the other business units of the firm.


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At the business unit level, the strategic issues are less about the coordination ofoperating units and more about developing and sustaining a competitive advantage forthe goods and services that are produced. At the business level, the strategyformulation phase deals with:

positioning the business against rivals anticipating changes in demand and technologies and adjusting the strategy to

accommodate them Influencing the nature of competition through strategic actions such as vertical

integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation,and focus) that can be implemented at the business unit level to create a competitiveadvantage and defend against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions anddepartments. The strategic issues at the functional level are related to businessprocesses and the value chain. Functional level strategies in marketing, finance,operations, human resources, and R&D involve the development and coordination ofresources through which business unit level strategies can be executed efficiently andeffectively.

Functional units of an organization are involved in higher level strategies by providinginput into the business unit level and corporate level strategy, such as providing

information on resources and capabilities on which the higher level strategies can bebased. Once the higher-level strategy is developed, the functional units translate it intodiscrete action-plans that each department or division must accomplish for the strategyto succeed.

CORPORATEAND STRATEGIC BUSINESSUNITS

Strategic Business Units

Strategic Business Unit orSBU is understood as a business unit within the overall corporate

identity which is distinguishable from other business because it serves a defined external

market where management can conduct strategic planning in relation to products and markets.

The unique small business unit benefits that a firm aggressively promotes in a consistent
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manner. When companies become really large, they are best thought of as being composed of

a number of businesses (or SBUs).

In the broader domain of strategic management, the phrase "Strategic Business Unit" came into

use in the 1960s, largely as a result ofGeneral's many units.

A Strategic Business Unit can encompass an entire company, or can simply be a smallerpart of a company set up to perform a specific task. The SBU has its own businessstrategy, objectives and competitors and these will often be different from those of theparent company. Research conducted in this includes theBCG Matrix.

An SBU is an sole operating unit or planning focus that does not group a distinct set ofproducts or services, which are sold to a uniform set of customers, facing a well-definedset of competitors. The external (market) dimension of a business is the relevantperspective for the proper identification of an SBU.

SBUs are also known as strategy centers, Independent Business Unit or even Strategic

Planning Centers.

Strategic Business Unit (SBU) is necessary when corporation starts to provide different

products and hence, need to follow different strategies.

SBUs are also known as strategy centers, Independent Business Unit or even Strategic

Planning Centers.

Strategic Business Unit (SBUs) is necessary when corporation starts to provide differentproducts and hence, need to follow different strategies. To ease its operation, corporate set

different groups of product/product line regarding the strategy to follow (in terms of

competition, prices, substitutability, style/ quality, and impact of product withdrawal). These

strategic groups are called Strategic Business Units (SBUs).

Each Business Unit must meet the following criteria:

1. Have a unique business mission, independent from other SBUs.

2. Have clearly definable set of competitors.

3. Is able to carry out integrative planning relatively independently of other SBUs.

4. Should have a Manager authorized and responsible for its operation.

There are three factors that are generally seen as determining the success of an SBU:[

1. the degree of autonomy given to each SBU manager,
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2. the degree to which an SBU shares functional programs and facilities with other

SBUs, and

3. The manner in which the corporation is because of new changes in market.

These strategic business units are also referred to as independent business units

or strategic planning units. The main philosophical concept behind the formation of strategic business

units is to serve a clear and defined market segment along with a clear and defined strategy. These

business units have to contain all the needs and corporate capabilities of the respective organization.

The entire portfolio of the concerned business has to be managed by allocation of managerial and

capital resources for serving the overall interest of the entire organization. This helps in developing a

balance in the earnings, sales and the assets at a level which is controlled and acceptable for taking

the right amount of risks.

The strategic business unit (SBU) is created with the application of set criteria which consist of the

competitors, price models, customer groups and the overall experience of the company. It is also

sometimes seen that a number of different verticals present in the same organization having similarcompetitors and target customers are amalgamated to form a single SBU. This helps in strategically

planning the overall business of the organization. This is also true for the company which has different

product ranges and some of them have similar capabilities in terms of research and development,

marketing and manufacturing. Such products can also be amalgamated to form a single unit.

4. BEHAVIOR ASPECTSOF ORGANIZATIONS

Organizations are collections of interacting and inter related human and non-humanresources working toward a common goal or set of goals within the framework ofstructured relationships. Organizational behavior is concerned with all aspects ofhow organizations influence the behavior of individuals and how individuals in turninfluence organizations.

Organizational behavior is an inter-disciplinary field that draws freely from anumber of the behavioral sciences, including anthropology, psychology, sociology,

and many others. The unique mission of organizational behavior is to apply theconcepts of behavioral sciences to the pressing problems of management, and,more generally, to administrative theory and practice.
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six aspects of organizational behavior

That is

1. team building,

2. communication,

3. culture,

4. leadership,

5. Objectives and

6. Setting goals.

What are different aspects to Organizational Behavior?

Organizational behavior attempts to target the root cause of interactions between two professionals atworkplace. As an example, for a company which does not have any organizational behavior practiceswill have their employees calling each other with abusive names. And though, it may acceptable withsome, it may not be a compulsion that everyone suit to that kind of addressing. OrganizationalBehavior accomplishes laying rules and guidelines for human behavior at work and asking theemployees to focus and adhere to the micro-level practices. Interaction between two employees issaid to be one of the backbones of success for organizations. Organizational Behavior targets thisfactor which goes a long way in targeting in managing people further leading to the effectivemanagement of the organization.

5.GOAL CONGRUENCEAND FACTORS INFLUENCINGTHE CONGRUENCE.


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Goal congruence is present when individuals, departments

and divisions focus their efforts on meeting

organizational goals. To ensure as far as possible that

managers and their subordinates work toward the

achievement of organizational goals requires attentionbeing paid to their levels of motivation.

Goal Congruence

Organizational goals are goals of top management and board of directors.

Participants act in their own self interest.

Management control system should be designed so that incentives/goals of participants are

consistent with the goals of the organization.


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Goal congruence is achieved when individuals in the organization

strive or are induced to strive towards the company goals. This

assumes, of course, individuals are aware of company goals and

the derivative performance criteria. The essence of companys

goals is conveyed by planning process, which expresses thesegoals in terms of budgets, standards and other formal measures of

performance. Management must tailor the planning activities to

encourage goal congruence at various levels of management. To

achieve goal congruence the following ideas are important

The firm should be viewed as pluralist entity where coalitions of

individual seek to express their own aspirations within the

structure of the firm.

Personnel cannot be viewed as people sharing the same goal, but alsoas people striving for such rewards such as power, security,

survival, and autonomy.

SIGNIFICANCEOF GOAL CONGRUENCEEnsures frictionless working.

Ensures achievement of organizations goal/strategic objective

Ensures coordination & motivation of all concerned

Ensures consistency in the working of all concerned.

Gives fair chance to its employees to achieve their personal goals.

Enhances the loyalty towards the company.

FACTORSTHOSEINFLUENCETHE GOAL CONGRUENCE

INFORMAL FACTORS

I. External factors set of attitudes of the society, work ethics

of the society

II. Internalfactors (Factors within the organization)


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Culture- Common beliefs, shared values, norms of behavior &

assumptions implicitly

accepted and explicitly built into.

Mgt. Style Informal/Formal

The Communication Channels

Perception and Communication e.g. Budget (meaning): A strictprofit control plan, Budget:A tentative guiding profit plan

FORMAL FACTORS

Management Control System A Strategy itselfRules Instructions, manuals and circulars, Physical controls, systemsafeguards, task control system.


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MODULE.2 THE STRUCTUREOF

MANAGEMENT CONTROL SYSTEMS.

1. THE STRUCTUREOF MANAGEMENT CONTROL SYSTEMS

1. RESPONSIBILITY CENTERS.


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Responsibility Centers

Output measured in monetary

terms


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Input measured in monetary terms

Output measured in monetaryterms

Output measured in monetary terms

Commonly perform work related to several products.

Inputs to a responsibility center are called cost elements or

line items (on a department cost report).

TYPESOF RESPONSIBILITY CENTERS

Important business goal: earn a satisfactory return on

investment:

ROI = (Revenues - Expenses) / Investment

Leads to 4 types of responsibility centers:

Revenue centers.

Expense centers.

Profit centers.

Investment centers.


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u Example: a unit of a chain store in a mall.

u

EXPENSE CENTERS/COSTCENTERS

Responsible for expenses (i.e., the costs) incurred but does not

measure its outputs in terms of revenues.

E.g., production departments, staff units such as accounting.

OR

u Responsibility centers whose employees control costs,

but

u Do not control their revenues or investment level.

u Examples: Production department in a manufacturing

unit, a dry cleaning business

u Two types of costs:

Engineered: those costs that can be reasonably

associated with a cost center direct labor, direct

materials, telephone/electricity consumed, office

supplies.

Discretionary: where a direct relationship between

a cost unit and expenses cannot be reasonably

made; Management allocates them on a

discretionary basis (e.g. depreciation expenses formachines utilized).

ENGINEEREDCOSTS


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u Should be measurable in monetary terms, outputs in

physical quantities.

u Works well in units such as production, distribution,

accounting receivables, payables where repetitive

tasks are performed.

u Developing standard costs for such activities is more

reliable than in other cases.

u Multiply standard cost per unit x no. of units produced

or processed = this is the ideal cost.

u Compare it to actual costs and the difference is

indicative of efficiency or lack thereof.

ENGINEEREDCOSTS IMPORTANT TOREMEMBER

u The fundamental purpose of all responsibility centers is

accountability; evaluating performance. And a

engineered cost center,

u Does not merely compare costs but also

u Holds the managers accountable for obtaining/producing

right quality of product

u Volume of production, speed of processing.

DISCRETIONARYCOSTS

u Mostly administrative and support service costs

u More difficult to measure in physical quantities or

precisely on monetary terms (e.g. customer relations or

even R & D).


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A revenue centre is a responsibility centre whose budgetary

performance is measured primarily by its ability to generate a

specified level of revenue.

PROFIT CENTRE

In a profit centre, the budget measures the difference between

revenues and costs.

INVESTMENT CENTRE

An investment centre is a responsibility centre whose budgetary

performance is based on return on investment. The uses of

responsibility canters depend to a great extent on the type of

organization structure involved. Engineered cost canters,

discretionary expense centre, and revenue canters are more often

used withfunctional organization designsand with the functionunits in amatrix design.

In contrast, with adivisional organization designs, it is possibleuse profit canters because the large divisions in such a structure

usually have control over both the expenses and the revenues

associated with profits.

ORPROFIT CENTERS

u Managers of profit centers control both the revenues and costs of

the product or service they deliver.

u It is like an independent business except it is part of a larger

organization (e.g. departmental stores of larger chains Wal Mart,

restaurants, corporate hotels such as Hilton, Holiday Inn).

uThe store manager would have responsibility for pricing, product

selection, and promotion.

u Cost for these units vary depending on ability to control labor,

waste, and hours.

u Revenues also will vary depending on the units service level,

location, etc.


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u In other words, local discretion would affect revenues and costs.

u Investments and some costs (e.g. centralized purchasing).

u Therefore, profits represent a broader index of both corporate and

local decisions.

u If performance is poor, it may reflect poor conditions that no one in

the organization could control as well as poor local conditions.

u For this reason, organizations should not evaluate performance only

based on costs and profits, but

u Perform detailed evaluations that include quality, material use, labor

use, and service measures that the local unit can control.

Measures of Performance

Return on investment = Profit/Investment

Return on assets = (net income) / (total assets).

Residual income = Pre-interest profit (Capital charge *

investment)

EVA is a form of residual income

What is EVA?

Economic Value Added

EE VE AYE, not a womens name!

One of a number of shareholder value metrics.

CFROI, SVA, EP,

Shareholder value is the goal.

Not inconsistent with stakeholder theory!


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EVA

What is EVA

EVA = Economic profit

Not the same as accounting profit

Difference between revenues and costs

Costs include not only expenses but also cost of capital

Economic profit adjusts for distortions caused by

accounting methods

Doesnt have to follow GAAP

R&D, advertising, restructuring costs, ...

Cost of capital accounted for explicitly

Rate of return required by suppliers of a firms debt

and equity capital

Represents minimum acceptable return.

Components of EVA

NOPLAT

Net operating profit after tax

Operating capital

Net operating working capital, net PP&E, goodwill, and

other operating assets

Cost of capital

Weighted average cost of capital %

Capital charge

Cost of capital % * operating capital


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Economic value added

NOPLAT less the capital charge

CALCULATING EVA

Net operating profit after tax (NOPAT)

- Capital charge (= WACC * Capital)

= Economic value added (EVA)

ENGINEEREDAN D DISCRETIONARY EXPENSE CENTERS

A cost centre is a responsibility centre in which manager is held

responsible for controlling cost inputs.

There are two general types of cost canters:

1. Engineered expense canters and

2. Discretionary expense canters.

Engineered costs are usually expressed as standard costs.

A discretionary expense centre is a responsibility centre whose

budgetary performance is based on achieving its goals by operating

within predetermined expense constraints set through managerial

judgment or discretion.

For expense centers the budget is a spending plan

For discretionary expense centers, fixed spending targets


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For engineered expense centers, flexible spending targets

(i.e., the budget has two components, a discretionary

component and a component that varies directly with volume)

Two types of costs:

ENGINEERED : those costs that can be reasonably associated with

a cost center direct labor, direct materials, and

telephone/electricity consumed, office supplies.

D ISCRETIONARY : where a direct relationship between a cost unit

and expenses cannot be reasonably made; Management

allocates them on a discretionary basis (e.g. depreciation

expenses for machines utilized).

ENGINEEREDCOSTS

Should be measurable in monetary terms, outputs in physical

quantities.

Works well in units such as production, distribution,

accounting receivables, payables where repetitive tasks are

performed.

Developing standard costs for such activities is more reliable

than in other cases.

Multiply standard cost per unit x no. of units produced or

processed = this is the ideal cost.

Compare it to actual costs and the difference is indicative of

efficiency or lack thereof.

ENGINEEREDCOSTS Important to remember


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The fundamental purpose of all responsibility centers is

accountability; evaluating performance. And a engineered

cost center,

Does not merely compare costs but also

Holds the managers accountable for obtaining/producing

right quality of product

Volume of production, speed of processing.

D ISCRETIONARYCOSTS

Mostly administrative and support service costs

More difficult to measure in physical quantities or precisely

on monetary terms (e.g. customer relations or even R & D).

Discretionary means, management allocates them based on

established polices (not arbitrarily).

More caution is required while using discretion cost numbers.

Difference between budgeted expenses and actual expenses

does not indicate efficiency.

Suppose if the actual cost is less than budget, does it mean

good or bad?

Suppose if the actual cost is higher than budget, does it

mean good or bad?

6. VARIOUS MEASURESOF PROFITS.

Gross Profit & Gross Margin

The gross profit(also known as gross operating profit) is the sales or

revenue less cost of goods sold (COGS). This number divided by sales is

the gross margin (in percentage terms). It is represented mathematically as

follows:


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Gross Profit = Sales - COGS

Gross Margin = Gross Profit*100/Sales

The calculations above, as with most of the calculations in this website, aresimple. But it is important that you understand the information you can get

out of the numbers. What gross margin tells you is how profitable the

business is before subtracting SGA, R&D, and ITD expenses. You are

likely to see high gross margins for technology and Internet companies. For

example, Microsoft Corporation's gross margin was around 90% at the time

of this writing. This means that for every $1 Microsoft gets from customers,

it keeps 90 cents and spends 10 cents to deliver its products or services to

the customer (although the 90 cents it keeps for each dollar it takes in stillhas to be reduced by other indirect costs of doing business such as SG&A,

R&D, and ITD). PepsiCo and Motorola Inc. had gross margins of

approximately 64% and 38%, respectively, at the time of this writing.

We recommend that if Teenvestors are looking at large-cap companies,

they stick to companies that have gross margins of 35% or more, unless

the company is very solid in all other ways discussed in this chapter. For

medium-capitalization firms, stick to gross margins of over 50% unless the

companies have other strong features.

Measures of Performance

Return on investment = Profit/Investment

Return on assets = (net income) / (total assets).

Residual income = Pre-interest profit (Capital charge *

investment)

EVA is a form of residual income

What is EVA?


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Economic Value Added

EE VE AYE, not a womens name!

One of a number of shareholder value metrics.

CFROI, SVA, EP,

Shareholder value is the goal.

Not inconsistent with stakeholder theory!

EVA

What is EVA

EVA = Economic profit

Not the same as accounting profit

Difference between revenues and costs

Costs include not only expenses but also cost of capital

Economic profit adjusts for distortions caused by

accounting methods

Doesnt have to follow GAAP



Rate of return required by suppliers of a firms debt

and equity capital


Components of EVA

NOPLAT


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Operating capital

Net operating working capital, net PP&E, goodwill, and

other operating assets

Cost of capital


Capital charge




CALCULATING EVA




-- ROI

One of the primary tools for evaluating the performance of investment

centers is return on investment. ROI is calculated as follows:

ROI = Income

.

Invested Capital

Since ROI focuses on income and investment, it has a natural advantage

over income (alone) as a measure of performance. It removes the bias of

larger investment over smaller investment.

Some companies break ROI down into two components: profit margin and

investment turnover as follows:


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Balanced Scorecard is a set of performance

measures constructed for four dimensions of

performance:

1. Financial

2. Customer

3. Internal processes

4. Innovation

Balanced Scorecard uses performance measures that are tied to the

companys strategy for success. Balance is a key factor using this

technique.

Note how balance is achieved:

1. Performance is assessed across a balanced set of dimensions

(financial, customer, internal processes, and innovation).

2. Quantitative measures are balanced with qualitative measures.

3. There is a balance of backward-looking measures


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Module.3 Transfer of Goods & Services between Divisions andits pricing.

1. INVESTMENT CENTERS

An investment center is a subunit that has responsibility for generating

revenues, controlling costs, and investing in assets. Since managers of

investment centers have control over inventory, receivables, equipment

purchases and so on, it makes sense to hold them responsible for

generating some kind of return on them.


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An investment centre is responsible for the production, marketing

and investment in the assets employed in the segment.

An investment centre manager decides on aspects such as the credit

policies, inventory policies, and within broad framework.

Investment centre manager responsible for profit in relation to

amounts invested in the division.

Financial performance of the manager of the division is measured by

comparing the actual with projected rate of return on investments of

the canters

Examples: Nordstrom, Inc. subunit Faconnable.

Managerial goal: to maximize return on investment.

Evaluation: rate of return (%) relative to a benchmark/budget rate of

return or relative to other investment center rates of return.

Evaluating Investment Centers with ROI

One of the primary tools for evaluating the performance of investment

centers is return on investment. ROI is calculated as follows:

ROI = Income

..

Invested Capital

Since ROI focuses on income and investment, it has a natural advantage

over income (alone) as a measure of performance. It removes the bias of

larger investment over smaller investment.

Some companies break ROI down into two components: profit margin and

investment turnover as follows:

Income Sales

ROI = x ....

Sales Inv. Capital


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3. MEASURES AND CONTROLSOF ASSETS.

AUDITING

Auditcategory

Brief description

Financial

statementaudit

Gives an opinion on the accuracy of thfinancial statements

Ensures compliance with the relevantaccounting standards and reportingframework

Internal audit An independent appraisal function

established within an organization toexamine and evaluate its activities as aservice to the organization

Need not be limited to books ofaccounts and related records

Fraud auditingand forensicaudit

Deters, detects, investigates, andreports fraud

Forensic: related to the legal system,especially issues of evidence

Operationalaudit

Audits operational aspects of theenterprise

Quality audit, R&D audit, etc


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Informationsystems audit

Audit of computer systems Checks whether the computer system

safeguards assets, maintains dataintegrity, and contributes toorganizational effectiveness andefficiency

Managementaudit

Audit of the management, as a toolfor evaluation and control oforganizational performance

Examines the conditions andprovides a diagnosis of deficiencies

with recommendations for correctingthem

Social audit Audit of the enterprise's reported

performance in meeting its declaredsocial , community, or environmentalobjectives

Environmentalaudit

Environmental compliance audit: achecking mechanism

Environmental management audit: anevaluation mechanism

THEAUDITINGPROCESS

Staffing the audit team

Creating an audit project plan

Laying the ground work

Conducting the audit

Analyzing audit results

Sharing audit results


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Writing audit reports

Dealing with resistance to audit recommendations

Building an ongoing audit program

BENEFITSOF AUDITING

Identify opportunities for improvement

Identify outdated strategies

Increase managements ability to address concerns

Enhance teamwork

Reality check

THE BALANCE SCORECARD

In the rapidly changing world of business, considering only the financial

measures of performance gives an incomplete picture of the overall

organizational performance. It has become increasingly necessary for

organizations to simultaneously look at non financial measures for this

purpose.

Concepts like JIT, TQM, and SIX SIGMA have brought out the growing

importance of non financial measures for evaluating the organizations overall

performance.

A combination of financial and non financial measures gives a better picture

of organizational performance. One concept which has received universal

acclaim is the Balance Scorecard (BSC), proposed by Robert Kaplan and

David Norton in 1992.

The BSC framework considers the customer perspective, internal business

perspective, and the innovation/learning and growth perspective, in addition to the

financial perspective

perspective Underlying questionCustomerperspective

To achieve our vision,how should we appear toour customer


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Rate of return required by suppliers of a firms debt and equity

capital


COMPONENTSOF EVA

NOPLAT


Operating capital

Net operating working capital, net PP&E, goodwill, and other operating assets

Cost of capital


Capital charge




Calculating EVA




BUDGETS

Budgets are business plans that are stated in quantitative terms and are

usually based on estimations.

These plans aid an organization in the successful execution of strategies.


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Due to the uncertainties in the business environment and / or due to wrong

estimation, there may be significant deviations between the a c t u a l s and

the plans.

Budgeting as a control tool, provides an action plan for the organization to

ensure least deviations

Budgets are used to give an overview of the organization and its operations.

They are useful in resource allocation whereby resources are allocated in

such a way that the processes which are expected to give the highest returns

are given priority.

Budgets are also used as forecast tools and make the organization better

prepared to adapt to changes in the environment

Budget preparation requires the participation of managers from different

functions / departments. This helps in integrating the tactical and operational

strategies of the departments with the corporate strategy of the organization.

Budgets act as a means to verify the progress of the various activities

undertaken to achieve the planned objectives. The verification is done by

comparing the a c t u a l s against standards

They help in the delegation of authority and allocation of responsibility and

accountability to more people in an organization. They thus promote division

of labor, which , in turn, promotes the process of specialization. Functional

specialization leads to the overall efficiency of the organization

STEPSIN BUDGET FORMULATION

Creating a budget department or appointing a budget controller

Developing guidelines for budget preparation

Developing budget proposals at department/business unit level

Developing the budget for the entire organization

Determining the budget period and key budgets factors

Benchmarking the budget

Budget review and approval

Monitoring progress and revising the budgets


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Types ofBudgets

Characteristics Examples

Appropriationbudget

A ceiling is set for certaindiscretionary expenditures

Based on the managementdecision

Training, advertising,sales promotion andR&D

Flexible budget A static amount is establishedfor discretionary andcommitted fixed costs and avariable rate is determined

per unit of activity for variablecost

The static part:Salaries,depreciation, propertytaxes, and planned

maintenance. Theflexible part : directmaterial, direct labor,and variableoverhead .salescommission

Capital budget Decisions regarding potentialinvestments are made usingdiscounted cash flow

techniques

New plant andequipment

Master budget A comprehensive plan isdeveloped for all revenue andexpenditure

All revenue andexpenditures for anyorganization

4. TRANSFER PRICES


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Transfer Prices

Price at which goods or services are sold between

responsibility centers within a company.

Revenue for selling center and cost for the receiving center.

2 general types of transfer prices:

Market based price.

Cost based price.

MARKET-BASED TRANSFER PRICES

Based on price for same product between independent parties, i.e., a market

price or, equivalently, an arms length price.

Adjusted for quantifiable differences such as credit costs.

Where available is widely used.

Frequently not available.

COST-BASED TRANSFER PRICES

When no reliable market price is available.

Cost plus a mark-up.

If based on actual cost, little incentive to reduce costs.

TRANSFER PRICING ISSUES

Negotiated by responsibility centers or set/arbitrated by top management.

Should manager have freedom to use alternative source?

Sub-optimization: maximize profits for a responsibility center may not

maximize profit for the consolidated company.


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OR

TRANSFER PRICING

A transfer price is the price one subunit charges for a product or service supplied

to another

Subunit of the same organization.

Intermediate products are the products transferred between subunits of an

organization.

TRANSFERPRICINGSHOULD:

(1) Help achieve a companys strategies and goals.

(2) fit the organizations structure

(3) promote goal congruence

(4) promote a sustained high level of management effort

TRANSFER-PRICING METHODS

1.Market-based transfer prices

2.Cost-based transfer prices3.Negotiated transfer prices

1. MARKET-BASEDTRANSFERPRICES

By using market-based transfer prices in a perfectly competitive market, a companycan achieve the following:

Goal congruence

Management effort

Subunit performance evaluation


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Should BUY continue to get the units from Supply or start to purchase the

units from the outside supplier? (From the standpoint of SF as a whole).

(What is the min. & max. transfer price if BUY and SUPPLY negotiate?)

Now, assume that Supply could use the facilities currently used to produce

the 3,000 units for BUY to make 5,000 units of a different product. The new

product will sell for $16.00 and has the following costs:

Direct Materials $3.00

Direct Labor 4.30

Variable Overhead 5.40

B. What is the min. & max. transfer price if BUY and SUPPLY negotiate?

C. What should be done from the companys point of view? Why?

Comparison of Methods

Achieves Goal Congruence

Market Price:Yes, if markets competitiveCost-Based:Often, but not alwaysNegotiated:Yes

Useful for Evaluating Subunit Performance

Market Price:Yes, if markets competitiveCost-Based:Difficult, unless transfer price exceeds full costNegotiated:Yes

Motivates Management Effort

Market Price:YesCost-Based:Yes, if based on budgeted costs; less incentive if based on actual costNegotiated:Yes


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Preserves Subunit Autonomy

Market Price:Yes, if markets competitiveCost-Based:No, it is rule basedNegotiated:Yes

Other Factors

Market Price:No market may existCost-Based:Useful for determining full-cost; easy to implementNegotiated:Bargaining takes time and may need to be reviewed

MULTINATIONAL TRANSFER PRICING

IRC Section 482 requires that transfer prices for both tangible and intangible

property between a company and its foreign division be set to equal the price that

would be charged by an unrelated third party in a comparable transaction (arms

length).

This still leaves a little room to wiggle.

5. VARIOUS CONTROLISSUES.

These are:

(a) The increasingly unstable external environment which results in a

Need for a tighter linkage of the management control system to

The formal planning system.

(b) The lack of stability in the external environment which causes a

Need for a more robust set of control variables than exists with the


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should ideally be done on a forward looking basis so that deviations may

be detected in advance of their occurrence and avoided by appropriate

actions.

Comparing Performance with Standards Appraisal of performanceor comparing of actual performance with pre-determined standards is an

important step in control process.

Comparison is easy where standards have been set in quantitative terms

as in production and marketing. In other cases, where results are

intangible and cannot be measured quantitatively direct personal

observations, inspection and reports are few methods which can be used

for evaluation. The evaluation will reveal some deviations from the set

standards. The evaluator should point out defect or deficiencies in

performance and investigate the causes responsible for these.

Taking Corrective Actions Managers should know exactly where in theassignment ofindividualorgroupduties, the corrective action must be

applied. Managers may correct deviations by redrawing their plans or by

modifying their goals. Or they may correct deviations by exercising their

organizing functions through reassignment or clarification of duties. They

may correct, also, by additional stapling or better selection and training of

subordinates.

OR

Steps in the Control Process

The control process is a continuous flow in Taj between measuring, comparing and action.Naturally Taj follows the four steps in the control process: establishing performance standards,measuring actual performance, comparing measured performance against established standards,and taking corrective action.

Step 1: Establish Performance Standards. Taj's Standards are created when objectives are setduring the planning process. Its standard is a guideline established as the basis for measurement.It is a precise, explicit statement of expected results from a product, service, machine, individual,or organizational unit. It is usually expressed numerically and is set for quality, quantity, andtime. Tolerance is permissible deviation from the standard.

Time controls relate to deadlines and time constraints. Material controls relate to inventoryand material-yield controls. Equipment controls are built into the machinery, imposed on the


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operator to protect the equipment or the process. Cost controls help ensure cost standards aremet. Employee performance controls focus on actions and behaviors of individuals and groups ofemployees. Examples include absences, tardiness, accidents, quality and quantity of work.Budgets control cost or expense related standards. They identify quantity of materials used andunits to be produced.

Financial controls facilitate achieving the organization's profit motive. One method offinancial controls is budgets. Budgets allocate resources to important activities and providesupervisors with quantitative standards against which to compare resource consumption. Theybecome control tools by pointing out deviations between the standard and actual consumption.

Operations control methods assess how efficiently and effectively an organization'stransformation processes create goods and services. Methods of transformation controls includeTotal Quality Management (TQM) statistical process control and the inventory managementcontrol. Statistical process control is the use of statistical methods and procedures to determinewhether production operations are being performed correctly, to detect any deviations, and to

find and eliminate their causes. A control displays the results of measurements over time andprovides a visual means of determining whether a specific process is staying within predefinedlimits. As long as the process variables fall within the acceptable range, the system is in control.Measurements outside the limits are unacceptable or out of control. Improvements in qualityeliminate common causes of variation by adjusting the system or redesigning the system.

Inventory is a large cost for Taj like other manufacturing firms. The appropriate amount to orderand how often to order impact the firm's bottom line. The economic order quantity model (EOQ)is a mathematical model for deriving the optimal purchase quantity. The EOQ model seeks tominimize total carrying and ordering costs by balancing purchase costs, ordering costs, carryingcosts and stock out costs. In order to compute the economic order quantity, the supervisor needs

the following information: forecasted demand during a period cost of placing the order, thatvalue of the purchase price, and the carrying cost for maintaining the total inventory.

The just-in-time (JIT) system is the delivery of finished goods just in time to be sold,subassemblies just in time to be assembled into finished goods, parts just in time to go intosubassemblies, and purchased materials just in time to be transformed into parts.Communication, coordination, and cooperation are required from supervisors and employees todeliver the smallest possible quantities at the latest possible date at all stages of thetransformation process in order to minimize inventory costs.

Step 2: Measure Actual Performance. Supervisors collect data to measure actual performanceto determine variation from standard. Written data might include time cards, production tallies,inspection reports, and sales tickets. Personal observation, statistical reports, oral reports andwritten reports can be used to measure performance. Management by walking around, orobservation of employees working, provides unfiltered information, extensive coverage, and theability to read between the lines. While providing insight, this method might be misinterpretedby employees as mistrust. Oral reports allow for fast and extensive feedback.


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In Taj computers give supervisors direct access to real time, unaltered data, and information. Online systems enable supervisors to identify problems as they occur. Database programs allowsupervisors to query, spend less time gathering facts, and be less dependent on other people.Supervisors have access to information at their fingertips. Employees can supply progress reportsthrough the use of networks and electronic mail. Statistical reports are easy to visualize and

effective at demonstrating relationships. Written reports provide comprehensive feedback thatcan be easily filed and referenced. Computers are important tools for measuring performance. Infact, many operating processes depend on automatic or computer-driven control systems.Impersonal measurements can count, time, and record employee performance.

Step 3: Compare Measured Performance against Established Standards. Comparing resultswith standards determines variation. Some variation can be expected in all activities and therange of variation - the acceptable variance - has to be established. Management by exceptionlets operations continue as long as they fall within the prescribed control limits. Deviations ordifferences that exceed this range would alert the supervisor to a problem.

Step 4: Take Corrective Action. The supervisor must find the cause of deviation from standard.Then, he or she takes action to remove or minimize the cause. If the source of variation in workperformance is from a deficit in activity, then a supervisor can take immediate corrective actionand get performance back on track. Also, the supervisors can opt to take basic corrective action,which would determine how and why performance has deviated and correct the source of thedeviation. Immediate corrective action is more efficient; however basic corrective action is themore effective.

PLANNING

OBJECTIVES

The objective of the planning and control process is planning, monitoring and

adjusting the activities of the function involved in providing information provision so

that the necessary use of information provision in the organization is realized on

time with an optimal use of capacity, by means of:

Planning

Checking

Evaluating

Reason


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Reasons for starting Planning & control processes include:

Setting up an annual information provision plan

Need (request) to adapt existing information provision plan

Gain insight into operational Functional Management capacity requirements

Target GroupThis process description is intended for:

Business information managers

Employees from the user organization involved with associated informationprovisions

IT staff

ActivitiesThis process description concerns Planning & Control, related activities, and

documents and reports to be drafted.

Planning & Control comprises the following activities:

Planning

Defining necessary capacity

Planning for necessary capacity

Defining the required time lines

Recognizing risks and the countermeasures to be taken

Allocation of capacity for changes

Coordination with other management processes

Checking Checking availability

Monitoring hours worked

Monitoring progress/time lines


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Evaluation

Evaluating the results

Recognizing problems

Establishing deviations and taking measures

ResultsResults of Planning & Control processes include:

Planning

Annual information provision plan and Annual FM Plan

Capacity Plan Detailed Plans

Risk Analyses

Deployment Reports

Verification

Progress report, actual time spent

Amended plans and schedules

Evaluation

Developments in Functional Management

Key IP issues

Discrepancies in actual vs. budgeted

Statistics


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Budgeting

Budgeting Strategic planning looks forward several years.

Budgeting focuses on next year.

Budget = a plan expressed in quantitative, usually monetary, terms that

covers a specified period of time usually one year.

Budget is developed as a result of negotiations between managers of

responsibility centers and their managers

Zero-based Review(Zero-based Budgeting)

A systematic way of analyzing ongoing programs.

Cost estimates are built up from scratch or zero.

Contrasts with taking the current level of costs as the starting point as iscustomarily done in the budgeting process (i.e., an incremental approach).

May overcome complacency.

Limitation of Zero-base Review

Time consuming and upsetting to normal functioning.

Cannot be effectively conducted every year.

Budget Uses

Aid in coordinating short run plans. Essentially a refinement of strategic

plans.


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A device for communicating plans.

A way of motivating managers.

A benchmark for controlling ongoing activities.

Actual compared to budget provides a red flag.

Directs attention where needed.

A basis for evaluating performance of responsibility centers and their

managers.

A means of educating managers about detailed workings of their

responsibility centers, and interrelationships with other centers.

The Master Budget Complete budget package.

3 principal parts, with budgeted balance sheet

Operating budget = Revenues, expenses, and changes in inventory

and other working capital items for the coming year.

Cash budget = anticipated sources and uses of cash in the coming

year.

Capital expenditure budget = planned changes in property, plant and

equipment.

Budgeted balance sheet is derived from other budgets.

Operating Budget Identical in format to the actual financial statements.

Budget committee consisting of member of top management preparesguidelines.

Generally, line positions make the significant decisions.

Budgets are usually prepared once a year, covering the next fiscal year, and

are broken down by month.


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2. Human resource management : Examination of the performance ofcurrentemployees to determine iftraining can help reduce performance

problems such as low output, uneven quality, excessivewaste. See also

activity analysis, job analysis, and task analysis.

Three basic steps in the performance analysis process:

1. Data collection,

2. Data transformation,

3. Data visualization.

Data collection is the process by which data about program performance are obtained from an

executing program. Data are normally collected in a file, either during or after execution,although in some situations it may be presented to the user in real time. Three basic datacollection techniques can be distinguished:

Profiles record the amount of time spent in different parts of a program. This information,though minimal, is often invaluable for highlighting performance problems. Profilestypically are gathered automatically.

Counters record either frequencies of events or cumulative times. The insertion ofcounters may require some programmer intervention.

Event traces record each occurrence of various specified events, thus typically producinga large amount of data. Traces can be produced either automatically or with programmer

intervention.

Following issues should be considered:

1. Accuracy. In general, performance data obtained using sampling techniques are lessaccurate than data obtained by using counters or timers. In the case of timers, theaccuracy of the clock must be taken into account.

2. Simplicity. The best tools in many circumstances are those that collect dataautomatically, with little or no programmer intervention, and that provide convenientanalysis capabilities.

3. Flexibility. A flexible tool can be extended easily to collect additional performancedata or to provide different views of the same data. Flexibility and simplicity are oftenopposing requirements.

4. Intrusiveness. Unless a computer provides hardware support, performance datacollection inevitably introduces some overhead. We need to be aware of this overheadand account for it when analyzing data.

5. Abstraction. A good performance tool allows data to be examined at a level ofabstraction appropriate for the programming model of the parallel program. For example,
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when analyzing an execution trace from a message-passing program, we probably wish tosee individual messages, particularly if they can be related to send and receive statementsin the source program. However, this presentation is probably notappropriate whenstudying a data-parallel program, even if compilation generates a message-passingprogram. Instead, we would like to see communication costs related to data-parallel

program statements.

PERFORMANCE ANALYSIS TOOLS1. HPM Toolkit2. PE Bench marker Toolset3. VampirGuideView (VGV)4. Paraver and Dimemas

5. Performance Toolbox6. Dynamic Probe Class Library (DPCL)7. Other Multi-Platform Parallel Performance Analysis Tools

REWARDING"Rewarding" means providing incentives to and recognition of employees, individually and asmembers of groups, for their performance and acknowledging their contributions to the agency's

mission. There are many ways to acknowledge good performance, from a sincere "Thank You!"for a specific job well done to granting the highest level, agency-specific honors and establishingformal cash incentive and recognition award programs.

REWARDING PERFORMANCE

Provide ample rewards to people who achieve objectives and

Deny rewards to those not achieving objectives!

1. The reward is clearly and closely linked to accomplishment or effort people know what theywill get if they achieve defined and agreed targets or standards and can track their performance

against them.2. Reward are meaningful3. Fair and consistent means are available for measuring or assessing performance, competence,contribution or skill

4. People must be able to influence their performance by changing their behavior and theyshould be able to develop their competences and skills.

5. The reward should follow as closely as possible the accomplishment that generated it.
https://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#HPMToolkithttps://computing.llnl.gov/tutorials/performance_tools/#HPMToolkithttps://computing.llnl.gov/tutorials/performance_tools/#PEBenchmarkerhttps://computing.llnl.gov/tutorials/performance_tools/#PEBenchmarkerhttps://computing.llnl.gov/tutorials/performance_tools/#VGVhttps://computing.llnl.gov/tutorials/performance_tools/#VGVhttps://computing.llnl.gov/tutorials/performance_tools/#Paraverhttps://computing.llnl.gov/tutorials/performance_tools/#Paraverhttps://computing.llnl.gov/tutorials/performance_tools/#PerfToolboxhttps://computing.llnl.gov/tutorials/performance_tools/#PerfToolboxhttps://computing.llnl.gov/tutorials/performance_tools/#DPCLhttps://computing.llnl.gov/tutorials/performance_tools/#DPCLhttps://computing.llnl.gov/tutorials/performance_tools/#Multi-PlatformToolshttps://computing.llnl.gov/tutorials/performance_tools/#Multi-PlatformToolshttps://computing.llnl.gov/tutorials/performance_tools/#PerformanceAnalysisToolshttps://computing.llnl.gov/tutorials/performance_tools/#HPMToolkithttps://computing.llnl.gov/tutorials/performance_tools/#PEBenchmarkerhttps://computing.llnl.gov/tutorials/performance_tools/#VGVhttps://computing.llnl.gov/tutorials/performance_tools/#Paraverhttps://computing.llnl.gov/tutorials/performance_tools/#PerfToolboxhttps://computing.llnl.gov/tutorials/performance_tools/#DPCLhttps://computing.llnl.gov/tutorials/performance_tools/#Multi-PlatformTools


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Arguments commonly used in favor of contingent pay are

that: It acts as a motivator

It encourages and supports desired behaviors It delivers the message that performance, competence, contribution and

skill are important

It provides a means for defining and agreeing performance and

competence expectations

It can reinforce the organizations value

It can help to achieve culture change by, for example, assisting with the

development of a performance culture

WHY PERFORMANCE-REWARD LINK IS IMPORTANT

Reward structure is managements most powerful impl

mcs external

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