Management Control SystemManagement Control System ManagementManagement: : Manage Men TactfullyManage Men Tactfully Group of persons, who directs and Group of persons, who directs and

manages all the activities, to achieve manages all the activities, to achieve common goal.common goal.

Coordinated activities to direct and control Coordinated activities to direct and control an organization.an organization.

ControlControl: : means taking the actions in such means taking the actions in such a way that organization achieves intended a way that organization achieves intended results.results.

SystemSystem: : prescribed or pre-decided way of prescribed or pre-decided way of carrying out the activities.carrying out the activities.

DEFINITIONDEFINITION OFOF MANAGEMENTMANAGEMENT

MANAGEMENT IS AN EXERCISE MANAGEMENT IS AN EXERCISE OF HARMONIZING MEN, OF HARMONIZING MEN, MATERIAL AND METHODS MATERIAL AND METHODS TOWARDS FULFILLMENT OF TOWARDS FULFILLMENT OF GOALS LEADING TO HUMAN GOALS LEADING TO HUMAN DEVELOPMENT,SOCIAL DEVELOPMENT,SOCIAL BENEFIT,AND GLOBAL WELFAREBENEFIT,AND GLOBAL WELFARE

Characteristics of Control Characteristics of Control SystemSystem

Detector OR SensorDetector OR Sensor: : device that measures device that measures what is actually happening in the process being what is actually happening in the process being controlled.controlled.

AssessorAssessor: : device that compares what is device that compares what is happening with some standard or goal or happening with some standard or goal or expected result or what should happen.expected result or what should happen.

Effector /feedbackEffector /feedback: : that alters behaviour if that alters behaviour if assessor indicates the need to do so.assessor indicates the need to do so.

Communication networkCommunication network: : devices that devices that transmit information between the detector and transmit information between the detector and assessor and between the assessor and assessor and between the assessor and effector. effector.

Management ControlManagement Control Can be defined as the process by Can be defined as the process by

which managers influence other which managers influence other members of the organization to members of the organization to implement the organization’s implement the organization’s strategies.strategies.

This involvesThis involves PlanningPlanning what organization should dowhat organization should do.. CoordinatingCoordinating the activities of all parts of the activities of all parts of

the organization.the organization. CommunicatingCommunicating information. information. EvaluatingEvaluating information. information. DecidingDeciding what, if any action should be what, if any action should be

taken.taken. InfluencingInfluencing people to change their people to change their

behaviour/take action in desired manner.behaviour/take action in desired manner.

The Cybernetic paradigm and control process

Cybernetics: Science of communication and Control.

The paradigm as developed by Griesenger for the control process—

• Set goals and performance measures• Measure achievement.• Compare achievement with goals.• Compute variances.• Report variances.• Determine causes of variance.• Take action to eliminate the variance.• Follow up to ensure that goals are met.

Strategy FormulationStrategy Formulation the process of deciding on new the process of deciding on new

strategies.strategies. In this activity In this activity creativecreative and and

innovativeinnovative thinking is strongly thinking is strongly encouraged.encouraged.

Strategic planningStrategic planning the process of deciding on programmes the process of deciding on programmes

that the organization should undertake that the organization should undertake and on the approximate amount of and on the approximate amount of resources that will be allocated to each resources that will be allocated to each programme over next several years.programme over next several years.

In formal strategic planning process, first In formal strategic planning process, first step is to write descriptions of the step is to write descriptions of the organization’s goals and strategies.organization’s goals and strategies.

Benefits of strategic planningBenefits of strategic planning Provides framework for preparation of budget, Provides framework for preparation of budget,

facilitates the formulation of effective operating facilitates the formulation of effective operating budget, optimal resource allocation.budget, optimal resource allocation.

Management development tool: provides excellent Management development tool: provides excellent management education and training tool that management education and training tool that provides managers with a process for thinking provides managers with a process for thinking about strategies and their implementation.about strategies and their implementation.

Mechanism for forcing management to think long Mechanism for forcing management to think long term: Managers tend to get engrossed in day-to-term: Managers tend to get engrossed in day-to-day activities. This process forces managers to day activities. This process forces managers to make time for thinking through important long-make time for thinking through important long-term issues.term issues.

Means of aligning managers with corporate Means of aligning managers with corporate strategies: In this process lot of debates, strategies: In this process lot of debates, discussions, negotiations take place due to which discussions, negotiations take place due to which corporate strategies and their implications get corporate strategies and their implications get clear to line managers.clear to line managers.

Limitations of strategic planningLimitations of strategic planning

Danger of this process becoming Danger of this process becoming form- filling exercise, devoid of form- filling exercise, devoid of strategic thinking.strategic thinking.

Organization may create large Organization may create large strategic planning department.strategic planning department.

Strategic planning is time Strategic planning is time consuming and expensive.consuming and expensive.

For companies which are having formal annual strategic planning process in place It involves following steps:

1.Reviewing and updating the strategic plan from last year.

2.Deciding on assumptions and guidelines.3.First iteration of new strategic plan.4.Analysis.5.Second iteration of new strategic plan.6.Review and approval.

Developing an organization structureDeveloping an organization structure

Types of organizationsTypes of organizations Functional Organization Functional Organization Business Unit OrganizationBusiness Unit Organization Matrix OrganizationMatrix Organization

Responsibility centersResponsibility centers is an organization unit that is headed is an organization unit that is headed

by a manager, who is responsible for by a manager, who is responsible for its activities and to achieve objectives.its activities and to achieve objectives.

Company is collection of various Company is collection of various responsibility centers.responsibility centers.

Responsibility centersResponsibility centers

ActivityInputs Outputs

Resources used Goods or Services Measured by costs.

EfficiencyEfficiency is the ratio of outputs to is the ratio of outputs to inputs. OR output per unit of input.inputs. OR output per unit of input.

EffectivenessEffectiveness is relationship is relationship between output and objectives.between output and objectives.

Types of responsibility centersTypes of responsibility centers Engineering Expense centers. e.g. Engineering Expense centers. e.g.

Manufacturing, warehousing, Manufacturing, warehousing, distribution. distribution.

Discretionary Expense centers e.g. Discretionary Expense centers e.g. administrative and support units (legal, administrative and support units (legal, public relations, human resources), R &D, public relations, human resources), R &D, advertising activitiesadvertising activities

Revenue centers e.g. marketing and Revenue centers e.g. marketing and sales sales

Profit centers e.g. business units Profit centers e.g. business units Investment centers e.g. business unitsInvestment centers e.g. business units

Profit CentersProfit Centers When a responsibility center’s financial When a responsibility center’s financial

performance is measured in terms of performance is measured in terms of profit, it is called Profit center. profit, it is called Profit center.

In business unit type of organization In business unit type of organization every business unit can be treated as every business unit can be treated as profit center.profit center.

This is also called divisionalization.This is also called divisionalization. In such case business unit head is In such case business unit head is

responsible for profit of his unit.responsible for profit of his unit.

Advantages of profit centers:Advantages of profit centers:

Quality of decisions improves.Quality of decisions improves. Speed of operating decisions is better.Speed of operating decisions is better. Corporate office is relieved of day-to-day decision-Corporate office is relieved of day-to-day decision-

making and can concentrate on broader issues.making and can concentrate on broader issues. Managers, subject to fewer corporate restraints, Managers, subject to fewer corporate restraints,

are free to use their imagination and initiative.are free to use their imagination and initiative. Provide excellent training ground for the Provide excellent training ground for the

managers.managers. Profit consciousness is enhanced.Profit consciousness is enhanced. This system provides top management with ready-This system provides top management with ready-

made information on profitability of the company’s made information on profitability of the company’s individual components.individual components.

Profit centers become responsive to improve their Profit centers become responsive to improve their competitive performance.competitive performance.

Difficulties with profit centersDifficulties with profit centers::• Loss of control of corporate to some extentLoss of control of corporate to some extent• If business unit is not well informed quality of If business unit is not well informed quality of

decisions is hampered.decisions is hampered.• Friction between business unit and corporate.Friction between business unit and corporate.• Competition between different units of the Competition between different units of the

organization may increase.organization may increase.• May result into additional cost.May result into additional cost.• There may be emphasis on short-term profitability.There may be emphasis on short-term profitability.

There is no completely satisfactory system for There is no completely satisfactory system for ensuring that optimizing the profits of each ensuring that optimizing the profits of each individual profit center will optimize the profits individual profit center will optimize the profits of the company as a whole.of the company as a whole.

Constraints on Business Unit Constraints on Business Unit Authority:Authority:

Constraints from other business units: Constraints from other business units: such as product decision, marketing such as product decision, marketing decision, and procurement decision.decision, and procurement decision.

Constraints from corporate management: Constraints from corporate management: such as resulting from strategic such as resulting from strategic considerations, those resulting because considerations, those resulting because uniformity is required, from economies of uniformity is required, from economies of centralization.centralization.

Measuring ProfitabilityMeasuring Profitability Types of Profitability Measures:Types of Profitability Measures: Contribution marginContribution margin Direct ProfitDirect Profit Controllable ProfitControllable Profit Income before taxesIncome before taxes Net IncomeNet IncomeManagers’ performance should be measured Managers’ performance should be measured

against those items they can influence, against those items they can influence, even if they do not have total control over even if they do not have total control over those items.those items.

Some frequently used termsSome frequently used terms Sales and other major revenuesSales and other major revenues Variable costVariable cost Contribution margin=sales- variable costContribution margin=sales- variable cost Fixed costFixed cost Segment margin=contribution margin-direct Segment margin=contribution margin-direct

fixed costfixed cost Attributable fixed costsAttributable fixed costs Segment profit contribution=Segment margin-Segment profit contribution=Segment margin-

attributable fixed costsattributable fixed costs Corporate net income= Segment profit Corporate net income= Segment profit

contribution-firm wide costscontribution-firm wide costs DepreciationDepreciation

Investment CentersInvestment Centers It is a responsibility center in which It is a responsibility center in which

inputs are measured in terms of inputs are measured in terms of cost/expenses and outputs are cost/expenses and outputs are measured in terms of revenues and in measured in terms of revenues and in which assets employed are also which assets employed are also measured.measured.

Autonomy of investment centers to Autonomy of investment centers to acquire assets may be full or partial but acquire assets may be full or partial but measurement of their performance is measurement of their performance is definitely judged by its use of assets.definitely judged by its use of assets.

Acquiring assets is an act of making a Acquiring assets is an act of making a long term commitment to use the asset long term commitment to use the asset effectively and efficiently for the effectively and efficiently for the organization.organization.

Investment centers have explicit Investment centers have explicit obligation to achieve the expected obligation to achieve the expected profit related to the quantum of assets profit related to the quantum of assets acquired.acquired.

Investment centers are evaluated on Investment centers are evaluated on profits, not in absolute terms but in profits, not in absolute terms but in relation to corresponding investmentrelation to corresponding investment

The performance of Investment The performance of Investment center is measured in terms ofcenter is measured in terms of

Return on Investment (ROI) Return on Investment (ROI) =Profit/Investment OR (Profit =Profit/Investment OR (Profit contribution/Sales revenue)*(sales contribution/Sales revenue)*(sales revenue/Assets)revenue/Assets)

Residual Income (RI) or Economic Residual Income (RI) or Economic value added (EVA) =Operating value added (EVA) =Operating income-Implied interestincome-Implied interest

Transfer PricingTransfer Pricing If two or more profit centers are If two or more profit centers are

jointly responsible for product jointly responsible for product development, manufacturing and development, manufacturing and marketing, each should have share in marketing, each should have share in the revenue generated when the the revenue generated when the product is finally sold.product is finally sold.

Transfer Price is the mechanism for Transfer Price is the mechanism for distributing this revenue.distributing this revenue.

Objectives Of Transfer PriceObjectives Of Transfer Price Each business unit should get relevant Each business unit should get relevant

information to determine optimum information to determine optimum trade off between company costs and trade off between company costs and revenues.revenues.

To induce cooperation and coordination To induce cooperation and coordination to take goal congruent decisionsto take goal congruent decisions

To measure, economic performance of To measure, economic performance of the individual business units.the individual business units.

Should be simple to understand Should be simple to understand and easy to administer.and easy to administer.

Fundamental principleFundamental principle is that the is that the transfer price should be similar to the transfer price should be similar to the price that would be charged if price that would be charged if product were to be sold to outside product were to be sold to outside customers or purchased from outside customers or purchased from outside vendorsvendors..

Sourcing decision and transfer price Sourcing decision and transfer price decisions are to be reviewed decisions are to be reviewed periodically periodically

Prerequisites for effective transfer Prerequisites for effective transfer price mechanism:price mechanism:

Competent managersCompetent managers Good atmosphereGood atmosphere Market price availabilityMarket price availability Freedom to source Freedom to source Freedom to sellFreedom to sell Full informationFull information Fair negotiationsFair negotiations

Different ways to decide transfer Different ways to decide transfer pricesprices

Market priceMarket price Full cost basisFull cost basis Cost +synthetic market priceCost +synthetic market price Variable cost +Lump sumVariable cost +Lump sum Prorating overall contributionProrating overall contribution Two sets of pricesTwo sets of prices

Goal CongruenceGoal Congruence Management has a task to arrange organizational Management has a task to arrange organizational

conditions and methods of operations, so that conditions and methods of operations, so that people can achieve their own goals best by people can achieve their own goals best by directing their efforts towards organizational directing their efforts towards organizational objectivesobjectives..

Control system has to be designed in such a way Control system has to be designed in such a way that it encourages the managers of responsibility that it encourages the managers of responsibility centers to take actions that are in their own best centers to take actions that are in their own best interests as well as in the best interest of the interests as well as in the best interest of the overall organization.overall organization.

Measures of performance of the units should be Measures of performance of the units should be so developed that it automatically leads to goal so developed that it automatically leads to goal congruence. Those should also satisfy congruence. Those should also satisfy organizations short term and long term goals.organizations short term and long term goals.

Budget and Budgetary ControlBudget and Budgetary Control BudgetBudget: A financial and/or : A financial and/or

quantitative statement, prepared quantitative statement, prepared and and approved prior to a defined approved prior to a defined period of timeperiod of time, of the policy to be , of the policy to be pursued during that period for the pursued during that period for the purpose of attaining given objectives. purpose of attaining given objectives. It can include income expenditure It can include income expenditure and employment of capital and employment of capital

BudgetBudget is a plan covering all phases of is a plan covering all phases of organizational activities for definite period organizational activities for definite period in future.in future.

It is generally for the period of one year.It is generally for the period of one year. Estimates profit potentialEstimates profit potential It is a management commitment; It is a management commitment;

managers agree to accept responsibility managers agree to accept responsibility for attaining the budgeted objectives.for attaining the budgeted objectives.

The budget proposal is reviewed and The budget proposal is reviewed and approved by authority higher than the approved by authority higher than the budgeteebudgetee

Periodically actual performance is Periodically actual performance is compared with plan, variances analyzed compared with plan, variances analyzed and explained and budget changed only in and explained and budget changed only in exceptional circumstances.exceptional circumstances.

It is structured by responsibility centers.It is structured by responsibility centers.

Purpose and use of budgetPurpose and use of budget • To fine tune the strategic planTo fine tune the strategic plan• To help coordinate the activities of all To help coordinate the activities of all

departments of the organizationdepartments of the organization• To assign the responsibility to To assign the responsibility to

managers, to authorize the amounts managers, to authorize the amounts they are permitted to spend, and to they are permitted to spend, and to inform the performance that is inform the performance that is expected of them.expected of them.

• To obtain a commitment to budget, To obtain a commitment to budget, which is the basis for evaluating their which is the basis for evaluating their actual performanceactual performance..

Budgetary ControlBudgetary Control The process of establishment of The process of establishment of

budgets in line with strategic budgets in line with strategic objectives, relating it to the objectives, relating it to the responsibilities of executives, responsibilities of executives, continuously comparing actual continuously comparing actual results with plan.results with plan.

Preparation of budgetsPreparation of budgets Top down processTop down process Bottom up processBottom up process Combination of above twoCombination of above two

Budgeting processBudgeting processNormally finance controller or Budget committee is Normally finance controller or Budget committee is

responsible for this process. responsible for this process. Publishing procedure and forms, assumptions for Publishing procedure and forms, assumptions for

preparation of the budgetpreparation of the budget Co ordinates with all departments, ensures that Co ordinates with all departments, ensures that

necessary information is properly communicated necessary information is properly communicated between interrelated departments.between interrelated departments.

Provides assistance, analyzes, recommendsProvides assistance, analyzes, recommends Documents and circulates final budgetDocuments and circulates final budget Analyzes the reported performance against Analyzes the reported performance against

approved budgetapproved budget Administers revision if required.Administers revision if required.

Master Budget for manufacturing companyMaster Budget for manufacturing company

•Direct Labour•Factory overheads•Production cost•Ending inventory•Cost of goods sold•Selling and distribution cost•Administration expenses•Research and Development cost•Capital expenses

•Sales•Production•Plant utilization•Maintenance expenses•Power and Fuel usage•Quality of products•Direct material usage•Indirect material usage•Direct material purchase

Budgeted balance sheet and Profit & Loss a/c, will be prepared by taking into consideration following different budgets for various activities.

Zero Base budgetingZero Base budgeting Zero base as the name suggests Zero base as the name suggests

starts with the premise that the starts with the premise that the budget for the next period is “zero”, budget for the next period is “zero”, unless the demand for a function, unless the demand for a function, process, project or activity is justified process, project or activity is justified for each rupee. Each manager has to for each rupee. Each manager has to justify money requirement and the justify money requirement and the effect if this money is not spent.effect if this money is not spent.

Capital budgeting and controlCapital budgeting and control Capital budgeting is defined as Capital budgeting is defined as

decision-making process by which decision-making process by which firms evaluate the purchase of major firms evaluate the purchase of major fixed assets, machinery, equipment, fixed assets, machinery, equipment, building expansion, acquisitions of building expansion, acquisitions of other firms etc.other firms etc.

Importance of Capital BudgetImportance of Capital Budget

Affects profitabilityAffects profitability Long time periodsLong time periods Substantial expendituresSubstantial expenditures IrreversibleIrreversible Scarce capital resourcesScarce capital resources Difficulties in evaluationDifficulties in evaluation

Kinds of proposalsKinds of proposals::• ReplacementReplacement• ExpansionExpansion• DiversificationDiversification• Research and developmentResearch and development• MiscellaneousMiscellaneous

Methods of Capital Investment EvaluationMethods of Capital Investment EvaluationTraditional Techniques of evaluationTraditional Techniques of evaluation:: Payback period=cost of project/ annual cash Payback period=cost of project/ annual cash

inflow.inflow. Payback reciprocal=1/payback period.Payback reciprocal=1/payback period. Accounting rate of return(Annual revenue from Accounting rate of return(Annual revenue from

project- Annual expenditure of project)/Project project- Annual expenditure of project)/Project investment*100investment*100

Discounted cash flow methodsDiscounted cash flow methods:: Net present value method (NPV)Net present value method (NPV) Profitability index=Present Value of cash Profitability index=Present Value of cash

inflow/Present value of cash outflowinflow/Present value of cash outflow Internal rate of return---Interest rate at which Internal rate of return---Interest rate at which NPV =0 NPV =0

Risks in capital expenditureRisks in capital expenditure RiskRisk is perceived variability of actual returns from is perceived variability of actual returns from

the estimated returns.the estimated returns. Methods to quantify risksMethods to quantify risks:: Sensitivity analysis: pessimistic, realistic, Sensitivity analysis: pessimistic, realistic,

optimistic estimates about the cash inflows and optimistic estimates about the cash inflows and outflows.outflows.

Assigning probability to expected cash flows.Assigning probability to expected cash flows. Standard deviation and Coefficient of variation.Standard deviation and Coefficient of variation. Risk adjusted discount rates: By using NPV Risk adjusted discount rates: By using NPV

method discount rates are adjusted for various method discount rates are adjusted for various probabilities.probabilities.

Certainty equivalent approach: Instead of Certainty equivalent approach: Instead of adjusting the discount rates the cash flows are adjusting the discount rates the cash flows are adjusted.adjusted.

Probability distribution approachProbability distribution approach Decision trees approach.Decision trees approach.

Risk analysis in practiceRisk analysis in practice

• Conservative estimate of revenueConservative estimate of revenue• Flexible investment yardstickFlexible investment yardstick• Safety margins in cost figures.Safety margins in cost figures.• Acceptable overall certainty index.Acceptable overall certainty index.

AuditsAudits Audit is systematic, independent Audit is systematic, independent

process for obtaining evidence and process for obtaining evidence and evaluating it objectively to determine evaluating it objectively to determine the extent to which budgets are the extent to which budgets are achieved/procedures are followed.achieved/procedures are followed.

Types of AuditTypes of Audit Internal AuditInternal Audit Financial AuditFinancial Audit Cost AuditCost Audit Management AuditManagement Audit Operations AuditOperations Audit

Basic principles of auditBasic principles of audit Integrity, objectivity and independenceIntegrity, objectivity and independence ConfidentialityConfidentiality Skill and competenceSkill and competence DocumentationDocumentation PlanningPlanning EvidenceEvidence System and internal controlSystem and internal control ConclusionConclusion ReportingReporting

Internal AuditInternal Audit is a tool for periodical review is a tool for periodical review of organizational systems and procedures, of organizational systems and procedures, financial aspects, directed towards financial aspects, directed towards compliance to set goals and objectives and compliance to set goals and objectives and standards. standards.

Financial AuditFinancial Audit: It is for the past period : It is for the past period normally for one year, independent normally for one year, independent evaluation by external auditor for evaluation by external auditor for assessing and attesting accuracy and assessing and attesting accuracy and reliability of financial data. It is performed reliability of financial data. It is performed on planned basis rather than on request.on planned basis rather than on request.

This is also called as This is also called as statutory audit.statutory audit. As As per company’s act it is mandatory for all per company’s act it is mandatory for all private and public ltd. companies to have private and public ltd. companies to have its accounts audited every year by its accounts audited every year by Chartered accountant.Chartered accountant.

Cost AuditCost Audit: An audit of efficiency, of : An audit of efficiency, of minute details of expenditure while minute details of expenditure while work is in progress and not post work is in progress and not post mortem. Important aspects of cost mortem. Important aspects of cost audit are,audit are,

Management Audit: Management Audit: It deals with all It deals with all aspects of the management process.aspects of the management process.

Operations Audit: Operations Audit: It is confined to the It is confined to the various activities and operations in various activities and operations in the functional areas.the functional areas.

Variance analysisVariance analysis Variance: Variation between planned Variance: Variation between planned

performance and actual performanceperformance and actual performance Reasons for variance:Reasons for variance: Specific management decision taken Specific management decision taken

to respond to new developments to respond to new developments not envisaged & planned initially.not envisaged & planned initially.

Because of some uncontrollable Because of some uncontrollable factors eg. Changes in Govt.policyfactors eg. Changes in Govt.policy

Controllable factors not monitored Controllable factors not monitored properly.properly.

Calculation of various variancesCalculation of various variances Revenue VariancesRevenue Variances Sales price variance=(Actual price-Standard Sales price variance=(Actual price-Standard

price)*Actual volumeprice)*Actual volume Sales volume variance=(Actual volume-Budgeted Sales volume variance=(Actual volume-Budgeted

volume)*Budgeted pricevolume)*Budgeted price Mix variance=((Total actual volume of sales for all Mix variance=((Total actual volume of sales for all

products* Budgeted proportion)-Actual volume of products* Budgeted proportion)-Actual volume of sales)*Budgeted per unit contributionsales)*Budgeted per unit contribution

Volume variance=((Total actual volume of sales Volume variance=((Total actual volume of sales for all products* Budgeted proportion)- Budgeted for all products* Budgeted proportion)- Budgeted volume of sales)*Budgeted per unit contributionvolume of sales)*Budgeted per unit contribution

Mix and Volume variance=(Actual volume-Mix and Volume variance=(Actual volume-Budgeted volume)* Budgeted per unit contribution Budgeted volume)* Budgeted per unit contribution

Market share variance=((Actual sales-(Industry Market share variance=((Actual sales-(Industry volume*Budgeted market share)*Budgeted per volume*Budgeted market share)*Budgeted per unit contributionunit contribution

Industry volume variance=(Actual industry Industry volume variance=(Actual industry volume-Budgeted industry volume)* Budgeted volume-Budgeted industry volume)* Budgeted market share* Budgeted per unit contribution. market share* Budgeted per unit contribution.

Expense VariancesExpense Variances Fixed cost variance=Actual fixed costs- Budgeted Fixed cost variance=Actual fixed costs- Budgeted

fixed costsfixed costs Actual Variable costs =Budgeted variable costs* Actual Variable costs =Budgeted variable costs*

Actual volume/Budgeted volume.Actual volume/Budgeted volume. Variable costs variance= Actual variable costs- Variable costs variance= Actual variable costs-

budgeted variable costsbudgeted variable costs

Investigation of variances:Investigation of variances: Conferences with department Conferences with department

managers, supervisors, employees of managers, supervisors, employees of particular responsibility centre.particular responsibility centre.

Analysis of work situation such as Analysis of work situation such as flow of work, coordination, flow of work, coordination, effectiveness of supervisioneffectiveness of supervision

On the spot investigation On the spot investigation Investigation by specialistsInvestigation by specialists Internal auditInternal audit Special studiesSpecial studies

Evaluation StandardsEvaluation Standards

1.1. Comparison with Predetermined Comparison with Predetermined standards/budgetsstandards/budgets

2.2. Historical StandardsHistorical Standards3.3. External standardsExternal standards

Limitations of variance analysisLimitations of variance analysis Unless accompanied by root cause analysis only Unless accompanied by root cause analysis only

the variance figures do not mean anything.the variance figures do not mean anything. Does not indicate whether any action is takenDoes not indicate whether any action is taken Does give indication: how much variance is Does give indication: how much variance is

acceptableacceptable Good performance by one product may offset bad Good performance by one product may offset bad

performance by otherperformance by other Reports only show what has happened, but does Reports only show what has happened, but does

give any indications of the effects of actions give any indications of the effects of actions taken.taken.

Principle of analysis of formal Principle of analysis of formal financial reports: The monthly profit financial reports: The monthly profit report should not contain any major report should not contain any major surprises.surprises.

One of the most important benefits One of the most important benefits of formal reporting is that it provides of formal reporting is that it provides the desirable pressure on sub the desirable pressure on sub ordinate managers to take corrective ordinate managers to take corrective actions on their own initiative.actions on their own initiative.

Management Control in service Management Control in service organizationsorganizations

The organizations which The organizations which produce/deliver and market produce/deliver and market intangible services are called service intangible services are called service organizations. e.g. Professional, organizations. e.g. Professional, financial services, Healthcare, R & D, financial services, Healthcare, R & D, Nonprofit organizations. Nonprofit organizations.

Characteristics of Service Characteristics of Service organizationsorganizations

Absence of inventory bufferAbsence of inventory buffer Difficulty in controlling qualityDifficulty in controlling quality Labour intensiveLabour intensive Multi unitMulti unit

Management control system for Management control system for banksbanks

Characteristics of Bank:Characteristics of Bank: Highly diversifiedHighly diversified Several variety of productsSeveral variety of products Wide geographical spreadWide geographical spread Structure of bank into HO, zonal offices, regional Structure of bank into HO, zonal offices, regional

offices, and branchesoffices, and branches Concern for quality of service and customer careConcern for quality of service and customer care Importance of effective internal controls and Importance of effective internal controls and

decision makingdecision making Treasury and risk managementTreasury and risk management Control on operations by Reserve BankControl on operations by Reserve Bank

Long Range PlanLong Range Plan Macro environmental analysisMacro environmental analysis Banking scenario analysisBanking scenario analysis Vision mission and planVision mission and plan Corporate objectivesCorporate objectives Business projectionsBusiness projections

Performance budgeting and control Performance budgeting and control systemssystems

Resource mobilizationResource mobilization Credit to different segments e.g. Industry, Credit to different segments e.g. Industry,

agriculture, foreign tradeagriculture, foreign trade Risk managementRisk management Management of NPAsManagement of NPAs Norms for expensesNorms for expenses HRHR Branch expansion and growthBranch expansion and growth

Operational Control System:Operational Control System: Direct Control: Visit of Senior officer from Direct Control: Visit of Senior officer from

controlling officecontrolling office Indirect Control:Indirect Control:1.1. Daily position of cashDaily position of cash2.2. Report excess withdrawals/cc accountsReport excess withdrawals/cc accounts3.3. Weekly reportsWeekly reports4.4. Monthly return of loans and advances sanctioned Monthly return of loans and advances sanctioned

by branchby branch5.5. Monthly overdraftsMonthly overdrafts6.6. Monthly branch performance reportsMonthly branch performance reports7.7. Quarterly reportsQuarterly reports8.8. Report of NPAsReport of NPAs

Non profit organizationsNon profit organizations The organizations for which Profit is The organizations for which Profit is

not the motive of operationsnot the motive of operations Educational Institutes, Hospitals, Educational Institutes, Hospitals,

Research organizations, old age Research organizations, old age homes, Schools for physically homes, Schools for physically handicapped, blind home, clubs, handicapped, blind home, clubs, orphanages.orphanages.

MCS for non profit organizations MCS for non profit organizations Funding, growth and controls are Funding, growth and controls are

three dimensions to be taken care of.three dimensions to be taken care of.

Various types of co-operativesVarious types of co-operatives Production orientedProduction oriented Service orientedService oriented Non profit Non profit

Balanced Score CardBalanced Score Card

Balanced Score card system of performance Balanced Score card system of performance measure is developed by Kaplan and Norton measure is developed by Kaplan and Norton

in 1992in 1992 BSC is a mechanism for linking long term BSC is a mechanism for linking long term

objectives with short term operational objectives with short term operational performance of unitperformance of unit

In absence of specific measures carefully In absence of specific measures carefully established for operating levels, the established for operating levels, the management of units can not clearly management of units can not clearly visualize the link between the activities visualize the link between the activities they manage and the corporate vision, they manage and the corporate vision, mission and objectives mission and objectives

The balanced score card is an example of The balanced score card is an example of holistic performance measurement holistic performance measurement system. As per this system business units system. As per this system business units should be assigned goals and measures should be assigned goals and measures from four perspectivesfrom four perspectives

FinancialFinancial CustomerCustomer Internal businessInternal business Innovation and learningInnovation and learning

Four perspectivesFour perspectives FinancialFinancial Inventory/Turnover ratio Inventory/Turnover ratio Cost Per Unit Cost Per Unit Hidden Factory Hidden Factory Activity Based Costing Activity Based Costing Cost Of Poor Quality Cost Of Poor Quality Overall Project SavingsOverall Project Savings Return on capital employedReturn on capital employed Gross profit marginGross profit margin Cash FlowCash Flow

CustomerCustomer Customer Satisfaction/Customer complaints Customer Satisfaction/Customer complaints On Time Delivery On Time Delivery Final Product Quality Final Product Quality Safety CommunicationsSafety Communications Customer retention RatioCustomer retention Ratio Market ShareMarket Share Internal Business ProcessesInternal Business Processes Defects, Inspection Data, DPMO, Sigma Level Defects, Inspection Data, DPMO, Sigma Level No. of suppliers as strategic partners No. of suppliers as strategic partners Supplier Quality Supplier Quality Through put timeThrough put time Quantity Dispatched Quantity Dispatched Rework HoursRework Hours Reduction in accidents/Pollution levelsReduction in accidents/Pollution levels

Innovation and Learning Innovation and Learning Quality of TrainingQuality of Training No. of training hours per employee No. of training hours per employee Meeting Effectiveness Meeting Effectiveness Lessons Learned Lessons Learned Improvement in staff morale Improvement in staff morale Project Schedule Versus Actual Date Project Schedule Versus Actual Date Number of Projects Completed /New Number of Projects Completed /New

products introducedproducts introduced Revenue from new products Revenue from new products No of suggestions received and No of suggestions received and

implementedimplemented Total Savings To DateTotal Savings To Date

In creating balanced score card In creating balanced score card managers must choose mix of managers must choose mix of measurements that measurements that • Accurately reflect critical factorsAccurately reflect critical factors• Show relation ships among measures in Show relation ships among measures in

cause and effect manner indicating how cause and effect manner indicating how non-financial measures affect long term non-financial measures affect long term financial resultsfinancial results

• Provide broad based view of the current Provide broad based view of the current status of the companystatus of the company

Activity Based Costing (ABC)Activity Based Costing (ABC) Activity Based Costing is a system Activity Based Costing is a system

that focuses on activities as the that focuses on activities as the fundamental cost generators and fundamental cost generators and uses the costs of these activities as uses the costs of these activities as building blocks for compiling cost of building blocks for compiling cost of the products.the products.

Steps in following ABC system:Steps in following ABC system:• Identify the major activities that take place in the Identify the major activities that take place in the

organizationorganization• Determine the cost driver for each activityDetermine the cost driver for each activity• Create a cost center for each major activityCreate a cost center for each major activity• Trace the cost of activities to products according to Trace the cost of activities to products according to

requirements by the products.requirements by the products. In ABC system the costs traced forIn ABC system the costs traced for

• Unit level activity Unit level activity • Batch level activity Batch level activity • Product level activity Product level activity • Facility level activityFacility level activity

ABC improves decision makingABC improves decision making• PricingPricing• Market segments, DistributionMarket segments, Distribution• Make-buy decisionsMake-buy decisions• Transfer pricingTransfer pricing• Plant closingPlant closing• Capital investment.Capital investment.

Methods for Sales ForecastingMethods for Sales Forecasting

Steps in Sales planning:Steps in Sales planning: Establishing foundationEstablishing foundation Sales forecasting activities---Sales forecasting activities---

Economic analysis, Industry Economic analysis, Industry forecasts, analysis of past trends, forecasts, analysis of past trends, Taking help of staff specialistsTaking help of staff specialists

Management judgment appliedManagement judgment applied

Causal approachCausal approach Non causal Non causal

approachapproach Direct or IndirectDirect or Indirect OROR Sales force Sales force

feedbackfeedback Sales manager’s Sales manager’s

judgmentjudgment Executive opinionExecutive opinion OROR

Economic rhythm Economic rhythm or trendor trend

Cyclical sequenceCyclical sequence Special history Special history

analogyanalogy Crosscut methodsCrosscut methods OROR Industry analysisIndustry analysis Product analysisProduct analysis End use methodEnd use method