All India Shri Shivaji Memorial Societys Institute of Management Question Bank 302 Management Control Systems

1. Explain the characteristics of Management Control Systems in detail and discuss how evolution of Control System takes place in an organization? 2. Explain with diagram the Cybernetic paradigm of the control process as proposed by Griessinger. Explain the difference between factual premises and value premises and how the gap between them can be reduced by managers Behavioral Repertoire. 3. Control is the central function in any organization. Do you agree with this statement? Comment in the light of role and utility of control function. 4. Explain the concept strategy. Also explain how BCG Matrix and GE Planning models help in Business Unit level strategy formulation. 5. What do you understand by Goal Congruence? Give examples and explain problem of Goal congruence faced by multidivisional companies at different levels. 6. Describe various types of responsibility centers by giving relevant examples. 7. Explain and compare ROI & EVA as methods of performance measurement in an investment center. Explain with examples how ROI can help in making accept or reject decision regarding investment. 8. What are the features, advantages & disadvantages of a profit center? 9. Distinguish between Engineered Expense Center and Discretionary Expense Center with respect to the following points. Give suitable examples. a) b) c) d) Budget preparation Cost Variability Type of Financial Control Performance Measurement

10. What is budget? Explain the types of budget and the importance of budgetary control system as a tool for Management Control.

11. Explain the traditional and discounting methods of capital budgeting. 12. Describe the concept and different methods of Transfer Pricing. 13. Balance score card started as a performance measurement system but has ended up as a full fledged management control system. Explain with suitable examples. 14. Explain audit function as a control tool covering Financial Audit, Internal Audit, Cost Audit & Management Audit. Give suitable examples. 15. What are the differences in the nature of control in service industry and manufacturing industry? Explain management control system applied in insurance companies. 16. Write short notes on a) b) c) d) Zero Based Budget Strategic Planning & Management Control Value Chain Performance Evaluation

17. Division A of a large divisionalized organization manufactures a single standardized product. Some of the output is sold externally whilst the remainder is transferred to Division B where it is a subassembly in the manufacture of that divisions product. The unit cost of Division As product are as follows: Rs. Direct material Direct labour Direct expenses Variable manufacturing overheads Fixed manufacturing overheads Selling and packing expense variable 4 2 2 2 4 1 15 Annually 10000 units of the product are sold externally at the standard price of Rs.30. In addition to the external sales, 5000 units are transferred annually to Division B at an internal transfer charge of Rs.29 per unit. This transfer price is obtained by deducting variable selling and packing expense from the external price since this expense is not incurred for internal transfers.

Division B incorporates the transferred-in goods into a more advanced product. The unit costs of this product are as follows. Rs. Transferred-in item (from Division A) Direct material and components Direct labour Variable overheads Fixed overheads Selling and packing expense variable 29 23 3 12 12 1 80 Division Bs manager disagrees with the basis used to set the transfer price. He argues that the transfers should be made at variable cost plus an agreed (minimal) mark-up since he claimed that division is taking output that Division A would be unable to sell at the price of Rs. 30. Customer demand at various selling prices: Division A Selling price Demand Division B Selling price Demand Rs.80 7200 Rs.90 5000 Rs.100 2800 Rs.20 15000 Rs. 30 10000 Rs.40 5000

The manager of Division B claims that this study supports his case. He suggests that a transfer price of Rs.12 would give Division A a reasonable contribution to its fixed overheads while allowing Division B to earn a reasonable profit. He also believed that it would lead to an increase of output and an improvement in the overall level of company profits. You are required: a) to calculate the effect hat the transfer pricing system has had on the companys profits, and

b) to establish the likely effect on profit of the suggestion by the manager of Division B of a transfer price of Rs.12. 18. Fastner International Ltd. is having production shops reckoned as profit centers. Each shop is allowed to charge other shops for materials supplied and services rendered. The shops are motivated through goal congruence, autonomy and management efforts. The company is having a welding shop as well as a painting shop. The welding shop welds annually 72,000 purchased items with other 1,56,000 shop made parts in to 12,000 assemblies. Total cost of this assembly for the welding shop works out to Rs. 24,000 p.a. for this level of operations. Out of the total production, 80% is diverted to painting shop at the same price i.e. Rs. 12 per assembly and remaining sold in the market. The printing shops cost of painting including transfer price from welding shop comes to Rs. 20 each. Painting shop sells all the assemblies duly painted at a price of Rs. 25 each. Painting shops fixed costs are Rs. 30,000 p.a. The manager of the welding shop has ascertained from the market that of late demand for the welded (unpainted) assembly has increased substantially and this situation is expected to continue for another 6 to 8 months. This has resulted I an increase in the market price from present Rs. 12 each to Rs. 14 each. He, therefore, proposes to increase the transfer price for supplies to painting shop. Manager of the painting shop refuses to accept the new transfer price of Rs. 14 each on the ground that his profitability will be adversely affected. Welding shop manager, therefore, proposes that, since supplying assemblies to painting shop at existing transfer price he is loosing Rs. 2 per assembly he should at least be allowed to sell in the external market extra quantity of 20% of his total present production in order to partially compensate him for the loss. He is then prepared to continue with the present transfer price for the balance quantity of painted assemblies to the extent of only the quantities received from welding shop.

Will this proposal benefit him? What will be the effect of it on the profitability of the painting shop as well as the total company? Justify your answer with appropriate and detailed calculations.

19. Explain Formal and Informal Management Control Systems with the help of following subsystems. a) Infrastructure. b) Management Style and culture. c) Rewards. d) Coordination and integration; e) Control Process. 20. Zenith Ltd. Uses ROI to measure the performance of its operating divisions. A summary of annual reports from two divisions is shown below; the companys cost is 12 percent. Division A Division B Capital Invested Rs. 2,40,000 Rs.4,00,000 Net Profit Rs. 48,000 Rs. 72,000 ROI 20% 18% 1. 2. 3. 4. What performance measurement procedure involving cost of capital would more clearly show the profitability of the divisions? Show numerically the result Compare merits and demerits of such a performance measurement system with ROI At what cost of capital both divisions be considered equally profitable as per method in Q.1. Suppose the manager of Division A were offered a one year project that would increase the investment base by Rs.1,00,000 and show an additional profit of Rs. 15,000, would the manager accepts this project if he were evaluated . a) On his divisional ROI? b) On the method involving cost of capital as in Q.1? Give reasons for your answer.