Assignment no 2

Q.1. What is financial goal setting? Explain techniques of financial goal setting
Q.2. Explain different types of responsibility centers
A responsibility center is a functional entity within a business that has its own
goals and objectives, dedicated staff, policies and procedures, and financial
reports. There may be many responsibility centers in a business, but never less
than one such center. Thus, a responsibility center is usually a subset of a
business.
A responsibility center is used to tie specific responsibility for revenues
generated, expenses incurred, and/or funds invested to individuals. This allows
the senior managers of a company to trace all financial activities and results of a
business back to specific employees. Doing so preserves accountability, and
may also be used to calculate bonus payments for employees.
1Revenue centers
Revenue centers usually have authority over sales only and have very little
control over costs. To evaluate a revenue centers performance, look only at its
revenues and ignore everything else.
Revenue centers have some drawbacks. Their evaluations are based entirely on
sales, so revenue centers have no reason to control costs. This kind of free rein
encourages Al the concession manager to hire extra employees or to find other
costly ways to increase sales (giving away salty treats to increase drink
purchases, perhaps).
2Cost centers
Cost centers usually produce goods or provide services to other parts of the
company. Because they only make goods or services, they have no control over
sales prices and therefore can be evaluated based only on their total costs.
One way for a cost center to reduce costs is to buy inferior materials, but doing
so hurts the quality of finished goods. When dealing with cost centers, you must
carefully monitor the quality of goods.
3Profit centers
Profit centers are businesses within a larger business, such as the individual
stores that make up a mall, whose managers enjoy control over their own

revenues and expenses. They often select the merchandise to buy and sell, and
they have the power to set their own prices.
Profit centers are evaluated based on controllable margin the difference
between controllable revenues and controllable costs. Exclude all
noncontrollable costs, such as allocated overhead or other indirect fixed costs,
from the evaluation. The beautiful thing about running a profit center is that
doing so gives managers an incentive to do exactly what the company wants:
earn profits.
Classifying responsibility centers as profit centers has disadvantages. Although
they get evaluated based on revenues and expenses, no one pays attention to
their use of assets. This scenario gives managers an incentive to use excessive
assets to boost profits.
For managers, the upside of using more assets is the resulting increases in sales
and profits. Whats the downside? Well, nothing; managers of profit centers
arent held accountable for the assets that they use.
This flaw in the evaluation of profit centers can be addressed by carefully
monitoring how profit centers use assets or by simply reclassifying a profit
center as an investment center.
4Investment centers
You could call investment centers the luxury cars of responsibility centers
because they feature everything. Managers of investment centers have authority
over and are held responsible for revenues, expenses, and investments
made in their centers. Return on investment (ROI) is often used to evaluate their
performance.
To improve return on investment, the manager can either increase controllable
margin (profits) or decrease average operating assets (improve productivity).
Using return on investment to evaluate investment centers addresses many of
the drawbacks involved in evaluating revenue centers, costs centers, and profit
centers. However, classification as an investment center can encourage
managers to emphasize productivity over profitability to work harder to
reduce assets (which increases ROI) rather than to increase overall profitability.
From an accounting perspective, a financial report should be issued to each
responsibility center that itemizes the revenues, expenses, profits, and/or return
on investment for which the manager of each center is solely responsible. This
can result in quite a large number of customized reports being issued on an
ongoing basis.

The use of multiple responsibility centers requires a certain amount of corporate

infrastructure to develop each center, track its results, and manage expectations
with the various managers.
Q.3. Explain limitations of financial reporting under historical cost convention
Financial statements prepared under historical accounting system suffer from a
number of limitations, which are as follows:
1. No Consideration Of Price Level Changes
Financial statements prepared under historical cost accounting are merely
statement of historical facts. Changes in the value of money as a result of
changes in general level of price are not taken into account. Hence, they fail to
give true and fair picture of the state of affairs of the organization.
2. Unrealistic Fixed Assets Values
In historical cost accounting, fixed assets are recorded and presented at the price
at which they are acquired. Changes in the market value of such assets are
ignored.
3. Insufficient Provision For Depreciation
Depreciation is a mechanism of generating funds to replace the fixed assets
when the replacement becomes due. In historical cost accounting, depreciation
is charged on the basis of historical cost of fixed assets, not at the price at which
the same assets are acquired. The provision made by way of depreciation
charged on the original cost will not be sufficient for the replacement of assets.
4. Unrealistic Profit
Income statement prepared under historical cost accounting does not reveal true
profit. Revenues are recorded on current value basis whereas expenses are
recorded at historical cost. Profits are over-stated during the period of inflation.
5. Mixing Up Of Holding And Operating Gain

In historical cost accounting, gain or loss on account of holding inventories may

be mixed up with operating gain or losses. Holding gain or losses should be
segregated from operating gain or losses to determine the true operating
performance.
6. Fails To Present A Fair Value Of Financial Position
Balance sheet consists of monetary and non-monetary items. Monetary items
like cash, loan, debtors, creditors etc. are shown at their current money value.
Non-monetary items like inventory, building, land etc. are shown at historical
costing, not at current value. During period of inflation, non-monetary items are
understated. Thus, balance sheet fails to present a fair value financial position.
Q.4. Write short notes
a. Management by objectives
Definition
Management by objectives (or MBO) is a personnel management technique
where managers and employees work together to set, record and monitor goals
for a specific period of time. Organizational goals and planning flow top-down
through the organization and are translated into personal goals for
organizational members. The technique was first championed by management
expert Peter Drucker and became commonly used in the 1960s.
Key Concepts
The core concept of MBO is planning, which means that an organization and its
members are not merely reacting to events and problems but are instead being
proactive. MBO requires that employees set measurable personal goals based
upon the organizational goals. For example, a goal for a civil engineer may be
to complete the infrastructure of a housing division within the next twelve
months. The personal goal aligns with the organizational goal of completing the
subdivision.
MBO is a supervised and managed activity so that all of the individual goals can
be coordinated to work towards the overall organizational goal. You can think of
an individual, personal goal as one piece of a puzzle that must fit together with
all of the other pieces to form the complete puzzle: the organizational goal.
Goals are set down in writing annually and are continually monitored by
managers to check progress. Rewards are based upon goal achievement.

Advantages
MBO has some distinct advantages. It provides a means to identify and plan for
achievement of goals. If you don't know what your goals are, you will not be
able to achieve them. Planning permits proactive behavior and a disciplined
approach to goal achievement. It also allows you to prepare for contingencies
and roadblocks that may hinder the plan. Goals are measurable so that they can
be assessed and adjusted easily.
Organizations can also gain more efficiency, save resources and increase
organizational morale if goals are properly set, managed and achieved.
disadvantages. Application of MBO does take some concerted effort. You
cannot rely upon a thoughtless, mechanical approach. You should note that
some tasks are so simple that setting goals makes little sense and becomes more
of silly annual ritual. For example, if your job is snapping two pieces of a
product together on an assembly line, setting individual goals for your work
borders on the absurd.
Rodney Brim, a CEO and critic of the MBO technique, has identified four other
weaknesses. There is often a focus on mere goal setting rather than developing a
plan that can be implemented. The organization often fails to take into account
environmental factors that hinder goal achievement, such as lack of resources or
management support. Organizations may also fail to monitor for changes, which
may require modification of goals or even make them irrelevant. Finally, there
is the issue of plain human neglect - failing to follow through on the goal.
b. Strategic business unit
Definition
A strategic business unit is a fully functional and distinct unit of the business
that develops their own strategic vision and direction. Within large companies
there are smaller specialized divisions that work towards specific projects and
goals, and we see this organizational setup frequently in global companies. The
strategic business unit, often referred to as an SBU, remains an important
component of the company and must report back through headquarters about
their operational status. Typically they will operate as an independent
organization with a specific focus on target markets and are large enough to
maintain internal divisions such as finance, HR, and so forth.
A strategic business unit is a significant organization segment that is analyzed to
develop organizational strategy aimed at generating future business or revenue.
Exactly what constitutes an SBU varies from organization to organization. In

larger organizations, an SBU could be a company division, a single product, or

a complete product line. In smaller organizations, it might be the entire
company.
Although SBUs vary drastically in form, they have some common
characteristics. All SBUs are a single business (or collection of businesses),
have their own competitors and a manager accountable for operations, and can
be independently planned for.
When organizations get large, they become slow, unmanageable, inflexible, and
difficult to focus. They distance people from each other, and consume more
energy than they release.
Q.5.Explain briefly the various stages of management control process citing
salient features of each