Is the process of evaluating,

monitoring and controlling the

various sub-units of the organization
so that there is effective and efficient
allocation and utilization of resources
in achieving the predetermined goals
 Involvement of people
Information about the actual state of
the organization is compiled by
people.
It is compared by people.
With the desired state decided by
people.
For significant difference, a course of
action is recommended by people
Action taken by people
 The management decides the desired
state or standards against which
performance is compared.
It decides what the organization plans
to achieve in a given time framework
which is known as Planning Process.
Actual Performance is compared to
Planned Performance in control, so
planning and controlling are
interlinked and are known as P&C
systems
 Planning activities of an organization
Coordinating activities of an organization
Communication information to different
levels of the hierarchical structure
Evaluating information and deciding the
actions to be taken
Influencing people to change their
behavior.
A responsibility centre is an organisation
unit that is headed by manager who is
responsible for its activities.
delegation of responsibility for specific to
successive lower levels of organisation.
motivation of the level of management
to which a certain task has been
delegated.
measurement of the achievement of
specified objectives.
The key consideration in determining the
responsibility centre is
ability to control cost or revenue
determining the question of
controllability
evaluation of responsibility centre as per
predetermined criteria
The responsibility centres may be classified
as
Revenue Centres
Expense Centres
(III) Profit Centres
(IV) Investment Centres
 In a revenue centre, output (I.e., revenue) is
measured in monetary terms, but no formal attempt
is made to relate input (I.e., expenses or cost) to
output.
The main focus of managements efforts will be on
revenue generated by it.
The sales department is an example for a revenue
centre.
The effectiveness of the centre is not judged by how
much sales revenue exceeds the cost of the centre.
Sales budget are prepared for revenue centre and
budgeted figures are compared with actual sales.
Generally the costs are not related to output.
 It is the lowest level of responsibility centre in an
organization.
Its manager is basically responsible for
production of a product or service; his decision
authority relates to how human resource,
machinery and materials should be used to
produce the product or service.
Expense centre manager has no control over
revenues, profits or investment.
He has no control over marketing decisions or
investment decisions.
Total performance of an expense centre
manager depends on how effectively and
efficiently an expense centre is operated.
 Effectiveness of an expense centre manager will
depend on a host of non-financial parameters such
as maintaining quality level of output, compliance
with production schedules and targets, maintaining
morale of the workers and so on.
Normally, separate reporting systems are used to
report effectiveness.
Efficiency is judged in terms of financial
performance.
It is measured and reported by the responsibility
accounting system.
Evaluation of the financial performance of an
expense centre manager is by comparing the
actual expenses of the centre against the budgeted
expenses.
 A profit centre is an organizational unit responsible
for both revenues and costs.
Profit centre manager has no control over the
investment in the centres assets.
Managers are concerned with both the production
and marketing of the products.
Activities of the manager is much more broader
than that of a revenue centre manager because of
the responsibility to produce the product most
efficiently.
Profit centres performance measured in terms of
profit.
It enhances profit consciousness
Example:division of a company that produces and
markets different products.
 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 centres
 Audit is the activity of examination and
verification of records and other evidence
by an individual or a body of persons so
as to confirm whether these records and
evidence present a true and fair picture
of whatever they are supposed to reflect.
Audits are most commonly used in the
accounting and finance functions
Audit category Brief description
Financial Gives an opinion on the accuracy of the financial
statements
statement audit Ensures compliance with the relevant accounting
standards and reporting framework

Internal audit An independent appraisal function established within

an organization to examine and evaluate its activities
as a service to the organization
Need not be limited to books of accounts and related
records

Fraud auditing and Deters, detects, investigates, and reports fraud

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

Operational audit Audits operational aspects of the enterprise

Quality audit, R&D audit, etc
Audit category Brief description
Information Audit of computer systems
Checks whether the computer system safeguards
systems audit assets, maintains data integrity, and contributes to
organizational effectiveness and efficiency

Management audit Audit of the management, as a tool for evaluation

and control of organizational performance
Examines the conditions and provides a diagnosis of
deficiencies with recommendations for correcting
them

Social audit Audit of the enterprise's reported performance in

meeting its declared social , community, or
environmental objectives

Environmental Environmental compliance audit: a checking

mechanism
audit Environmental management audit: an evaluation
mechanism
 Staffing the audit team
Creating an audit project plan
Laying the ground work
Conducting the audit
Analyzing audit results
Sharing audit results
Writing audit reports
Dealing with resistance to audit
recommendations
Building an ongoing audit program
 Identify opportunities for improvement
Identify outdated strategies
Increase managements ability to address
concerns
Enhance teamwork
Reality check
 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.
perspective Underlying question
Customer perspective To achieve our vision, how
should we appear to our
customer

Financial perspective To succeed financially, how

should we appear to our
shareholders

Internal business To satisfy our customer and

shareholders, at what business
perspective processes must we excel?

Innovation/learning To achieve our vision, how

growth perspective will we sustain our ability to
change and improve?
 If an organization emphasizes only short-
term or financial goals, it will not be able
to successfully execute its strategies and
excel in the business. The balance
scorecard serves as a tool for strategic
performance control by clarifying the
vision and strategy of the organization
and articulating the top management's
expectations
 A transfer is referred to the movement of
goods from a responsibility center to
another, within the same company

Different types of responsibility center,

belonging to different organizational
levels, are involved in the transfers
 Many organizations set up business units
that cater to the needs of other business
units within their own fold. For example,
one business unit may manufacture
components that are used by another
business unit to assemble the final
product.
Here , there is a transfer of goods from the

first business to the second and the

concept of transfer pricing comes into play.
 Decentralization is one of the approaches
that many large organizations use to
attain operational effectiveness. However
, the main challenges in operating in a
decentralized manner lie in designing
responsibility structures and formulating
appropriate policies and methods to
determine the performance of the
responsibility centers.
The technique of transfer pricing plays an
important role in the smooth functioning
of responsibility structures in such an
organization
 Goal congruence:- the divisional manager in
maximizing the profits of his division, should not
engage in decision-making that fails to optimize
the organizations performance.
Performance appraisal :-it should aid in
reliable and objective assessment of the value
added activities by profit centers toward the
organization as a whole
Divisional autonomy:- each divisional manger
should be free to satisfy the requirements of his
profit center from internal or external sources.
There should be no interference in the process by
other divisions like buying centers and selling
centers
 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.
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
 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
Types of Budgets Characteristics
Appropriation budget A ceiling is set for certain
discretionary expenditures
Based on the management
decision
Flexible budget A static amount is established
for discretionary and committed
fixed costs and a variable rate is
determined per unit of activity
for variable cost
Capital budget Decisions regarding potential
investments are made using
discounted cash flow
techniques
Master budget A comprehensive plan is
developed for all revenue and
expenditure
Examples
Training, advertising, sales
promotion and R&D
The static part: Salaries,
depreciation, property taxes,
and planned maintenance. The
flexible part : direct material,
direct labor, and variable
overhead .sales commission
New plant and equipment
All revenue and expenditures
for any organization
 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.
 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
Economic value added
NOPLAT less the capital charge
Net operating profit after tax (NOPAT)
- Capital charge (= WACC * Capital)
= Economic value added (EVA)