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-2007 Management-control-system –

-2007 Management-control-system –

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Management-control-system – 4th Sem -
Management-control-system – 4th Sem -

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Published by: MAHENDRA SHIVAJI DHENAK on May 27, 2010
Copyright:Attribution Non-commercial


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Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, pleaseregister!
Q2) Briefly define Discretionary Expense center, Engineered Expense Center, ProfitCentre and Investment Center? How budget prepared in Discretionary ExpenseCenter? How is performance of the manager evaluation in Discretionary ExpenseCenter?1. The Profit Center.
Many operating unit managers have responsibility and authorityfor both production and sales. They make decisions about what products and services to produce, how to produce them, their quality level, price, sales and distribution systems. Butthese managers may not have the authority to determine the level of capital investment intheir facilities. In these cases, operating profit may be the single best (short- term) performance measure for how well the managers are creating value from the resources thecompany has put at their disposal. Such a unit, in which the manager has almost completeoperational decision-making responsibility and is evaluated by a straightforward profitmeasure, is called a
profit center.2. The Investment Center.
When a local manager has all the responsibilitiesdescribed above as well as the responsibility and authority for his or her center’s workingcapital and physical assets, the manager is running an investment center. The performance of such a unit is best measured with a metric that relates profits earned to the level of physicaland financial assets employed in the center. Investment center managers are with metrics asreturn on investment (ROI) and economic value-added.
3. Engineered Expense Center
. Engineered cost are those for which the right or  proper amount can be estimated with reasonable reliability, for example material and directlabour. It have the following characteristic1. Their input can be measured in monetary terms2. Their output can be measured in phisical terms3. The optimum dollar a,,ount of input required to produce one unit of output can bedetermined.For engineered expense center, it decides whether the proposed operating budgetrepresent s the unit cost of performing its task efficiently. In discretionary expense center,
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, pleaseregister! budgeting is determined by the magnitude of the job that needs to be done, it usualy carriedout in one of two ways:Incremental Budgeting; In this model, discretionary expense cente's current level of expense is taken as starting point. This amount is adjusted for inflation, anticipated in theworkload continuing job, special job, or the cost of compatable jobs in similar units (if available).Zero Base Budgeting; In this aproach, budgeting made thorough analysis of eachdiscretionary expense center on a rolling schedule, all are reviewed in every period (at leastfive year).
4. Discretionary Expense Center.
Staff units, including general and administrative(G&A) departments, such as finance, human resources, and legal; research and development(R&D) departments; and marketing units such as those performing advertising and promotion, are usually treated as discretionary expense centers. The output from these units isnot easily measured in financial terms, and the relationship between the resources theyexpend (inputs) and the outcomes they produce is weak. Companies control thesediscretionary expense centers by negotiating and eventually authorizing an annual budget andthen monitoring whether their actual spending remains within the budgeted amounts.Someorganisation units have outputs that are not measured in monetary terms.These are principallyadministrative staff units (e.g.;accounting ,legal,industrial relations),research and productdevelopment organisation,and some types of marketing activities,Management makes budgetary decisions for discretionary expense center that differ from those foe engineered expense center.Management formulates the budget fodiscretionary expense center by determining the magnitude of the job that needs to be done.The workdone by discretionary expense center falls in to two generalcategories:Continuing work is done consistently from year to year ,such as the preparation of financial statement by the controller office.Special work is a “one-shot”project-foeg.developing and installing a profit-budgeting system in a newely acquired division.
Generated by Unregistered Batch DOC & DOCX Converter 2010.2.406.1388, pleaseregister!A technique often used in preparing a discretionary expense center’s budget ismanagement by objectives,a formal process in which a budgetee proposes to accomplishspecific jobs and suggests the measurement to be used in performance evaluation.The primary job of the discretionary expense center’s manager is to obtain the desiredoutput.Spending an amount that is “on budget” to do this is considered satisfactory;spendingmore than that is cause for concern;and spending less may indicate that the planned work isnot being done.In discretionary center as opposed to engineered centers,the financial performance report is not a means of evaluating the efficiency of the manager.If these two types of responsibility centers are not carefully distinguished,management may erroneously treat a discretionary expense center’s performance report as anindication of the unit’s efficiency,thus motivating those making spending decision to expandless than the budgeted amount,which in turn will lower otput.For this reason,it is unwise toreward executive who spend less than the budgeted amount.
Q.3 Every SBU is a profit center but every profit center is not a SBU? What are theconditions that should be fulfilled for an organization unit to be converted into a profitcenter? What are the different ways to measure the performance of profit centers?Discuss their relative merit & demerits.
Soln:- HAVE TO UPDATE THIS PARTIn the competitive market environment of today’s business cannot survive unlessthere is total accountability and associated responsibility and authority. Distribution sector also needs to be treated as a business entity if financial viability is to be achieved. The headsof the business units should be empowered to act and be held accountable for their actions & performance. Such a concept would be achievable if each circle is declared as a profit center with its own accounting system. The performance parameters as well as benchmarks can beset for improvement. This would also bring in the sense of ownership and competition, whichare essential ingredients for success of a business. The MOA stresses upon the need for declaration of a circle as a profit center and establishing base line parameters as well as benchmarks for measuring improvements consequent upon the commercial, administrative andtechnical interventions. The operating expenses of the circle, which contribute towards the

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