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It dispenses the need to employ external consultants to act as internal auditors hence saving
large sum of money. This is even especially true when an internal audit department is
properly run with well trained and experienced internal auditors;
The internal auditors are intimately acquainted with the business as they are continuously
employed in the same concern and have access to much confidential information and to all
levels of management. Hence, they really are special personnel who have very in depth
inner knowledge which can then contribute to the company;
The Internal Audit maintains a group of highly skilled people available to cope with non-
recurring and exceptional jobs which no many employee could deal with efficiently and
effectively;
It ensures that the organization detailed standard policy and procedures are running
smoothly. This compared to the external auditors primary role of the ability to express the
true and fair view of the clients financial statements audit;
Internal auditors are invaluable in areas like operational audits, constant examination of
internal check controls, the detailed application of normal auditing method and detailed review
of the various type of management reporting;
Last but not least, it provides an excellent training ground for future executives. Trainee
personnel obtain intimate knowledge of the business which they can study problems of all
kinds at different levels.
The following categories of function may be carried out by an internal audit department:
1. Advisory- meaning that the internal auditor may recommend improvements and changes in
the system in operation and in the setting up of new systems
2. Executive-the internal audit department may actually deise and install changes and
improvements to existing systems and set up new systems
3. Reporting-the internal audit department prepares routine report on the companys activities
either on a comprehensive, or on an exception basis
Ans :
If R&D decisions made quickly and effectively then one can expect always
updated and latest quality product of the firm in the market.
Due to the influence of trips (trade related intellactual property rights) the
competition in global scenario bacame very tough before the top
management there are various patents, copyrights acts available in these
provisions to protect the R&D findings of one company thats why there is
heavy expenditure is required in R&D activities by the corporates.
Socio cultural differences among the market territories influence the direction
of R&D activities for e.g. incase of Annapurna iodized salt invented by HLL
made an intensive research on preserving the iodine content in food cooked
by indian receipies for that they have introduced stable iodine salt which has
been patented in 80 countries which encapsulates iodine in aluminium and
magnatium hydroid.
Thus, these are the considerations involved in regulating R&D function by the
top management especilly in view of challenges faced on account of
globalization.
Q. 2 a. Explain subtle difference among the Management audit, Quality audit and Technical
audit?
Ans :
Management Audit
For e.g. it involves the decision taken by the management, reporting and follow up
procedures, direction given by the management to the company, leadership etc are
examined in the management audit.
Quality Audit
A systematic and independent examination to determine whether quality activities and
related results comply with planned arrangements and whether these arrangements are
implemented effectively and are suitable to achieve the stated objectives.
For e.g. it involves the quality testing of the final output of the plant
whether it is goods or services.
Technical Audit
Q.7 Explain responsibility centre and map the process of evaluation thereof from one
stage to another, with the help of illustrations cum experience of the corporates?
Answer:
Introduction
Nature
A responsibility centre exists to accomplish one or more purpose termed its objectives. If
each responsibility centre meets its objectives, the goals of the organization would have
been achieved.
The output of responsibility center could be tangible like product or intangible like service
or advice output of a responsibility center could be input to another responsibility center
or could be sold in market place to earn revenue.
Management is responsible for ensuring the optimum relationship between inputs and
outputs. In some centers, relationship is casual and direct. In production department
control focuses on using minimum input necessary to produce required output according to
correct specifications, quality standards and in right quantity.
In many situations inputs are not directly related to the outputs. Advertising expenses are
intended to increase sales revenue but since revenue is affected by many factors other
than advertising, the managements decision to increase advertising budget is based on its
judgement rather than data. The value of R&D expenditure may not be known for many
years.
Inputs can always be measured in terms of cost. Inputs are the resources used by the
responsibility centers.
Calculating the value of output is much difficult to measure. Annual revenue may be an
important measure of output but did not express all that the organization did during the
year like R&D, training and advertising etc. It is not possible to measure value of output of
HR, PR, R&D etc. In non profit organizations there may be quantitative measures of
output. At best we may use surrogates.
Efficiency is the ratio of outputs to inputs or the amount of the output per unit of input.
A major objective of any profit oriented organization is to earn satisfactory profit. Thus,
profit is an important measure of effectiveness. Since profit is the difference between
revenue (a measure of output) and expenses (a measure of input), it is also a measure of
efficiency. Thus, profit measures both efficiency and effectiveness.
There are four types of responsibility centers, classified according to the nature of
monetary inputs and outputs that are measured for control process:
1. Revenue centers
2. Expenses centers
3. Profit centers
4. Investment centers
1. Revenue Centers
In a revenue centre, output (i.e.revenue) is measured in monetary terms, but no
formal attempt is made to relate input (expense or cost) to output. Typically
revenue centers are marketing / sales unit that do not have authority to set selling
price and are not charged for the cost of goods they market.
2. Expense Centers
Expense centers are responsibility centers whose inputs are measured in monetary
terms, but whose outputs are not. There are two types of expense centers.
iii. The optimum rupee value of input required to produce one unit
of output can be determined. Engineered expenses centers are
usually found in manufacturing operations. They could be
engineered expense centers in marketing like warehousing,
distribution, trucking in administration and support departments
also.
4. Annual Budgets if a company has decided on long range R&D program, and has
implemented this program with a system of project approval, the preparation of
the annual R&D budget is mainly the calenderization of the expenses for the
budget period. If the budget is in line with the strategic plan, approval is routine
and primarily serves to assist cash and personal planning.
5. Marketing Centers
Marketing activities are those undertaken to obtain orders for companys products.
These activities include test marketing, the establishment, training and supervision
of sales force, advertising and sales promotion all of which have characteristic
that present management control problem. When it is possible to measure a
marketing departments output evaluating the effectiveness of marketing effort is
much more difficult. It is because that the factors beyond the marketing
departments control may invalidate the assumption on which sales budget were
based.
Engineered
Expense Centers Optimal
relationship can
be established
Output
Inputs
s
Work
Dollar Physical
Discretionary
Expense Centers Optimal
relationship cannot
be established
Output
Inputs
s
Work
Dollar Physical
Marketing Function
Revenue Centers
Inputs are not
related to outputs
Output
Inputs
s
Work
Dollar only
Dollar
for costs
Revenue
directly
incurred
Business Units
Profit Centers
Inputs are related
to outputs
Output
Inputs
s
Work
Dollar
Dollar Costs
Profits
Business Unit
Investment
Centers Inputs are related
to capital employed
Output
Inputs
s
Capital Employed
Dollar
Dollar Costs
Profits
Q.10 Mane jay LTD ,engaged in diversified activities consisting of 9 independent profit
centres decided to sell one of its division profits centre to a group of its managers .narrate the
changes that are needed in control system ,practice and procedure ,giving the reasons.
Answers
There is no guiding principle declared that certain types of units are inherently profits centres
and others are not. Management decisions as to whether a give units should be profits centre is based
on the amount of influence(even if not control) the units managers exercise over the activities that
affect the bottom line.
Marketing
A marketing activity can be turned into profit century charging it with the cost of the
production sold. this transfers price provide the marketing managers with the relevant information to
make a optimum revenue /cost trade offs, and the standard practice of measuring a profits centres
managers by centre profitability provides a cheque on how well these trade offs. Have been made the
transfer priced charged to the profit cater should be based on the standard cost. Rather than the actual
cost. Of the product being sold. Using the standard cost has is separated .the marketing cost
performance from that the manufacturing cost performance.
When should a marketing activity be given profit responsibility? when the marketing
managers is in the best position to make the principle cost revenue trade off .this often occurs where
different conditions exist in different geographical areas for example a foreign marketing activity ,in
such an activity ,it may be difficult to control centrally such decision as how to market product. How
to set the price, how much to sends on sales promotions, when to spends it ,and on which media ,how
to train salespeople or dealers ,where and when to established new dealers.
Manufacturing
The manufacturing activity is usually an expenses centre, with management being judged on
performance versus costs and overhead dudgets.this measure can cause problems however since it
does not necessarily indicate how the manager is performing all aspect of his job.
Example
A manager may skimp on quality control, shipping products of inferior quality in order to
obtain standards cost credit.
Managers who are measured against standards may lack the incentive to manufacture
products that are difficult to produce-or to improve the standards themselves. some authors
maintain that manufacturing units should not be meet into profits centres unless they sell a
large pertain of their outputs to outside customers. the regards the units that sell primarily to
other business units as profit centre.
Paper 2008
Q.11) ABC ltd has two division x and y. ROI and particulars of x and y are given below.
Solution:-
Profit
Sales
Div x div y
7 Lakhs 26 Lakhs
= 7% = 5.2%
Sales
Investment (assets)
= 4 times 5 times
Comment
Div x perform better than div y. Profit margin of x is 7% & of y is 5.2%. Though sales of x is
Rs 100 lakhs which is lower than of y i.e. 500 lakh. But efficiency of div x is more than div y because
it is earning more margin. About ROI it is 28% of x & 26% of y which means asset management of x
is proper (current assets such as debtors, receivable) is mismanaged working capital is mismanaged.
Turnover of y is good for which x have to work.
OR
Q11. shandilya ltd has adopted Economic value Added.(EVA) technique for appraisal of
performance of its three division A,B,& c. company charges 6% for current assets and 8% for
fixed asset while computing EVA relevant data are given below.
1) Tabulate budgeted and actual Return on assets for each of the divisions.
2) Tabulate budgeted and actual Economic Value Added for each of divisions.
3) Comment upon both method based on result.
Solution:-
Profit
Sales
Div A
Budget Actual
360 320
2000 1960
= 18% = 16%
Div B
Budget Actual
220 240
2400 2560
= 9% = 9.36%
Div C
Budget Actual
200 240
3200 3600
= 6.25% = 5.55%
OR
DIV A
Budget
-----------
152
360-158 = 208
EVA = 208
Actual
profit = 320
-----------
149.6
EVA = 170.4
DIV B
Budget
-----------
176
220 - 176 = 44
EVA = 44
Actual
Profit = 240
-----------
189.6
EVA = 50.4
DIV C
Budget
-----------
232
EVA = -32
Actual
Profit = 200
-----------
260
EVA = -60
COMMENT
Negative EVA destroys value of company and positive EVA creates wealth for company.