Management Control System

Presented by: Ravish prakash

Management Control System
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

Characteristics of Control System In Organization
‡ 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. so planning and controlling are interlinked and are known as P&C systems . ‡ 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.

.Functions ‡ 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.

.Responsibility Centres A responsibility centre is an organisation unit that is headed by manager who is responsible for its activities. ‡ motivation of the level of management to which a certain task has been delegated. ‡ delegation of responsibility for specific to successive lower levels of organisation. ‡ 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 .

.e.. ‡ The main focus of management¶s efforts will be on revenue generated by it. . ‡ The effectiveness of the centre is not judged by how much sales revenue exceeds the cost of the centre. revenue) is measured in monetary terms. ‡ Sales budget are prepared for revenue centre and budgeted figures are compared with actual sales. ‡ Generally the costs are not related to output.e. ‡ The sales department is an example for a revenue centre. but no formal attempt is made to relate input (I. output (I. expenses or cost) to output.Revenue Centres ‡ In a revenue centre.

. ‡ Total performance of an expense centre manager depends on how effectively and efficiently an expense centre is operated. ‡ Expense centre manager has no control over revenues. machinery and materials should be used to produce the product or service.Expenses Centre ‡ It is the lowest level of responsibility centre in an organization. his decision authority relates to how human resource. ‡ Its manager is basically responsible for production of a product or service. ‡ He has no control over marketing decisions or investment decisions. profits or investment.

‡ Normally. separate reporting systems are used to report effectiveness. compliance with production schedules and targets. ‡ Evaluation of the financial performance of an expense centre manager is by comparing the actual expenses of the centre against the budgeted expenses. maintaining morale of the workers and so on. ‡ It is measured and reported by the responsibility accounting system. ‡ Efficiency is judged in terms of financial performance. .‡ Effectiveness of an expense centre manager will depend on a host of non-financial parameters such as maintaining quality level of output.

‡ Profit centre¶s performance measured in terms of profit.Profit Center ‡ A profit centre is an organizational unit responsible for both revenues and costs. ‡ It enhances profit consciousness ‡ Example:division of a company that produces and markets different products. ‡ Profit centre manager has no control over the investment in the centre¶s assets. ‡ 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. ‡ Managers are concerned with both the production and marketing of the products. .

Investment Center ‡ An investment centre is responsible for the production. ‡ Investment centre manager responsible for profit in relation to amounts invested in the division. and within broad framework. ‡ Financial performance of the manager of the division is measured by comparing the actual with projected rate of return on investments of the centres . ‡ An investment centre manager decides on aspects such as the credit policies. marketing and investment in the assets employed in the segment. inventory policies.

Audits are most commonly used in the accounting and finance functions .AUDITING ‡ 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.

investigates. etc Fraud auditing and forensic audit Operational audit . and reports fraud ‡Forensic: related to the legal system. detects.Categories Of Audits Audit category Financial statement audit Internal audit Brief description ‡Gives an opinion on the accuracy of the financial statements ‡Ensures compliance with the relevant accounting standards and reporting framework ‡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 ‡Deters. R&D audit. especially issues of evidence ‡Audits operational aspects of the enterprise ‡Quality audit.

maintains data integrity. and contributes to organizational effectiveness and efficiency ‡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 ‡Audit of the enterprise's reported performance in meeting its declared social . or environmental objectives ‡Environmental compliance audit: a checking mechanism ‡Environmental management audit: an evaluation mechanism Social audit Environmental audit . community.Audit category Information systems audit Management audit Brief description ‡Audit of computer systems ‡Checks whether the computer system safeguards assets.

The auditing process ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ 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 .

Benefits of Auditing ‡ Identify opportunities for improvement ‡ Identify outdated strategies ‡ Increase management¶s ability to address concerns ‡ Enhance teamwork ‡ Reality check .

‡ A combination of financial and non financial measures gives a better picture of organizational performance. ‡ Concepts like JIT.THE BALANCE SCORECARD ‡ In the rapidly changing world of business. and SIX SIGMA have brought out the growing importance of non financial measures for evaluating the organizations overall performance. It has become increasingly necessary for organizations to simultaneously look at non financial measures for this purpose. considering only the financial measures of performance gives an incomplete picture of the overall organizational performance. proposed by Robert Kaplan and David Norton in 1992. . One concept which has received universal acclaim is the ´Balance Scorecard´ (BSC). TQM.

how should we appear to our customer To succeed financially. and the innovation/learning and growth perspective. at what business processes must we excel? To achieve our vision. how should we appear to our shareholders To satisfy our customer and shareholders. in addition to the financial perspective perspective Customer perspective Financial perspective Internal business perspective Innovation/learning growth perspective Underlying question To achieve our vision. how will we sustain our ability to change and improve? .The BSC framework considers the customer perspective. internal business perspective.

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 .Implementing the BSC ‡ If an organization emphasizes only shortterm or financial goals.

TRANSFER PRICING ‡ A transfer is referred to the movement of goods from a responsibility center to another. within the same company ‡ Different types of responsibility center. are involved in the transfers . belonging to different organizational levels.

‡ Here . there is a transfer of goods from the first business to the second and the concept of transfer pricing comes into play.Many organizations set up business units that cater to the needs of other business units within their own fold. . one business unit may manufacture components that are used by another business unit to assemble the final product. For example.

‡ The technique of transfer pricing plays an important role in the smooth functioning of responsibility structures in such an organization .‡ 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.

should not engage in decision-making that fails to optimize the organization¶s performance.the divisional manager in maximizing the profits of his division. ‡ 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:. There should be no interference in the process by other divisions like buying centers and selling centers .Objectives of TP policy ‡ Goal congruence:.each divisional manger should be free to satisfy the requirements of his profit center from internal or external sources.

BUDGETS ‡ 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. ‡ Budgeting as a control tool. there may be significant deviations between the a c t u a l s and the plans. provides an action plan for the organization to ensure least deviations .

‡ Budgets are also used as forecast tools and make the organization better prepared to adapt to changes in the environment .‡ 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.

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 .‡ Budget preparation requires the participation of managers from different functions / departments.

Functional specialization leads to the overall efficiency of the organization . in turn. promotes the process of specialization.‡ They help in the delegation of authority and allocation of responsibility and accountability to more people in an organization. which . They thus promote division of labor.

Steps in Budget Formulation ‡ 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 .

The flexible part : direct material. and variable overhead . direct labor.sales commission Capital budget Decisions regarding potential investments are made using discounted cash flow techniques A comprehensive plan is developed for all revenue and expenditure New plant and equipment Master budget All revenue and expenditures for any organization . sales promotion and R&D Flexible budget The static part: Salaries.Types of Budgets Appropriation budget Characteristics A ceiling is set for certain discretionary expenditures Based on the management decision A static amount is established for discretionary and committed fixed costs and a variable rate is determined per unit of activity for variable cost Examples Training. property taxes. advertising. depreciation. and planned maintenance.

± Cost of capital accounted for explicitly ‡ Rate of return required by suppliers of a firm¶s debt and equity capital ‡ Represents minimum acceptable return. advertising. restructuring costs.EVA ‡ 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 ‡ Doesn¶t have to follow GAAP ‡ R&D. ... .

Components of EVA ‡ NOPLAT Net operating profit after tax ‡ Operating capital Net operating working capital. goodwill. net PP&E. 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 .

Capital charge (= WACC * Capital) = Economic value added (EVA) .Calculating EVA Net operating profit after tax (NOPAT) .

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