2008

Q.1 ) Explain the benefits accrued to the top management by the internal audit?
Ans : Major adantages !aing An "nternal Audit #epartment
• 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 !nowledge which can then contribute to the
company;
• The Internal "udit maintains a group of highly s!illed people available to cope with non#recurring and
exceptional $obs which no many employee could deal with efficiently and effectively;
• It ensures that the organi%ation 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 li!e operational audits, constant examination of internal chec!
controls, the detailed application of normal auditing method and detailed review of the various type of
management reporting;
• 'ast but not least, it provides an excellent training ground for future executives. Trainee personnel obtain
intimate !nowledge of the business which they can study problems of all !inds at different levels.
The following categories of function may be carried out by an internal audit department(
1. Adisory# meaning that the internal auditor may recommend improvements and changes in the system in
operation and in the setting up of new systems
2. Executie#the internal audit department may actually deise and install changes and improvements to existing
systems and set up new systems
3. $eporting#the internal audit department prepares routine report on the company&s activities either on a
comprehensive, or on an exception basis
%. $outine testing#the department routinely monitors the performance of the company&s system,eg. by examining
and testing controls such as those over buying procedure and by cash counts or stoc! counts
Q. 1 a. Explain the considerations inoled in performing the function of $&# by top management in ie' of
the challenges of the globali(ation?
Ans :
)lobali%ation means no barriers of trade between the countries across the globe. "nyone can freely trade the
goods and services among the countries in the globe. This results into stiff competition in the global mar!et, in
this competitive mar!et if the firm has to survive then it must be updated and the products of the firms must have
the latest technology in it.
In the situation li!e this if the *+, department is functioned by top management then this will be useful for the
future of the organi%ation because, top management can ma!e decisions very quic!ly due to powers in their hand
and the experience that they earn.
If *+, decisions made quic!ly and effectively then one can expect always updated and latest quality product of
the firm in the mar!et.
,ue 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 *+, findings of one company that&s why there is heavy expenditure is required in *+, activities by
the corporates.
"lso due to intense copetition it is indeed to corporates to udate their products and services with their rivals
products and services.
/ocio cultural differences among the mar!et territories influence the direction of *+, activities for e.g. incase of
"nnapurna iodi%ed salt invented by H'' made an intensive research on preserving the iodine content in food
coo!ed by indian receipies for that they have introduced stable iodine salt which has been patented in 01 countries
which encapsulates iodine in aluminium and magnatium hydroid.
1
2008
Thus, these are the considerations involved in regulating *+, function by the top management especilly in view
of challenges faced on account of globali%ation.
Q. ) a. Explain subtle difference among the Management audit* Quality audit and +echnical audit?
"ns (
Management Audit ,
• " management audit may be described as a systematic and ob$ective appraisal of the quality of management,
aimed both at individual managers and toward the management team as an interloc!ing system of decision
ma!ers.
• 2anagement audit concerned with the ways and means to perform specific tas!.
• 3or e.g. it involves the decision ta!en 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 ,
• " 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 ob$ectives.
• " quality audit is concerned with the quality of results of specific tas!s which involves various products and
services.
• 3or e.g. it involves the quality testing of the final output of the plant whether it is goods or services.
+echnical Audit ,
• Technical audit can be described as systematic and independent examination of technical facilities of the
company.
• It is concerned with the exmining the technical specifications of the various entities of the company
• 3or e.g. factory layout, production or manufacturing facilities, locations, machineries, processes etc. comes
under technical audit.
Q.- Explain responsibility centre and map the process of ealuation thereof from one stage to another* 'ith the
help of illustrations , cum , experience of the corporates?
Ans'er:
"ntroduction 4
" responsibility centre is an organi%ation unit that is headed by a manager who is responsible for its activities. In a
sense, a company is a collection of responsibility centers, each of which is represented by a box on the organi%ation
chart. These responsibility centers from a hierarchy, at the lowest level are the centers for sections, wor! shifts, and
other small organi%ation units. ,epartments or business units comprising several of these smaller units are higher in
the hierarchy. 3rom the standpoint of senior management and the board of directors the entire company is a
responsibility center, though the term is usually used to refer to units within the company.
.ature 4
" responsibility centre exists to accomplish one or more purpose termed its ob$ectives. If each responsibility centre
meets its ob$ectives, the goals of the organi%ation would have been achieved.
The output of responsibility center could be tangible li!e product or intangible li!e service or advice output of a
responsibility center could be input to another responsibility center or could be sold in mar!et place to earn revenue.
$elationships bet'een inputs and outputs 4
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2008
2anagement 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. "dvertising expenses are intended to increase
sales revenue but since revenue is affected by many factors other than advertising, the management&s decision to
increase advertising budget is based on its $udgement rather than data. The value of *+, expenditure may not be
!nown for many years.
Measuring "nputs and outputs 4
Inputs can always be measured in terms of cost. Inputs are the resources used by the responsibility centers.
5alculating the value of output is much difficult to measure. "nnual revenue may be an important measure of output
but did not express all that the organi%ation did during the year li!e *+,, training and advertising etc. It is not
possible to measure value of output of H*, 6*, *+, etc. In non profit organi%ations there may be quantitative
measures of output. "t best we may use surrogates.
Efficiency and Effectieness 4
7fficiency is the ratio of outputs to inputs or the amount of the output per unit of input.
7ffectiveness is determined by the relationship between a responsibility centers output and its ob$ectives. 7fficiently
and effectiveness are not mutually exclusive. 7very responsibility centre should be both effective and efficient. In
summary, a responsibility centre is efficient if it does right things.
+he role of profit 4
" ma$or ob$ective of any profit oriented organi%ation is to earn satisfactory profit. Thus, profit is an important measure
of effectiveness. /ince 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.
+ypes and flo' of $esponsibility centers 4
There are four types of responsibility centers, classified according to the nature of monetary inputs and outputs that
are measured for control process(
8. *evenue centers
9. 7xpenses centers
:. 6rofit centers
;. Investment centers
8. $eenue /enters 4
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 mar!eting < sales unit that do not have
authority to set selling price and are not charged for the cost of goods they mar!et.
9. Expense /enters 4
7xpense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs
are not. There are two types of expense centers.
I. Engineered Expense centers 4 It has following characteristics
i. Their inputs can be measured in monetary terms.
ii. Their output can be measured in physical terms.
iii. The optimum rupee value of input required to produce one unit of output can be determined.
7ngineered expenses centers are usually found in manufacturing operations. They could be
engineered expense centers in mar!eting li!e warehousing, distribution, truc!ing in administration
and support departments also.
II. #iscretionary Expense center 4 ,iscretionary expenses centers include administrative and support
units, research and development, and most mar!eting activities. The output of these centers cannot be
measured in monetary terms. The term discretionary means management exercise its $udgement about what
the costs should be ta!ing into account its strategy and competitive environment.
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2008
0eneral control consideration 4
=udget preparation 4 2anagement formulates budget for a discretionary expense center by
determining the magnitude of the $ob that needs to be done. The wor! done by a discretionary expense center
falls into two categories continuing and special.
5ontinuing wor! is done consistently from year to year such as preparation of financial statement by
controller&s department. /pecial wor! is a one slot pro$ect. 7.g. developing and installing a profit budgeting
system in a newly acquired division. 2=> is used for budget preparation in a discretionary cost center, where
in a budget proposes to do specific $obs and suggest measures to be used in performance evaluation.
The planning function for discretionary expense center is usually carried out in two ways.
a. Incremental =udgeting 4 In this method current level of expenses is ta!en as a starting point. This
amount is ad$usted for inflation, anticipated changes in wor!load of continuing $obs, special $obs and
if data are readily available, and the cost of comparable $obs in similar units.
b. ?ero =ased =udgeting 4 " thorough review is made of each expense center. This review attempts to
ascertain de novo that is from scratch, the resource actually required to carry out each activity. This
analysis establishes a new base; the annual budget simply tries to !eep the cash in line with this new
base.
/ost ariability 4 In most discretionary cost centers personnel cost centers personnel cost is the
predominated cost. This is insulated from short term fluctuation in sales volume. If you try to ad$ust it
with volume the cost of hiring and training would increase. If we retrench moral of the people goes down.
+ypes of 1inancial control 4 The main purpose of the discretionary expense budget is to control cost by
allowing the manager to participate in the planning, sharing in the discussion of what tas!s should be
underta!en, and what level of effort is appropriate for each. Thus financial control is exercised at the
planning stage before the costs are incurred.
Measurement of 2erformance 4 The primary $ob of a discretionary expense centers manager is to obtain
the desired output. /pending an amount that is “on =udget to do this is considered satisfactory spending
more than that it is cause for concern, spending less may indicate that the planned wor! is not being done.
The financial performance report is not a means of evaluating the efficiency of the manager.
:. Administratie and support centers 4 5ontrol problem of administrative expenses is especially difficult.
I. The problem inherent in measuring output, and
II. The frequent lac! of goal congruence between the goals of departmental staff and the company as
a whole.
,ifficulty in measuring output 4 The principal output in administrative center is "dvice and /ervice 4 functions
that are virtually impossible to quantity much less evaluated. /ince output cannot be measures, it is not possible to
set cost standards against which to measure financial performance. Thus, a budget variance cannot be interpreted
as representing efficient or inefficient performance and which to discontinue. These decisions, of course are
highly sub$ective but they are within the policy limits on total research spending.
;. Annual 3udgets 4 if a company has decided on long range *+, program, and has implemented this program
with a system of pro$ect approval, the preparation of the annual *+, budget is mainly the calenderi%ation 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.
@. Mar4eting /enters 4
2ar!eting activities are those underta!en to obtain orders for company&s products. These activities include
test mar!eting, the establishment, training and supervision of sales force, advertising and sales promotion 4 all
of which have characteristic that present management control problem. Ahen it is possible to measure a
mar!eting department&s output evaluating the effectiveness of mar!eting effort is much more difficult. It is
because that the factors beyond the mar!eting departments control may invalidate the assumption on which
sales budget were based.
There are two types of 2ar!eting "ctivities.
i. >rder tilling or 'ogistic activities 4 which ta!es place after an order has been received.
ii. >rder getting activities or true mar!eting activities.
1lo' of one stage to another stage
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2008
Manufacturing 1unction
$esearch & #eelopment 1unction
Mar4eting 1unction
3usiness 5nits
5
6or4
>ptimal relationship
can be established
Inputs >utputs
,ollar 6hysical
7ngineered 7xpense
5enters
Inputs
>utputs
,ollar
6hysical
6or4
>ptimal relationship
cannot be established
,iscretionary 7xpense
5enters
6or4
Inputs are not related to outputs
Inputs
>utputs
,ollar only for costs
directly incurred
,ollar *evenue
*evenue 5enters
6or4
Inputs are related to outputs
Inputs >utputs
,ollar 5osts ,ollar 6rofits
6rofit 5enters
2008
3usiness 5nit
Q.17 Mane jay 8+# *engaged in diersified actiities consisting of 9 independent profit centres decided to sell
one of its diision profits centre to a group of its managers .narrate the changes that are needed in control
system *practice and procedure *giing the reasons.
Ans'ers
There is no guiding principle declared that certain types of units are inherently profits centres and others are
not. 2anagement 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.
Mar4eting
" mar!eting activity can be turned into profit century charging it with the cost of the production sold. this
transfers price provide the mar!eting managers with the relevant information to ma!e 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. *ather than the actual cost. >f the product being sold. Bsing the standard cost has is separated .the
mar!eting cost performance from that the manufacturing cost performance.
Ahen should a mar!eting activity be given profit responsibilityC when the mar!eting managers is in the best
position to ma!e the principle cost revenue trade off .this often occurs where different conditions exist in different
geographical areas 4for example a foreign mar!eting activity ,in such an activity ,it may be difficult to control
centrally such decision as how to mar!et 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 $udged 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 $ob.
Example
• " manager may s!imp on quality control, shipping products of inferior quality in order to obtain standards
cost credit.
• " managers may be reluctant to interrupt production schedule in order to produce a rush corroder to
accommodate a customer.
• 2anagers who are measured against standards may lac! the incentive to manufacture products that are
difficult to produce#or to improve the standards themselves. some authors maintain that manufacturing units
should not be meet into profits centres unless they sell a large pertain of their outputs to outside customers.
the regards the units that sell primarily to other business units as profit centre.
:erice and supports units
Bnit for maintained ,information ,technology ,transformations engendering ,consulting , customer service and similar
supports activities can all be made into profits center,these may operate out of headquarters and service corporate
division ,or they may fulfil similar function within business units .they charge customer for service rendered ,with the
finical ob$ective of generating enough business so that their revenues equal their expenses .the prevalence of such
practices is shown -the firms charge “based on usage “probably treat these units as profit centres . usually ,the units
receiving these service have the option of procuring them from an outside vender ,provide the can offer service of
equal quality at a lower price.
D.88. "=5 ltd has two division x and y. *>I and particulars of x and y are given below.
6
,ollar 6rofits

/apital Employed
Inputs are related to
capital employed
Inputs >utputs
,ollar 5osts
Investment 5enters
2008
2A$+"/58A$: #";":"<. = >$:) #";":"<. ? >$:)
*>I 90E 9FE
/ales 811 'a!hs @11 'a!hs
Investment 9@ 'a!hs 811 'a!hs
7=IT Gl"HH/ 91 'a!hs
"nalyse and comment upon performance of both divisions.
:olution:@
6rofit
6rofit margin I ########### J811
/ales
#i x di y
G 'a!hs 9F 'a!hs
6rofit margin ################ J811 ############## J811
811 'a!hs @11 'a!hs
I GE I @.9E
/ales
Turnover of assets I ################
Investment -assets.
811 'a!hs @11 'a!hs
Turnover of assets #################### #################
9@ 'a!hs 811 'a!hs
I ; times @ times
6rofit margin GE @.9E
Turnover of assets ; times @ times
*oI 90E 9FE
/omment
,iv x perform better than div y. 6rofit margin of x is GE + of y is @.9E. Though sales of x is *s 811 la!hs
which is lower than of y i.e. @11 la!h. =ut efficiency of div x is more than div y because it is earning more margin.
"bout *>I it is 90E of x + 9FE of y which means asset management of x is proper -current assets such as debtors,
receivable. is mismanaged wor!ing capital is mismanaged. Turnover of y is good for which x have to wor!.
<$
Q11. shandilya ltd has adopted Economic alue Added.>E;A) techniAue for appraisal of performance of its
three diision A*3*& c. company charges BC for current assets and DC for fixed asset 'hile computing E;A
releant data are gien belo'.
6articulars ,ivision " ,ivision = ,ivision c
=J "JJ =J "JJ =J "JJ
profit :F1 :91 991 9;1 911 911
5urrent assets ;11 :F1 011 GF1 8911 8;11
3ixed assets 8F11 8F11 8F11 8F11 9111 9911
• budgeted JJ "ctual -*s in carors.
>n the basis data given below(#
8. Tabulate budgeted and actual *eturn on assets for each of the divisions.
9. Tabulate budgeted and actual 7conomic Kalue "dded for each of divisions.
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2008
:. 5omment upon both method based on result.
:olution:@
6rofit
6rofit margin I ########### J811
/ales
#i A
3udget Actual
:F1 :91
6rofit margin ########## J 811 ############## J811
9111 8LF1
I 80E I 8FE
#i 3
3udget Actual
991 9;1
6rofit margin ########## J 811 ############## J811
9;11 9@F1
I LE I L.:FE
#i /
3udget Actual
911 9;1
6rofit margin ########## J 811 ############## J811
:911 :F11
I F.9@E I @.@@E
7K" I 6rofit 4 cost of op
>*
7K" I >6 6*>3IT 4 -5apital employee J A"55.
,IK "
3udget
7K" profit I :F1
5."sset I ;11 JFE I 9;
3."sset I 8F11J 0EI 89:
###########
8@9
:F1#8@0 I 910
7K" I 910
Actual
profit I :91
5."sset I :F1 JFE I 98.F
3."sset I 8F11J 0EI 890
###########
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2008
8;L.F
:91 #8;L.F I 910
7K" I 8G1.;
,IK =
3udget
7K" profit I 991
5."sset I 011 JFE I ;0
3."sset I 8F11J 0EI 890
###########
8GF
991 # 8GF I ;;
7K" I ;;
Actual
6rofit I 9;1
5."sset I GF1 JFE I ;@.F
3."sset I 8011J 0EI 8;;
###########
80L.F
9;1 #80L.F I 910
7K" I @1.;
#"; /
3udget

7K" profit I 911
5."sset I 8911 JFE I G9
3."sset I 9111J 0EI 8F1
###########
9:9
991 # 9:9 I #:9
7K" I #:9
Actual
6rofit I 911
5."sset I 8;11 JFE I 0;
3."sset I 9911J 0EI 8GF
###########
9F1
911 4 9F1 I #F1
7K" I #F1
5>227MT
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2008
Megative 7K" destroys value of company and positive 7K" creates wealth for company.
Q.1)) 03M 8td * currently engaged in manufacture of medium engineering
products* ta4es oer a company engeged in +elcom :ector. #esign an
"ntegrated Management /ontrol :ystem for 03M 8td. Assuming company
has merged into 03M 8td.
Ans:@ "ny organisation,however well aligned its structure is to the choosen strategy, cannot effectively
implement its strategy without a consistent management control system. Ahile organisations structures defines
the reporting relationships + the responsibilities + the authorities of different managers, it need an
appropriately designed control system to function effectively.
Mow we will discuss planning + control requirements of different corporate strategies for
)=2 'td.,
,ifferent corporate strategies imply the following differences in the context in which control system
need to be designed(
• "s firms become more diversified , corporate level mangegers may not have significant !nowledge
of, or experience in, the activities of the company&s various business units.If so, corporate 4level managers for
highly diversified firm cannot expect to control the different businesses on the basis of intimate !nowledge of
their activities, and performance tends to be carried out at arm&s length.
• /ingle#industry + related diversified firms posses corporatewide core competancies on which the
strategies of most of the business units are based. 5ommunication channels + transfer of competanciesacross
business units, therefore, are critical in such firms. In contrast, there are low levels of interdependence among
the business units of unrelated diversified firms. This implies that as firms become more diversified, it may be
desireable to change the balance in control systems from an emphasis on fostering cooperation to an emphasis
on encouraging encouraging entrepreneurial spirit.
/pecific tendancies ,in design of control systems corresponding to variations in corporate strategies for )=2
'td., are given belowN..
/trategic 6lanning (
)iven the low level of interdependence, conglomerates of )=2 'td, tend to use vertical strategic planning
systems# that is, business units prepare strategic plans + submit them to senior management to review +
approve. =ecause of the high level of interdependencies, strategic plannig systems for releted diversified +
single industry firms tend to be both vertical + hori%ontal. The hori%ontal dimension might be incorporated
into strategic planning process in a number of different ways. 3irst, a group executives might be given the
responsibilities to develop strategic plans for the group as a whole that explicitly identifies synergies across
individual individual business units within the group. /econd, strategic plans of individual business unit could
have an interdependence section, in which the general manager of the business unit identifies the focal
lin!ages with other business units + how those lin!ages will be exploited. Third, the corporate office could
require $oint strategic plans for intredependent business units. 3inally, strategic plans of individual business
units could be circulated to managers of similar business units to critique + review.
3udgeting :
In a single# industry firm, the chief executive officer may !now the firm&s operations intimately + corporate
+ business unit managers tend to have more frequent contact. Thus, chief executive of single industry firms
may be able to control the operations of suborddinates through informal + personaly oriented mechanism, such
as frequent personal interactions. If so, this lessons the need to rely as heavily on the budgeting system as the
tool for control.
>n the other hand in conglomerates li!e )=2 'td,it is nearly impossible for the chief executive to rely on
informal interpersonal interactions as a control tool( much of the communication + control has tobe achieved
through the formal budgeting system. This implies the following budgeting system characteristics in )=2
'td(
• =usiness unit managers have somewhat greater influence in developing their budgets since they ,not
the corporate office, possess most of the information about their respective product or mar!et environments.
• )reater emphasis is often placed on meeting the budget since the chief executive has no other
informal controls available.
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2008
+ransfer 2ricing :
Transfer of goods + services between units are more frequent in single industry + related diversified firms
than in the conglomerates li!e )=2 'td. The usual transfer pricing policy in a conglomerate is to give
sourcing flexibility to business units + use arm&s length mar!et prices, However, in a single#industry or a
related diversified firm, synergies may be important, + business units may not be given the freedom to ma!e
sourcing decision.
"ncentie /ompensation :
The incentive compensation policy tends to differ across corporate strategies in the following ways(
Bse of formulas( 5onglomerates, in general are more li!ely to use formulas to determine business unit managers
bonuses( that is , they may base a larger portion of the bonus on quantitative, financial measures, such as O percent
bonus on actual economic value added -7K". in excess of budgeted 7K". These formula#based bonus plans are
employed because senior management typically is not familiar with what goes on in a variety of disperate businesses.
6rofitability measures ( In case of unrelated diversified firms, the incentive bonus of the business unit managers tends
to be determined primarily by the profitability of that unit, rather than the profitability of the firm.
Thus by this way we can design the inegrated management control system for )=2 'td., assuming the other company
has merged into )=2 'td.
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