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Question Paper

Management Control and Information Systems (MB281) : April 2003



Part A : Basic Concepts (30 Points)


This part consists of questions with serial number 1 - 30.
Answer all questions.
Each question carries one point.
Maximum time for answering Part A is 30 Minutes.

1. Which of the following is false about Management Control Systems?
a. They ensure that the right strategies are carried out to obtain the organizations goals
b. They anticipate future conditions
c. They are self-regulating in nature
d. They bring unity out of diverse activities of an organization
e. They help management in decision-making.
< Answer >
2. Which of the following points is not correct with respect to implementation of Process
Quality Teaming in a manufacturing unit?
a. Management selects a unit, such as a manufacturing department, whose output as well
as the input are to be improved
b. A team is formed which includes people from all key functions that have an impact on
the success of the unit
c. The responsibilities of each function are assigned to the individual, and the
departmental head is made responsible for the quality and value of the output
d. The team tries to find out specific customer requirements, desires and needs
e. Cause and effect analysis is performed for the major problems and a specific corrective
action is determined.
< Answer >
3. Focusing on people who participate actively in the planning process and thereby helping
management in cost-control through budgeting process is the feature of
a. Financial Accounting
b. Cost Accounting
c. Control Accounting
d. Decision Accounting
e. Responsibility Accounting.
< Answer >
4. Which of the following statements about Non-Financial Audit is not true?
a. It relies primarily on standards set internally on the basis of customer and competitor
information
b. The focus is on exceeding standards set internally or by industry competitors
c. Standards are essentially the same from audit to audit
d. It is conducted, on an average, every 18 to 24 months
e. It focuses on a broad range of functions that contribute to the success or failure of a
particular process.
< Answer >
5. Which of the following statements is false with regard to key success variables?
a. They are those variables in the external environment to which goals, objectives and
strategies of managers, are most sensitive
b. They are also referred to as key success factors
c. The top management should continuously analyze the reasons for significant changes in
them
d. They are only quantitative in nature
e. They indicate to the management, the necessity for prompt action.
< Answer >
6. Which of the following Audit Tools is the most rigid?
a. Survey
b. Questionnaire
c. Focus Group
d. Interview
e. Direct Observation.
< Answer >
7. Which of the following creates cushion against the variability of the environment and
provides resources for innovation and adaptation in various stakeholders areas?
a. Managerial Style
b. Organizational Culture
c. Organizational Slack
d. Organizational Growth
e. Organizational Ethics.
< Answer >
8. When the librarian asked his assistant to find out the most popular book, he identified it on
the basis of its dirty or well-used pages. This is an example of
a. Accretion data
b. Erosion data
c. Archival data
d. Participant observation
e. Field observation.
< Answer >
9. A renowned cycle manufacturing company makes use of a managerial style which
emphasizes authorized control systems, formal measurement and evaluations wherein only
the top executives maintain decision-making mechanism, with the help of information
gathered at lower levels of organization. This is an example of
a. External Control Style
b. Internal Control Style
c. Mixed Control Style
d. Democratic Style
e. Participative Style.
< Answer >
10. In which of the following Audit Tools, the researchers have little control over content of
response?
a. Survey
b. Questionnaire
c. Interview
d. Focus Group
e. Both (a) and (d) above.
< Answer >
11. A business organization holds review meetings for performance appraisal of responsibility
centre which focus on identifying the facilitating and inhibiting factors in the achievement or
non-achievement of targets so that necessary remedial actions can be taken after thorough
analysis of the reasons for non-achievement. This is an example of:
a. SWOT Analysis
b. Force Field Analysis
c. ABC Analysis
d. Cost-Benefit Analysis
e. Value Chain Analysis
< Answer >
12. Which of the following activities an Audit cannot do?
a. Identify outdated strategies
b. Measure performance improvements
c. Change mind-set
d. Mobilize people to action
e. Increase managements ability to address concerns.
< Answer >
13. Which of the following statements is false regarding ethical principle of fairness in the design
of control systems?
a. The concept of fairness is stressed to achieve the environment which is conducive to
ethical behaviour
b. Managerial controls that do not incorporate the concept of fairness tend to create stress
and resentment among the employees
c. The ethics administrator should maintain disciplinary records to ensure that the ethics
program is perceived as fair by the organizational participants
d. The concept of fairness need only be confined to the employees of the organization, and
not extended to the activities of the stakeholders
e. Fair wages and salaries should be paid to the employees to provide opportunities for
growth.
< Answer >
14. Which of the following have to be approved by the shareholders, as required by corporate by-
laws and securities regulators?
a. Salaries
b. Wages
c. Benefits
d. Pensions
e. Incentives
< Answer >
15. The concepts of Engineered Costs and Discretionary Costs play an important role in the
performance evaluation of which of the following responsibility centres?
a. Revenue Centre
b. Investment Centre
c. Expense Centre
< Answer >
d. Profit Centre
e. Both (a) and (b) above.
16. Which of the following Incentive Plans ensures that the managers receive an award equal to
the market value of the stock since the date of a reward?
a. Stock Option
b. Stock Appreciation Right
c. Performance Share
d. Phantom Share
e. Bonus.
< Answer >
17. Which of the following is not a feature of Management By Objectives (MBO)?
a. It is a process of joint setting of goals by the superiors and the subordinates
b. It imposes self-control upon managers
c. It has its roots in behavioral science
d. It emphasizes quantitative performance only
e. It has proved to be a powerful management tool.
< Answer >
18. When the principal has insufficient information about the activities of the agents, he cannot
ascertain the agents contribution to the firms results. This is a situation of
a. Work Aversion
b. Shirking
c. Information Asymmetry
d. Private Information
e. Moral Hazard.
< Answer >
19. The measure of performance which compares the output with the corresponding achievement
of corporate objectives is generally called
a. Efficiency Measure
b. Process Measure
c. Effectiveness Measure
d. Both (a) and (b) above
e. None of the above.
< Answer >
20. Which of the following information systems attempts to guard the managers against
inappropriate assumptions and is used by the managers before making a decision?
a. External Information System
b. Systematic Information System
c. Social Information System
d. Continuing Information System
e. Executive Information System.
< Answer >
21. IBM wants to consolidate its age-old product. viz., mainframe computer, to remain a market-
leader globally. This is an example of which of the following types of corporate mission?
a. Build
b. Hold
c. Harvest
d. Divest
e. None of the above.
< Answer >
22. Management Information System (MIS) is commonly used in which of the following
methods of monitoring of Development Programs?
a. Indicator based monitoring
b. Monitoring by beneficiaries
c. Monitoring by legislator
d. Monitoring by media
e. Monitoring through field visit.
< Answer >
23. Which of the following is not a characteristic of Strategic Planning?
a. It is regular in nature. i.e., it takes place at regular intervals of time
b. It is a complex process
c. The information necessary for strategic planning is derived from the external
environment
d. Strategic Planning consists of two aspects goal setting and strategy formulation
e. It is a creative and analytical process.
< Answer >
24. Which of the following statements is false regarding a Non-profit organization?
a. An organization that is chartered by the state to operate in the interests of the society, is
known as a Non-profit organization
b. The primary objective is to render the best possible service to customers
< Answer >



c. A Non-profit organization receives contributed capital which can be divided into two
principal categories: plant and endowment
d. In a Non-profit organization, there is restraint on distribution of profits as well as on
earning profits
e. A Non-profit organization does not pay enough attention to its pricing policy.
25. As per Bowers model, the authority of designing the Programming Process vests with the
a. Top Management
b. Middle Management
c. Lower Level of Management
d. Both (a) and (b) above
e. All (a), (b) and (c) above.
< Answer >
26. Which of the following is not correct about Transfer Price(s)?
a. Transfer Price is the value placed on the transfer of goods or services among two or
more profit centers of same organization
b. Accounts are prepared on the basis of transfer price for transactions that are carried out
among the business units
c. Transfer Prices also refer to the expenses incurred by corporate office which are
charged to the business units
d. The concept of Transfer Price is basically aimed at simulating the external market
conditions within the organization
e. Transfer Prices should induce goal congruent decisions.
< Answer >
27. The term mission organization is used to refer to
a. Professional organization
b. Financial Services organization
c. Non-profit organization
d. Merchandizing organization
e. Manufacturing organization
< Answer >
28. In which of the following types of exposure, is the subsidiary manager held responsible for
the dependence effects of exchange rates?
a. Translation Exposure
b. Transaction Exposure
c. Economic Exposure
d. Both (a) and (b) above
e. All (a), (b) and (c) above.
< Answer >
29. Procurement, payroll, storage are examples of
a. Informal Information
b. Private Information
c. Non-financial Information
d. Task Control Information
e. None of the above.
< Answer >
30. In case of management control of projects, which of the following controls does not
recognize gradations of quality?
a. External Control
b. Internal Control
c. Cybernetic Control
d. Go / No-go Control
e. Post Control.
< Answer >

END OF PART A

Part B : Problems/Caselets (50 Points)
This part consists of questions with serial number 1 - 7
Answer all questions.
Points are indicated against each question.
Detailed workings should form part of your answer.
Do not spend more than 110 - 120 minutes on Part B.
1. Sakarina Ltd. has furnished the following information pertaining to sales for the quarter ending December
31, 2002:
You are required to compute the following:
a. Total sales variance
b. Sales price variance
c. Sales volume variance
d. Sales mix variance
e. Sales quantity variance
(2 + 2 + 2 + 2 + 2 = 10 points) < Answer >
2. Sanath Engineering Ltd., an engineering conglomerate, is growing at the rate of about 200% every year.
The company has two divisions namely Division C and Division Y. Division C assembles an intermediate
product for which there is no external market. Division Y is using this intermediate product to make the
final product.
The demand schedule for the final product produced by Division Y is given below:
The costs of each division are:
The transfer price for the intermediate product is Rs.17.50, which is determined on full cost basis.
You are required to:
a. Prepare a statement showing contribution for each division and the company as a whole at various
selling prices.
b. Find the selling price which maximizes the contribution of Division Y and the company as a whole.
c. Compute the transfer price that will maximize the profit of the company under the divisional
organization when there is no market for the intermediate product and the supplying division has no
capacity constraints.
d. Determine the output to be produced by Division C that will maximize the companys profit, if there is
no market for the intermediate product and the supplying division has no capacity constraints.
(6 + 1 + 2 + 3 = 12 points) < Answer >
Caselet 1
Read the following caselet carefully and answer the following questions:
3. Discuss the Management Control System you would recommend for OReilley Associates.
(7 points) < Answer >
4. Managements early assessment of the products chances of succeeding was critical to the profitability of
OReilley Associates. Comment.
(6 points) < Answer >
In 1990, O Reilley Associates was one of the largest advertising agencies in the United States. Billings for the
ad industry were over $260 billion on a worldwide basis that year, compared to $125billion in 1984. The 20
largest firms accounted for nearly 35 percent of world wide billings in 1990. Fourteen of these were independent
agency networks and six were advertising groups. Most of the firms were based in the US or UK.
Companies of all sizes retained advertising agencies to create and execute marketing plans, advertising
strategies, and campaigns. The agencies ranged from those that provided only traditional advertising services to
others with extensive marketing research and consulting capabilities.
Advertising agencies were compensated by their clients in one of two ways. Traditionally, an ad agency received
a 15 percent commission on advertisement placed in television, radio or print. The client would be billed the full
amount, and 15 percent would be kicked back to the agency from the medium. Creative work and campaign
development were not charged to the client.
With the increased use of non-advertising services, a fee-based system was introduced. These services included
design, graphics, market research, sales promotion, direct mail campaigns, merchandising, event planning, and
public relations. For these nontraditional services, clients were charged billable hours plus expenditures. For
Products Budget Actual
Units Selling price per unit (Rs.) Units Selling price per unit (Rs.)
A 10,000 40 11,000 42
B 7,000 60 6,500 58
C 5,000 50 5,200 55
Selling Price (Rs.) Quantity sold (Units)
50 1,000
45 1,500
40 2,000
35 2,500
30 3,000
25 3,500
Particulars Division C (Rs.) Division Y (Rs.)
Variable cost per unit 5.50 3.50
Fixed cost per annum 30,000 45,000
production of campaign, the client was billed cost plus 15 percent. This fee structure was necessary because the
kickback scheme no longer was feasible with the new services and different media.
O Reilley Associates was organized into six divisions, namely, Account management, Creative management,
Information management, Media management, Administrative management and Production management. The
account executive ultimately was responsible for managing the client account, including coordinating the
creative, marketing, and media strategies within the agency.
New client decisions
One of the senior managements most critical roles was deciding which new clients to accept. Potential clients
whose products competed with an existing clients products were not even considered. Aside from this, O
Reilley Associates considered any new client that (1) had a solid business reputation, (2) was in good standing in
the community, and (3) whose product met a consumer need.
New product Introduction
The information management division began by conducting marketing studies and using focus groups to
determine if there was a consumer need. If a need existed, the consumer benefit was identified. Once a
consumer need was identified, a creative strategy, based primarily on the consumer benefit, was developed.
When the agency finished test marketing, it gave recommendations to the client about the probable outcome of a
full-scale product launch. Only after the client decided to proceed would the agency generate any significant
revenue from the assignment.
Existing Product Support
A new campaign for an existing product began when the previous campaigns run period ended. The decision to
develop a new campaign required both the clients and the agencys judgement. A drop in a products market
share was a definite sign that a new campaign should be considered.
Account Profitability
The most profitable accounts were those that advertised frequently with same copy. A client who required a
constant stream of new copy was far less profitable than the one who used the same copy repeatedly. A clients
size frequently affected its profitability. In large client organizations, the advertising plan had to be cleared at
numerous levels, which involved a great deal of time and effort on the agencys part.
Personnel Costs
Personnel constituted much of the cost associated with servicing an account. Payroll accounted for 60 to 65
percent of OReilley Associates gross revenues. All employees except administrative staff filed time sheets that
recorded the number of hours they worked, broken down by the client account. Approximately 85 percent of the
payroll was accountable to the individual clients. Since 65 percent of revenues covered payroll and 85 percent of
payroll was accountable, 55 percent of revenues were direct personnel expenses. At OReilly Associates, if
direct payroll associated with an account was less than 55 percent of the revenues, the account was considered
profitable.
Caselet 2
Read the following caselet carefully and answer the following questions:
5. According to you, what are the reasons for the success of Ayala Conglomerate in such adverse Business
environment?
(6 points) < Answer >
6. Comment on the Management Control System followed by Ayala.
(5 points) < Answer >
7. What benefit was Ayala deriving from the mixed business model of family owned and public companies?
(4 points) < Answer >
The Philippines would seem to be an unlikely place to find perspectives on management and governance. Hit
hard by the 1997 Asian crisis, the country endured two years of fiscal mismanagement and economic decline
under the administration of President Joseph Estrada, who was removed from office in January 2001; a heavy
depreciation of the currency; and a global slowdown. Most companies in the Philippines have suffered
accordingly.
Survivors of such economic volatility can offer valuable lessons. Ayala Corporation has come through the past
five years with its businesses and reputation untarnished, which is more than many other conglomerates in Asia,
one can say. Founded as a distillery in 1834, the company soon expanded into trading and agriculture, and it now
operates business ranging from land to water, light-rail to auto retail, and telephones to banking. Ayala
companies currently represent some 25 percent of the market capitalization of the Philippine Stock Exchange.
Ayala Corporation is the holding company with 58.2% stake held by Zobel de Ayala family, 19.1% by
Mitsubishi, 4.4% by Shoemart and rest by public investors. Ayala group of companies are Ayala International
Pte, with 100% holding, Ayala Land with 70% holding, Bank of Philippine Islands with 35% holding and Globe
Telecom with 32% holding. Apart from these under the umbrella of AC Capital, which is a division of the Ayala
Corporation, there are several subsidiaries with interests in agriculture, insurance, auto assembly, electronics and
infrastructure. Among these companies AL, BPI and GT are publicly listed companies.
Ayala has put its faith in this conglomerate model because of limited market size and its willingness to be part of
the infrastructure needs of the country. They have entered into businesses varying from construction of roads,
supply for drinking water, railways and real estate. Their telecom business, Globe, was launched in early 1990s,
when Government was seeking to liberalize the economy. ITT, the largest investor in Globe at that time decided
to sell all of its telecom holding around the world. Rather than sell out with ITT, they opted to take a majority


stake, bring in a strategic partner, and build up the companys franchise. They believed a revolution was about
to take place and they did not want to miss it.
A major shift in its organizational thinking occurred in 1991. Rather than just have a real-estate company that
was increasingly diversifying into other fields, they spun the real-estate operations off into a separate company
and left Ayala Corporation as the holding company of that and all its other businesses. Since then, they have
followed the strategic logic of an investment company. They enter into businesses that have potential for growth
and for which they have a value-adding proposition, and manage them to grow into leadership positions
domestically.
Their division AC Capital, which is responsible for all of Ayala Corporations domestic non-listed businesses
has venture capital disciplines. Over the years, they have become involved in a number of smaller businesses,
looking to build them up to leadership positions during ten-year time frame. Now they have started focusing
their noncore holdings into AC Capital, where they can give them a stricter financial focus. More clearly
defined financial discipline will better identify the winners and weed out the rest. In the past they evaluated their
subsidiaries on the equity, operating margins, net income, and the like. During the past year, they have been
turning toward the concept of economic value added; a metric that instills greater capital discipline and better
reflects the value their managers are creating.
They are great believers in the combination of stable family and partner interests, on the one hand, and the
institutional investors of a public company, on the other. They feel that between these two extremes lies the
most sustainable model. There is an ever-increasing tension between the institutional investors focus on
quarterly results and the need for long-term strategy and stability. Widely held public companies are seeing a
dramatic rise in their CEO turnover, often because there is no single large institution willing to tell the CEO,
Look, hang in there. Lets agree on our long-term strategy. Even if it takes a short-term hit, you know well
back you up. CEOs have to roll the dice in a bigger and bigger way, and chances are that theyll fail
occasionally.
END OF PART B
Part C : Applied Theory (20 Points)
This part consists of questions with serial number 8 - 10.
Answer all questions.
Points are indicated against each question.
Do not spend more than 25 -30 minutes on Part C.

8. In addition to examining costs incurred, the auditors call attention to management actions that they believe
are substandard. Explain the role of project auditing in an on-going project
(7 points) < Answer >
9. What is a cooperative society? How are they operated?
(6 points) < Answer >
10. Budgets are not merely accounting documents, they are blue prints for managerial action during a budget
period. Elucidate.
(7 points) < Answer >

END OF PART C

END OF QUESTION PAPER



Suggested Answers
Management Control and Information Systems (MB281) : April 2003
Part A : Basic Concepts

1. Answer :
(c) < TOP >
Reason : The purpose of a management control system is to assist management in the coordination of the
activities of the organization and in the steering of those activities toward the achievement of the
firms overall purposes, goals and objectives. Management control systems anticipate future
conditions. They are not self-regulating in nature. Managers usually operate in situations of
uncertainty and the control systems ensure that proper actions are taken whenever needed, in
spite of the uncertainty.
All other options are true regarding Management control systems.
2. Answer :
(c) < TOP >
Reason : Process Quality Teaming combines several successful total quality techniques into a
cybernetic control system with cybernetic features like feedback loops, action plans, and
environment scanning. While implementing Process Quality Teaming in a manufacturing unit,
the responsibilities of each function are assigned to the individual, and each person should be
made responsible for the quality and value of the output he/she makes, rather than only the
departmental head.
All other options are correct with respect to implementation of Process Quality Teaming in a
manufacturing unit.
3. Answer :
(e) < TOP >
Reason : Responsibility Accounting helps managers to trace costs, revenues and profits in order to
enable them to arrive at right decisions. It focuses on people who participate actively in the
planning process and thereby help management in cost-control through budgeting process.
Financial Accounting is concerned with the preparation of an income statement and balance
sheet which describe the financial position of the firm on a given date.
Cost Accounting aims to provide prompt cost data for managerial planning, controlling and
decision making.
Control Accounting analyzes the success of the organization in achieving its goals.
Decision Accounting helps the management to arrive at right decisions. The focus is on
economic analysis that is essential to arrive at the right decision.
4. Answer :
(c) < TOP >
Reason : Non-Financial Audit relies primarily on standards set internally on the basis of customer and
competitor information. Standards should change as performance improves and should not
be the same from audit to audit.
All other options are true regarding Non-Financial Audit.
5. Answer :
(d) < TOP >
Reason : Key success variables are those variables in the external environment to which the goals,
objectives and strategies of managers, are most sensitive. They are also referred to as key success
factors as they help in explaining the success or failure of the organization. They are qualitative
and their measurement is subjective in nature. However, they should not be omitted from the
control system because they are qualitative.
All other options are true regarding Key success variables.
6. Answer :
(a) < TOP >
Reason : Survey is an inexpensive and consistent means of gathering and aggregating large amounts of
data. It consists of written survey and telephone survey and is the most rigid of the tools,
without much flexibility.
Questionnaire is used in the absence of enough resources for either a full-fledged survey or for
interviewing a sizeable number of respondents. It provides more flexibility than survey.
A Focus Group is a group of people who jointly participate in an interview that does not use a
structured question-and-answer method to obtain information from these people.
Interview is a technique to gather data from the conversation between two people, and is a
highly flexible research tool.
In Direct Observation, the researcher gathers data by directly observing the relevant actors and
settings.
7. Answer :
(c) < TOP >
Reason : In terms of management control systems, Organizational Slack creates cushion against the
variability of the environment and it provides resources for innovation and adaptation in various
stakeholders areas.
Managerial Style is the term associated with individual managers and refers to the management
style adopted by them in controlling the various activities of the organization.
Organizational Culture consists of shared values, beliefs and norms which grow over time. The
culture of an organization is greatly influenced by the environment in which it operates.
Organizational Growth is a very broad term which refers to improved market share, increased
profitability, increased revenue, better HR Practices, better work environment, better
corporate governance and others.
Organizational Ethics is concerned with the moral justification of the organizations structures
and practices.
8. Answer :
(b) < TOP >
Reason : Erosion data is used to measure wear on a place or object. Therefore, the given example is an
example of Erosion data.
Accretion data is used to examine the residue or evidence left by a certain process in order to
estimate its use or popularity.
Archival data consists of written records which are used to measure process performance.
Participant observation involves the full participation of the researcher in an activity, who
makes mental notes of the dynamics and feelings involved with participating.
In Field observation, the interviewer watches the interaction of a group without getting directly
involved.
9. Answer :
(a) < TOP >
Reason : External Control Style emphasizes authorized control system, formal measurements and
evaluations wherein the top executive maintains decision-making mechanism, with the help of
information that is gathered at the lower levels of the organization. Hence, the given example is
that of External Control Style.
Internal Control Style focuses upon the human aspects of the organization. It is participative in
nature and puts emphasis on the motivation of the subordinates such as social esteem, self
actualization and others.
Mixed Control Style includes characteristics of both External Control Style and Internal
Control Style. It is based upon both objective and subjective measures.
Democratic Style is the one in which policies, strategies and standards are determined by the
entire group of people who are expected to achieve them. A democratic leader ensures that
everybody understands the overall goals, objectives and plans.
Participative Style is nothing but Democratic Style.
10. Answer :
(c) < TOP >
Reason : Interview is a technique to gather data from the conversation between two people, and is a
highly flexible research tool. The researchers have little control over content of the response.
Survey is an inexpensive and consistent means of gathering and aggregating large amounts of
data. It consists of written survey and telephone survey and is the most rigid of the tools, without
much flexibility. The researchers have high control over content of the response.
Questionnaire is used in the absence of enough resources for either a full-fledged survey or for
interviewing a sizeable number of respondents. It provides more flexibility than survey. The
researchers have lesser control over content of the response compared to a survey.
A Focus Group is a group of people who jointly participate in an interview that does not use a
structured question-and-answer method to obtain information from these people. In this case
also, the researchers have high control over content of the response as there is a skilled
facilitator, who is responsible for guiding the group and managing group dynamics, and an
effective moderator guide who targets the information needed from the session.
11. Answer :
(b) < TOP >
Reason : Force Field Analysis was developed by Kurt Lewin. According to him, there are certain
facilitating factors(driving forces) and certain inhibiting factors(restraining forces) for every
situation faced by an individual. This concept is applicable to management control systems in
organizations too. In an organization these two factors are first identified through review
meetings for performance appraisal of responsibility centers. After identification, these factors
are further divided into factors that are within the control of the manager of the responsibility center and those
beyond his control. The reasons for non-achievement are analysed and a remedial action plan is
drawn up.
SWOT Analysis is a strategic planning tool that is used by the management to assess
organizations strengths (S) and weaknesses (W), as well as environmental opportunities (O)
and threats (T).
Activity Based Costing (ABC) Analysis is generally used to estimate the internal cost structure
of an organization during the Development Phase of Target Costing. According to this approach,
all the activities till the product is sold, are identified and costs are estimated using multiple cost
drivers.
In Cost-Benefit Analysis, total costs are weighed against the total benefits to find out the
feasibility of doing a particular task.
Value Chain Analysis is an analysis of the value chain of a firm. The value chain of any firm is
the linked set of value-creating activities of which it is a part, from acquiring the basic raw
materials for component suppliers to making the ultimate end- use product and delivering it to
the final customers.
12. Answer :
(d) < TOP >
Reason : An Audit is a tool used to monitor a companys financial performance as well as non-financial
performance. Audit is only a monitoring or evaluation tool to check compliance with a
requirement or standard and cannot mobilize people to action.
All the other activities stated can be done by Audit.
13. Answer :
(d) < TOP >
Reason : The concept of fairness should not be confined only to the employees of the organization,
but should be extended to the activities of the stakeholders too.
For example, a customer is a stakeholder and fairness to the customer can be maintained by
truthful advertising, to help the customer to make wise decisions.
All other options are true regarding ethical principle of fairness in the design of control
systems.
14. Answer :
(e) < TOP >
Reason : Incentives are more related to the management control function. It is the duty of the senior
management to devise the best incentive plan possible. The incentives must be approved by
the shareholders, as required by corporate by-laws and securities regulators. Incentive
plans should be approved by the board of directors before they are implemented.
Wages are the remunerations paid by the employer for the services of hourly, daily, weekly and
fortnightly employees. They also refer to the remunerations paid to production and maintenance
employees (blue-collar workers).
Salaries refer to the remunerations paid to clerical, professional and managerial employees
(white-collar workers).
Benefits help employees to deal with certain contingencies and to meet certain social
obligations. They satisfy an employees economic, social and psychological needs.
Pensions are a part of benefits. They are usually given to government employees after
retirement.
15. Answer :
(c) < TOP >
Reason : Expense Center is the responsibility center in which inputs or expenses, rather than outputs, are
measured in monetary terms. Control of expenses incurred by the responsibility center is the
focus of managerial attention. Costs are classified into two broad categories, namely, engineered
costs and discretionary costs.
Revenue Center is the responsibility center in which outputs are measured in monetary terms
and the focus of managements efforts is on the revenue generated by the unit.
Investment Center is the responsibility center whose performance is evaluated in terms of
profit, and assets employed in earning the profit.
Profit Center is the responsibility center whose performance is measured in terms of profits.
16. Answer :
(d) < TOP >
Reason : Phantom Share is a long-term incentive plan which ensures that the managers receive an award
equal to the market value of the stock since the date of a reward.
Stock Option offers long-term benefits and gives managers the right to buy a number of shares
of stock at a given date in the future.
Stock Appreciation Right gives managers the right to receive cash payments based on the
increase in the value of stock from the time of the award until a specified future date.
Performance Share is an incentive plan which awards managers a specified number of shares
when they meet specific long-term goals.
17. Answer :
(d) < TOP >
Reason : Management By Objectives (MBO) is a joint setting of goals/objectives by the superior and
the subordinate, and clarifying on the objectives itself. Although the process employed is similar
to the process used in budgetary control, MBO is a much broader concept. It not only emphasizes
quantitative performance but also qualitative performance.
All other options are features of Management By Objectives.
18. Answer :
(c) < TOP >
Reason : Information Asymmetry is the situation in which the principal has insufficient information
about the activities of the agents, and he cannot ascertain the agents contribution to the firms
results.
Work Aversion is the preference for leisure over effort by some agents.
Shirking is the situation in which agents deliberately hold their efforts.
Private Information is the added information that the agent may have about the task assigned to
him than the principal.
Moral Hazard is the situation in which the agent misinterprets Private Information.
19. Answer :
(c) < TOP >
Reason : Effectiveness Measure measures performance of output in an organization.
Efficiency Measure measures performance of inputs over a specified period of time for a given
level of output.
Process Measure measures the production process.
20. Answer :
(b) < TOP >
Reason : Systematic Information System is used to appraise the decisions made by the managers. The
views of the managers are tested under the assumptions that he made the decisions. These are
used by the managers before making a decision and this system attempts to guard the managers
against inappropriate assumptions.
External Information System enables an organization to systematically scan the environment to
identify threats and opportunities. A market intelligence system provides information about
changing patterns of consumer preferences, performance of various competing brands in terms of
market share, and so on. The information that is collected from the external environment should
be passed on to the person concerned.
Social Information System is typically based on social indicators, which indicate social
conditions. For example, the government initiates a program to uplift a target population above
the poverty line. The design of this program is based on an important social indicator the
people living below the poverty line.
Continuing Information System is the system in which information is collected scientifically
and systematically on a continuing basis over a sufficiently long period of time.
Executive Information System gives top management immediate and easy access to
information about a firms Critical Success Factors (CSFs), in accomplishing the organizations
strategic objectives. Information is presented in a tailor-made form according to the preferences
of executives using them.
21. Answer :
(b) < TOP >
Reason : Hold Mission implies objective of protection of market share and the competitive position. The
objective of IBM stated here implies Hold Mission.
Build Mission implies objective of increased market share, at the expense of short-term
earnings and cash flow.
Harvest Mission implies objective of maximizing short-term earnings and cash flow, at the
expense of market share.
Divest Mission implies objective to withdraw from the business either through a process of
slow liquidation or out-right sale.
22. Answer :
(a) < TOP >
Reason : In Indicator based monitoring, the appropriate Management Information System (MIS)
highlights the key parameters of performance. These key parameters are used as indicators. The
deviations for each indicator are recorded and suitable follow-up action is taken as per the
deviations.
Monitoring by beneficiaries is a method of monitoring, where the beneficiaries are directly
questioned about the usefulness of the program. Suggestions from the beneficiaries about how to make more
effective program are welcomed.
Monitoring by legislator is done on behalf of the development organization. Whenever there is
a controversy, the government nominates a member who is an expert in that subject to monitor
the program. The person does the entire monitoring job and submits his report to the
government.
Monitoring is also carried out by the press and other media, who disseminate information about
the status of programs. The government allocates lot of funds for public welfare programs, and
the media plays the role of a watch dog in ensuring that the people at large are appraised of the
way the money is being spent by the officials.
Monitoring through field visit is carried out either through periodic monitoring or through
surprise checks. Observations made during the field visits are recorded and a report is sent to the
officers. Then the officers may suggest necessary recommendations or improvement of the
program.
23. Answer :
(a) < TOP >
Reason : Strategic Planning is the process of deciding on the goals of the organization, on changes in
these goals, and on the resources used to attain these goals. It is a long term planning and is
carried out at the top level of management. It is irregular in nature.i.e., problems, opportunities
and solutions do not rise at regular intervals. They are dealt with whenever they are perceived.
So option (a) is not a characteristic of Strategic Planning.
All other options are characteristics of Strategic Planning.
24. Answer :
(d) < TOP >
Reason : A Non-profit organization is defined as an organization in which the assets or income cannot
be distributed to, for the benefit of, its members, officers, or directors. A Non-profit organization
can, of course, compensate its employees, including officers and members, for services rendered
or for goods supplied by them. In a Non-profit organization, there is a restraint only on the
distribution of profits, not on earning profits. On an average, a modest profit needs to be
earned by a Non-profit organization in order to provide working capital and for possible rainy
days.
Therefore, option (d) is false.
All other options are true regarding Non-profit organization.
25. Answer :
(a) < TOP >
Reason : Bowers model suggests that ideas, proposals, and approval of projects come from the lower
levels of management. However, the authority for designing the programming process vests
with the Top Management.
26. Answer :
(c) < TOP >
Reason : Transfer Price is the value placed on the transfer of goods or services among two or more profit
centers of same organization. However, the expenses incurred by corporate office which are
charged to the business units are not called Transfer Prices.
All other options are correct regarding Transfer Price.
27. Answer :
(c) < TOP >
Reason : Non-profit organization is also referred to as mission organization because such an
organization is primarily driven by its mission, which denotes its purpose.
Others are not known as mission organizations.
28. Answer :
(c) < TOP >
Reason : Economic Exposure implies the exchange rate exposure of the firms cash flows to changes in
the real exchange rate. Under this type of exposure, it would be appropriate for the control
system to evaluate the manager on decisions that would have enabled the subsidiary to respond
to changes in the real exchange rate. Hence, the subsidiary manager should be held
responsible for the dependence effects of exchange rates resulting from Economic
Exposure.
Translation Exposure to exchange rates is the income statement and balance sheet exposure of
Multinational Enterprises (MNEs) to changes in the nominal exchange rates and results from the
fact that MNEs must consolidate their accounts in a single currency in spite of their cash flows
being denominated in multiple currencies.
Transaction Exposure indicates the exchange rate exposure that the firm has in its cross-border
transactions, when such transactions are entered into today, but payments to settle the
transactions are made at some future date.
29. Answer :
(d) < TOP >
Reason : Task Control Information constitutes most of the formal information that flows through an
organization in its daily operations. Procurement, payroll, storage are examples of Task
Control Information.
Informal Information is the information obtained through observation, face-to-face
conversations, and meetings, in contrast to information obtained from formal reports.
The added information that the agent may have about the task assigned to him than the
principal is known as Private Information.
Management control systems in order to be effective, should be concerned with the ends as
well as with the process and means. While knowledge of the ends is provided by financial
information, non-financial information provides insights relating to the means. Non-financial
information is also known as Key Variable or Key Success Factor.
30. Answer :
(d) < TOP >
Reason : Go/No-go Control is the most frequent type of control exercised on projects. Project team
performance is the primary focus of control rather than specific items performed by individuals.
Go/No-go Control does not recognize gradations of quality.
External Control uses an authorized control system wherein the top executive maintains
decision-making mechanism, with the help of information that is gathered at the lower levels of
the organization.
Internal Control focuses upon the human aspects of the organization. It is participative in nature
and puts emphasis on the motivation of the subordinates such as social esteem, self actualization
and others.
Cybernetics is defined as the science of communication and control in machine or animal. The
basic principle of cybernetics is that it mainly deals with the negative aspects of thought process.
Cybernetic Control is mainly used in the control of projects.
Post Control is exercised after completion of project. It serves as a basis for reward or
punishment.


Part B : Problems

1. Sakarina Ltd.
a. Total sales variance =

Standard

sales ~ Actual sales

= Rs.10,70,000 ~ Rs.11,25,000 = Rs.55,000
(F)
b. Sales price variance = Actual quantity of sales (Standard

price ~ Actual price)

A = 11,000units (Rs.40 ~ Rs.42) = Rs.22,000 (F)
B = 6,500units (Rs.60 ~ Rs.58) = Rs.13,000 (A)
C = 5,200units (Rs.50 ~ Rs.55) = Rs.26,000 (F)
Rs.35,000 (F)
c. Sales volume variance = Standard sale price (Standard

quantity ~ Actual quantity)

A = Rs.40 (10,000units ~ 11,000units) = Rs.40,000 (F)
B = Rs.60 ( 7,000units ~ 6,500units) = Rs.30,000 (A)
C = Rs.50 ( 5,000units ~ 5,200units) = Rs.10,000 (F)
Rs.20,000 (F)
d. Sales mix variance = Standard sale price (Revised standard

quantity ~ Actual quantity)

Product
Standard sales
Units
Revised Standard
sales
Quantity
Actual sales
Units
A 10,000 x Rs.40
=
Rs. 4,00,000
10,318
11,000 x Rs.42
=
Rs. 4,62,000
B 7,000 x Rs.60
=
Rs. 4,20,000
7,223
6,500 x Rs.58
=
Rs. 3,77,000
C 5,000 x Rs.50
=
Rs. 2,50,000
5,159
5,200 x Rs.55
=
Rs. 2,86,000
22,000

Rs.10,70,000 22,700 22,700 Rs.11,25,000
A = Rs.40 (10,318units ~ 11,000units) = Rs.27,280 (F)
B = Rs.60 (7,223units ~ 6,500units) = Rs.43,380 (A)
C = Rs.50 (5,159units ~ 5,200units) = Rs. 2,050 (F)
Rs.14,050 (A)
e. Sales quantity variance = Standard sale price (Revised standard

quantity ~ Standard quantity)

A = Rs.40 (10,318units ~ 10,000units) = Rs.12,720 (F)
B = Rs.60 (7,223units ~ 7,000units) = Rs.13,380 (F)
C = Rs.50 (5,159units ~ 5,000units) = Rs. 7,950 (F)
Rs.34,050 (F)
< TOP >
2. The contribution for each division and the company as a whole for the various selling prices are as follows:
Division C
Division Y
Company
b. Based on the information given in (a), the selling price of Rs.40 will maximize the contribution of
division Y (i.e. Rs.38,000) and the selling price of Rs.35 will maximize the contribution of the
company as a whole.
c. Where there is no market for the intermediate product and the supplying division has no capacity
constraints, the correct transfer price is the marginal cost of supplying division for that output at which
the sum of marginal cost of both the supplying division and the receivers division equals the
receiving divisions marginal revenues from sale of such finished product. When variable cost per unit
is constant and fixed cost remains unchanged this rule will result in a transfer price, which will be
equal to the supplying divisions unit variable cost. Therefore the transfer price will be set at Rs.5.5.
d. There are different levels of units at which sales can be made at the given selling prices. The optimum
output, at which the companys profit is maximum, is the output level immediately preceding the
output at which the sum of the marginal cost of both the supplying division and the receiving division
will exceed the marginal revenue for the first time.
The marginal cost and marginal revenue at different levels of output is as follows:
Output level
(a)
Total revenue
(b) = (a) 17.50
Variable cost
(c) = (a) Rs.5.50
Total contribution
(b)-(c)
Rs. Rs. Rs. Rs.
1,000 17,500 5,500 12,000
1,500 26,250 8,250 18,000
2,000 35,000 11,000 24,000
2,500 43,750 13,750 30,000
3,000 52,500 16,500 36,000
3,500 61,250 19,250 42,000
Output level Total revenue
Rs.
Variable cost
Rs.
Transfer cost
Rs.
Total contribution
Rs.
(a) (b)
(c) = (a)
Rs.3.50
(d) (b)-(c)-(d)
1,000 50,000 3,500 17,500 29,000
1,500 67,500 5,250 26,250 36,000
2,000 80,000 7,000 35,000 38,000
2,500 87,500 8,750 43,750 35,000
3,000 90,000 10,500 52,500 27,000
3,500 87,500 12,250 61,250 14,000
Output level Total revenue
Rs.
Variable cost
Rs.
Total contribution
Rs.
(a) (b)
(c) = (a) Rs.9
(b)-(c)
1,000 50,000 9,000 41,000
1,500 67,500 13,500 54,000
2,000 80,000 18,000 62,000
2,500 87,500 22,500 65,000
3,000 90,000 27,000 63,000
3,500 87,500 31,500 56,000
Output in units Marginal cost
Rs.
Marginal Revenue
Rs.
*Assuming fixed cost is to be incurred even if no output is produced.
The output level of 2,500 is the level immediately preceding the level at which marginal cost (4,500)
exceeded marginal revenue (2,500) for the first time.
Thus the supplying division has to produce 2,500 units to maximize the profit.
< TOP >
Caselet 1

3. We can devise a good Management Control System for OReilley Associates in following ways:
Pricing: With a shift from pure advertisement to non-advertisement services, the company should shift from
commission based revenue system to fee based revenue system. The fee structure should be based on
professional time spent on the engagement. The hourly billing rate should be based on the compensation of
the grade of professionals plus a loading for overhead costs and profit.
Profit Centers and Transfer Pricing: As the size of the organization increases, controlling becomes
difficult. If the organization is divided into profit centers and cost centers, it becomes easy to monitor and
control. Support units, such as Information Processing, Transportation, Telecom, Printing and Procurement
should charge consuming unit for their services.
Control of operations: Attention should be given to scheduling the time of professionals. The billed time
ratio, which is the ratio of hours billed to professional hours available, should be watched closely. When
project teams do the work, control should be done by comparing the actual performance to the planned
performance.
Performance Measurement and Appraisals: The performance of the executives should be done by MBO
method. Performance of the creative executives can be assessed with the help of market performance of
their work. By and large assessment of an individual should include feedback evaluated by superiors, peers,
subordinate and the clients. But as we know professional work is very qualitative in nature, so the appraisal
should be qualitative in nature.
< TOP >
4. OReilley has to apply its past experience to assess the profit potential of new account. It should use cost
data from the current accounts to estimate the cost of servicing new accounts. It should also estimate the
spending necessary to build up a product to desired market share. Typically, a products cost includes an
allowance for advertising cost. If the advertising allowance could cover the expected cost of building
market share and maintaining the product, it can be taken as sufficient evidence for accepting the
assignment.
Before a new product was actually launched, there was exhaustive market research conducted for the product
and its campaign was tested through focused groups. First the need for the product was evaluated, and
customer acceptance was studied. The test marketing for the new product was done in a selected market.
Only after it gains success in the test market was it taken up for actual launch. The client was informed about
the outcome of the full-scale launch at this stage. It was only after that client agreed to proceed further; it
was taken for full-scale launch. The revenue was the function of the advertising budget needed to support the
full scale product launch and had to cover all expenses up to that time. Hence it was very critical for the
managers to assess early the success of the new product.
< TOP >
Caselet 2

5. The reasons for success of Ayala Conglomerate can be explained as follows:
a. They are the best example of an adaptive organization. They could adapt themselves with the changing
business environment. They first built their core business for initial years and once saturation was
reached, they diversified into unrelated area to reap the maximum benefit from emerging market.
b. They had an optimal organization structure .They followed the conglomerate model where the holding
company had stakes in its group companies. The group company was a totally independent entity as far
as decision making was concerned. They have segregated their core and non-core businesses and used
different criteria for investing or divesting the present businesses.
c. Ayala believed in the decision they took and stuck with it, as in the case of telecom business they could
see the revolution that was coming in telecom. The business prudence and visionary leadership is a key
to successful organization.
< TOP >
6. The kind of Management Control System Ayala is following can be defined as having effective
1,000 9,000* 50,000
1,500 4,500 17,500
2,000 4,500 12,500
2,500 4,500 7,500
3,000 4,500 2,500
3,500 4,500 (2,500)
organization structure and strict financial control. The holding company Ayala Corporation followed investment
company logic. They invested in the company where they thought they could add value, and divested from
loss making companies.
They also managed their relationship with their partners well and maintained their brand equity high even in
bad times. They were bringing better financial discipline in their business by switching from earlier model of
ROE, net income, operating margin to economic value added. This is a better method of evaluating how
much value the managers are creating.
The organization structure that Ayala is following provides the financial and operational independence to the
different group companies and at the same time enjoy the brand value that Ayala has built over the years.
The right mix of family ownership and public companies allows them to back their managers to pursue long
term goals at the cost of immediate pressure on performance.
< TOP >
7. There have been big debates on the issue of family owned and public companies as two extremes. Ayala
has chosen a right mix of these two models. The public owned companies have more pressure to show
quarterly performance and their CEOs are always under pressure and they tend to overlook long term
strategy. Ayala has divided their business interests in two parts, one containing companies operating in
matured industry while other companies operating in growing market have been clustered under one
division, AC Capital.
< TOP >


Part C: Applied Theory

8. A project audit is a formal and systematic verification of the performance of an ongoing project. It is an
activity of measurement against predefined and relevant standards. It must take place as the work is being
done. Otherwise the defective work on individual work packages may be covered by the subsequent work.
For example, the quality of a plumbing work in a construction project cannot be checked after ceilings have
been finished.
A project audit is designed to be a practical, cost effective, independent and reliable source of information
about the project. This is intended to serve as a support to, and a basis for management decision making.
Therefore, it is by nature a critical activity which is primarily concerned with identifying actual and
potential deficiencies related to projects execution, and only secondarily with identifying and reporting
exceptional strengths and accomplishments.
Levels of project audit: Three different levels of project audits have been defined which differ
according to the effort required, the time taken, and the results expected.
The overview audit obtains a well founded opinion as to whether or not a project is in trouble. An
administrative audit is a thorough examination of a project covering all aspects except detailed
examination of technical quality. Third is technical audit which is concerned with specific technical issues
and problems within a project.
< TOP >
9. Cooperative societies are those that are owned and controlled by the producers of the basic commodity.
The producers not only supply the basic commodity, they are also the shareholders of the company. The
basic objective of cooperative societies is to maximize the returns to the producer members. The elected
representatives of the producers organizations generally take care of the control process.
These societies follow 3-tier structure. The village level society procures the basic commodity, e.g., milk,
from the producers at a fixed price. The district level union adds value to the commodity by processing the
raw material and converting it into intermediate, finished products such as butter, ghee, cheese etc. The
district union uses modern technology and professional management. The state level body undertakes the
marketing activities on behalf of the district unions. It also provides certain centralized services such as
purchase of new equipment, and other important materials for the entire society.
< TOP >
10. It is true that budgets are not merely accounting documents, they are blue pints for managerial actions
during the budget period. Budgets are effective tools for short-term planning and control in organizations.
Budget is essentially a future plan of action. It is considered as a guide of desired future expectations. It
reduces uncertainty and forces executives to map out future courses of action clearly. This helps the
organization to face the future challenges with confidence.
Budgeting is the national plan that is needed to control all aspects of an organization for definite period of
time. Budgets help in finding out how the alternatives are progressing. They are used to measure and
compare actual results and anticipated results. Necessary corrective actions are taken if any differences are
noticed.
Budgetary control presents an overall managerial view point of all the activities within an organizational

structure which is essential to management success. Organizations need budgeting to enable management to
make an early study of problems and outlined ways of tackling the same.
< TOP >

< TOP OF THE DOCUMENT >