MGAD40H3

ASSIGNMENT 2

Lecture 01
Student Name: Yishan (Ophelia) Zhu
Student Number: 998857063

Q1. Consider the “nine management principles”(p788) used to develop the RCMS. Principle
#4 states that “outcome measures are preferable to process controls.” a. Under what
conditions is this principle valid in the design of management control systems?
Outcome measures are used to determine and evaluate how close the results are comparing to
the initial goal, which usually involve rewarding individuals for generating good results, whereas
process controls focus on a process that lead to a certain outcome. The aforementioned
principle is valid when the organization is under decentralized management, as outcome
measures would motivate different subdivisions to fulfill certain revenue targets independently.

b. Do these conditions apply in universities? Discuss.
In USC, which is under decentralized management since 1981, the aforementioned condition
enables the principle to guide the development of the RCSM to apply well, with the 19 colleges
and schools acting as management centres with their own decision-making powers. However,
many universities, especially smaller institutions, are still centrally managed, where the
condition would not hold.

2. Under the revenue center management system (RCMS).
a. What factors would a Dean consider when deciding to offer or not offer a new course?
Under the RCMS, the paramount consideration of the deans when the decision is made are
profit which is directly linked the popularity of the courses offered, as the number of student
taking the course contributes directly to the revenue. To achieve this, the dean may approve
courses that are either designed to offer high marks to attract students, or targeting a large
audience of students, such as general education courses, which may sometimes be
unnecessary, as other schools may have already offered such courses. As a result, all tuition
dollars would be retained at their own school since the school is a revenue and responsibility
center.

b. Are these factors consistent with the strategy and objectives on the University? Discuss.
The current strategic plan of USC is called the Plan for Increasing Academic Excellence, the
objective of which is to position USC as one of the most influential and productive research
universities in the world. However, the aforementioned practice under RCMS is evidently
inconsistent with such strategy. The excessively easy courses offered and kept to attract
students often fell below the standards of the university, thus failing to meet societal and
students’ true needs. Though, the university requires considerable funds for research, it is
inappropriate for the school to compete with each other for revenue. The identical or similar
courses offered across the schools are redundant and a waste of resources, which may be
positioned elsewhere to better help achieving the university’s objective. Since the
3.Consider the relationship between responsibility centers under the RCMS.
a. Identify any transfer pricing mechanisms currently in place.
The full-cost transfer pricing mechanism is in place. Each revenue centre was responsible for
the full costs of its operations. Direct costs are related to the people and equipment assigned
directly to that centre. Simultaneously, buildings, utilities and various kind of support such as
libraries, which are provided by the administrative centres, are supposed to be recorded as
indirect expense of shared resources. In the current system, the university administrators and
revenue centre managers determine and evaluate the cost pools of shared resources in
collaboration. The costs are subsequently assigned to different centers, based on either actual
usage or approximations.

b. What type of transfer pricing mechanism(s) would you recommend to resolve the problem
of “course proliferation” (Encouragement of inappropriate” courses)? Be specific.
The dual rate transfer pricing mechanism would be recommended to the USC. The
administrator would act as the selling PC and be credited the sales prices. The schools as
revenue centres would act as the buying PC, and be charged the marginal cost. The difference
would be charged to the university account and eliminated when financial statements are
consolidated. The implementation of this regime would reduce the indirect expenses borne by
the schools significantly. Consequently, the tendency of schools to compete excessively with
each other for students to offset their expenses would be considerably lowered, therefore
diminishing the phenomena of course proliferation.

4. Consider Figure 1(p790)
a. Ignoring the RCMS for this question only, what type of management control system would
we expect in a company with subsidiaries located at position 2 and position 4? You should
provide a paragraph for each of these two situations describing the recommended
management control system.
In companies with subsidiaries located at position 2, high cost of production and low quality are
recorded. Which would likely involve new or dying products. The recommended type of
management control system would be result control and action control. Action control would
ensure that employees perform certain actions known to be beneficial to the company, as well
as result control to measure efficiency of outcome.

In companies with subsidiaries located at position 4, low cost of production and high quality are
recorded. Which is high efficient and financial independent. Result control would be
recommended which involves rewards for individuals for obtaining optimal results to maximize
profit since cost is not a major concern.

b. Given the RCMS in place, what adjustments to the current system, if any, would you
recommend? For each change recommended provide your reasoning.
Based on the current system, the first adjustment would be recommended to USC is to
implement internal auditing for the inspection of the financial statements of each individual
school as well as the university, in order to ensure the authenticity of the financial reports.
Since the problem of gaming financial statements exists widely among all subsidiaries, with no
efficient regulation implemented. Further adjustment would be recommended is for the
university to reclaim some powers from its subsidiaries, such as the power of creating new
courses. It is also preferable for the university to hold the power of allocating courses to
different schools to avoid them offering identical or similar courses, therefore maximizing the
efficiency of resource allocation. Another recommendation is to further decentralize the
management of the university. Currently, the RCMS forces deans to think of their mission more
in financial terms than in terms of their academic mission. The financial pressure discourages
innovation and even teaching quality. Innovation and initiative may be stifled because RCMS
institutionalized decentralization only to the level of the deans and thus, did not go far enough,
which deans are unlikely to carry the financial pressure.

Q5. For point 5- Encouragement of end-of-period financial gameplaying listed under the
criticisms of the RCMS system consider the comment “The deans and many others within the
university did not consider such manipulation unethical”- Do you agree? Discuss from both
the ethical and governance perspectives.
I do not agree. It is unethical to move revenue and expenses between fiscal years since
employees should behave according to budgeting or control rule.

From the ethical perspective, the practice of constant manipulation of balance between fiscal
years effectively deceives the investors and donors by providing false disclosures of the fiscal
situation. The funds USC received from big donors are based on their impression that the
university is well run, which is based on false information. The high bond ratings USC received
from rating agencies are also based on this false information, misleading investors to bear
undesired risks. The raison d’être of the financial report is to evaluate the genuine performance
of subdivisions. Manipulating the financial statement would lead the employees to make
inefficient recourse allocation, even worse, alter the financial management system.

From the governance perspective, It seems that the university administration and deans of each
schools do not realise the behaviour to be unethical, consequently, the governance system is
flawed on its top level. There seems governance on the RCMS is weak or even nil, which
enables revenue centre managers to move revenues and expenses freely sans regulations. The
governance is supposed to be established to prevent the manipulations from happening by
controlling the behaviour of the top-level administrators and deans, and safeguard benefits and
values are created directly for the university.