MS -43/2021

1. Discuss the inter linkages between TQM, JIT, Activity Based Costing, with the Management Control
Systems.

Total quality management:

TQM can be defined as both a philosophy and a set of guiding principlesthat represents the foundation of a
continuously improving organisation. It isan integrated and comprehensive system approach that works
horizontallyacross an organisation, involving all departments and employees andextending backward and
forward to include both vendors andclients/customers. TQM integrates with other management methods
toenhance business efficiency. It provides a framework forimplementing effective quality and productivity
initiatives that can increaseprofitability and competitiveness of the organisation in the long run.

TQM philosophy has the following distinct features:

i) It focuses on the continuous improvement of an organisation
ii) It is a systematic, integrated, consistent, and organisation-wide perspective involving all
iii) It stresses primarily on total satisfaction of both internal employees and external customers
iv) It contributes towards effective utilisation of organisation resources
v) It provides a competitive advantage, which in turn increases productivity and lowers cost

Benefits of TQM
i) It leads to ultimate customer satisfaction
ii) Implementation of TQM empowers all levels of management – from high rank to worker rank
iii) It enhances reputation – faults and problems are spotted and sorted quicker (zero defects)
iv) It reduces failure, rework, and waste, which further helps in reducing cost of manufacturing
v) It increases employee and equipment productivity
vi) It helps in efficient use of scarce resources
vii) It ensures streamlined maintenance and production process
viii) Higher employee morale – workers are motivated by extra responsibility, team work, and
involvement in the decision-making process
ix) It addresses key problem areas such as mistakes in work processes, redundant processes,
unnecessary tasks, and duplicate efforts
x) It ensures better profitability, speedy organisational development, and brings in a competitive
advantage

TQM and MCS: In the literature on TQM, three "managerial" functions have been clearly identifiedviz.
innovation, kaizen (continuous improvement) and maintenance. Topmanagement should focus on the
innovation, middle management on kaizen andsupervisors and workers on maintenance. Interestingly these
three functionscorrespond to the "hierarchy of control" framework discussed earlier viz. strategy
formulation, management control and the task control. An equivalence between TQM and MCS ideas is
presented below.

Just in time:
Just-in-Time (JIT) is a management study that puts in great effort to removesources of production waste by
manufacturing the right part in the right place atthe right time.JIT is applied mainly to production processes
which are used tomanufacture same products and components. The JIT concept is built aroundthe
philosophy that inventory is evil. But it is not just a method to reduceinventories. It is a method of producing
what is needed.

JIT is fundamentally based on two tenets:

(i) Elimination of waste
Waste is defined as any activity that does not add value. Anything over theminimum amount necessary is
waste. Waste results from any activity,that adds to its cost without adding value to it, such as moving and
storing.
(ii) Respect for humans
This tenet recognizes that for a system to work, humans must be activelyinvolved. In a JIT environment,
considerable effort is dedicated to buildingteams. Work is handled by teams on the shop floor, rather than
byindividuals. Workers are given more responsibility.

The seven wastes to be eliminated according to JIT are:

1. Over production: Over production is to manufacture products before itis actually needed. If the demand
for that product decreases, the extraparts or products produced may not be useful or needed. Also
overproduction results in high storage costs and is also difficult to detectdefects. So, over production is
considered a waste.
2. Inventory: Excess procurement or production builds up stock ofmaterials which are not immediately used,
thus locking space andfunds carrying heavy costs.
3. Waiting time: Waste of time happen when goods are not moving orbeing processed. The operator, the
machine or the part will either benot working or be worked upon. The duration of waiting is can be saidto
be unproductive and may create more serious consequences.
4. Movement: Any unnecessary movement is a waste of energy; itcauses blockages, disrupting movements
and delaying the flow of otheritems creating delays.
5. Effort: The people, who work, do not make a study as to how theproducts on which they are making are
utilised and do not realise thepurpose for which they are made. This lack of education will lead towaste of
resources. Finally, they end up in shortage of resources whenneeded.
6. Defective products: The defective products lead to a tremendous lossto the company. This is because they
use up the same equipment,workmen and the time that would be used to make good products.Thus
defective products use up resources and result in losses.
7. Over Processing: Some steps like unnecessary processing orproduction do not add value to the final
output. As a result, it is waste ofall the inputs that go into the process.

JIT and MCS: An important aspect of JIT is "the practice of establishing relationship with customers for
automatic ordering". When there is an advance booking of an order, the JIT could work very well. For
advance booking, the relationship between theorganization and itscustomers should be one of trust and
confidence. For all practical purposes, customers become insiders and part of the administrative process.
This in a way is anessential condition for JIT system to be effective.JIT can be considered an important
operational control mechanism, with a focus oncycle time reduction thereby leading to better efficiency and
productivity. The goal ofthe JIT is to have zero inventory wherein the optimum lot size is one - i.e. goods
areproduced or ordered only when they are needed. In reality this happens rarely.Anthony and Govindrajan
(1994) observe that "the term is a catchy way of stating thedirection in which lot size should be headed". It
indeed is a catchy phrase even though it doesn't capture the reality. Perhaps a better phrase would be
"Minimum Inventory Driven System" (MIDS), but catch phrases have their own appeal.

Activity based costing:

Activity Based Costing (ABC) is a powerful tool for measuringperformance.It is based upon the fundamental
premise that products consume activitiesto build and deliver. Those activities consume resources and the
resourcesare acquired at a cost. By establishing these linkages ABC brings clearvisibility to the flow of costs
in an organisation making it that much easier tomanage costs.The first obvious step in designing an
activitybased costing is identificationof activities. An activity can be defined as an event, task or unit of
workwhich has a specific purpose; for example designing products, setting upmachines, operating machines
and distributing products.Correlating cost and the activity will help us get a clear understanding of
therelationship between sources of activity demand (called ‘cost drivers’ in ABCterminology) and the related
costs. This association can benefit thedistributor in determining where the costs are being incurred, what
isinitiating the costs and where to apply efforts to curb inflationary costs.

Thus the usefulness of ABC goes beyond refining cost finding methods. Itbecomes a potent tool for cost
management when used properly. Since themanagers of production, sales etc. understand the activities
performed bytheir departments and staff much more clearly, tracing costs to suchactivities enables them to
see a cause-and-effect relationship between thetwo. With this understanding they can proceed to
investigate the costsincurred and then devise means to control them much better than what thecost data
and reports from traditional costing methods allowed them to do.At the next stage, such activity focus is
used in preparing budgets whichimprove the budgeting process tremendously. Activity Based Budgeting
isthe name for such an approach. Using activity based budgets and activitybased costs for cost management
is called Activity Based Management.

Activity based costing and MCS: ABC has important implications for management control. It yields better
picture of the product costs facilitating decision-making in relation to pricing, product mix, make or buy
decisions etc. It has been pointed out that because of a large number of cost drivers and "activity cost pools",
companies do not find it worthwhile to generateABC information on routine basis. Instead of relying on a
large number of cost drivers, it is preferable to focus on "critical drivers". Since ABC generates a more
accurate picture of the product cost, it can provide critical insights to the cost basketof products that a
company is producing. This information is useful for strategicpurposes to realign the product basket. Hence,
ABC is essentially a tool for strategicplanning and strategic think. Herein lies its linkage with the control
system hierarchy.

2. Select any Organization of your choice and study how the performance of Investment Centresare
measured in that organisation? Give your views on the method that is being practiced by that
organization.

Investment centre is a responsibility centre in which inputs are measured in terms ofcost/expenses and
outputs are measured in term of revenues and in which assetsemployed are also measured. Thus, the
investment centre is responsible for the assetsunder its disposal alongwith the profit. It involves questions
related to as to whatassets and liabilities should be included for determining the investment base of
theinvestment centre.

An investment centre manager is responsible for the production, marketing and investment in the assets
employed on that division or segment of the organization. Hehas to take decisions related to credit policy,
inventory policy as well as investmentin equipments to be used for production and marketing. That way it
may be taken asextension of profit centre that it covers all the elements relevant to the measurementof
performance of division. As a responsibility centre, the performance of thedivision concerned would be
measured in relation to the profits and assets employed in the division concerned.

Investment centers are decentralized divisions or sub-units for which the manager has maximum discretion
in determining not only short-term operating decision on product mix, pricing and production methods, but
also level and type of investment. An investment center extends the profit center concept in that the
measured profit is related to the center investment. It may be described as a special form of profit center
since a profitability measure is being developed for the center. The concept relating profits to assets
employed has an intuitive appeal for it for indicates whether the return for the capital invested in the division
and it is important that an evaluation be made the overall company are earning on in elaborate systems for
authorizing capital investment center performance can be the aggregation of past and present capital
projects each project individually. Such a measurement also provides an incentive for division managers to
monitor capital investments carefully while managing their operations. The managers will also be motivated
to watch the levels of inventory and receivables since these accounts will almost always be included in that
investment base.

These are two important and popular methods of measuring investment centre performance. They are
Return on Investment (ROI) and Residual Income (RI).
Return on Investment (ROI)
Return on investment is a popular and easier method of measuring investmentcentre performance. ROI is
the relationship between return or profit andinvestment. It is usually expressed in terms of percentage. The
profit here refers to profit before taxes and interest or operating profit. We take such profit as profit before
taxes and interest is not influenced by extraneous factors such as financingor taxes over which the divisional
manager does not have any control. Similarly, the investment here refers to operating assets which are
available for use in theoperations. Thus,

ROI can be defined as

ROI=Profit before Interest and Tax * 100

Net operating Investment

Net operating investment may be in terms of written down value or the gross value of the fixed assets. The
net value of the assets would depend upon the depreciationmethod used. It would be better to use, the
average value of the fixed assets duringtheir useful life.

Residual Income
An alternative measure of financial performance of an investment centre is residualincome. It is an amount
that remains after deducting an "implied" interest chargefrom operating income. In other words, the
difference between the actual operatingincome of a division and the required/expected income is the
residual income. Theexpected return on investment is capital charge. The idea is that the division bears
acharge for the assets provided by the company concerned to the division for its use. The efficiency of the
division, on this basis, is to be judged on the contribution beyond the expected return which may be based
on the cost of capital or opportunity cost of the investment.
Symbolically,
SRI=SPC - (SROI x SR) Where
SRI = segment residual income
SPC = segment profit contribution
SPC = segment profit contribution
SROI = segment Expected ROI
SR = segment resources.

Other Performance Measure

ROI and RI are the popular methods of measuring performance of investmentcentres. However, several firms
use other methods or measures also. They are: growth in market share, sales growth (actual achieved vis-a-
vis theplanned or budgeted performance), and profit growth etc. Other factors, such as new product
development and personnel development of the divisionconcerned may also be considered for such
measurement.

The best example I can think of for an “Investment Center” at any major company would be Apple’s Braeburn
Capital where most of Apple’s billions of dollars are invested. The mysterious fund in the desert that manages
Apple’s cash
Here's an article from Harvard Business Review. The primary function is still the same today, but the article
was published in 1978. Measuring Investment Center Performance

If you're talking about an investment center as in a physical location - with an investment company, they
typically don't exist anymore outside of some trading academies and day trading offices in larger cities. Most
trading center type services are mostly remote. You may find a few franchise type opportunities as I've seen
emails from them, but I'm unsure if they're successful anymore. There is a company called Trading Academy,
but I think most is done online. Outside of the mainstream stuff there is also what is called “Prop Trading”
which stands for Proprietary Trading and is basically a company that gives you capital to trade for profit once
you've proven you can follow their methodology. Most of these companies are subsidiaries of major
brokerages since they were spun off from banks as these were seen as conflicts of interest with clients. They
operate similar to hedge funds, but have no allegiance and trade whatever they want. Some firms have zero
requirements assuming you can simply prove yourself as trainable and produce and others require a serious
prop background and personal capital.

Schwab used to have an investment center in their branch in downtown San Franscisco, but I'm unsure if it's
still there. I believe they had a library and computers set up for clients complete with classes and seminars
for education on investing, financial planning and advanced trading topics. They probably still do it for
nostalgic reasons.

3. You are required to prepare a Flexible Budget for the production at 80 percent and 100 percent activity
on the basis of the following information:
Production at 50 % capacity 5,000 units
Raw materials Rs. 80 per unit
Direct labour Rs. 50 per unit
Direct expenses Rs. 15 per unit
Factory expenses Rs. 50,000 (50% fixed)
Administrative expenses Rs. 60,000 (60% variable)

Flexible Budget
50% 80% 100%
Capacity of Output Units 5,000 8,000 10,000
Raw Material 400000 640000 800000
Labor 250000 400000 500000
Direct Expenses 75000 120000 150000
Prime Cost 725000 1160000 1450000
Factory expenses
Variable 25000 40000 50000
Fixed 25000 25000 25000
Factory Cost 775000 1225000 1525000
Admin Expenses- fixed 40% (60,000) 24000 24000 24000
Variable 60% 36000 57600 72000
Total Cost 835000 1306600 1621000

4. As a manager of a Multinational Company what are the difficulties that you may be confronted with
while adopting management control practices across various countries.
A management control systems (MCS) is a system which gathers and uses information to evaluate the
performance of different organizational resources like human, physical, financial and also the organization
as a whole considering the organizational strategies. Finally, MCS influences the behavior of organizational
resources to implement organizational strategies. MCS might be formal or informal. The term ‘management
control’ was given of its current connotations by Robert N. Anthony. He defined Management Control is the
process by which managers influence other members of the organization to implement the organization’s
strategies. Management control systems are tools to aid management for steering an organization toward
its strategic objectives and competitive advantage. Management controls are only one of the tools which
managers use in implementing desired strategies. However strategies get implemented through
management controls, organizational structure, human resources management and culture.

A fundamental concept underlying the definition of management control is that an management control
structure provides only reasonable assurance that agency objectives will be achieved. Limitations are
inherent in all management control systems. These result from poor judgement in decision-making, human
error, management's ability to override controls, collusion to circumvent control, and consideration of costs
and benefits relative to management control. No matter how well management control operates, some
events and conditions are beyond management's control.

Management controls are the organization policies and procedures to reasonably ensure that
i) programs achieve their intended results
ii) resource are used consistent with agency mission
iii) programs and resources are protected from waste, fraud and mismanagement
iv) all applicable laws and regulations are followed
v) reliable and timely information is obtained, maintained, reported and used for decision making.

Instead of considering the management control as an isolated management tool, it should be an integral
part of the entire cycle of planning, budgeting, management accounting, reporting and auditing. For instance
good management control system can assure that performance measurements are complete and accurate.
Another example is management control standards of organization would align staff and authority with
project responsibilities.to be carried out, improving both effectiveness and accountability. Similarly the
accountability for resources could be improved by more closely aligning budget accounts with programs and
charging significant resources used to produce the program's output and outcome.

Difficulties
Judgement Mistakes
Effective management control may be limited by the realities of human judgement. Decision are often made
within a limited time frame, without the benefit of complete information, and under time pressures of
conducting agency business. These judgement decision may affect achievement of objectives, with or
without good management control. Management control may become ineffective when management fails
to minimize the occurrence of errors (e.g., misunderstanding instructions, carelessness, distraction, fatigue,
or mistakes).

Management Override
Management may override or disregard prescribed policies, procedures, and controls for improper purposes
(e.g., to enhance presentation of their agency's financial or compliance status). Override practices include
misrepresentations to state officials, staff from the central control agencies, auditors, or others.

Management override must not be confused with management intervention (i.e., the departure from
prescribed policies and procedures for legitimate purposes). Intervention may be required in order to
process non-standard transactions that otherwise would be handled inappropriately by the management
control system. A provision for intervention is needed in all management control systems since no system
anticipates every condition. Management's actions to intervene in management control should be
documented and disclosed to appropriate personnel.

Collusion
Collusion activities can result in control failure. Individuals, acting collectively to perpetrate and conceal an
action from detection, may alter financial data or other information in a manner that cannot be identified
by the management control system.

Cost versus Benefits

The cost of management control must not exceed benefits to be derived. Potential loss, associated with
exposure, should be weighed against the cost to control it. Although the cost-benefit relationship is a primary
criterion to be considered in designing management control, the precise measurement of cost is generally
not possible. The challenge is to find a balance between excessive control (which is costly and
counterproductive) and too little control.

5. Study the ‘Christian Medical College and Hospital, Vellore’ Case given in Block 5 of this course and
answer the questions given at the end of the case.

Questions:
a) Identify and analyse the problems/issues involved in the CMCH case.
b) Analyse and comment upon the Financial and Management Control System (including the special
fund instituted in 1962) prevalent in CMCI-1.
c) What recommendations would you like to offer for solving various problems/issues identified by
you?
d) What strategy of growth would you like to recommend for CMCH, giving reasons/justifications for
your recommendations?

Solutions:
a) Problems/issues involved in the CMCH case:
According to doctors there should be a clear understanding and implementation of the policy of missionary
hospital regarding charity. Medical facilities in the country have been improving fast and no Christian medical
institution can now try to provide facilities technically superior to anything available anywhere outside. But
if they conform to their missionary objectives, they can provide service which is superior in its human quality
and conformity to high standards of medical ethics which patients and the relatives value highly and which
is hard for money to buy. It is specially this human quality which attracts to missionary hospitals patients
who are in a position to buy service of the same technical quality. From the point of view of the missionary
hospital, the principal reason for maintaining paying wards and treating patients who could very well afford
to go to hospitals which sell equally good even more comfortable facilities, is to earn money with which to
give free treatment of high technical, human and ethical quality to poorer patients who cannot afford to buy
them outside. In other words, the pay wards exist only to make charity wards possible.

As far as charity is concerned we need to separate the entirely free patient from the patient who pays varying
degrees of the cost of treatment. We talk about the human quality of medical care. I do not believe that this
has anything to do with religion. It is something which qualifies us to be called human; opposite types of
behaviour are in human qualities. Part of this basic human quality of medical care is to ensure that the sick
patient is given the best possible care regardless of the ability to pay. There are many who feel that the
human quality of our medical care has gradually deteriorated during the past few years, and I would be
inclined to agree with them.

b) Financial and Management Control System prevalent in CMCI-1

The Treasurer prepared a "maintenance budget" every year for approval by the Council of Management. The
hospital did not operate a capital budget as almost all capital equipment were gifts from organisations or
patients or bought with the aid of the special fund.

The finances of the hospital has been causing concern to the management of CMCH. In 1971, the deficit was
8.6% - nearly Rs. 1.26 million. The donations had stabilized and there were reasons to believe that they may
go down marginally. The hospital had to:
➢ Project their needs for the next five years. and
➢ develop a plan for meeting the deficit, if any.

The SQCU had collected a large amount of data regarding the various aspects of the working of CMCH. Some
of the salient features of the studies conducted by SQCU are given below:
➢ Wages and Salaries: Traditionally CMCH paid salaries which were lower than the "going rate" as the
governing principle was the "spirit of service". During 1969, the ward boys and peons formed a union
and went on a strike to demand wages comparable to those paid by the government hospitals
around. The management had to yield. Commented a doctor, "This was an unprecedented step. None
of us were emotionally prepared at that time to accept the idea of a strike. But it did take place. Every
time the government revises its scales, which it does before every election, we may have no option
but to increase our wages." The study by SQCU showed (based on data for the period 1966-67 to
1970-71) that the "natural trend" due to increments to staff called for a provision of 3.3% increase in
wages and salaries (consolidated for all categories) per year.
➢ Drugs: Due to an increase in the use of sophisticated drugs, mostly due to the sophisticated
technologies used, a 10% increase was considered adequate coverage.
➢ Depreciation: An estimated 5% increase was expected basically due to the installation of a power
laundry and the Central Sterile Supply Depot CSSD).
➢ Maintenance and Power: Initial projections showed that the increase in costs due to additional
spares, maintenance crews and power will be around 10%.
➢ Income: Income from patient sources had increased by 31% for the period 1968-69 to 1970-1. Several
doctors were against tapping this source for additional income. It was felt that CMCH was already
considered "very expensive". But pressed with the need for additional funds, the doctor group at
CMCH made several suggestions. Some of them were:
• creating more private beds to generate income,
• charging OPs for repeat visits,
• increasing the charges to patients by a blanket 5-10%,
• expanding the "paying clinics", and
• reducing the discretionary privileges of doctors in slashing bills-charity.

The essential characteristics of the special fund started in; 1962 were the following:
➢ Each clinical unit will be entitled to a percentage of the physician's fees over and above Rs. 100
charged to and recovered from the patients in that unit. This will be credited to-a department "special
fund".
➢ The department retained the right to use the funds for furthering the technological developments in
the clinic as it deemed fit. The special fund was really a fund for discretionary spending at the disposal
of the unit. Exhibit 14 gives the magnitude of special funds available with the major clinics.
➢ The designated aid from charitable organisations outside India and from within the country and those
from grateful patients provided an added resource base for growth for the clinical units. The ability
to attract funds from these sources depended largely on the "contacts" the doctors had developed.
➢ Diagnostic units (like X-ray, pathology, blood bank, and biochemistry) as they did not come in contact
with the patients or collect "fees", were not entitled to a share in the special fund. As such the only
source of funds for growth in the laboratories were gifts from abroad. Observed a senior professor.
"The labs grow whenever it has a foreigner as the unit head. He has contacts and gets gifts. 'Otherwise
 it does not grow. This is a very sad situation." The service support was not growing in tandem with
the growth of clinical units and their sophistication.

c) Recommendations for solving various problems/issues given above are as follows:

The total length of stay of the patient at the hospital: The average stay of a patient in the various clinical
units and the length of pre-operative stay should be considered. It does not cover the waiting time of the
patients due to non-availability of beds. The pre-operative waiting time, according to a senior surgeon "really
consists of two elements, a necessary period for emotional adjustment of the patient and an avoidable
element due to delays in getting diagnostic test results. Our biggest problem is 'the X-ray department. Would
you believe that for a barium meal the waiting time is 15 days?"

"In addition, patients wait to get admitted. Obviously, a patient who has come from Delhi will wait in a hotel
here and spend all his money waiting for admission. He has nothing left to pay the hospital later on and we
are forced to give `charity' at the time of his discharge."CMCH has an excellent "automatic kitchen", under
the direction of highly qualified dieticians. Observed the chief dietician, "We have the best facilities in the
country. We serve three kinds of food - English (or Western), Indian and Modified/Optional food in special
cases. Mostly private ward patients take English style food." Only about 100 private patients, 100 general
ward patients and 65 free patients took food from the kitchen. Most of them used the hotel facilities in
Vellore town. Several hotels in Vel lore were allowed entry into the hospital to serve food.

A third area for cost reduction which was being considered was rationalization of staffing pattern. It was
suggested that staffing, especially the medical and nursing help, should be based on the "Extent ofCare" that
the patient needs rather than on a clinical unit basis, or on the basis of blanket formula. The Nursing Council
of India had laid down a standard for nurse-patient ratio in teaching hospitals as 1 : 4. This ratio was not
adhered to by most hospitals; l : 6 was common. The Nursing Council did not envisage differential nurse-
patient ratio based on patient needs and the care called for.

d) Strategy of growth
Clinical units were planning improvements in the level of technology applied. Radiation therapy had received
a gift of a 45 m.e.v. betatron for deep therapy, the only one of its kind in Asia as gift from the Danish
International Development Authority, Rs. 6, 00,000 was needed to construct a building to house it and shield
the environment from radiation hazards. The gift did not include the cost of building or the recurring costs
of maintenance. Typically, gifts of equipment were accepted by the clinical units. They did not make an
exhaustive evaluation of the recurring costs to the hospital or the income generating potential of the new
facility. This is but one example.Research groups, the pride of CMCI-1 were also concerned with their future
as USAID and other external funds, it was rumoured, were likely to be restricted. Reflecting on these aspects
and more specifically on the financial needs of the hospital, Dr. Koshi the Director said, We have come to a
stage in our growth where we need some soul-searching. Our traditional approach to growth may not be
effective in the future. We need to raise more funds, become self-sufficient. Sometimes I wonder whether
unfettered growth is the best strategy - is there an optimum size for a hospital? Whether we should
deliberately slow down some clinical units and pace up some plan for our technology? We have abundant
faith, a dedicated staff, a certain organisational vitality. We should be able to find our answers. The first item
on my agenda is the financial forecast. I also need to develop a strategy for CMCH which will ensure its
unique position of excellence in the health map of our country."