Assignment

Subject: 401 - Management Control Systems

Name: Anirudra Dhale,

Roll No.: N20283014

Case Study: New Jersey Insurance Company Case

1. Types of organizations (types of organizations):

A company's strategy is strongly influenced by its organizational structure, this is because the
structure of a company is very influential for its control system (control system). There are three
types of organizational structure, namely Functional structure, business unit structure, and matrix
structure. If you look at the organizational structure of New Jersey Insurance as shown in Exhibit
1, it is known that the type of structure they apply is a business unit structure, where the structure
is divided based on their respective responsibilities (per business unit) and this business unit is
controlled by the unit manager as management arm. besides that, there are 5 sub-divisions, where
there are still divisions based on the area for the sub-division itself. The characteristics of this
organizational structure that can impact or affect the control system of an organization are:

a. Focus on multiple responsibilities

b. control techniques used

c. The standard used to measure the performance of the unit manager

The problem here is why the control system does not run smoothly are:

a. The organizational structure in this company has many business units, even within the business
unit itself. For example, for this legal division, it is divided into 5 sub-divisions.

b. There are no standards to measure the performance of the manager's unit or

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2. Competency of human resources the organizational:

The structure of the business unit used here is based on responsibility (responsibility centre). for
this type of organization is divided into 2 types:

a. Revenue centre (work unit that produces).

b. Expense centre (a work unit that incurs costs without earning)

If you look at the case in New Jersey Insurance, where the work unit being discussed is the legal
division with sub-divisions for individual loans and corporate loans, it can be seen that this
organization is an expense centre. The task for each of these sub-divisions is to be responsible for
the loan application process for both individuals (smaller value) and corporate (much higher value
than individual). one of them is analysing loan collateral in the form of houses or other properties.

The individual loan sub-division is divided into 3 sections based on the region, namely Atlantic
Coast, Midwest, and Pacific Coast, which is controlled by a representative. In addition, there is 1
reserve that will help for areas that are having a lot of work or to replace if a representative is sick,
and one new person who is still in training status. In addition to the five people above, to support
the work of this sub-division, there are 26 people who serve as mortgage assessors (mortgage
examiner). Unlike employees in the legal division, all of whom are law majors, these collateral
appraisers have no legal background. They have been carefully selected and trained to check and
approve loan applications that enter the division.

In addition, due to the ability of these collateral appraisers and also the different problems of each
region, although the standard that has been set is 15 transactions/day/examiners from the previous
12 transactions/day/examiners, it cannot be carried out according to the standard.

3.Budget:

For the individual loan sub-division, due to the use of appraisers who have no legal background,
it will require large costs for training. For the corporate loan sub-division, because the loans given
are more numerous and more complex in analysing, then the workers are taken with legal
backgrounds.

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Q.1: In what ways does Mr. Somersby control the operation of the sections of his division?
In what ways does top management control the operations of the law division?

Mr. Somersby controls the operation of the division by requiring reports from each section of his
division. Which such reports he was able to monitor the performance as well as the expenditures
of each section. The law division has about five sections to which two of them seem more crucial
than the others. This is because such section handle accounts that can either make or break the
financial status not only of their division but of the company as well. Because of the importance
of such sections, Mr. Somersby conducts conferences with the sections in order to determine if
there are any problems during their operation and to prepare for future developments. The top
management controls the law division by monitoring the financial standing of the division through
the required reports that they acquire. They screen discrepancies and questionable differences in
cost through comparison with the division’s previous financial report. They are able to do because
of the established standard they have set from their years of experience [most of the employees
have been retained due to their costly training. Thus, hiring of new employees are avoided unless
needed] and frequent transactions in their “routinary” operation. They require the division to set
budgets, and monitor their projected costs from their incurred cost. The same goes to Mr.
Somersby. When large deficits are detected they questions such occurrence in order to justify the
incurred cost or to make certain actions for the situation to desist.

Q.2: What possibilities for improving control, if any, do you think should be explored?

Since budget plans seems to be crucial in their company, they should try to establish more definite
parameters for their reports especially for the corporate loan division. They should incorporate the
factor of TIME with their reports. For doing almost “routinary” transactions and for handling such
situations for a longer period of time, the examiners should have a clearer gauge as to how long
their transactions would be. By sending reports on a timelier manner they would be able to have
more reliable figures for their budget estimates. As for larger accounts [like those of the corporate
loans], they should also try to consider not only outsourcing on the legal matter but for investment
matters as well. They could consider hiring consultants that have a larger network in these matter
in order to have a broader reference in the evaluation process.

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These financial experts might be able to help them more in accessing mortgages, company and

individual net worth and the market standing of any investment. With this, just like on legal
matters, these too can be a form of marketing, because they can claim to have a more reliable
service because of the presence of financial experts that are not tied with their company. [Thus
unbiased reports and projections]. They should also coordinate with the government in some cases
so that they could keep track and prepare for any policy changes in their area that might affect the
prices of their resources but that of their needed inputs as well.

Q.3: As Mr. Montgomery, what comments would you make and what questions would you
ask Mr. Somersby about the performance of the two sections of the law division for the first
6 months of 1987?

As Mr. Montgomery, my comments for Mr. Somersby would be as follows: There have been huge
deviations on the projected budget and the actual budget of the law division. More particularly,
the individual loan section has incurred most of those deviations. From the figures, it seems that
the corporate loan section had lesser number of transactions compared to their previous year. It
seems that the individual loan section has employed an outsider which is different because their
division has carefully trained and well experienced examiners and has not required to have one
from the previous years.