Vipul’s MANAGEMENT CONTROL SYSTEMS Dr. K. C. PANDEY MA (Eo), FICWA, CFA Ph.D. Director, H.K.Instute of Management Studies and Research, Jageshvart (1), Mumba - 400102. Lote Dr. P. K. BANDGAR Com, PhD, FIONA, Brac, Oe nsive of Marae, Vast, Nev Mumbo = 400 703. | CA. Dr. S. P. DAS Mu, MPhil Ec), MBA Fn), Ph.D, CA | Professor, Don Bosco Instute of Management and Research, rie, Mumba - 400 070. FOURTH REVISED EDITIONPublished by: NV. Maroo, For\ipul Prakashan, 161, J. Seth Road, ‘Mumbai = 400 004 meget on! tone narnia thin inane tt a ISBN: 978-93:86473-92-4 Tae Re Raa Soy eT apa Sposa Han Zrovay me dee ot Rca neds hae tog a mo eats Sates dhe, ts eer wn pemezon oe Respect Copyright ~ Eliminate Piracy 14, Wadala Udyog Bhavan, ‘Wadala, Mumbal- 400031, vv w PREFACE It is a matter of goat privilege for us to place before the esteemed readers the Fourth Revised Edition of the book ‘Management Control Systems. The Indian Financial System has reached the maturity level as attained by the developed countries under the constant vigilance of Fegulators such as SEBI, RBI, Companies Act, 1986 and Securities Contract (Regulation) Act, 1956. The developed economies have reposed confidence on Indian system of corporate working, The Indian ‘sovornment has been passing the timely legislations, rules, regulations ‘and amendments to ment the changing economic environment, ‘The book covers lucid presentation, tailor made approsch, ‘comprehensive text with plonty of illustrations and has several «additional welcome features. The book covers the course contents of the students preparing for MMS/MBA of the University of Mumbai and M.Com., GA, CS, ICWA and other professional examinations. We are ‘confident that with al these features, the students will find this book al. the more useful and rewarding for them. We dedicate this work to Lord Ganesha who is ® constant source of energy who involves us in serving the students and teacher community. Constructive and helpful suggestions for improvement in this book will be gratefully acknowledged, ‘We are very much thankful to Shr Nitinbhai Maroo and staff members of Mis. Vipul Prakashan, Mamba for their personal involvement in the publication of the book. Authors[MMS SECOND YEAR — FOURTH SEMESTER. (SUB: MANAGEMENT CONTROL SYSTEMS SYLLABUS s. Ni Particulars @ Financial Goal Setting: > Analysis of icrementl ROT > Senstity Anais Developing franca goats along organizational Nerarchy > Concept and technique of Responsibity Budgeting [> Analfcal fremewark for Developing Responstity Budgets Budgeting with MBO System @ [Organizational growth > Responsiltycerres and profit centres >> entation and creation of prof centres, prof centres a5 2 contol system > Decentralization and poft centres, @ Mechanics. of determining profit objectives of pf canoes > Problems and perspectives of transfer ping. > inearprogramming technique for determining Problems of growth the corporste contro [co [eontrot in special sectors: Scrap Control > Cont of RD - Project contro > Adinisrative Cost Control > Audt-fieneyAude-ntermal At > Government Cost Aust > Management Aud. FnancllRepoting to Manogement Under conditions of rice level change. objective and methodcogy. 3 Seesione| Jot 3 Hours| (8). [Measurement of Asets Employed > Applicaton of MCS. in. Public Sector, ‘Organizaton & Propritory Organizations. | 2 Session Service| OF3 Hours (6)_|Case Studies and Presentations 2 Sessions | [of3 Hours Reference Text: ‘+ Anthony & Govindrajan~ Management Control System (TATA McGraw Hil) ‘+ Macao & Kirby ~ Management Control Systems (Pence Hall India) + Manogement Control Systems » L. Ghosh (rete Hall India)CONTENTS No. Chapter Pages 4. | rerspecive of Manapeent convo Stems 1% |) aaa 2. | Franca oa seting =) 15-66 3. | cxsanisaton Herrcies and Behaviour 1 | 67-86 4. | Responsbiny centres ~ 32 87-349 5. | mone cennes — , 320-162 6. | TransterPcng 1.1 163-204 7. essing and Convoing of rot na Assets] 205-246 &. | reormance Measurement and Cont ara anagerent Control Systems in Service & Non 9 1 profit Organisations vs | 279-292 20, aude - 1 293-304 Francl Reporting to Management under 41. | Catone of Pe Level Changes 305-324 | riversty uesion Panes aaasas Peso f Mangement Cnt Stans, Ghoptert Perspective of Management Control Systemy Tr 12 13 14 as 1 7 18 Tntroduction Understanding Strategies Management Control Systems Perspective of Management Control Systems ‘The Concept of Corporate Strategy Business Unit Strategies Boundaries of Management Control Goals, Exercises SS eesJ trregenene corr sitions A. INTRODUCTION: Management contol ences in any oganston tht prac deena. Manage and ec pi natn of er wh ma See hs. The cra ove ed ese for ouing ual ng weve he reures ao elude money. mene ‘nets maine nd eis ordre cvs managers onl sd ra eecivey. in onder 10 contol efecvely e manage shold Snow the ‘SHeeative methods osama ‘Management cota systems sal tn the fs svat. The sategy est develope tough s fra nd tonal proce The tegen dates te desig tte fen’ management contol sre Seakpe emege hough expesinentaon, ‘eich are lures byte fs mansgeent systema Management onl Stems Cala dept ren cten ein "The Fens epee in diferent environmental stems The environment isa dame cnt tng em inn The ican ne al a topos ip the esepy and then design maogenent conta systema ode eecate ‘Gc Sty the dertraon thebasclang tm ga nds of torpanaton and he alton fhe ous of acto and the aoaton of sous Seay fer caring ut he Tan 8 Wad gem ln de have he overall ete ofthe State managenent a sem of dine ‘Suis whch ls he deepest an eflcve sy fo Rep aleve “Spore gn The sap anager pre ay i ih ge ‘Etomune cjetves and make atop decne Stgc corti he proms ths ssn nig wep alo eel fan ng the option on which sey base, continously eating fhe Sale ab ieingimplenened and thing cmetive messre fo oust ste acoaing Shane on One rand opereing cn ete prom cng at Specie ta a td ut econ tt ss eng arformancs othe ogniston, Pani conta she proces By ch manage ‘ltrs thaan npanston oes out ian ln efter and fete. 1.2. UNDERSTANDING STRATEGIES: sn word tray served rom the Grsk word ‘satego’ which meas grea tn may sen soatey eral este te and sore of ietng allay ‘easiest ab edn bw ode hw angi To achieve ile veal betes, Many ergaiations have aleatves| ‘Subhing thieves Steg concerned ih cing whch leat tobe ‘Sop fo sconpls he ove cjertvs ofthe oration. Thus tale) ‘Saprehenre longi plan Posie of opener Cote Stems fa) 4424 DEFINITION oF sraATEcr: Various expershive dene ‘satay alow (8) -Acconting o Allee D. Chandler "Sty te dermatoses son sjtices of an enti ad tion 9 eco of sa a ‘ction rears ner cringe gas (2) Acsonting to Kenneth Andrews, “Say the ptr of ches, pp ‘nd he major pls and laf aon th pS tsk es ‘St sinh oman nai ean fc soa stk (© Acorn © Lawn R Joc nd Willan F. ht “A sy ef, ‘pene andl ple ha ls ig nage of ef halges eh ernment” Thos in simple words statey 6 4 broad long plan designed to achive the vel ebjesvs ofthe fm, States ae dened nade acceso ‘he fm. To formulate satis, one has Yo toow te jeter snd ale et Should te folwed. Shategy 4 ftuteodeed plan Seng) ka a ompetesive sn inated plan Fes have tHe leas step hy Intra a ell as "eneral envionment fice the ste fomolater el implmesatin. Thee nen for proper allston of asf dra he eto cess aso atin betes Seley uve apple SSwallasronbesies orien "peice baie 4.22 POLICIES AND STRATEGIES: Toles re the satements oF guidelines for deson making, I is «contingent deci. The. pales provide gains fr dats whch abe Sonya devo inthe rasan bec the peli Provide puenes he ‘ubrdinats o tke deco oles are abo fhoughtareted. Fay ie creed ‘ehh ou of acon tah the wet objcives. issn over gue tha ovens cnt the anager acon, Fal), poly sage sateent whi canbe reed or imp aan Satie aor ours of action the pln which pin he eevee of the ong objective Ito a tle for mung dts Spy cote ok Optimum ate of resources With the lp of sles the onganiion can ‘ke optim se of resources in de io achieve the deed ejects The {aableemources can beard ow asm exten if the ste ae tobe followed. thee ae no prope: Seatac, then the crpaiation may ot be abe ‘otha the anangement of proper rsce 4.3 MANAGEMENT CONTROL SYSTEMS: ‘Management contol system 5 procs by which management inensy other seers of he organisation to implement theorists sep etey ae ‘cient An eranisnonconers inputs nto ese outpte. The manager execs “trl oer theinpt and the proses responsible fr gerating the dened ou ‘Nr vedio spe, share homogenate Each of he uu ca be Viewed as 2 proces of converting input it desed output, ach ut que teen fro otter and thee dlerencs are extremely important rm th pol of ‘ew of planing and conto n desing each unt of te oat fom te ee Domi of designing appropiate plsnning and corr! mechanisms the most nportant [tebe ofeach sabrant is whater soups can be quid and teerte ‘Another imporant etre of varios typex of aban whee th process hey {Swell defined and unrstoo. A nutter of scr are inveved in sanaptnent| contol sich as planing, cordinaton,commancation, eahation declon-hng nd infencing others behaviour, Management onzl dots at secur mean hat Sons sould conform tthe pan In eae the mance ave now bevel a be erent fom thse assumed during the preparation of plan, the planned cons may ‘ase oe appropri Ths management contol shou nications “Te Chef Executive Ofer far the responsibilty 4 formulate the company’s states that are expected to atin the cannon’ bjctines The sates Many oak wonder on pape utes they ae impleriened,teovanistow ha thing to gain Thus, management cond often 9 ned by the management earls nto ver the implementation of stepsanagenest col Sten Management onl proces epi alter he formion of th rans’ ols ann a Se een concept ivaving all steettonships between manny a Pang and coil are common to all stems PAGAN a eeScmenahng antec proc of Sing ot fen ous of ae ihe bos fo mest the @ectves. Ts eutomatay eds te aa sa april, lang. term efetine and plan of acon, An five Pa eres uk! poses te owing hese ia rccmtpis Flaw Tere shouldbe sae pan of an organ and the Fame communicated th ssbornate who ate response roe an, not only the sty necomnty, but i should be a ec wo he er pope fhe organistion Its no communi ‘Ran wlbe aaa to steve he betes (@) Po plan There should be a. profit plan ot budget prepared by an Sn a nt ropnny cers sa comic 1 eld rh hechy wo tc ropenele ar eat earns enplye tnt seule ted to pet i Maan Tn oe a te deed ene Ts pose Se Pee ried scien ono Tu HT va ee aa nb nine rae Sel Torte eesti eran acinar infermaton ptm 19 rece ae fee ein ode cnt the ait Of = leat nc aborinesconbememes ees athenep ors sa mAs CONCEPTS: a Sr Orange col ten is eo 1 dest te mera ‘Management is getting | through the people. It refers 1) Management thing done fgh he po. Managemen et hehe of ay of an ngneon Wh cr ee ners od re ow anagem, 8 fe destiny. Thee Pave Oe (CEO) ho sso kan 8 Manag a eine phe te eoprobltyr neing ONS Deo on ee ogc’ egy Wah expe © So a at en tne, he oop abo spore aan eo baling and agement cn! He we of OPE Simone eet means making eet ators fo lane. preuppan he Con Co get hs tently pan he bi of 9 Perspective of Management Canta Stems, |} ay fi and cole the report about acta outome ofthe pan. The co ‘Siete etn cry canna ce Sie ‘Teco ns pons of comping te sual rel he omerponding ees dad seperate ely oy ctr Sajsting the bulge etnies x cecng the cases of the Alfereces ‘Coos alo a pt stage management wich ensues whether rns voc asi cnr he vs o the srr Sitmnpctraaton mages mere ein eeepc 1 Spe Ay pct man caring epein aies ‘Cheat nerd pr hat pens oto epoca soph ipedecng, Ancient a ea feat veyseme ies of acs cai ot nan organisation. The scgenetatl spum na _e_ io rcm m e ton. iectve manager contol reas well degre repring ‘Pim Nae ts to ls cies ny Te ‘rrnmen i bconing more adore complex. Thre ae more produ Soyo caging whey snd matte, Te aaganent ea erae ot [ptimal solution for this complet. Therere, there ma need for various me, 1_ansotcrv oF mace onTROL BYTES Se ee ot es Me ae re is re Smee ee aera moras Petpet aa 30 er ce peepee en eee eee ras iti Segehl eee ae eee ace es Spe coe eine ee Eacinaens ss ate Soke aramumst arene sg aint nee te Lisa heres ae ee Saletan oe ops ar a Boe ete pte Seg ne eT ene tite Seer arrears Ee ate an cee ne Selva aioe Sl sats ea ceaThre ae sever ways of bering te a a They impor ay bec opt cs can ic seta cn be toh nine th De PS mamta snd muna per Hs dese te ey oe ead on sles promouonaoverang end cscrch seme Sal ie he vm trates pens nacre ee es seme of fice sigs ay te sein Sing sea cay stn reps may changed a septs canbe opnd Ti te for nen i eo duct tig pie pain. The sy [Samuel ee ~~ on and neve Ths ft 0 as © SEO mma Pe on a eae eel pti, Toe cies seh Sat ends which oe eganiston wants fo ache. These mion and Bete labo ein y Atuyun of neat enone Te sand sop i he prs of aan ee se aula of tal eet. He era SORE lw manpower natn es ey, Prose see eo lan option Te tala et neal viet Sey Sine be sng he ects A proper aya te Teen pors cng andes ef open uo any of Era nomen he oneal vient rer he set tn Concrete Ope can Nohagea SEclgpnent sad thereon fo The sede ld abe poe sna he exelent mere pvt et oppor Ah Gop anyas Cap enya mene cpio presen: eons ee Ce prams el of be smi Sh 2 etal Dic af opt ese beeen he et sae opto oe og The FET als cuy. Whe safer pp, the agement sibfutemeaen beard ee” sii act satel The management ht fe lercave OTe tthe baa of SNOT and GAP amas. The sates should sec conan ote fame her + ned ane ‘See ome Ss Sey to an ter SEES Sty tent rime 00 Cone of mn The manage hs ses on apposite ty ‘pinay, ene ea atte ine ee tld set he tet sooty pon fhe saben. se ec cote aemae atepis.The ste WSN Pepi of Manapenet Cert Ste |] ———__13] {Bre the maximum benefit a the minimum cons can be wei for plement (©) Operational conto Operational contol ia pros sed for esuting the tats hich seed a eee tect and ete ales te Sono of aida ks Te so be lied or scoping the ks sre proerbed ay prt of the management conta proses Operate cota can ‘shred thouph the meu of hanan begs nachites Computes ised Im procs conta ate part of operstnal contra, Many operational cota ste ae sitet ratare The eltoraip betwee ese and ec he ‘ton ated toring ah out conta ack othe dese Hat othe imum decsion shold be within th ceptable ln However the ‘Scnom order guanly, wali Hine and tier technique of opersional ‘che ln io alee sytens re pe (© Management contol Management contol ivelves the proceso Implementing ste, Tern geecaly 4 fad tine able and sr of steps in aordance with which management cortl ther pce The Imanagenent conta 2 ye of pling shi cont sty ft doe in trganntion Iisa proces by which management uence thes meer ef the rps to mpiment harass’ sg eitedy. neo ‘management conta the atendon of he management bon argon. any tak contr! ys ae sci aatre we as toto cto ‘manogement contol The marogeert conta invelves the behave of angers a manager inert wih ter managers an cannot be shown efor of equations (@ Financial con Fiance! conto ihe procs which management ensures thaten organsaton cars out i ancl plane etectvey Paneal pase ‘pared and submited te tp managenert for the pepe of ee nt {pprva. Once the plano se approved, they ae ed yanaicls fr the ‘hivement of gn Actual slr then compared with he pln at ferent level of management. Then he deviations se aceainad onthe tas of tet Sateen eet et See coe car en She ater 0 RaSh mien anaes Se (© Geriopmt band baling camer rb, cane rescuing Serre nay tls cern tr tragme atae Sores San ra ean ge lm °° he tt why earn oer apr == copra en o Reethtcpean Tonernesca narra Saaceyastacnisvaeoaer ae Semgatenamemccaac tai iy fostar accion cuabtpeea yy genta peoug tron bate ropes vl of wes created EVA i regard se comprobesive mee of Todiencameue picts ee ee soc. Se a dgipsamntntt schooner untecesionne Es 2 ttn 2 CEE earn 7 Rene mp me he pean a ante cian en Samar eases aes actrees ai cts tare ne Sensei ce caer trooete aaoucegena oe sono rae Go Seti fp] valuton of good and ae» company may tenchnark.he EVA sped se ‘ieotewn vel cogtsd that EV ihe employes Compensation fa yf {St icounilty ands shreolden and prone tnd proving sardies ‘alse VA can bes aan nto a cue ddan foros of vet ay. EvAasa Popular Performance Mensre: ‘he cncpt of rome Vale Ade pe omer the ope perfomance an pevorce of busine seer ae welt Tor th parpor, all {vito are modeled; monone and commited fer of née vale fo ‘Saris vetnent Th cone of Eamon ae Ad ery impart rom {Beinvestors point of view et hn sce which le he ow wel maropers {8 psoming thc py tk of ceatng wen Thu, Bonomi Value Added na {Popular method of meaning te pone fhe bose Te tie ons ould produce enough pro sce the cet fepil eonone Vale Added ‘tempt mont spproprt eto of ot capa. Capital employed hin {Soh alison menue ahem opereng ti aed by hat apis mesure ‘hoon pot tt EcnomicVlue Adon = ces wh ae peat [eater ct of cpl fbeon ace an ‘Applicaton of Economic Value Add: "he cnc of Exum Vals Add sing wily sa by th compan 3 everest ut pron a oa poo dor aed ‘Expr artan PA) orcas fw evn csr tothe company which te share by aire nest groups Eames Vale Added sa repens 2 {eames on whch svt may dtm, whethr a uae epic worth investing Ths helps fo mesure the eerste eran of» Baines Se ‘wl some Vale Aled pes bea perl oa tht gel manages depy ‘Spal or maximum in rmome Vale Added ian important i incorporate facia decison aril in merge an acon tht poeple silly of Epany to gence st sunpos Exons Vow Added pre of compar and ‘Eom Value Adds pend lh at adr ene sper prot Eom ‘Vale Added ssn npr uproot Benoni Vue ‘Added anton of gro an shares Cool an be sad se eco ‘ronnie Var Added msde bya company over the fencna ompany ‘lpn by avenge fil employed Rsnonk Vloe Added cans be widely {ed ara bane for mange competion come Va Added based epi ‘Smperaon sheet ny tone acounalty wares sed preteg {cl improving shareholders vive. Annual eonomse Value Aad get Show Be ‘stblahe ch oprtn tne upon previous on et ated op an down nse upon previous urs acta patomance Exon Value Added of anes ‘sh Stet ra et Boe ini Emi ae Aid ithe company= trrspere corte Economic Value Added Analysis in India: Tronanie Valve Added revealed the gloomy pefomance of Indian composes Many lted compet have sated shoving Bonomi Vale Add cleulatons {henna epee fr the benefit ofthe starhalers. The peste Bonomi Vale Fart Goal Sting Py GV) EVA=NOPAT~Costof Capital 04550-4275) Core £40275 Gros Isiaton22: ‘Nid perme as ben wen ysftwae, ac, pasa ute natn ‘imparts The companice ike Fndetan Uneve, Mart, Suz TC have ben ey Ul provides you the following inrmaton as on Sst March 20, conn Seon Ve et The nage acuta hve Feo lace het ron 9.33008 ebaTivnielng he expan onthe ture prope epeatl ost maogenent roo ame i= PEs rectctcng A mangement somite nace oa ot oe = wel pals [i catigenct io valroucd munagenen Benoni Vale lrg a feta pew nylon coer rt ee ome 8 ton 2 seem ae BVA ron th flowing data he yet end Set Mah, 209 oe = = meee] ‘oa acai Foe 3 GD Protbetrnee an e €200 em 2 (i ees pid 20, et ee oo “ eles eae al th Rik eat 1% a 69 Langer Mahe Rate = 2% ca ren Bo. aoe (Bea) =ue2 ‘ouareregued cae the Boron Va de sate sotation {0 Caan ot Wego Arrge Cost of Cota ae fom, Ke =Re B®) es Tes ae wepaee ae aay ™ "5 ne oe * 78 a nas se Sm] |W caeaston Cot ot Debt wace = 4B 100 =1425% Rateofiteret = 209 «ay cost Cpta ployed» 125 of 200 Croee i 2 Tears ce 2-0 amcaeton f NOPAT i =1% ama] | m_Caason cf Weghin Averag Cet of apa oon) rrr 60) sane neat a oo paren || fea 2) co ) are iT PAT isa) |e 2 a|__na] | ‘sm uiira —orapener cor srs ant Gos sting amas [Nimber of gut Stars Wak wace =3228 .100=248% se oie Go) —-NoraT =PBT—Ts wk 200 aks 305 of 2000 aks 5215 2000 -* 400 aks Calealtion of the Marke Price (MP ofthe Share e100 ake MP = EPSP /E Ratio ° BVA. =NOPAT-Cot of Capital MP #521526 ‘ean iakhe 31126 ae 31290 08874 aks ‘Caletation of Vat of the fim (Capt played 1000 +1300 +200 = Maret Price «Number of Shares 2500 ake 31290% 4) lake Masteaion 23: 2516 aks ‘Modern Indusses LA. ngage in texts busines. It income sateent and (8) Caleattion of EVA, tance shet ar given blow TEVA. = NOPAT-Cot of Capital (0 Income Statement forthe year ended 313205: NoPAT =POITQ-1) Price Ra =3000(1-03) Soe van $200k uncon toate ey EVA =2100 ak (12% of Equity & Reserve Surplus + Bak Loan) rer 00 EVA +2100 aha 12%f 000 kbs) ect etnias A =82100-108 kde eat mo Teivezakhe tee Ta 808 ‘ou (o Caution of Market Value Added (MVA) cans 205 Pater a (Bane Shean on TSS i a Ea 7a ‘aes eae an ‘ea Ne ay See Oiseg soi eh ee pe 06a i ooanaay 7) ali abe Pe ‘essen Fae ane 30 |Pa ty ‘| ee ap Tenterden) = a — tse 1 cy ia [oun aba A ml ‘im] «24 FREE CASH FLOW: {GD The Companys weighed average Cot of Caps 1 {4¥) The Coepany ited on BSE and asa P/E Ratio of 6 times. "You ae requted calculate (valu of th fir) EVA and () VA, Sottone (0) Catelation of EPS: nming ier x ‘ome athe “Acompany/ vale depends on ee cash ow FC which defined a fll CFs Net operating profit afer ax—Netinvestens a operting apie NOPAT = Ne nvestnet in operating pal = TEBIT «<-0)—(Copta of cent yer = capital of previous ye) staan cnc tr cing one tn et often fe Gah ows wiles whl ed os her ack pea} treo nt rar Cath conentan ce so _ Corman lel fll 1 yin which hy purchase inventory, el gs on a an then ile aecounsvseivablen Tis yee is fered a he cath conversion ‘Sek Sound working cpt ple i designed to mini the time Between ah ‘Speer on mara he colton of eaten ss TT es coweson cycle mode which foes onthe Ing of ne between the payne made by the company and recip of ash i @) Inventory conversion pero trvenary conversion period i the serge tne (© ued fo comet arn i ised pods and then os hoe gods [Th menoyconveron prod icles fallow aver every conversion period’ = aS For example, avenge invenory of» cenpany 18 €20000 and se ace ‘100508 ene etry conversion pet wil be 72 days alow 20000 Tewenary conversion period = aes rays “Ths it tals an average of 72 day to convert matin fn goods and toss these gods ve neen (a) Receivables ellecton period: Recelrabies callecton prod the verge Tig tnereqted wcnvet he compan’ evades no cash Bt 0 SURG Gch fellowinge sal rs abo led sy days ae oustanding (050) 15 ‘Slot llows: Recor Recelvblecolicton pared = TERE For eample if cena ofa company are 67 and sles ae € 3000000, ‘be wccvablescllson period willbe 24 days a follows: a Rectivabls colon peiod = TERS TED 24s “Tus it thes 24 day afer ale to convert the recevables nt ash yin dtene pra: Fran dered prs the average engi of ie © ket puch ef tsa an py fa orem cle sels Paysbes Payable delered peed RSD For expe fa compay aan srerage has 30 days to pay for materi i su eat of gos wld E4000 per year and is acount payable average ‘cot, then te payables efered period willbe 3 days follows: rao Satng, > 507 Papbles dfered prod = aS =m0days ‘Thus the clued figure i cst withthe sated gure of 90 days sayment period Hench company fas been working ety ™ (©) Cast conversion oye The cash conversion je ets lhe thee period and al the engi of ine beer he rs aul cs expendureend io «ash orp. Ths, th cash onverson eye equal the sveape length of tine "pes up incre ants The cahconuon see canbe Seed ot flows Cash = Inventory + Reciabis Payables ccnverion conversion” calerdpe” are ole patod petiod = ‘lows Cash conversion jee =72 days +24 dys -0dayn days lReanalsote cued inthe way a under ‘Cas ntow del ~eash payment ely = 72 days + 24 days 90 day «6 aon 25 RETURN ON NET WORTH: tno et woth fl oe vets ote the company it inde proper sf shahdes and hse ls nonw NP op Net prot iste ay aero pois nd ret woth i equ othe guy apt and roereh Tht i sgn! bese Iaian sounting norms do ate rein aroun ine share cpa bt nc int races ad sup lve wnt vet ine ompany te ROWW shoul eat 1s pee FRONW espe the nt prot i tea of egy sharers ids I an ‘impo yr of performance of egy shbldere fen nats he tea the fds employed by th The port far whch mats ‘tacos lve ie company the spec oan deg a fa {he fa Tey ao ant to sea thet cme nee Sc wee ‘cannes Tha acl omer a ar Perego ok seo hareaaa aaaaaaaaaaaaaaaaaaaaics, a lenratlon 24 ancl Goa Sing ]_$$_$_$_$___ ‘You ae require oct stun on et worth an comment onthe pexormance tte compa exon 74 et income statement an lance sect f Gem ifr he year ees eee sua N ee eat Aa atone ssement fr the yer ended 31.3209: = RONW = Rbrenh =O <2 ain . = c100 en G Return on act worth of he company 6 926% whch is very low. Ths he vs pooanc the company tne ey ch tone Cacti — 2 | ‘Mastration 2.5: mam te, a The ac see of abo snd fli tain Prom ter ac te 300| ‘abies ‘07-08 | 200620, — ears | 200620, een al, = fea =(% (temas tows ‘o so vo | et or mass 2 bee ad {TD atnce Shet aon 332005 a] | ee ae er SF 7 = =| eae ‘ty Toa gene Swing co owes oan wo) or 220 [Some cy = ere rar = | im j i. = |e fect fam] | |p «| eon a |» we +) “ou ae euled@ als te RONW ad Samneton Os peas Be sa | nee. a i once ta | “ ence tin wal rn = eal Bee “Bown on ‘a ears os al Te HONW re yu 207 10 RE as nce 1 oe 200-1 Tas he copy peroomanse haben proving seme 7]FH rrsoee conra str 2.6 PRICE EARNING RATIO (P/E RATIO): es var oso rseeang en oan over mare of he dsaiity of» compa it ¢ ~ReoTEgay Sore” Saw = 200 poplar tl valu of ely eter, Price of equ share depends upon rveraia ME Ferd uch as Goverment Ply seo ouok, Gut of anager fio ‘Eallocatcbutn poy, put Yor oes and shareolding pate. Ths P/E fp esse dg mit fps peut an etre. Earigs sac pve present & v ‘hci nt ens re ae CSR. dents Row many yess we can expect recover the pce pad for ms Pur of she cated os ‘The F/ERAiis high an thus he sar vere aa epee aatation 27. ato = Ms peste EPS) ‘Alu captaied stows P/E sao of company an be compared with duty P/E ato, Noma, th P/E ra z eee ee oer cane induaysvemge of P/E Actorlingto | PAPowen ota eres eienc 7 rao upoa nes beer br invent ints share Ths he Et arate oa Prrcabals Span shld be lowe The epatton of compar dopende spon 00) spss inh stck mart th F/E sao ower thn there ia oper vest = stu {Rlbecampan’share He P/E at ey hgh, ht meas fe stares vend “herniation lan ian oor 200 {nde esr in share cnet be recomend G asain 2 ara 8a f Cala th P/ ct fom he flowing coma vam = ene ne — eam are, 6 [caaeeecom toe a satan an ra Si tans] |g fotan ind ine Bet Sendawe 94 sm] ce este 26 fnmao| tion ofS © a ea Prof afer tax ss4000 scone sau ewe Pence dividend 54am) [opwessremeem | at Eras ae Tome x ate 6 HFC and watt pas ole oman sare EHO ws ear __ 0.00 slain 5 = Ro Equity anes "10000 ic ee “07 Tara 7 Saat Pe a © P/ERa ME Seon ss © Uren 00) smo] | “357 Ps Ta ‘3009 =112 Times (etm 208 ‘sa ‘The P/E at of th company’s sae in 112 tes which at ower itn Tabs] ew mope iene npn te Hans, ro Ea saFF terme con srs 2.7 EARNING PER SHARE (EPS): Taming osteo ech ey share tickled onthe wuts OS ane far ong song Na on sie ee re The the mow porate ode vein ‘een SOMESET! uw he nnngs at erases ons hare Is clea ‘slows PAT=Pifetncedvdent EPS ="Number of Equity Shares igh Bs, beter he hance of eting nae on tener a wel ent ee een he inves cnn compare ie EFS of dfeent compa in he csptlappesain, copay tar eer an take he con a ssa The Hamaga ha 9 mae eo 9 em ihe EPS Eimyeroyer Treaty te peoemanee of company sbter jad in ems of ens pt er eer be mporat ease of anomie oman of Fa ee ef capt tbe compare ender the pet npr apa sy Twn be mae ote bn eau of PSA her EP earn i csy EPS ore of he mar actors fein te vend a ie rd the rit ps fhe compan Acay owt 8 EPS Paci eis near ofa gue rest of roti. co BS "The cash eimings per hare it called by dividing the net proft before eprecoon with numberof equ shares flows PAT + Depreciation (CoN BTS Nps of ut Shares ‘Tiss 3 more eae sdk for memset of perfomance of cepa cspeayhugpy copia inteive companies where provon for deprection, SESE tring pr share pein deterring the maet pie of he equity Seely comune Habe help estimating te company opel 1018) ‘pate otc shareholders Re cash EPS provides the lige postion f the Company pay aividend tots shselder en Iatration 2 gh roe tcl an yur eet Mac = a a a TY ‘a ‘nna one eu ‘wan osometee ‘sen remeron sca) Perse poe anaes 2 Calelte(@) PS and (i) PE Rao and comment on te peoomanse OF te company. Suton: WCalclaion of PAT ar a ser ‘nox er sn star 505 ‘sso ar 70 ect does $8 Lass Mp2 (P/E Rao = ME 3 =7Tine “The BS of the company 8455 which stacy €10 sare ering 8455 yur whic comes 6 455% pa Hence, actor. The P/E ati 7 es whichis "ower le Hono, th share stnderped and hares acpe forrest ne ‘eng, The pefomance ofthe compeny i atilacey enti 3 “The inca dats relating tC Lis given below Serer “i ote austen rece sea 5e0Frnt cotssvins rl tatng Fn flog aah ifr eyed 3109208, >_> _— —— aa ‘a 3 a) Pets Ci aoe) =a owas = = ee 200K nn Sena iqueloaicine aloe = (uswcanmscorrens 2 Seition PAT Preferane Dividend Ese] o ‘EPS * "No. of Equity Shares som son rag saan an tesa PAT + Depreciation - Preference Dividend Folowing he Income Satsient nd Balance Sheet of Masini Lid camry - PAT: Dein es [react _20n¢00 ‘ssap00 eer “400000, “470.000 ® et 0000 730 i en Tair] — are =4et08 | ie isco | sam ote i ‘| setts wesc ose €6s0 anaes AES ath ie ja _pmgymcmsamenmensstates | ae ee ah eS “ene | [asm es aaa) afr —] a] — ‘tno| sano|omn So] aca sone sana} eanam| owe soe] 13000 | [tenons ‘ame om Pals i E E i E Eeragenet Conta res “Jou ae rue nels PS ith the Dp of EFS Conta Chat and sgt conrerive ne rogue to cntal the EPS ‘Solan Catattion of EFS onthe bass of EFS Cond Char [aa eed | He | erin tw [Pv Caan son] sam] On [opr ty Datoet ete a a he cg et emrcsane “ 2attettnn ie pace eas ope pr frome ~ reer roeecuate passes nee feaee ‘| Pace enyete pet poner aren tart af a9 \ | Deena on tnesent RON = EERE 100 = ‘text thot pncon may adversely aft the profilo he in thelong ran. (Poor measure: ROI i poor mens of Sim's performance because it abo sifeced by many external facies which are ot array the (© Allocation of resources: here are number of vss a fay dares 2 [rblem of allot of resources. The efficiency of parent depends upon {he cot and capt uvested is del to acne the cose as Well a apa teach dvison (mn the a ofthe into ican be sd that ROI ert an desu measte for judging the Srancslpertrmancs of bnins fa. However, the ue st eis ‘sto ange trends compare results an ov he changing Pater fo devi oer "ats and andar fo measure ore preciely te efceney diferent sectors of the ‘snes an for diferent cst of xp Rot and EVA: Return om investment the mt of profit fie tao gos investment. The amount oases eplayecomespond fo the vr ofall atl crt ties appear ln the bul set ofa compar On the oer Rand, economic value ade is =| ‘eolue amount sed in monetary ferme. It i deed by deducting fran the etanager Cobol ene rg saree eat by mauling the na copa charge. The cpa cage i ave at by mul Sree eyed bya opeted rte The rash Between ROL an EVA Senor beter known rom he folowing mp ilastation 23 wae ae ead Lou acsunt of XL forthe eur ended 3st Desember 3008 ‘since Sheet on tat at are given Below: ee ‘Beano value aed in asaate amount ated monet ts is derived by deducing from the net operating profit capital charge. The capil carg i ‘ered By mulling the vale fase employed by rate Thos onan Ve ‘Midd prof oes on investment he follwing eons (0) The oer pofit of an investment centre may al ving to deans hat increase {ROL Whare an investment rte har 8 RO of 20% pole forthe mage ‘0 increase ts eral RT by sling an ast whose RI 15%. nese theca of to Doan Lvs Account forthe er ended 92209: ‘xu Caplin in tinvestent cent ib 1 here old Bea Ses re = Spinone iam (2) The uso spat oie fc dierent pes of esi act adsnige = 0 ‘cru rom the usaf EVA. Ang erst ate may bese fer estes a ree x {Bead ates and sw ste may be ed for cent scr cnr he ‘aro dogs of ik int ates may be td for dfent typ of fed ttm Yo] | Senn coat can er! Gta aren pad a @ | edecon as goreing he Squston of ees jr tm # |e» tnropet of comparable vermeil nesent ete ave the sme prt z © Ghee Howenes under the ROT maths, feet nent te provid or Teco ia 1 ee veces ae ene nea © Balance Fina] | —_- Met would be ening tgp infor epson sles sin poston oem 4 Tae ut a |. Beatie cate ie erence aaa = {he companies un iste cner Hower 6s ofthe Bee RO re a | tm mmasoecain st) 8 ros of eaton nin, Tl he capac nen snes whe 10th: Sa etme ewe na 0 sion 235 oi: wl me ‘0 oar ie hollowing deta reparding Sva Sih Ld eis) a 3 comes a "cow (nome | "| wena | se | ha conten — =| * ® @ @ we ® Feo ned » » 2 t = “Jara gue o ane) Reta cn invesinet nd a i 2 g g ea ; and caret onthe ratan between Be Soltion: (a) Return on Investment ROD = Qbtat eepoed Petco = Cepia Eyed 18.100 sr SNOPAT— Capt charge 910% of 280 ks ose=28 cero () —Feanomic Vale Added The corporate cot of capital eating money inven eee and debtors 17% posta Theft fru rele bythe compan fr ivesting in eed asst 1% pot tn Calulst the ROI snd EVA frm the above and show the erence between the vo methods of invest conte evaluation, Solon: (Computation of Retr on Invertment euine Test [coh | tress [tai | Fad | Taet| Bute | RO ‘Seow | Son ines | mane | ett * [a |e |e | | « |e] @ e [wl] » |ow|w] wm | ol] w