Management Control System using EVA (Economic Value Added) as a performance measure in a firm

Gorus Milk and Milk Products Ltd
• Gorus produces only milk with help of 150 cattle and 15 employees. • Company’s Production of Milk is 60000 ltr. of Milk per month. • Selling Price: Rs 20 per Ltr. • Total Revenue is : Rs 12,000,00 per month • Total Cost: Rs 800,000 per month • Total Profit: Rs. 375000 per month • per month.

What is MCS ???
• 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. • Management Control System is about taking steps to help ensure that the employees do what is best for the organization.

Fundamentals of MCS
• First, planning and control are the two most closely interrelated management functions. • Second, the human side of the control process needs to be stressed as much as, if not more than, the tasks or 'numbers crunching' side. • Finally, evaluating, coaching, and rewarding are more effective in the long term than measuring, comparing, and pressuring or penalizing

Designing a MCS
Step 1: Setting Performance Standards Step 2: Measure actual results Step 3. Evaluate results, give feedback and coach Step 4. Take corrective action

1. Setting Performance Standards
1. One worker will take care of only ten as allotted cattle. 2. Standard production for 1 cattle was measured at 400lt./month,Hence one worker was responsible for 4000lt. Per month 3. Incentive of Rs.1.5/lt. will be given to worker,if autual production > standard production 4. A additional supervisor was appointed to record all the particulars of production So that performance can be evaluated 5. Quality of food was improved and additional Rs. 40000 was provided for this purpose 6. Two machinary of Rs.300000 each was installed,of which one is for milking and one for manufacturing paneer 7. Two skilld employees were appointed to manufacture paneer 8. Standard food consumption for one cattle ie measured at Rs.2300 9. A incentive of Rs.2500 will be given to worker,that will give maximum production with minimum consumption

2. Measure actual results

3. Evaluate results, give feedback and coach

What is EVA ???
• EVA stands for Economic Value Added • It is a single, value-based measure that is intended to evaluate business strategies, capital projects and to maximize long-term shareholders wealth. • Value that has been created or destroyed by the firm during the period can be measured by comparing profits with the cost of capital used to produce them.
Cost

Earned Value Schedule Technical Performance

Economic value added = Adjusted after-tax operating income – Cost of invested capital (%) × Adjusted average invested capital

EVA- Features
• If EVA is positive company is creating wealth and vice-versa. • Over the long term only those companies creating capital or wealth can survive • EVA is an amount not a percentage rate of return.

EVA Advantages
• EVA is more than just performance measurement system and it is also marketed as a motivational, compensationbased management system that facilitates economic activity and accountability at all levels in the firm. • EVA covers all aspects of the business cycle. • Annual performance measured tied to executive compensation • Long-term performance that is not compromised in favor of short-term results

EVA Disadvantages
• EVA focuses on ends and not means as it does not state how manager can increase company's value. • EVA may focus on immediate results which diminishes innovation • EVA does not control for size differences across plants or divisions. • EVA is based on financial accounting methods that can be manipulated by managers.

Results
• Total EVA before application of MCS: Rs 3,30,000. Per Liter EVA is Rs 5.5.

• Total EVA after application of MCS: Rs 4,24,000. Per Liter EVA is Rs 5.8.

THANK YOU

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