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Module 1.
Introduction to Management Control Systems and the
Environment of Management Control.


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

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.

Management control is concerned with coordination, resource

allocation, motivation, and performance measurement. The
practice of management control and the design of management control
systems draw upon a number of academic disciplines. Management
control involves extensive measurement and it is therefore related to
and requires contributions from accounting especially management
accounting. Second, it involves resource allocation decisions and is
therefore related to and requires contribution from economics
especially managerial economics. Third, it involves communication,
and motivation which means it is related to and must draw
contributions from social psychology especially organizational

Management control systems use many techniques such as

 Balanced scorecard
 Total quality management (TQM)
 Kaizen (Continuous Improvement)
 Activity-based costing
 Target costing
 Benchmarking and Bench trending
 Budgeting
 Capital budgeting
 Program management techniques, etc.

• In the management parlance , control traditionally refers to the

activities of establishing standards of performance, evaluating actual
performance against these standards, and implementing corrective
actions to accomplish organizational objectives

The nature of MCS

• The central focus of MCS is Business Strategy Implementation.

• MCS provides knowledge , insight, and analytical skills related to how
a corporation’s senior executive design and implement the on going
management systems that are used to plan and control the firms
 The elements of MCS
• Elements of MCS include
• Strategic Planning,
• Budgeting,
• Resource Allocation ,
• Performance Measurement,
• Evaluation, And Rewards,
• Responsibility Centers, Transfer Pricing

Concepts of MCS
• The MCS builds on concepts from
• Business Strategy,
• Organizational Behavior,
• Human Resource and
• Financial & Managerial Accounting.

Elements of Control System

• Every control system has at least four elements

1. Detector or Sensor – a device that measures what is actually

happening in the process being controlled.

2. An Assessor – a device that determines the significance of what is

actually happening by comparing it with some standard or expectation of
what should happen

3. An effectors – a device that alters behavior if the assessor indicates the

need to do so.

4. A communications network – a device that transmit information

between the detector and the assessor and between the assessor and the
 The Three examples of CS
1. Thermostat
2. Body Temperature
3. Driver of an automobile


1. Thermometer which measures the current temperature of a room

2. An Assessor which compares the current temperature with the accepted
standard for what the temperature should be.
3. An effectors which prompts a furnace to emit heat or activates an air
conditioner which also shuts off these appliances when the temperature
reaches the standard levels
4. A communication network, which transmit information from thermometer
to the assessor and from the assessor to the heating or cooling element

Body temperature

1. The sensory nerves scattered through the body

2. The Hypothalamus center in the brain, which compares information
received from detectors with the 98.6 f standard.
3. The muscles and organs (effectors) that reduce the temperature when
it exceeds the standard and raise the temperature when it falls below
the standard
4. 4. The overall communications system of nerves is self regulating. If
the system is functioning properly, it automatically corrects for
deviations from the standards without requiring conscious effort.

Automobile Driver

• Assume you are driving on a high way where the legal speed 65 kmph.
Your control system acts as the following.

1. Your eyes measures actual speed by observing the speedometer.

2. your brain compares the actual speed with desired speed, and, upon detecting a
deviation from the standard.
3. Directors your foot to ease up or press down on the accelerator.
4. As in body temperature regulation your nerves form the communication system
that transmits information from eyes to brain and brain to foot.
• An organization consist of a group of people who work together to achieve
certain common goals. The CEO decides on the overall strategies that will
enable the organization to meet its goals.
• Subject to the approval of the CEO , the various business unit mangers formulate
additional strategies that will enable their respective units to further these goals
• The management control process is the process by which managers at all levels
ensure that the people they supervise implement their intended strategies.

• A system is a prescribed and usually repetitious way of carrying out an
activity or a set of activities. Systems are characterized more or less
rhythmic, coordinated, and recurring series of steps intended to
accomplish a specified purpose.

• Management control is the process by which managers influence other
members of the organization to implement the organization’s
strategies. It includes

• Planning

• Coordinating

• Communicating

• Evaluating

• Deciding
• Influencing


•The nature and purpose of the organization,

•Organization structure and size
•National culture
•Strategic mission and competitive strategy
•Corporate strategy and
•organizational diversification
•Competitive strategy
•Managerial styles
•Organizational slack
•Stakeholders expectations and controls




• Corporate level
• Business level
• Functional level

There are basically two categories of companies; one, which have different businesses
organized as different directions or product groups known as profit centres or strategic business
units (SBUs) and other, which consists of companies which are single product companies. Eg.
Reliance Industries and Ashok Leyland Limited.

The SBU concept was introduced by General Electric Company (GEC) of USA to manage
product business. The fundamental concept in the SBU is the identification of dicrete
independent product/market segments served by the organization. Because of the different
environments served by each product, a SBU is created for each independent product/segment.
Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it
is serving.

Each SBU has a clearly defined product/market segment and strategy. It develops its strategy
according to its own capabilities and needs with overall organizations capabilities and needs.
Each SBU allocates resources according to its individual requirements for the achievement of
organizational objectives. As against the multi product organizations, the single product
organizations have single strategic business unit. In these organizations, corporate level
strategy serves the whole business. The strategy is implanted at the next lower level by
functional strategies. In multiple product company, a strategy is formulated for each SBU
(known as business level strategy) and such strategies lie between corporate and functional
level strategies.

The three levels of strategy are explained as follows;

Corporate level strategy:

At the corporate level, strategies are formulated according to organization wise policies. These
are value oriented, conceptual and less concrete than decisions at the other two levels. These
are characterized by greater risk, cost and profit potential as well as flexibility. Mostly, corporate
level strategies are futuristic, innovative and pervasive in nature. They occupy the highest level
of strategic decision making and cover the actions dealing with the objectives of the
organization. Such decisions are made by top management of the firm. The examples of such
strategies include acquisition strategies, diversification, structural redesigning, etc. The board of
directors and chief executive officer are the primary groups involved in this level of strategy
making. In small and family owned businesses, the entrepreneur is both the general manager
and the chief strategic manager

Business Level Strategy:

The strategies formulated by each SBU to make best use of its resources given the environment
it faces, come under the gamut of business level strategies. At such a level, strategy is a
comprehensive plan providing objectives for SBUs, allocation of resources among functional
areas and coordination between them for achievement of corporate level objectives. These
strategies operate within the overall organizational strategies i.e within the broad constraints
and policies and long term objectives set by the corporate strategy. The SBU managers are
involved in this level of strategy. The strategies are related with a unit within the organization.
The SBU operates within the defined scope of operations by the corporate level strategy and is
limited by the assignment of resources by the corporate level. However, corporate strategy is
not the sum total of business strategies of the organization. Business strategy relates with the
“how” and the corporate strategy relates with the “what”. Business strategy defines the choice of
product or service and market of individual business within the firm. The corporate strategy has
impact on business strategy.

Functional level Strategy:

This strategy relates to single functional operation and the activities involved therein. This level
is at the operating end of the organization. The decisions at this level within the organization are
described as tactical. The strategies are concerned with how different functions of the enterprise
like marketing, finance, manufacturing, etc contribute to the strategy of other levels. Functional
strategy deals with a relatively restricted plan providing objectives for specific function,
allocation of resources among different operations within the functional area and coordination
between them for achievement of SBU and corporate level objectives
Sometimes a fourth level of strategy also exists. This level is known as the operating level. It
comes below the functional level strategy and involves actions relating to various sub functions
of the major function. For example, the functional level strategy of marketing function is divided
into operating levels such as marketing research, sales promotion, etc


INTRODUCTION: - To understand the process of strategic management the concept

should be understood and controlled. The term strategy is derived from the Greek word

Definition: William Glueck, a Management Professor defined it as “A unified,

comprehensive and integrated plan designed to assure that the basic objectives of
the enterprise are achieved”. Alfred Chandler defined Strategy as:- “The
determination of the basic long term goals and objectives of an enterprise and the
adoption of the courses of action and the allocation of resources necessary for
carrying out these goals”. Thus strategy is: - a. A plan / course of action leading to
a direction. b. It is related to company’s activities. c. It deals with uncertain future.
d. It depends on vision / mission of the company to reach its current position.

1. Before making a decision managers have to look into the course of deciding since
Strategy involves situations like: -

a) How to face the competition. b) Whether to undertake expansions/diversification c)

To be focused/ broad based d) How to chart a turn around e) Ensuring
stability/should we go in for disinvestments etc

2. An establishment and successful company would start to face new threats in the
environment. This is due to its success and emergence of new competitors. It has to
rethink the course of action it has been following. This is called strategy.

3. With such rethinking and environment analysis, new opportunities may emerge and
be identified.

4. To make use of these opportunities, the company might fundamentally rethink and
reason the ways and means, the actions it had been following in the past. These are
called “strategies “.

5. For a company to survive and to be successful strategy is one of the most significant
concepts to emerge in the field of management. According to Alfred chandler the
determination of basic long-term goals and objectives of an enterprise and the
adoption of the course of action and the allocation of resources for carrying out these
goals. William Glueck defines strategy as “a unified, comprehension and integrated
plan designed to assure that the basic objectives of the enterprises are achieved”.

6. Michael Porter views strategy as the “core of general management is strategy”.

Managers must make companies flexible, respond rapidly, benchmark the best
practices, outsource aggressively, develop core competencies; in fact should know
how to play new roles every day. Hyper competition is a common phenomenon that
rivals copy very fast.

7. Companies can outperform rivals only if it can establish a difference it can preserve
and deliver greater value at a reasonable cost.

8. Strategy rests on unique activities –“The essence of strategy is in the activities –

choosing to perform things differently and to perform different activities than rivals”.
9. Strategy is long term. If company focus is only on operational effectiveness. It can
become good and not better. Overemphasis on growth leads to the dilutions of
strategy. Growth is achieved by deepening strategy.

10. Strategy is the future plan of action, which relates to the company’s activities and its
mission/vision i.e. when it would like to reach from its current position.

11. It is concerned with the resource available today and those that will be required for
the future plan of action. It is about the tradeoff between its different activities and
creating a fit among these activities.


1. When a company performs different business/ has portfolio of products, the company
will organize itself in the form of strategic business units (SBU’s).

2. In order to segregate different units each performing a common set of activities,

many companies are organized on the basis of operating divisions/decisions. These
are known as strategic business units.


3) Strategies are looked at corporate level SBU level

4) There exists a difference at functional levels like marketing, finance, productions etc.
Functional level strategies exist at both corporate and SBU level. It has to be aligned and

5) CORPORATE LEVEL STRATEGY: It’s a broad level strategy and all its plan of actions is at
corporate level i.e. what the company as a whole. It covers the various strategies
performed by different SBU’s. Strategies needs should be in align with the company

6) Resources should be allocated to each SBU and broad level functional strategies. To
ensure things there would need to have co-ordination of different business of the SBU’s.

7) For most companies strategies plans are made at 3 levels.


As the SBU level deals with a relatively. Smaller area that provides objectives for a specific
function in that SBU environment are marketing, finance, production, operation etc.


Larger Companies like conglomerates with multiple business in different countries needs
larger level strategy.

1) A relatively smaller company may require a strategy at a level higher than corporate

2) It’s how the company perceives itself in its role towards the society/ even countries
in terms of vision/ mission statement/ a set of needs that strives to fulfill corporate
level strategies are then derived from the societal strategy.


In the dynamic environment & due to the complexities of business strategies are needed to
be set at lower levels i.e. one step down the functional level, operational level strategies.
There are more specific & has a defined scope. E.g. Marketing Strategy could be subdivided
into sales Strategies for different segments & markets, pricing, distribution etc. Some of
them may be common & some unique to the target markets. It should contribute to the
functional objectives of marketing function. These are interlinked with other strategies at
functional level like those of finance, production etc


Corporate level is divided from the societal level strategy of a corporation S.B.U Level are
put in to action under the corporate level strategy. Functional Strategies operate under SBU
Level. Operational Level is derived from functional level strategies

These are the levels at which strategies are formulated. Strategy is a plan or an action
leading to a particular direction. We have corporate level Strategy and Strategic Business
Unit level to fulfill the objectives of the company.


Strategy at Different Levels of a Business

Strategies exist at several levels in any organisation - ranging from the overall business (or
group of businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the business
to meet stakeholder expectations. This is a crucial level since it is heavily influenced by
investors in the business and acts to guide strategic decision-making throughout the business.
Corporate strategy is often stated explicitly in a "mission statement".

Business Unit Strategy - is concerned more with how a business competes

successfully in a particular market. It concerns strategic decisions about choice of products,
meeting needs of customers, gaining advantage over competitors, exploiting or creating new
opportunities etc.

Operational Strategy - is concerned with how each part of the business is organised
to deliver the corporate and business-unit level strategic direction. Operational strategy
therefore focuses on issues of resources, processes, people etc.



Strategy can be formulated on three different levels:

• corporate level
• business unit level
• Functional or departmental level.

While strategy may be about competing and surviving as a firm, one can argue that
products, not corporations compete, and products are developed by business units. The
role of the corporation then is to manage its business units and products so that each is
competitive and so that each contributes to corporate purposes.

Consider Textron, Inc., a successful conglomerate corporation that pursues profits

through a range of businesses in unrelated industries. Textron has four core business

• Aircraft - 32% of revenues

• Automotive - 25% of revenues
• Industrial - 39% of revenues
• Finance - 4% of revenues.

While the corporation must manage its portfolio of businesses to grow and survive, the
success of a diversified firm depends upon its ability to manage each of its product
lines. While there is no single competitor to Textron, we can talk about the competitors
and strategy of each of its business units. In the finance business segment, for
example, the chief rivals are major banks providing commercial financing. Many
managers consider the business level to be the proper focus for strategic planning.

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses in

which the company should compete and with the development and coordination of that
portfolio of businesses.

Corporate level strategy is concerned with:

• Reach - defining the issues that are corporate responsibilities; these might
include identifying the overall goals of the corporation, the types of businesses in
which the corporation should be involved, and the way in which businesses will
be integrated and managed.
• Competitive Contact - defining where in the corporation competition is to be
localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation
was clearly identified with its commercial and property casualty insurance
products. The conglomerate Textron was not. For Textron, competition in the
insurance markets took place specifically at the business unit level, through its
subsidiary, Paul Revere. (Textron divested itself of The Paul Revere Corporation
in 1997.)
• Managing Activities and Business Interrelationships - Corporate strategy seeks to
develop synergies by sharing and coordinating staff and other resources across
business units, investing financial resources across business units, and using
business units to complement other corporate business activities. Igor Ansoff
introduced the concept of synergy to corporate strategy.
• Management Practices - Corporations decide how business units are to be
governed: through direct corporate intervention (centralization) or through more
or less autonomous government (decentralization) that relies on persuasion and

Corporations are responsible for creating value through their businesses. They do so by
managing their portfolio of businesses, ensuring that the businesses are successful
over the long-term, developing business units, and sometimes ensuring that each
business is compatible with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that can
be planned independently from the other business units of the firm.
At the business unit level, the strategic issues are less about the coordination of
operating units and more about developing and sustaining a competitive advantage for
the goods and services that are produced. At the business level, the strategy
formulation phase deals with:

• positioning the business against rivals

• anticipating changes in demand and technologies and adjusting the strategy to
accommodate them
• Influencing the nature of competition through strategic actions such as vertical
integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation,

and focus) that can be implemented at the business unit level to create a competitive
advantage and defend against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and
departments. The strategic issues at the functional level are related to business
processes and the value chain. Functional level strategies in marketing, finance,
operations, human resources, and R&D involve the development and coordination of
resources through which business unit level strategies can be executed efficiently and

Functional units of an organization are involved in higher level strategies by providing

input into the business unit level and corporate level strategy, such as providing
information on resources and capabilities on which the higher level strategies can be
based. Once the higher-level strategy is developed, the functional units translate it into
discrete action-plans that each department or division must accomplish for the strategy
to succeed.


Strategic Business Units

Strategic Business Unit or SBU is understood as a business unit within the overall corporate
identity which is distinguishable from other business because it serves a defined external
market where management can conduct strategic planning in relation to products and markets.
The unique small business unit benefits that a firm aggressively promotes in a consistent
manner. When companies become really large, they are best thought of as being composed of
a number of businesses (or SBUs).

In the broader domain of strategic management, the phrase "Strategic Business Unit" came into
use in the 1960s, largely as a result of General's many units.

A Strategic Business Unit can encompass an entire company, or can simply be a smaller
part of a company set up to perform a specific task. The SBU has its own business
strategy, objectives and competitors and these will often be different from those of the
parent company. Research conducted in this includes the BCG Matrix.

An SBU is an sole operating unit or planning focus that does not group a distinct set of
products or services, which are sold to a uniform set of customers, facing a well-defined
set of competitors. The external (market) dimension of a business is the relevant
perspective for the proper identification of an SBU.

SBUs are also known as strategy centers, Independent Business Unit or even Strategic
Planning Centers.

Strategic Business Unit (SBU) is necessary when corporation starts to provide different
products and hence, need to follow different strategies.

SBUs are also known as strategy centers, Independent Business Unit or even Strategic
Planning Centers.

Strategic Business Unit (SBUs) is necessary when corporation starts to provide different
products and hence, need to follow different strategies. To ease its operation, corporate set
different groups of product/product line regarding the strategy to follow (in terms of
competition, prices, substitutability, style/ quality, and impact of product withdrawal). These
strategic groups are called Strategic Business Units (SBUs).

Each Business Unit must meet the following criteria:

1. Have a unique business mission, independent from other SBUs.

2. Have clearly definable set of competitors.
3. Is able to carry out integrative planning relatively independently of other SBUs.
4. Should have a Manager authorized and responsible for its operation.

There are three factors that are generally seen as determining the success of an SBU:[

1. the degree of autonomy given to each SBU manager,

2. the degree to which an SBU shares functional programs and facilities with other
SBUs, and
3. The manner in which the corporation is because of new changes in market.

These strategic business units are also referred to as independent business units
or strategic planning units. The main philosophical concept behind the formation of strategic business
units is to serve a clear and defined market segment along with a clear and defined strategy. These
business units have to contain all the needs and corporate capabilities of the respective organization.
The entire portfolio of the concerned business has to be managed by allocation of managerial and
capital resources for serving the overall interest of the entire organization. This helps in developing a
balance in the earnings, sales and the assets at a level which is controlled and acceptable for taking
the right amount of risks.

The strategic business unit (SBU) is created with the application of set criteria which consist of the
competitors, price models, customer groups and the overall experience of the company. It is also
sometimes seen that a number of different verticals present in the same organization having similar
competitors and target customers are amalgamated to form a single SBU. This helps in strategically
planning the overall business of the organization. This is also true for the company which has different
product ranges and some of them have similar capabilities in terms of research and development,
marketing and manufacturing. Such products can also be amalgamated to form a single unit.


Organizations are collections of interacting and inter related human and non-human
resources working toward a common goal or set of goals within the framework of
structured relationships. Organizational behavior is concerned with all aspects of
how organizations influence the behavior of individuals and how individuals in turn
influence organizations.

Organizational behavior is an inter-disciplinary field that draws freely from a

number of the behavioral sciences, including anthropology, psychology, sociology,
and many others. The unique mission of organizational behavior is to apply the
concepts of behavioral sciences to the pressing problems of management, and,
more generally, to administrative theory and practice.
six aspects of organizational behavior

That is

1. team building,

2. communication,

3. culture,

4. leadership,

5. Objectives and

6. Setting goals.

What are different aspects to Organizational Behavior?

Organizational behavior attempts to target the root cause of interactions between two professionals at
workplace. As an example, for a company which does not have any organizational behavior practices
will have their employees calling each other with abusive names. And though, it may acceptable with
some, it may not be a compulsion that everyone suit to that kind of addressing. Organizational
Behavior accomplishes laying rules and guidelines for human behavior at work and asking the
employees to focus and adhere to the micro-level practices. Interaction between two employees is
said to be one of the backbones of success for organizations. Organizational Behavior targets this
factor which goes a long way in targeting in managing people further leading to the effective
management of the organization.


Goal congruence is present when individuals, departments
and divisions focus their efforts on meeting
organizational goals. To ensure as far as possible that
managers and their subordinates work toward the
achievement of organizational goals requires attention
being paid to their levels of motivation.

Goal Congruence

• Organizational goals are goals of top management and board of directors.

• Participants act in their own self interest.

• Management control system should be designed so that incentives/goals of participants are

consistent with the goals of the organization.
Goal congruence is achieved when individuals in the organization
strive or are induced to strive towards the company goals. This
assumes, of course, individuals are aware of company goals and
the derivative performance criteria. The essence of company’s
goals is conveyed by planning process, which expresses these
goals in terms of budgets, standards and other formal measures of
performance. Management must tailor the planning activities to
encourage goal congruence at various levels of management. To
achieve goal congruence the following ideas are important –

The firm should be viewed as pluralist entity where coalitions of

individual seek to express their own aspirations within the
structure of the firm.

Personnel cannot be viewed as people sharing the same goal, but also
as people striving for such rewards such as power, security,
survival, and autonomy.


Ensures frictionless working.

Ensures achievement of organization’s goal/strategic objective

Ensures coordination & motivation of all concerned

Ensures consistency in the working of all concerned.

Gives fair chance to its employees to achieve their personal goals.

Enhances the loyalty towards the company.



I. External factors – set of attitudes of the society, work ethics

of the society

II . Internal factors (Factors within the organization)

Culture- “Common beliefs, shared values, norms of behavior &
assumptions” implicitly

accepted and explicitly built into.

Mgt. Style – Informal/Formal

The Communication Channels

Perception and Communication – e.g. Budget (meaning): A strict

profit control plan, Budget:
A tentative guiding profit plan


Management Control System –A Strategy itself

Rules –Instructions, manuals and circulars, Physical controls, system
safeguards, task control system.



Responsibility Centers

 Output measured in monetary

 Input measured in monetary terms

 Output measured in monetary


 Output measured in monetary terms

• Commonly perform work related to several products.

• Inputs to a responsibility center are called cost elements or

line items (on a department cost report).


• Important business goal: earn a satisfactory return on


• ROI = (Revenues - Expenses) / Investment

• Leads to 4 types of responsibility centers:

• Revenue centers.

• Expense centers.

• Profit centers.

• Investment centers.

• Responsible for outputs of center as measured in monetary

terms (revenues).

• Not responsible for the costs of goods or services that the

center sells.

• E.g., sales organization.

• Also responsible for selling expenses (e.g., travel, advertising,

point-of-purchase displays, sales office salaries, rent).


u Responsibility Centers whose members control revenues


u Not the manufacturing or acquisition cost of the

products or service they sell, or

u The level of investment in the responsibility center.

u In other words, you cannot link the input to the output.

u Most revenue centers may not set selling prices

u They definitely have no control over the costs of input

acquired (service manager of an automobile workshop
does not control gasoline costs)

u These centers are generally not allocated costs of the

goods that they market (there are exceptions). Manager
is responsible only for costs directly incurred by his/her

u They are evaluated on the basis of actual sales or orders

booked against budgets or quotas and
u Example: a unit of a chain store in a mall.


• Responsible for expenses (i.e., the costs) incurred but does not
measure its outputs in terms of revenues.

• E.g., production departments, staff units such as accounting.


u Responsibility centers whose employees control costs,


u Do not control their revenues or investment level.

u Examples: Production department in a manufacturing

unit, a dry cleaning business

u Two types of costs:

– Engineered: those costs that can be reasonably

associated with a cost center – direct labor, direct
materials, telephone/electricity consumed, office

– Discretionary: where a direct relationship between

a cost unit and expenses cannot be reasonably
made; Management allocates them on a
discretionary basis (e.g. depreciation expenses for
machines utilized).

u Should be measurable in monetary terms, outputs in
physical quantities.

u Works well in units such as production, distribution,

accounting – receivables, payables where repetitive
tasks are performed.

u Developing standard costs for such activities is more

reliable than in other cases.

u Multiply standard cost per unit x no. of units produced

or processed = this is the ideal cost.

u Compare it to actual costs and the difference is

indicative of efficiency or lack thereof.


u The fundamental purpose of all responsibility centers is

accountability; evaluating performance. And a
engineered cost center,

u Does not merely compare costs but also

u Holds the managers accountable for obtaining/producing

right quality of product

u Volume of production, speed of processing.


u Mostly administrative and support service costs

u More difficult to measure in physical quantities or

precisely on monetary terms (e.g. customer relations or
even R & D).
u Discretionary means, management allocates them based
on established polices (not arbitrarily).

u More caution is required while using discretion cost


u Difference between budgeted expenses and actual

expenses does not indicate efficiency.

u Suppose if the actual cost is less than budget, does it

mean good or bad?

u Suppose if the actual cost is higher than budget, does it

mean good or bad?


• Performance measured as difference between revenues and


• E.g., independent division of a company, factory that sells its

output to the marketing division.


• Encourages managers to act as if they are running their own


• Only useful if manager influences both revenues, and costs.

• If senior management requires service performed by other

responsibility center at no charge, than not a profit center,
e.g., internal audit.

• If output is homogeneous (e.g., tons) no advantage to

monetary measure of revenue.

• Multiple profit centers create spirit of competition.


A responsibility centre is an organizational subsystem charged with

a well-defined mission and headed by a manager accountable for the
performance of the centre. "Responsibility centers constitute
the primary building blocks for management control." It is also
the fundamental unit of analysis of a budget control system.
Responsibility centre is an organization unit headed by a
responsible manager.

There are four major types of responsibility canters: cost centres,

revenues canters, profit canters and investment canters.

Cost Centre

A cost centre is a responsibility centre in which manager is held

responsible for controlling cost inputs. There are two general types
of cost canters: engineered expense canters and discretionary
expense canters. Engineered costs are usually expressed as
standard costs. A discretionary expense centre is a responsibility
centre whose budgetary performance is based on achieving its goals
by operating within predetermined expense constraints set through
managerial judgment or discretion.

A revenue centre is a responsibility centre whose budgetary
performance is measured primarily by its ability to generate a
specified level of revenue.


In a profit centre, the budget measures the difference between

revenues and costs.


An investment centre is a responsibility centre whose budgetary

performance is based on return on investment. The uses of
responsibility canters depend to a great extent on the type of
organization structure involved. Engineered cost canters,
discretionary expense centre, and revenue canters are more often
used with functional organization designs and with the function
units in a matrix design.

In contrast, with a divisional organization designs, it is possible

use profit canters because the large divisions in such a structure
usually have control over both the expenses and the revenues
associated with profits.


u Managers of profit centers control both the revenues and costs of

the product or service they deliver.

u It is like an independent business except it is part of a larger

organization (e.g. departmental stores of larger chains – Wal Mart,
restaurants, corporate hotels such as Hilton, Holiday Inn).

u The store manager would have responsibility for pricing, product

selection, and promotion.

u Cost for these units vary depending on ability to control labor,

waste, and hours.

u Revenues also will vary depending on the unit’s service level,

location, etc.
u In other words, local discretion would affect revenues and costs.

u Investments and some costs (e.g. centralized purchasing).

u Therefore, profits represent a broader index of both corporate and

local decisions.

u If performance is poor, it may reflect poor conditions that no one in

the organization could control as well as poor local conditions.

u For this reason, organizations should not evaluate performance only

based on costs and profits, but

u Perform detailed evaluations that include quality, material use, labor

use, and service measures that the local unit can control.

Measures of Performance

• Return on investment = Profit/Investment

• Return on assets = (net income) / (total assets).

• Residual income = Pre-interest profit – (Capital charge *


• EVA is a form of residual income

What is EVA?

• Economic Value Added

• EE VE AYE, not a women’s name!

• One of a number of shareholder value metrics.


• Shareholder value is the goal.

• Not inconsistent with stakeholder theory!


• What is EVA

EVA = Economic profit

– Not the same as accounting profit

– Difference between revenues and costs

– Costs include not only expenses but also cost of capital

– Economic profit adjusts for distortions caused by

accounting methods

• Doesn’t have to follow GAAP

• R&D, advertising, restructuring costs, ...

– Cost of capital accounted for explicitly

• Rate of return required by suppliers of a firm’s debt

and equity capital

• Represents minimum acceptable return.

Components of EVA


Net operating profit after tax

• Operating capital

Net operating working capital, net PP&E, goodwill, and

other operating assets

• Cost of capital

Weighted average cost of capital %

• Capital charge

Cost of capital % * operating capital

• Economic value added

NOPLAT less the capital charge


Net operating profit after tax (NOPAT)

- Capital charge (= WACC * Capital)

= Economic value added (EVA)


A cost centre is a responsibility centre in which manager is held

responsible for controlling cost inputs.

There are two general types of cost canters:

1. Engineered expense canters and

2. Discretionary expense canters.

Engineered costs are usually expressed as standard costs.

A discretionary expense centre is a responsibility centre whose

budgetary performance is based on achieving its goals by operating
within predetermined expense constraints set through managerial
judgment or discretion.

For expense centers the budget is a spending plan

For discretionary expense centers, fixed spending targets

For engineered expense centers, flexible spending targets
(i.e., the budget has two components, a discretionary
component and a component that varies directly with volume)

Two types of costs:

E NGIN EE RE D : those costs that can be reasonably associated with

a cost center – direct labor, direct materials, and
telephone/electricity consumed, office supplies.

D ISCRE TIONAR Y : where a direct relationship between a cost unit

and expenses cannot be reasonably made; Management
allocates them on a discretionary basis (e.g. depreciation
expenses for machines utilized).


Should be measurable in monetary terms, outputs in physical


Works well in units such as production, distribution,

accounting – receivables, payables where repetitive tasks are

Developing standard costs for such activities is more reliable

than in other cases.

Multiply standard cost per unit x no. of units produced or

processed = this is the ideal cost.

Compare it to actual costs and the difference is indicative of

efficiency or lack thereof.

E NGIN EE RE D COSTS – Important to remember

The fundamental purpose of all responsibility centers is
accountability; evaluating performance. And a engineered
cost center,

Does not merely compare costs but also

Holds the managers accountable for obtaining/producing

right quality of product

Volume of production, speed of processing.


Mostly administrative and support service costs

More difficult to measure in physical quantities or precisely

on monetary terms (e.g. customer relations or even R & D).

Discretionary means, management allocates them based on

established polices (not arbitrarily).

More caution is required while using discretion cost numbers.

Difference between budgeted expenses and actual expenses

does not indicate efficiency.

Suppose if the actual cost is less than budget, does it mean

good or bad?

Suppose if the actual cost is higher than budget, does it

mean good or bad?


Gross Profit & Gross Margin

The gross profit (also known as gross operating profit) is the sales or
revenue less cost of goods sold (COGS). This number divided by sales is
the gross margin (in percentage terms). It is represented mathematically as
Gross Profit = Sales - COGS

Gross Margin = Gross Profit*100/Sales

The calculations above, as with most of the calculations in this website, are
simple. But it is important that you understand the information you can get
out of the numbers. What gross margin tells you is how profitable the
business is before subtracting SGA, R&D, and ITD expenses. You are
likely to see high gross margins for technology and Internet companies. For
example, Microsoft Corporation's gross margin was around 90% at the time
of this writing. This means that for every $1 Microsoft gets from customers,
it keeps 90 cents and spends 10 cents to deliver its products or services to
the customer (although the 90 cents it keeps for each dollar it takes in still
has to be reduced by other indirect costs of doing business such as SG&A,
R&D, and ITD). PepsiCo and Motorola Inc. had gross margins of
approximately 64% and 38%, respectively, at the time of this writing.

We recommend that if Teenvestors are looking at large-cap companies,

they stick to companies that have gross margins of 35% or more, unless
the company is very solid in all other ways discussed in this chapter. For
medium-capitalization firms, stick to gross margins of over 50% unless the
companies have other strong features.

Measures of Performance

• Return on investment = Profit/Investment

• Return on assets = (net income) / (total assets).

• Residual income = Pre-interest profit – (Capital charge *


• EVA is a form of residual income

What is EVA?
• Economic Value Added

• EE VE AYE, not a women’s name!

• One of a number of shareholder value metrics.


• Shareholder value is the goal.

• Not inconsistent with stakeholder theory!


• What is EVA

EVA = Economic profit

– Not the same as accounting profit

– Difference between revenues and costs

– Costs include not only expenses but also cost of capital

– Economic profit adjusts for distortions caused by

accounting methods

• Doesn’t have to follow GAAP

• R&D, advertising, restructuring costs, ...

– Cost of capital accounted for explicitly

• Rate of return required by suppliers of a firm’s debt

and equity capital

• Represents minimum acceptable return.

Components of EVA

Net operating profit after tax

• Operating capital

Net operating working capital, net PP&E, goodwill, and

other operating assets

• Cost of capital

Weighted average cost of capital %

• Capital charge

Cost of capital % * operating capital

• Economic value added

NOPLAT less the capital charge


Net operating profit after tax (NOPAT)

- Capital charge (= WACC * Capital)

= Economic value added (EVA)

--  ROI

One of the primary tools for evaluating the performance of investment

centers is return on investment. ROI is calculated as follows:

ROI = Income


Invested Capital

Since ROI focuses on income and investment, it has a natural advantage

over income (alone) as a measure of performance. It removes the bias of
larger investment over smaller investment.

Some companies break ROI down into two components: profit margin and
investment turnover as follows:
Prof. Marg. Turnover
Income Sales

ROI = …………… x …………....

Sales Inv. Capital

In calculating ROI, companies measure “income” in a variety of ways; net

income, income before interest and taxes, controllable profit… The text
uses the commonly used net operating profit after taxes, NOPAT. This
formula does not hold managers responsible for interest.

Further, invested capital is measured in a variety of ways In the text,

invested capital is measured as total assets - noninterest-bearing current
liabilities (accounts payable, income taxes payable, and accrued

A major problem with ROI is that the denominator, invested capital, is

based on historical costs net of depreciation. As those assets become fully
depreciated, the invested capital denominator becomes extremely low and
the ROI number quite high. And to compound the problem, managers may
therefore be compelled to put off purchases of new equipment necessary
for long-term success. They “under invest.”



Additional problems with ROI exist. Managers of investment centers

with high ROI’s may be unwilling to invest in assets that will dilute
their current ROI. This will lead to underinvestment. Conversely,
evaluation in terms of profit can lead to overinvestment.

we would like managers to invest in assets that earn a return in

excess of the cost of capital. Since “You Get What You Measure,”
managers may overinvest to grow profits (because their
compensation package is based on total profits) even though the
return on invested capital is less than the cost of capital.

Perhaps the solution to the overinvestment problem on the previous

slide is to measure performance based on ROI. The problem here is
that managers will have a tendency not to invest at less than their
current ROI even if this reduced return is greater than the cost of

 A problem with assessing performance with only

financial measures, like profit, ROI, and RI/EVA, is
that financial measures are “backward looking.”
Balanced Scorecard is a set of performance
measures constructed for four dimensions of

1. Financial

2. Customer

3. Internal processes

4. Innovation

Balanced Scorecard uses performance measures that are tied to the

company’s strategy for success. Balance is a key factor using this

Note how balance is achieved:

1. Performance is assessed across a balanced set of dimensions

(financial, customer, internal processes, and innovation).

2. Quantitative measures are balanced with qualitative measures.

3. There is a balance of backward-looking measures


Module.3 Transfer of Goods & Services between Divisions and

it’s pricing.


An investment center is a subunit that has responsibility for generating

revenues, controlling costs, and investing in assets. Since managers of
investment centers have control over inventory, receivables, equipment
purchases and so on, it makes sense to hold them responsible for
generating some kind of return on them.
• An investment centre is responsible for the production, marketing
and investment in the assets employed in the segment.

• An investment centre manager decides on aspects such as the credit

policies, inventory policies, and within broad framework.

• Investment centre manager responsible for profit in relation to

amounts invested in the division.

• Financial performance of the manager of the division is measured by

comparing the actual with projected rate of return on investments of
the canters

Examples: Nordstrom, Inc. subunit Faconnable.

Managerial goal: to maximize return on investment.

Evaluation: rate of return (%) relative to a benchmark/budget rate of

return or relative to other investment center rates of return.

Evaluating Investment Centers with ROI

One of the primary tools for evaluating the performance of investment

centers is return on investment. ROI is calculated as follows:

ROI = Income


Invested Capital

Since ROI focuses on income and investment, it has a natural advantage

over income (alone) as a measure of performance. It removes the bias of
larger investment over smaller investment.

Some companies break ROI down into two components: profit margin and
investment turnover as follows:

Income Sales

ROI = …………… x …………....

Sales Inv. Capital



Audit Brief description

• Gives an opinion on the accuracy of the
Financial financial statements
• Ensures compliance with the relevant
statement accounting standards and reporting
audit framework

• An independent appraisal function

Internal audit established within an organization to
examine and evaluate its activities as a
service to the organization
• Need not be limited to books of
accounts and related records
• Deters, detects, investigates, and
Fraud auditing reports fraud
• Forensic: related to the legal system,
and forensic especially issues of evidence
• Audits operational aspects of the
Operational enterprise
• Quality audit, R&D audit, etc
• Audit of computer systems
Information • Checks whether the computer system
safeguards assets, maintains data
systems audit integrity, and contributes to
organizational effectiveness and
• Audit of the management, as a tool
Management for evaluation and control of
organizational performance
audit • Examines the conditions and
provides a diagnosis of deficiencies
with recommendations for correcting
• Audit of the enterprise's reported
Social audit performance in meeting its declared
social , community, or environmental
• Environmental compliance audit: a
Environmental checking mechanism
• Environmental management audit: an
audit evaluation mechanism


• Staffing the audit team

• Creating an audit project plan

• Laying the ground work

• Conducting the audit

• Analyzing audit results

• Sharing audit results

• Writing audit reports

• Dealing with resistance to audit recommendations

• Building an ongoing audit program


• Identify opportunities for improvement

• Identify outdated strategies

• Increase management’s ability to address concerns

• Enhance teamwork

• Reality check


• In the rapidly changing world of business, considering only the financial

measures of performance gives an incomplete picture of the overall
organizational performance. It has become increasingly necessary for
organizations to simultaneously look at non financial measures for this

• Concepts like JIT, TQM, and SIX SIGMA have brought out the growing
importance of non financial measures for evaluating the organizations overall

• A combination of financial and non financial measures gives a better picture

of organizational performance. One concept which has received universal
acclaim is the “Balance Scorecard” (BSC), proposed by Robert Kaplan and
David Norton in 1992.

The BSC framework considers the customer perspective, internal business

perspective, and the innovation/learning and growth perspective, in addition to the
financial perspective

perspective Underlying question

Customer To achieve our vision,
how should we appear to
perspective our customer
Financial To succeed financially,
how should we appear to
perspective our shareholders

Internal business To satisfy our customer

and shareholders, at what
perspective business processes must
we excel?

Innovation/learnin To achieve our vision,

g growth how will we sustain our
ability to change and
perspective improve?

• If an organization emphasizes only short-term or financial goals, it will not be

able to successfully execute its strategies and excel in the business. The
balance scorecard serves as a tool for strategic performance control by
clarifying the vision and strategy of the organization and articulating the top
management's expectations



EVA = Economic profit

– Not the same as accounting profit

– Difference between revenues and costs

– Costs include not only expenses but also cost of capital

– Economic profit adjusts for distortions caused by accounting methods

• Doesn’t have to follow GAAP

• R&D, advertising, restructuring costs, ...

– Cost of capital accounted for explicitly

• Rate of return required by suppliers of a firm’s debt and equity


• Represents minimum acceptable return.



Net operating profit after tax

• Operating capital

Net operating working capital, net PP&E, goodwill, and other operating assets

• Cost of capital

Weighted average cost of capital %

• Capital charge

Cost of capital % * operating capital

• Economic value added

NOPLAT less the capital charge

Calculating EVA

Net operating profit after tax (NOPAT)

- Capital charge (= WACC * Capital)

= Economic value added (EVA)


• Budgets are business plans that are stated in quantitative terms and are
usually based on estimations.

• These plans aid an organization in the successful execution of strategies.

• Due to the uncertainties in the business environment and / or due to wrong
estimation, there may be significant deviations between the a c t u a l s and
the plans.

• Budgeting as a control tool, provides an action plan for the organization to

ensure least deviations

• Budgets are used to give an overview of the organization and its operations.
They are useful in resource allocation whereby resources are allocated in
such a way that the processes which are expected to give the highest returns
are given priority.

• Budgets are also used as forecast tools and make the organization better
prepared to adapt to changes in the environment

• Budget preparation requires the participation of managers from different

functions / departments. This helps in integrating the tactical and operational
strategies of the departments with the corporate strategy of the organization.

• Budgets act as a means to verify the progress of the various activities

undertaken to achieve the planned objectives. The verification is done by
comparing the a c t u a l s against standards

• They help in the delegation of authority and allocation of responsibility and

accountability to more people in an organization. They thus promote division
of labor, which , in turn, promotes the process of specialization. Functional
specialization leads to the overall efficiency of the organization


• Creating a budget department or appointing a budget controller

• Developing guidelines for budget preparation

• Developing budget proposals at department/business unit level

• Developing the budget for the entire organization

• Determining the budget period and key budgets factors

• Benchmarking the budget

• Budget review and approval

• Monitoring progress and revising the budgets

Types of Characteristics Examples
Appropriation A ceiling is set for certainTraining, advertising,
budget discretionary expenditures sales promotion and
Based on the managementR&D

Flexible budget A static amount is establishedThe static part:

for discretionary andSalaries,
committed fixed costs and adepreciation, property
variable rate is determinedtaxes, and planned
per unit of activity for variablemaintenance. The
cost flexible part : direct
material, direct labor,
and variable
overhead .sales
Capital budget Decisions regarding potential New plant and
investments are made using equipment
discounted cash flow
Master budget A comprehensive plan is All revenue and
developed for all revenue and expenditures for any
expenditure organization

Transfer Prices

Price at which goods or services are sold between

responsibility centers within a company.

Revenue for selling center and cost for the receiving center.

2 general types of transfer prices:

Market based price.

Cost based price.


• Based on price for same product between independent parties, i.e., a market
price or, equivalently, an arm’s length price.

• Adjusted for quantifiable differences such as credit costs.

• Where available is widely used.

• Frequently not available.


• When no reliable market price is available.

• Cost plus a mark-up.

• If based on actual cost, little incentive to reduce costs.


• Negotiated by responsibility centers or set/arbitrated by top management.

• Should manager have freedom to use alternative source?

• Sub-optimization: maximize profits for a responsibility center may not

maximize profit for the consolidated company.


A transfer price is the price one subunit charges for a product or service supplied
to another

Subunit of the same organization.

Intermediate products are the products transferred between subunits of an



(1) Help achieve a company’s strategies and goals.

(2) fit the organization’s structure

(3) promote goal congruence

(4) promote a sustained high level of management effort


1. Market-based transfer prices

2. Cost-based transfer prices

3. Negotiated transfer prices


By using market-based transfer prices in a perfectly competitive market, a company

can achieve the following:

Goal congruence

Management effort

Subunit performance evaluation

Subunit autonomy

Market prices also serve to evaluate the economic viability and profitability of
divisions individually.

-When supply outstrips demand, market prices may drop well below their historical

-Distress prices are the drop in prices expected to be temporary.

-Basing transfer prices on depressed market prices will not always lead to optimal
decisions for an organization.


When transfer prices are based on full cost plus a markup, suboptimal
decisions can result.

Dual Transfer Prices

-An example of dual pricing is for Larry & Co. to credit the Selling Division
with 112% of the full cost transfer price of $24.64 per barrel of crude oil.

-Debit the Buying Division with the market-based transfer price of $23 per
barrel of crude oil. And debit a corporate account for the difference!


Negotiated transfer prices arise from the outcome of a bargaining process between
selling and buying divisions.

General Guideline: min. & max. transfer price

Maximum transfer price = Market price

Minimum transfer price = Incremental costs per unit incurred up to the point of

+ Opportunity costs per unit to the selling division

Incremental cost often times = variable cost

Opportunity costs often times = lost CM

Opportunity costs could = lost savings

Min. & Max. Transfer price—examples

(1) Slow car

(2) S.F. Manufacturing

1. Slowcar Company

• The Assembly Division of SLOWCAR Company has offered to purchase 90,000

batteries from the Electrical Division (ED) for $104 per unit. At a normal
volume of 250,000 batteries per year, production costs per battery are:

• Direct materials $40

• Direct labor 20

• Variable factory overhead 12

• Fixed factory overhead 42

• Total $114

• The Electrical Division has been selling 250,000 batteries per year to outside
buyers for $136 each. Capacity is 350,000 batteries/year. The Assembly
Division has been buying batteries from outside suppliers for $130 each.

• Should the Electrical Division manager accept the offer? Will an internal
transfer be of any benefit to the company?

2.SF Manufacturing

• The SF Manufacturing Co. has two divisions in Iowa, the Supply Division and
the BUY Division. Currently, the BUY Division buys a part (3,000 units) from
Supply for $12.00 per unit. Supply wants to increase the price to BUY to
$15.00. The controller of BUY claims that she cannot afford to go that high,
as it will decrease the division’s profit to near zero. BUY can purchase the
part from an outside supplier for $14.00. The cost figures for Supply are:

• Direct Materials $3.25

• Direct Labor 4.75

• Variable Overhead 0.60

• Fixed Overhead 1.20

• A. If Supply ceases to produce the parts for BUY, it will be able to avoid one-
third of the fixed MOH. Supply has no alternative uses for its facilities.
Should BUY continue to get the units from Supply or start to purchase the
units from the outside supplier? (From the standpoint of SF as a whole).

• (What is the min. & max. transfer price if BUY and SUPPLY negotiate?)

• Now, assume that Supply could use the facilities currently used to produce
the 3,000 units for BUY to make 5,000 units of a different product. The new
product will sell for $16.00 and has the following costs:

• Direct Materials $3.00

• Direct Labor 4.30

• Variable Overhead 5.40

• B. What is the min. & max. transfer price if BUY and SUPPLY negotiate?

• C. What should be done from the company’s point of view? Why?

Comparison of Methods

Achieves Goal Congruence

Market Price: Yes, if markets competitive

Cost-Based: Often, but not always

Negotiated: Yes

Useful for Evaluating Subunit Performance

Market Price: Yes, if markets competitive

Cost-Based: Difficult, unless transfer price exceeds full cost

Negotiated: Yes

Motivates Management Effort

Market Price: Yes

Cost-Based: Yes, if based on budgeted costs; less incentive if based on actual cost

Negotiated: Yes
Preserves Subunit Autonomy

Market Price: Yes, if markets competitive

Cost-Based: No, it is rule based

Negotiated: Yes

Other Factors

Market Price: No market may exist

Cost-Based: Useful for determining full-cost; easy to implement

Negotiated: Bargaining takes time and may need to be reviewed


IRC Section 482 requires that transfer prices for both tangible and intangible
property between a company and its foreign division be set to equal the price that
would be charged by an unrelated third party in a comparable transaction (arm’s

This still leaves a little “room to wiggle.”


These are:

(a) The increasingly unstable external environment which results in a

Need for a tighter linkage of the management control system to

The formal planning system.

(b) The lack of stability in the external environment which causes a

Need for a more robust set of control variables than exists with the
Current dollar based budget.

(c) The increasing diversification of large corporations which often

Will be creating more complex organizational forms (at the extreme,

The matrix structure) operating in widely differing environments (the

Multi-dimensional corporation) and in very different businesses (the


Even for small or medium-sized organizations these three factors are


and much the same kind of changes can be identified for public sector


• What drives the organization? What is its motivation for getting the MF? Development of

• How well do organizational structures and policies fit the strategy?

• How does organizational performance get measured?

• How are reporting and review done?

• How is MCS operationalized at the center level?

• What roles does Management Information System (MIS) play in the organization’s MCS?

• Motive driving the organization;

• Fit between the organization’s structure and policies and its strategy;

• Measurement of organizational performance, and the issue of including vision, mission

and objectives in performance measurement;

• System for reporting and review;

• Role of MIS and internal control in the organization’s MCS.


Module 4. The Process Part of Management Control

Steps involved in management control process

The essential elements of any control process are

• Establishment of Standards
• Measurement
• Comparing performance with the standards
• Taking corrective actions

Establishment of Standards is the first step in control process.

Standards represent criteria for performance. A standard acts as
reference line or a basis of appraisal of actual performance. Standards
should be set precisely and preferable in quantitative terms. Setting
standard is closely linked and is an integral part of the planning process.
Standards are used or bench marks by which performance is measured in
the control operations at the planning stage, planning is the basis of

Measurement of Performance after establishing the standards, the

second step is to measure actual performance of various individuals,
groups or units. Management should not depend upon the guess that
standards are being met measurement of performance against standards
should ideally be done on a forward looking basis so that deviations may
be detected in advance of their occurrence and avoided by appropriate

Comparing Performance with Standards Appraisal of performance

or comparing of actual performance with pre-determined standards is an
important step in control process.
Comparison is easy where standards have been set in quantitative terms
as in production and marketing. In other cases, where results are
intangible and cannot be measured quantitatively direct personal
observations, inspection and reports are few methods which can be used
for evaluation. The evaluation will reveal some deviations from the set
standards. The evaluator should point out defect or deficiencies in
performance and investigate the causes responsible for these.

Taking Corrective Actions Managers should know exactly where in the

assignment of individual or group duties, the corrective action must be
applied. Managers may correct deviations by redrawing their plans or by
modifying their goals. Or they may correct deviations by exercising their
organizing functions through reassignment or clarification of duties. They
may correct, also, by additional stapling or better selection and training of


Steps in the Control Process

The control process is a continuous flow in Taj between measuring, comparing and action.
Naturally Taj follows the four steps in the control process: establishing performance standards,
measuring actual performance, comparing measured performance against established standards,
and taking corrective action.

Step 1: Establish Performance Standards. Taj's Standards are created when objectives are set
during the planning process. Its standard is a guideline established as the basis for measurement.
It is a precise, explicit statement of expected results from a product, service, machine, individual,
or organizational unit. It is usually expressed numerically and is set for quality, quantity, and
time. Tolerance is permissible deviation from the standard.

· Time controls relate to deadlines and time constraints. Material controls relate to inventory
and material-yield controls. Equipment controls are built into the machinery, imposed on the
operator to protect the equipment or the process. Cost controls help ensure cost standards are
met. Employee performance controls focus on actions and behaviors of individuals and groups of
employees. Examples include absences, tardiness, accidents, quality and quantity of work.
Budgets control cost or expense related standards. They identify quantity of materials used and
units to be produced.

· Financial controls facilitate achieving the organization's profit motive. One method of
financial controls is budgets. Budgets allocate resources to important activities and provide
supervisors with quantitative standards against which to compare resource consumption. They
become control tools by pointing out deviations between the standard and actual consumption.

· Operations control methods assess how efficiently and effectively an organization's

transformation processes create goods and services. Methods of transformation controls include
Total Quality Management (TQM) statistical process control and the inventory management
control. Statistical process control is the use of statistical methods and procedures to determine
whether production operations are being performed correctly, to detect any deviations, and to
find and eliminate their causes. A control displays the results of measurements over time and
provides a visual means of determining whether a specific process is staying within predefined
limits. As long as the process variables fall within the acceptable range, the system is in control.
Measurements outside the limits are unacceptable or out of control. Improvements in quality
eliminate common causes of variation by adjusting the system or redesigning the system.

Inventory is a large cost for Taj like other manufacturing firms. The appropriate amount to order
and how often to order impact the firm's bottom line. The economic order quantity model (EOQ)
is a mathematical model for deriving the optimal purchase quantity. The EOQ model seeks to
minimize total carrying and ordering costs by balancing purchase costs, ordering costs, carrying
costs and stock out costs. In order to compute the economic order quantity, the supervisor needs
the following information: forecasted demand during a period cost of placing the order, that
value of the purchase price, and the carrying cost for maintaining the total inventory.

· The just-in-time (JIT) system is the delivery of finished goods just in time to be sold,
subassemblies just in time to be assembled into finished goods, parts just in time to go into
subassemblies, and purchased materials just in time to be transformed into parts.
Communication, coordination, and cooperation are required from supervisors and employees to
deliver the smallest possible quantities at the latest possible date at all stages of the
transformation process in order to minimize inventory costs.

Step 2: Measure Actual Performance. Supervisors collect data to measure actual performance
to determine variation from standard. Written data might include time cards, production tallies,
inspection reports, and sales tickets. Personal observation, statistical reports, oral reports and
written reports can be used to measure performance. Management by walking around, or
observation of employees working, provides unfiltered information, extensive coverage, and the
ability to read between the lines. While providing insight, this method might be misinterpreted
by employees as mistrust. Oral reports allow for fast and extensive feedback.
In Taj computers give supervisors direct access to real time, unaltered data, and information. On
line systems enable supervisors to identify problems as they occur. Database programs allow
supervisors to query, spend less time gathering facts, and be less dependent on other people.
Supervisors have access to information at their fingertips. Employees can supply progress reports
through the use of networks and electronic mail. Statistical reports are easy to visualize and
effective at demonstrating relationships. Written reports provide comprehensive feedback that
can be easily filed and referenced. Computers are important tools for measuring performance. In
fact, many operating processes depend on automatic or computer-driven control systems.
Impersonal measurements can count, time, and record employee performance.

Step 3: Compare Measured Performance against Established Standards. Comparing results

with standards determines variation. Some variation can be expected in all activities and the
range of variation - the acceptable variance - has to be established. Management by exception
lets operations continue as long as they fall within the prescribed control limits. Deviations or
differences that exceed this range would alert the supervisor to a problem.

Step 4: Take Corrective Action. The supervisor must find the cause of deviation from standard.
Then, he or she takes action to remove or minimize the cause. If the source of variation in work
performance is from a deficit in activity, then a supervisor can take immediate corrective action
and get performance back on track. Also, the supervisors can opt to take basic corrective action,
which would determine how and why performance has deviated and correct the source of the
deviation. Immediate corrective action is more efficient; however basic corrective action is the
more effective.



The objective of the planning and control process is planning, monitoring and
adjusting the activities of the function involved in providing information provision so
that the necessary use of information provision in the organization is realized on
time with an optimal use of capacity, by means of:

• Planning
• Checking
• Evaluating

Reasons for starting Planning & control processes include:

• Setting up an annual information provision plan

• Need (request) to adapt existing information provision plan
• Gain insight into operational Functional Management capacity requirements

Target Group
This process description is intended for:

• Business information managers

• Employees from the user organization involved with associated information
• IT staff

This process description concerns Planning & Control, related activities, and
documents and reports to be drafted.

Planning & Control comprises the following activities:

• Defining necessary capacity
• Planning for necessary capacity
• Defining the required time lines
• Recognizing risks and the countermeasures to be taken
• Allocation of capacity for changes
• Coordination with other management processes

• Checking availability
• Monitoring hours worked
• Monitoring progress/time lines
• Evaluating the results
• Recognizing problems
• Establishing deviations and taking measures

Results of Planning & Control processes include:


• Annual information provision plan and Annual FM Plan

• Capacity Plan
• Detailed Plans
• Risk Analyses
• Deployment Reports


• Progress report, actual time spent

• Amended plans and schedules


• Developments in Functional Management

• Key IP issues
• Discrepancies in actual vs. budgeted
• Statistics


• Strategic planning looks forward several years.

• Budgeting focuses on next year.

• Budget = a plan expressed in quantitative, usually monetary, terms that

covers a specified period of time usually one year.

• Budget is developed as a result of negotiations between managers of

responsibility centers and their managers

Zero-based Review
(Zero-based Budgeting)
• A systematic way of analyzing ongoing programs.

• Cost estimates are built up from scratch or zero.

• Contrasts with taking the current level of costs as the starting point as is
customarily done in the budgeting process (i.e., an incremental approach).

• May overcome complacency.

Limitation of Zero-base Review

• Time consuming and upsetting to normal functioning.

• Cannot be effectively conducted every year.

Budget Uses

• Aid in coordinating short run plans. Essentially a refinement of strategic

• A device for communicating plans.

• A way of motivating managers.

• A benchmark for controlling ongoing activities.

• Actual compared to budget provides a “red flag.”

• Directs attention where needed.

• A basis for evaluating performance of responsibility centers and their


• A means of educating managers about detailed workings of their

responsibility centers, and interrelationships with other centers.

The Master Budget

• Complete budget package.

• 3 principal parts, with budgeted balance sheet

• Operating budget = Revenues, expenses, and changes in inventory

and other working capital items for the coming year.

• Cash budget = anticipated sources and uses of cash in the coming


• Capital expenditure budget = planned changes in property, plant and


• Budgeted balance sheet is derived from other budgets.

Operating Budget
• Identical in format to the actual financial statements.

• Budget committee consisting of member of top management prepares


• Generally, line positions make the significant decisions.

• Budgets are usually prepared once a year, covering the next fiscal year, and
are broken down by month.
• Some companies preparing a rolling 12-month budget in which every three
months, the quarter just completed is dropped and three additional months
are added on.

• OB is a control device used to compare to actual. Variances are identified.

Cash Budget
• Revenues and expenses from the operating budget translated into cash
inflows and outflows for cash planning.

The Capital Expenditure Budget

• List of investments that management plans to make in long-term (= fixed =
property, plant, and equipment) assets in the coming year.

• Usually separated from preparation of operating budget.

Flexible (Variable) Budgets

• Shows planned behavior of costs at various volume levels.

• Usually expressed in terms of a cost-volume relationship

• Costs at one particular level, budgeted or planned level, are used in the
operating budget.

• Usually same level used for setting standard costs.


Performance Analysis

1. Finance: Examination of various financial performance indicators (such as

return on assets and return on equity) in comparison with the results
achieved by the competing firms of about the same size.
2. Human resource management: Examination of the performance of
current employees to determine if training can help reduce performance
problems such as low output, uneven quality, excessive waste. See also
activity analysis, job analysis, and task analysis.

Three basic steps in the performance analysis process:

1. Data collection,

2. Data transformation,

3. Data visualization.

Data collection is the process by which data about program performance are obtained from an
executing program. Data are normally collected in a file, either during or after execution,
although in some situations it may be presented to the user in real time. Three basic data
collection techniques can be distinguished:

• Profiles record the amount of time spent in different parts of a program. This information,
though minimal, is often invaluable for highlighting performance problems. Profiles
typically are gathered automatically.
• Counters record either frequencies of events or cumulative times. The insertion of
counters may require some programmer intervention.
• Event traces record each occurrence of various specified events, thus typically producing
a large amount of data. Traces can be produced either automatically or with programmer

Following issues should be considered:

1. Accuracy. In general, performance data obtained using sampling techniques are less
accurate than data obtained by using counters or timers. In the case of timers, the
accuracy of the clock must be taken into account.
2. Simplicity. The best tools in many circumstances are those that collect data
automatically, with little or no programmer intervention, and that provide convenient
analysis capabilities.
3. Flexibility. A flexible tool can be extended easily to collect additional performance
data or to provide different views of the same data. Flexibility and simplicity are often
opposing requirements.
4. Intrusiveness. Unless a computer provides hardware support, performance data
collection inevitably introduces some overhead. We need to be aware of this overhead
and account for it when analyzing data.
5. Abstraction. A good performance tool allows data to be examined at a level of
abstraction appropriate for the programming model of the parallel program. For example,
when analyzing an execution trace from a message-passing program, we probably wish to
see individual messages, particularly if they can be related to send and receive statements
in the source program. However, this presentation is probably not appropriate when
studying a data-parallel program, even if compilation generates a message-passing
program. Instead, we would like to see communication costs related to data-parallel
program statements.


1. HPM Toolkit
2. PE Bench marker Toolset
3. VampirGuideView (VGV)
4. Paraver and Dimemas
5. Performance Toolbox
6. Dynamic Probe Class Library (DPCL)
7. Other Multi-Platform Parallel Performance Analysis Tools

"Rewarding" means providing incentives to and recognition of employees, individually and as
members of groups, for their performance and acknowledging their contributions to the agency's
mission. There are many ways to acknowledge good performance, from a sincere "Thank You!"
for a specific job well done to granting the highest level, agency-specific honors and establishing
formal cash incentive and recognition award programs.


Provide ample rewards to people who achieve objectives and

Deny rewards to those not achieving objectives!

1. The reward is clearly and closely linked to accomplishment or effort people know what they
will get if they achieve defined and agreed targets or standards and can track their performance
against them.
2. Reward are meaningful
3. Fair and consistent means are available for measuring or assessing performance, competence,
contribution or skill
4. People must be able to influence their performance by changing their behavior and they
should be able to develop their competences and skills.
5. The reward should follow as closely as possible the accomplishment that generated it.
Arguments commonly used in favor of contingent pay are
• It acts as a motivator
• It encourages and supports desired behaviors
• It delivers the message that performance, competence, contribution and
skill are important
• It provides a means for defining and agreeing performance and
competence expectations
• It can reinforce the organization’s value
• It can help to achieve culture change by, for example, assisting with the
development of a performance culture


• Reward structure is management’s most powerful implementation tool

• Kinds of incentives offered signal desired behavior & performance
• Rewards induce people to go all out to
o Execute strategy effectively
o Achieve objectives in strategic plan


• Make a commitment.
• Choose rewards.
• Negotiate agreements.
• Maintain momentum.

Make a commitment

Every business needs to be clear about its reward and recognition system. To motivate staff and
create a climate for improvement, organizations need to make a commitment to a strategy for
recognizing and rewarding performance – considering both financial and non-financial rewards.

People need to be recognized for the performance that they achieve… both individually and in
teams. There needs to be a focus on the significant achievements that have occurred, particularly
identifying teams that have performed well.

A great way to commit is to involve staff – consult with them about the nature of the rewards.
Ask staff for ideas on what might work as a reward scheme.
Staff should be consulted in the planning and implementing of any reward system. This means
openly discussing where improvement can be made and what reward system will work best.

Consider your own business. What kinds of performance is rewarded and how?

Choose rewards

Once you have committed to the concept and principle of recognizing and rewarding
performance, the first step is to plan how this will happen. What kinds of rewards are possible?
What are the best ways of rewarding performance?

It may be a celebration for a whole team. Maybe it’s an award for service delivery – once a
month. Some people want a financial incentive for profits and company gains.

Everyone has a different expectation of reward and recognition. Most people want some kind of
acknowledgement: “I want to be acknowledged that I did something.”

Many businesses link rewards to KPIs (key performance indicators). Achieve them and get a
reward. Achieve beyond the expectation and get a bigger reward!

Recognition may be in the form of career development opportunities, or the chance to take on
special projects. Some companies are very creative and clever with their awards and rewards –
for example giving people a chance to give back to the community, on company time.

It’s essential to choose rewards that are appropriate for your organization and possible within its
structure. And rewards should cover individual performance as well as team or organization

Negotiate agreements

Commitment to high performance is greater if reward and recognition systems are mutually
agreed. Creating an opportunity for negotiation is an important part of establishing successful
recognition and reward systems.

Successful reward systems involve negotiated agreements, about pay or conditions, or sometimes
profit share and bonuses. Negotiating is important because mutual agreement ensures greater
commitment to high performance.

Maintain momentum

The benefits gained by initial improvements and rewards need to be consolidated and built on so
that the momentum for improvement is sustained. Maintaining momentum and continuing to
improve performance, is achieved by rewarding consistent high performance as well as improved
A good manager will reward their staff and build on their strengths. As higher performance
levels are achieved it’s important to set new targets and new challenges.

Motivation, reward or recognition systems will always need to be updated, as they have a use-by
date. Fresher approaches and different approaches need to be found.


Strategic planning is an organization's process of defining its strategy, or

direction, and making decisions on allocating its resources to pursue this strategy,
including its capital and people. Various business analysis techniques can be used
in strategic planning, including SWOT analysis (Strengths, Weaknesses,
Opportunities, and Threats ), PEST analysis (Political, Economic, Social, and
Technological), STEER analysis (Socio-cultural, Technological, Economic, Ecological,
and Regulatory factors), and EPISTEL (Environment, Political, Informatics, Social,
Technological, Economic and Legal).

There are many approaches to strategic planning but typically a three-step process
may be used:

• Situation - evaluate the current situation and how it came about.

• Target - define goals and/or objectives (sometimes called ideal state)
• Path / Proposal - map a possible route to the goals/objectives

Strategic planning is a very important business activity. It is also important in the public sector
areas such as education. It is practiced widely informally and formally. Strategic planning and
decision processes should end with objectives and a roadmap of ways to achieve them.

One of the core goals when drafting a strategic plan is to develop it in a way that is easily
translatable into action plans. Most strategic plans address high level initiatives and over-arching
goals, but don’t get articulated (translated) into day-to-day projects and tasks that will be
required to achieve the plan. Terminology or word choice, as well as the level a plan is written,
are both examples of easy ways to fail at translating your strategic plan in a way that makes
sense and is executable to others. Often, plans are filled with conceptual terms which don’t tie
into day-to-day realities for the staff expected to carry out the plan.

The following terms have been used in strategic planning: desired end states, plans, policies,
goals, objectives, strategies, tactics and actions. Definitions vary, overlap and fail to achieve
clarity. The most common of these concepts are specific, time bound statements of intended
future results and general and continuing statements of intended future results, which most
models refer to as either goals or objectives (sometimes interchangeably).

What is strategic planning?

A strategy is an overall approach and plan. So, strategic planning is the overall planning that
Facilitates the good management of a process. Strategic planning takes you outside the dayto-
Day activities of your organization or project. It provides you with the big picture of what
You are doing and where you are going. Strategic planning gives you clarity about what you
Actually want to achieve and how to go about achieving it, rather than a plan of action for dayto-
Day operations.
Strategic planning enables you to answer the following questions:
_ Who are we?
_ What capacity do we have/what can we do?
_ What problems are we addressing?
_ What difference do we want to make?
_ Which critical issues must we respond to?

_ Where should we allocate our resources?/what should our priorities be?


Planning the process:-

The management team of the project or organization.

Understanding the context:-

All staff and Board members: Administrative staff should be involved if it is important for them to
understand the organization’s issues and problems.

Vision, values and mission discussion:-

All staff and Board members. It is very important to involve all staff, including administrative staff in this
discussion as it is likely to provide a set of operating principles – in other words, to make it clear why
people who work in the project or organization are expected to work and behave in a certain way.

Review of strengths and weaknesses, opportunities and

Programme or professional staff for the whole of this process; include administrative staff in the
discussions around internal strengths and weaknesses.

Discussion of strategic options and goals:-

Professional staff and Board members.

Organizational structure:-
The management team with input from the rest of the staff.

The Strategic Planning Process

In today's highly competitive business environment, budget-oriented planning or

forecast-based planning methods are insufficient for a large corporation to survive and
prosper. The firm must engage in strategic planning that clearly defines objectives and
assesses both the internal and external situation to formulate strategy, implement the
strategy, evaluate the progress, and make adjustments as necessary to stay on track.

A simplified view of the strategic planning process is shown by the following diagram:

The Strategic Planning Process

Mission &



& Control


The mission statement describes the company's business vision, including the
unchanging values and purpose of the firm and forward-looking visionary goals that
guide the pursuit of future opportunities.

Guided by the business vision, the firm's leaders can define measurable financial and
strategic objectives. Financial objectives involve measures such as sales targets and
earnings growth. Strategic objectives are related to the firm's business position, and
may include measures such as market share and reputation.

Environmental Scan

The environmental scan includes the following components:

• Internal analysis of the firm

• Analysis of the firm's industry (task environment)
• External macro environment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the external
analysis reveals opportunities and threats. A profile of the strengths, weaknesses,
opportunities, and threats is generated by means of a SWOT analysis

An industry analysis can be performed using a framework developed by Michael Porter

known as Porter's five forces. This framework evaluates entry barriers, suppliers,
customers, substitute products, and industry rivalry.

Strategy Formulation

Given the information from the environmental scan, the firm should match its strengths
to the opportunities that it has identified, while addressing its weaknesses and external

To attain superior profitability, the firm seeks to develop a competitive advantage over
its rivals. A competitive advantage can be based on cost or differentiation. Michael
Porter identified three industry-independent generic strategies from which the firm can

Strategy Implementation

The selected strategy is implemented by means of programs, budgets, and procedures.

Implementation involves organization of the firm's resources and motivation of the staff
to achieve objectives.

The way in which the strategy is implemented can have a significant impact on whether
it will be successful. In a large company, those who implement the strategy likely will be
different people from those who formulated it. For this reason, care must be taken to
communicate the strategy and the reasoning behind it. Otherwise, the implementation
might not succeed if the strategy is misunderstood or if lower-level managers resist its
implementation because they do not understand why the particular strategy was

Evaluation & Control

The implementation of the strategy must be monitored and adjustments made as

Evaluation and control consists of the following steps:

1. Define parameters to be measured

2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined standard
5. Make necessary changes

• Budgets are business plans that are stated in quantitative terms and are
usually based on estimations.

• These plans aid an organization in the successful execution of strategies.

• Due to the uncertainties in the business environment and / or due to wrong

estimation, there may be significant deviations between the c t u an l s and
the plans.

• Budgeting as a control tool, provides an action plan for the organization to

ensure least deviations

• Budgets are used to give an overview of the organization and its operations.
They are useful in resource allocation whereby resources are allocated in
such a way that the processes which are expected to give the highest returns
are given priority.

• Budgets are also used as forecast tools and make the organization better
prepared to adapt to changes in the environment

• Budget preparation requires the participation of managers from different

functions / departments. This helps in integrating the tactical and operational
strategies of the departments with the corporate strategy of the organization.

• Budgets act as a means to verify the progress of the various activities

undertaken to achieve the planned objectives. The verification is done by
comparing the a c t u a l s against standards

• They help in the delegation of authority and allocation of responsibility and

accountability to more people in an organization. They thus promote division
of labor, which , in turn, promotes the process of specialization. Functional
specialization leads to the overall efficiency of the organization
Steps in Budget Formulation
1. Creating a budget department or appointing a budget

2. Developing guidelines for budget preparation

3. Developing budget proposals at department/business unit


4. Developing the budget for the entire organization

5. Determining the budget period and key budgets factors

6. Benchmarking the budget

7. Budget review and approval

8. Monitoring progress and revising the budgets


Over the past twenty years or so, there has been a gradual evolution in the techniques used in
public sector budgeting in countries such as Australia, New Zealand, Singapore and OECD
countries where the focus has shifted from input controls to program performance. Over the past
few years, a greater performance focus is also being adopted in a number of PICs.Whilst the
three key forms of this evolution are often referred to differently, they can generally referred to
as: Line-Item Budgeting; Program Budgeting; and Performance Budgeting.

LINE-ITEM BUDGETING is based on specifying and controlling inputs - for example, the number of
staff and the type of goods, services and assets required for the operation. Parliament approves
budget appropriations for each agency at the “line-item” level - for example salary and wages,
travel, maintenance, purchase of vehicles - which are often, referred to as the expenditure

This approach is associated with tight central expenditure control and compliance oriented

This is often effective where there is weak financial management capacity in line-agencies,
Both human and/or systems related. However, it does not provide any linkage between resource
allocations and the objectives of government expenditure or, for that matter, consideration of the
efficiency or effectiveness of that expenditure. Rather, the focuses of budget allocation decisions
tend to be at the micro level and short term. In addition, as the financial management capacity of
government develops, such an approach significantly limits the ability of managers to actually
manage and make the necessary resource allocation adjustments in response to changes in the
operational environment as they arise.

PROGRAM BUDGETING emphasizes the objectives of government programs and endeavors to

Program goals, objectives and resource allocations. It is also associated with the specification of
program performance indicators (or targets) against which program performance is measured by
government. Appropriations aremade to programs and/or sub-programs, often at the level of a
limited number of aggregated expenditure categories (e.g. salary and wages, goods & services,
capital) – similar in the spirit of economic classification of state operations. This provides
managers greater flexibility to reallocate resources without seeking central approval.
However, a major weakness of program budgeting arose from the fact that in its purest form,
programs do not necessarily align to the organizational structures.

A number of units, including from different organizations, may have varying degrees of
responsibility for contributing to the program delivery. This creates obvious difficulties
associated with the allocation of resources and most importantly, the accountability for the
program performance. Therefore overtime, countries have tended to redefine the scope of
programs in accordance with organizational responsibilities.

PERFORMANCE BUDGETING is a further refinement, with an emphasis on specifying outputs: that is

Deliverables; and outcomes: what is to be achieved? Appropriations are made to organizational
units for a limited number of specified outputs, the delivery of which should contribute to
achieving the program outcome. Similar to program budgeting, performance measures and
targets are specified as a tool for assessing how well an agency is doing in delivering its outputs
and progress towards achieving the outcomes.

The management philosophy of both program and performance budgeting is based on increasing
Levels of devolution of authority to managers, in exchange for increased accountability.
However, the experience of all countries has been that the specification of appropriate and
measurable program outcomes/ outputs is a challenging and resource intensive task – requiring
refinement over many years.

SDEs are at various different stages in this evolution, many exhibiting characteristics of the first
two and a fewer number, in the early stages of the third. However, when considering which form
is most appropriate for any particular country and the sequencing, it worth noting an often quoted
observation5of lessons learnt from the financial management reforms in OECD countries, which
highlighted the need to:

• Foster an environment that supports and demands performance before introducing performance
Or outcome budgeting.
• Control inputs before seeking to control outputs.
• Budget for work to be done before budgeting for results to be achieved.
• Adopt and implement predictable budgets before insisting that managers efficiently use the
Resources entrusted to them.

That is, the focus should be on “Getting The Basics Right” rather than any particular technique.
Likewise, establishing an effective performance management framework, with appropriate
incentives, rewards and sanctions, is the key driver of achieving better program performance.

From a legal point of view, what is at stake with the preparation stage of the budget is essentially
Procedures, the design of which is closely related with the economics that was just dealt with:
“good” procedures are those which permit “good” allocation of resources.
The legislative framework for these procedures is typically provided by three categories of legal

• The constitution, which vests the power to make laws for the State in Parliament. It also sets
out how these powers are to be exercised through the enactment of Bills and may set out the
general responsibilities of the government, including the obligation for the executive to
periodically prepare a budget, and submit it to parliament for approval by vote. Without this
approval vote of a budget, all actions of either revenue or expenditure nature that the executive
might take would be unconstitutional and thus liable for cancellation by courts.

• The organic budget law, which essentially contains the overall architecture of the budgetary
Process. By this law, the parliament imposes on the executive the rules relating to the role and
responsibility of key players (MoF,Departmental secretaries, etc.) in the preparation and
execution of the budget, its contents, the timing of its presentation to Parliament, the
requirements for amending the approved budget, as well as external audit requirements.

• Various financial regulations, finally, established by the executive itself and approved by
Parliament, to correctly implement at the administrative level the budget
preparation obligations.

A budget process refers to the process by which governments create and
approve a budget. · The Financial Service Department prepares worksheets to assist
the department head in preparation of department budget estimates · The
Administrator calls a meeting of managers and they present and discuss plans for
the following year’s projected level of activity. · The managers can work with the
Financial Services, or work alone to prepare an estimate for the departments
coming year. · The completed budgets are presented by the managers to their ·
Executive · Officers for review and approval. Justification of the budget request may
be required in writing. In most cases, the manager talks with their administrative
officers about budget requirements. Adjustments to the budget submission may be
required as a result of this phase in the process. Typically, the budget cycles occurs
in four phases.

The first requires policy planning and resource analysis and includes revenue estimation.

The second phase is referred to as policy formulation and includes the negotiation and planning
of the budget formation.

The third phase is policy execution which follows budget adoption is budget execution—the
implementation and revision of budgeted policy.

The fourth phase encompasses the entire budget process, but is considered its fourth phase. This
phase is auditing and evaluating the entire process and system.

• Revenue Estimation performed in the executive branch by the finance director,

clerk's office, budget director, manager, or a team.
• Budget Call issued to outline the presentation form, recommend certain goals.
• Budget Formulation reflecting on the past, set goals for the future and reconcile
the difference.
• Budget Hearings can include departments, sections, the executive, and the public
to discuss changes in the budget.
• Budget Adoption final approval by the legislative body.
• Budget Execution amending the budget as the fiscal year progresses.

STAGE 1: Estimates. Part A -

STAGE 1: Estimates. Part B -

STAGE 2: First estimates of deficit.

STAGE 3: Narrowing of the deficit.

STAGE 4: The Budget


In budgeting (or management accounting in general), a variance is the difference between

a budgeted, planned or standard amount and the actual amount incurred/sold. Variances can be
computed for both costs and revenues.

The concept of variance is intrinsically connected with planned and actual results and effects of
the difference between those two on the performance of the entity or company.

Types of variances

Variances can be divided according to their effect or nature of the underlying amounts.

When effect of variance is concerned, there are two types of variances:

• When actual results are better than expected results given variance is
described as favorable variance. In common use favorable variance is
denoted by the letter F - usually in parentheses (F).
• When actual results are worse than expected results given variance is
described as adverse variance, or unfavorable variance. In common use
adverse variance is denoted by the letter A or the letter U - usually in
parentheses (A).

The second typology (according to the nature of the underlying amount) is determined by the
needs of users of the variance information and may include e.g.:

• Variable cost variances

o Direct material variances
o Direct labour variances
o Variable production overhead variances
• Fixed production overhead variances
• Sales variances

Variance analysis, in budgeting (or management accounting in general), is a
tool of budgetary control by evaluation of performance by means of variances
between budgeted amount, planned amount or standard amount and the actual
amount incurred/sold. Variance analysis can be carried out for both costs and

First set a Target. You can’t make a comment on your results without some idea about where
you wanted to end up. Whether it’s a budget made six months ago or a forecast put together at
the beginning of the month the target should include the units you expect to sell and the average
price you will sell them at. The same can be done on the cost side; how many units you expect
to produce and at what cost per unit.

Factor out non-relevant items. Many things can impact Revenue and these must be analysed
and, in some cases, adjusted for which means they must be tracked.

• Customer Refunds/Settlements. Was there a quality problem a few months ago that you
are paying for now with a high number of customer settlements? Since these relate to a
prior period they need to be factored out of this month’s sales figures to get an accurate
picture of what happened.
• Lost Business. What customers cancelled their orders this month? How many units did
they average a month and at what average price?
• New Business. What new customers submitted orders this month? How many units and
at what average price? With these two items you can determine the net impact on overall
sales for the period. Are the customers you are bringing on-board paying less then the
customers lost? If this pattern repeats it can become a problematic trend.

Then analyze the Results. Once you have adjusted your sales to get the true sales figure for the
month you can then determine how many units were sold and at what average price. Armed with
the information above a Financial Analyst can tell you how much of the $25,000 variance was
due to non-related factors, volume differences and price differences.


As you may know that variance analysis is intrinsically connected with planned and
actual results and effects of the difference between those two on the performance
of the entity or company.
This variance analysis can lead to the identification of certain types of task that
frequently overrun their budget whilst other tasks may be seen to regularly come in
under their budget. Occurrences such as these require further investigation in order
to identify potential efficiency gains. The major problem with a variance analysis
approach to project monitoring is the amount of time it takes to establish actual
costs. On the majority of large projects, supported by a typical accounts
department, there will be a time lag of around 6 weeks before spend information
can be accurately reported.

The shortcomings and disadvantages of VA can be addressed below:

The monitoring cycle can be so long that it renders the application of control
impossible. Typically, by the time a problem has been identified through variance
analysis it is too late to take corrective action. This is a major shortcoming of
variance analysis and highlights the need for a monitoring system that depicts the
current status of the project more effectively.


Building a Performance Measurement System

1. Bring together all stakeholders; i.e. everyone who has an interest in the PMS. The
purpose of this first step is to build consensus on what should be accomplished from the
PMS. What are the needs of your organization? A cross-functional team needs to be
formed for directing the design of the PMS.
2. Next, your cross-functional team will need to formulate a plan for analyzing activities,
collecting data, communicating to users, etc. Your main objective is to identify areas that
need to be measured. Start by looking at how your business is organized. For example, if
your business is organized around assembly plants, than your PMS should follow this
3. Once you have an understanding of what needs to be measured, you have to collect the
data that will be used for decision making. It's usually best to have one member of the
cross-functional team for each area that will be measured. For example, if you are
collecting operating data, you should have an operating person on your cross-functional
team. The purpose of step 3 is to determine how you will manage the data within your
PMS. How often will the data be needed? Can it be measured and reported within the
4. The cross-functional team must select a test site within your company. Here you will run
pilot tests to determine the feasibility of a PMS. When you select a site, make sure you
are dealing with activities that can be measured. You should select a site that has room
for improvement and current employees are not happy with the current system. However,
you need a test site that can generate reliable data. So the existing system must be
reasonably sound.
5. At the test site, you will need to collect lots of data. Several questions must be addressed.
How easy is it to collect the data? How big should the test area be? How many people
should be involved? Once again, you need to determine the feasibility of a PMS, the costs
versus the benefits. Make sure you have support from users at this stage of the process. If
not, you may need to go back to the drawing board.
6. Once you have collected and analyzed the data at the test site, you need to present the
results of your performance measurements to management. Make sure you present the
outputs in a useable and easy-to-understand format. For example, operating people will
want performance information presented differently than marketing people. You must
tailor the information to fit the user.

- Lack of support from upper-level management (single biggest reason for failure).

- Inability to form a good cross-functional team.

- The PMS doesn't fit the organization.

- The organization is not willing to change.

1.Hierarchical Approach:- whenever possible, the factors of PMS should be
decomposed hierarchically into a practical level of detail without getting lost
into operational details on the shop floor level.

2. Different dimensions: - The PMS should accent the interaction between

customers and service providers. In addition the PMS should provide an
opportunity to measure the customer perception.
3. Modularity: - The PMS should be able to provide a set of different target
areas adaptable to specific company requirements and to different service

4. Flexibility/Extensibility: - The PMS should be Flexible, extensible and

adaptable in order to take environmental challenges and changing needs of
operations and service processes into consideration.

5. Combination of top down and a bottom up Approach: - The PMS

should integrate top down Approach (based on strategic objectives) and
bottom approach (based on specific operational needs and processes) that
ensure the practical applicability of the PMS

6. Measurment of customer benefits: - The PMS should be able to

support the measurements of customers benefits to industrial services
operations based on hard objectives PIs (e.g. cost) and soft but quantifiable
PIs (e.g. satisfaction)


 What gets measured gets improved

 Focuses attention on the items measured

 Poorly designed measures can result in misguided decisions


 Financial statements

 Designed for reporting purposes, not guidance

 Historical, short-term focus

 Follow arbitrary rules

 Ignores non-financial information

 Much useful information is not reported

 Easy to manipulate through operating decisions

 Examples

 Profitability

 Net income

 Return on assets

 Financial position

 Debt position

 Stock price

 Cost / managerial accounting

 Primary purpose is to value inventory for financial statement purposes

 Designed to allocate costs, not to control them

 Historical, short-term focus

 Provide information for managerial decisions

 Examples

 Standard costing and related variances

 Comparisons of actual results to budgets or targets

 Market share


 Lack of relevance

 Many measures are interesting, but not useful

 Market share, revenue, etc.

 Trends may be useful

 Measures may be poorly designed or collected

 Customer satisfaction, employee morale, etc.

 Goals are arbitrarily determined, beyond the ability of the system

 Lack of vision

 Short-term focus impedes decisions with long lead times or long-term


 Focus on what is currently being done, not what should be done

 Fail to consider the overall organization

 Promote detrimental outcomes

 Short-term thinking

 Local optimization

 Manipulation of operations or measures

 Well-intentioned but detrimental actions

“The numbers these systems generate often fail to support the investments in new
technologies and markets that are essential for successful performance in global


 Performance is acceptable on all dimensions except profit

 Measures are not aligned with strategy

 Measures do not reflect critical success factors

 Competitive price, but customers do not buy

 Functionality or quality may be more important to the customers

 No one notices if the measures are not produced

 Not using them anyway

 Irrelevant

 Redundant

 Questionable

 Managers debate the meaning of the measures

 Measures are confusing

 Share price is lethargic despite solid financial performance

 Measures are backward looking

 Share price reflects future expectations

 The market expects that current performance will not continue

 Have not changed the measures or targets in a long time

 Obsolete, easily met, do not foster change

 Corporate strategy has changed

 Measures become irrelevant


 Initiative must start at the top

 Senior management has overview, power to implement the system

 Goals of lower levels determined by needs of higher levels

 “Top down” system prevents local optimization while

emphasizing overall optimization

 Must be balanced

 Financial and non-financial measures

 Leading and lagging measures

 Must be relatively simple

 Limit measures to critical success factors

 Too many measures lead to confusion, redundancy, wasted

effort, irrelevance

 Employees may ignore or subvert complex system

 Must promote intended behavior

 Employees’ actions must be aimed at improving the organization, not

meeting arbitrary goals

 Poor measures promote dysfunctional behavior

 Employees must understand why something is being measured

 Should provide guidance, not just feedback

 Performance-based compensation

 Powerful motivator

 Who participates?

 General guidelines

 Must promote intended behavior

 Long-term or short-term goals?

 Employee must understand the performance/pay link

 Employee must have some control over the measures

 Must be significant enough to motivate

 Pay for ideas?

 Must look beyond the entity

 External groups can provide useful information

 Include measures of value chain performance?

 Measures should be benchmarked

 Other departments or divisions

 Other entities


 Useful

 Not everything can be measured in monetary terms

 Customer service

 Goal attainment

 Innovation

 Employee involvement
 Frequently difficult to measure

 Rough measures or trends may be better than nothing

 Many companies believe they could be useful, but do not measure them

 Difficult to measure

 Resistance to change

 Even when measured, they may not be used

 Suspicious about the validity of measures

 Resistance to change


Balanced Scorecard Basics

The balanced scorecard is a strategic planning and

management system that is used extensively in business and industry,
government, and nonprofit organizations worldwide to align business activities to the vision
and strategy of the organization, improve internal and external communications, and
monitor organization performance against strategic goals. It was originated by Drs. Robert
Kaplan (Harvard Business School) and David Norton as a performance measurement
framework that added strategic non-financial performance measures to traditional financial
metrics to give managers and executives a more 'balanced' view of organizational
performance. While the phrase balanced scorecard was coined in the early 1990s, the roots
of the this type of approach are deep, and include the pioneering work of General Electric on
performance measurement reporting in the 1950’s and the work of French process
engineers (who created the Tableau de Bord – literally, a "dashboard" of performance
measures) in the early part of the 20th century.

The balanced scorecard has evolved from its early use as a simple performance
measurement framework to a full strategic planning and management system. The “new”
balanced scorecard transforms an organization’s strategic plan from an attractive but
passive document into the "marching orders" for the organization on a daily basis. It
provides a framework that not only provides performance measurements, but helps
planners identify what should be done and measured. It enables executives to truly execute
their strategies.

This new approach to strategic management was first detailed in a series of articles and
books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of
previous management approaches, the balanced scorecard approach provides a clear
prescription as to what companies should measure in order to 'balance' the financial
perspective. The balanced scorecard is a management system (not only a measurement
system) that enables organizations to clarify their vision and strategy and translate them
into action. It provides feedback around both the internal business processes and external
outcomes in order to continuously improve strategic performance and results. When fully
deployed, the balanced scorecard transforms strategic planning from an academic exercise
into the nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell
the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and innovation."

Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,”
Harvard Business Review (January-February 1996): 76.


The balanced scorecard suggests that we view the organization from four perspectives, and
to develop metrics, collect data and analyze it relative to each of these perspectives:

The Learning & Growth Perspective

This perspective includes employee training and corporate cultural attitudes related to both
individual and corporate self-improvement. In a knowledge-worker organization, people --
the only repository of knowledge -- are the main resource. In the current climate of rapid
technological change, it is becoming necessary for knowledge workers to be in a continuous
learning mode. Metrics can be put into place to guide managers in focusing training funds
where they can help the most. In any case, learning and growth constitute the essential
foundation for success of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things
like mentors and tutors within the organization, as well as that ease of communication
among workers that allows them to readily get help on a problem when it is needed. It also
includes technological tools; what the Baldrige criteria call "high performance work

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective
allow the managers to know how well their business is running, and whether its products
and services conform to customer requirements (the mission). These metrics have to be
carefully designed by those who know these processes most intimately; with our unique
missions these are not something that can be developed by outside consultants.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of

customer focus and customer satisfaction in any business. These are leading indicators: if
customers are not satisfied, they will eventually find other suppliers that will meet their
needs. Poor performance from this perspective is thus a leading indicator of future decline,
even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of

customers and the kinds of processes for which we are providing a product or service to
those customer groups.

The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and
accurate funding data will always be a priority, and managers will do whatever necessary to
provide it. In fact, often there is more than enough handling and processing of financial
data. With the implementation of a corporate database, it is hoped that more of the
processing can be centralized and automated. But the point is that the current emphasis on
financials leads to the "unbalanced" situation with regard to other perspectives. There is
perhaps a need to include additional financial-related data, such as risk assessment and
cost-benefit data, in this category.


The balanced scorecard (BSC) is a strategic performance management tool - a

semi-standard structured report supported by proven design methods and
automation tools that can be used by managers to keep track of the execution of
activities by staff within their control and monitor the consequences arising from
these actions.

The core characteristic of the Balanced Scorecard and its derivatives is the presentation of a
mixture of financial and non-financial measures each compared to a 'target' value within a single
concise report. The report is not meant to be a replacement for traditional financial or operational
reports but a succinct summary that captures the information most relevant to those reading it. It
is the method by which this 'most relevant' information is determined (i.e. the design processes
used to select the content) that most differentiates the various versions of the tool in circulation.

The first versions of Balanced Scorecard asserted that relevance should derive from the corporate
strategy, and proposed design methods that focused on choosing measures and targets associated
with the main activities required to implement the strategy. As the initial audiences for this were
the readers of the Harvard Business Review, the proposal was translated into a form that made
sense to a typical reader of that journal - one relevant to a mid-sized US business. Accordingly,
initial designs were encouraged to measure three categories of non-financial measure in addition
to financial outputs - those of "Customer," "Internal Business Processes" and "Learning and
Growth." Clearly these categories were not so relevant to non-profits or units within complex
organizations (which might have high degrees of internal specialization), and much of the early
literature on Balanced Scorecard focused on suggestions of alternative 'perspectives' that might
have more relevance to these groups.

Modern Balanced Scorecard thinking has evolved considerably since the initial ideas proposed in
the late 1980s and early 1990s, and the modern performance management tools including
Balanced Scorecard are significantly improved - being more flexible (to suit a wider range of
organizational types) and more effective (as design methods have evolved to make them easier to
design, and use).

The four perspectives

The 1st Generation design method proposed by Kaplan and Norton was based on the use of three
non-financial topic areas as prompts to aid the identification of non-financial measures in
addition to one looking at Financial. Four "perspectives" were proposed:[20]

• Financial: encourages the identification of a few relevant high-level financial

measures. In particular, designers were encouraged to choose measures that
helped inform the answer to the question "How do we look to shareholders?"
• Customer: encourages the identification of measures that answer the
question "How do customers see us?"
• Internal Business Processes: encourages the identification of measures
that answer the question "What must we excel at?"
• Learning and Growth: encourages the identification of measures that
answer the question "Can we continue to improve and create value?".

The Balanced Scorecard is ultimately about choosing measures and targets. The
various design methods proposed are intended to help in the identification of these
measures and targets, usually by a process of abstraction that narrows the search
space for a measure (e.g. find a measure to inform about a particular 'objective'
within the Customer perspective, rather than simply finding a measure for
'Customer'). Although lists of general and industry-specific measure definitions can
be found in the case studies and methodological articles and books presented in the
references section. In general measure catalogues and suggestions from books are
only helpful 'after the event' - in the same way that a Dictionary can help you
confirm the spelling (and usage) of a word, but only once you have decided to use it


There are two different types of compensation management: direct and indirect. Compensation is
the combination of monetary and other benefits provided to an employee in return for their time
and skill. The field of compensation management provides management with the ideal
combination of the different remuneration types. The purpose of this type of program is to retain
and motivate good employees.

Direct compensation is typically comprised of salary payments and health benefits. The creation
of salary ranges and pay scales for different positions within the company are the central
responsibility of compensation management staff. The evaluation of the employee and employer
portions of benefit costs is an important part of a compensation package.

Effective compensation plans are routinely compared with other firms in the same industry or
against published benchmarks. Although some jobs are unique within a specific firm, the vast
majority of positions can be compared to similar jobs in other firms or industries. Direct
compensation that is in line with industry standards provides employees with the assurance of
fair compensation. This process helps the employer avoid the costly loss of trained staff to a


During the term of this policy, the Board of Directors of the Seattle Public Schools
shall provide the Management Staff, which includes administrators,
professional/technical, other support staff and office/clerical employees on
Management Staff Salary Schedules with salary and fringe benefits as set forth

The Board acknowledges the necessity to comply with applicable laws concerning

A. The salary schedules for Management Staff positions covered by this policy shall
be as adopted from time to time in compliance with legal constraints. Experience
credit (step adjustments) shall also be granted as appropriate to the circumstances.

B. The list of position titles appropriate to this policy which are paid according to the
Management Staff Salary Schedule shall be maintained by the Classification and
Compensation Department within the Human Resources Department.

C. the District’s contribution for Management Staff who participate in the district’s
group medical benefits program shall be determined annually in accordance with
state funding and local policy.

D. the District assumes 100% of the Retiree Medical Subsidy (aka “Retiree Carve



District employees are automatically covered by a group dental plan, vision plan
and life/long term disability plan and may participate in a choice of medical plans.
All employees who work more than .5 but less than 1.0 receive prorated health
benefits equal to their current FTE. Refer to the Employee Benefits Program booklet
for information on eligibility and plan options, or call the Benefits Helpline at (206)
957-7066, or on-line visit


A Flexible Benefits Plan, or Section 125 Plan, is offered to any employee who is
eligible to participate in the group insurance plans. Premium Conversion, Health
Care Reimbursement, Dependent Care Reimbursement and Premium Expense
Account plans are available.


Each regular employee will be entitled to up to twelve (12) working days of sick leave for the work year,
to be used for illness, injury or illness-emergencies, as follows:

1. Sick Leave Application: Sick leave days are to be used for absence caused by personal illness,
injury, medical disability (including childbearing), poor health, or an emergency caused by family illness
where no reasonable alternative is available to the employee.
1. Sick Leave Accumulation: Each employee’s portion of unused sick leave allowance shall
accumulate from year to year as provided by state law and the rules and regulations of the Superintendent
of Public Instruction under that law.

1. Sick Leave Cash out: Under specific circumstances, employees may be eligible to receive a cash
out payment of part of their accumulated sick leave days.

a. On or before January 15 of each year, employees with a sick leave accumulation may elect to be
compensated at the ratio of 4:1 at their per diem rate for sick leave accumulated in excess of sixty (60)
days which was earned but unused during the previous calendar year.

b. Employees who leave the District (terminate employment) and then subsequently return to employment
with the District at a later date, or employees transferring from another Washington State public school
district or educational service district, may upon written request to Human Resources have their
previously unused sick leave balance reinstated.

c. Employees who retire shall be entitled, upon written request to Human Resources, to compensation for
all unused Sick Leave up to the one hundred eighty (180) days maximum at the ratio of 4:1, at their per
diem rate.

d. In the event of the death of an employee, the estate representative may apply for payment of
accumulated sick leave for the deceased employee by contacting Payroll Services.


Management Staff employees are eligible for workers’ compensation time loss benefits as provided by
law. Employees may supplement their time loss benefits with previously accrued sick leave and/or annual
leave. However, the total of time loss benefits and sick leave and/or annual leave may not exceed the
employees’ normal net pay. Net pay equals gross pay less statutory deductions.


All regular employees will be granted annual leave according to their scheduled work year as set forth on
Attachment A.
1. Annual Leave Accumulation: Employees who work a full year may accumulate annual leave days
from year to year as described below. Employees who work less than a twelve (12) month year do not
accrue annual leave days.

Effective 09/01/97, no employee may carry over more than two hundred forty
(240) hours of annual leave from one school year to the next. Employees
must reduce their leave balance to no more than two hundred forty (240)
hours by the end of August of each year.

2. Annual Leave Cash out: The five (5) day annual leave cash out has been
eliminated for management staff.
No employee may cash out more than two hundred forty (240) hours of

annual leave at the time of separation from District (i.e., resignation,

termination, death, layoff, etc.). If an employee uses vacation prior to

separation/retirement, the total of time used and vacation cash-out may not

exceed two hundred forty (240) hours.

The two hundred forty (240) hour limit includes any annual leave which may
have been cashed out during the current year. For example, if an employee
cashes out forty (40) hours of annual leave on June 1, and resigns on August
15, that employee may only cash out the difference between the two
hundred forty (240) hour limit and the forty (40) hours cashed out on June 1.
The result is a limit of two hundred (200) hours based on the facts in this
2. Change in Work Year: Employees who change from a full work year to a work
year which is less than 12 months will be entitled to cash out some or all of
the previously accrued annual leave days, not to exceed a maximum of thirty
(30) days.


Eligible employees will be provided up to two (2) days of personal leave per
year with pay to deal with personal business of an emergency nature. The
number of days granted will be dependent upon the individual employee’s
assigned work year (see Item III, Work Year). Such days shall not accumulate
from year to year. Application for and use of these days shall be as follows:
Personal Leave days shall be used for hardships or other pressing needs and will be
granted in situations which require absence during working hours for purposes of
transacting or attending to personal or legal business or to family matters.


Management staffs are entitled to paid holidays, according to

their work year, as listed below:
Full-Year Employees (12) 223 & 204 Day Employees (10)
Independence Day Veterans’ Day
Labor Day Thanksgiving Day
Veterans’ Day Day after Thanksgiving
Thanksgiving Day Christmas Eve Day
Day after Thanksgiving Christmas Day
Christmas Eve Day New Year’s Eve Day
Christmas Day New Year’s Day
New Year’s Eve Day Martin Luther King Day
New Year’s Day Presidents’ Day
Martin Luther King Day Memorial Day
Presidents’ Day
Memorial Day

Up to three (3) consecutive days of bereavement leave following the death of a member of the
immediate family will be provided. Two (2) additional days for up to a total of five (5) may be
granted upon application to and approval by the immediate supervisor. Such leave shall be
without loss of pay, and must be applied for and used consistent with established District policies
and procedures.


Professional leave will be provided as an approved absence without loss of pay from an
employee’s regularly assigned duties so that the employee may participate in activities directly
related to the profession or professional growth, such as workshops, seminars and conferences.
Such leaves will be available on a limited basis to management staff consistent with District
guidelines and procedures.


Paid leave up to a limit of two (2) days per year may be requested for days which are normally
worked but which fall on days that the work site is not open due to inclement weather.


Other employee benefits related to leaves of absence and compensatory time


Corporate Compensation Plans (CCP) has created financially innovative retirement

and insurance programs for many of the country’s most prestigious corporations
and law firms. The objective of these programs is to provide financial security to
their employees and partners by protecting their incomes and preserving their
assets, and by doing so, help their organizations attract and retain the talent they
need to compete in today’s global economy. Our goal is to ensure individuals do not
outlive their income and their families do not outlive their assets.
The Committee shall approve all incentive-compensation and
deferredcompensation plans for the Company's
officers. In addition, the Compensation Committee shall
approve all equity-based plans for the benefit of the
Company's officers, directors, employees and/or
consultants and may approve such other incentive,
deferred and other compensation plans, retirement plans
or other benefit plans that the Committee reasonably
believes to be in the best interests of the Company and its

Corporate Compensation Plans (CCP) has created financially innovative retirement

and insurance programs for many of the country's most prestigious corporations
and law firms. The objective of these programs is to provide financial security to
their employees and partners by protecting their incomes and preserving their
assets and by doing so, help their organizations attract and retain the talent they
need to compete in today's global economy. Our goal is to ensure individuals do not
outlive their income and their families do not outlive their assets. With our focus on
protecting today's dollars to build tomorrow's assets, we developed specialized long
term disability plan designs to do just that. The Disability Retirement Completion
Plan was our pioneer concept for one of the largest investment banks in the
country. Its implementation resulted in, at the time, the largest purchase of
individual disability insurance policies covering over 2000 executives. Subsequently,
Corporate Compensation Plans transformed the plan into a patented 401k plan
feature "401kSecure" an insurance program that continues contributions directly
into disabled employees' 401k accounts so their retirement assets will grow just as
if they were working. To support these product innovations, CCP synthesized key
factors such as personalized benefit and premium illustrations, modeling tools, and
data security to create the first e-signature web-based enrollment platform for the
communication and enrollment of individual disability insurance a platform that has
been used by major disability insurance carriers for our joint marketing efforts in the
public corporation sector.




“Characteristics of Service Industry Determines the nature of

MCS to be followed and strategy to be used to implement
the said MCS”.

Service Industry Differs from Mfg. Industry in terms of

• Inventory building - cannot store the product

• Different resources requirements - labor intensive

• Quality of product – difficult to control (Relative concept and Professional


• Pricing of product – No sound cost base

• Multi-unit organization setup – fast food chain


Characteristics of Service Industry

1. Very few tangible assets  ROI may be meaningless

2. Special class of labor  seeks more autonomy in working.

3. Input and output measurement is difficult  difficult to arrive at

effectiveness and efficiency of a professional.

4. Usually of small size  Viability of elaborate MCS is in question.

4.Marketing of the services is usually informal  may lead to
problem in arriving at inputs of revenues.

5. Cost of service s is of flexible nature such as traveling expenses,

communication expenses therefore building standards is difficult

1. Pricing – Usually linked with time spent.

2. Transfer Pricing
(When service providing unit is defined as Profit center)

3. Strategic Planning and Budgeting – usually long range staffing plan.

4. Control of operations – Crux is in scheduling the professional time.

Hours billed

5. Billed time ratio = ----------------------------------------

Professional hours available


1. Recommendations of investment banker V/s Stock Market indicators.

2. Closeness of Diagnosis & Actual findings.

3. Judgments made by superiors.

4. Use of numerical ratings.

5. Appraisal by peer professionals/ self appraisal.

6. Client reports.

7. Budget to measure the cost/time performance.

8. Professional quality and quantity of work – Clients referrals, Time taken to

complete the task.

9. Internal audit to control quality and quantity. MCS in Service Organization –


1. Time and cost budgets

2. Revenue generated (to rank performance)

3. Quality control trough – Metrics such as Client Satisfaction, Number of complains

and average complains received, Complain disposal rate, Claim settlement period

4. Client profile of a branch/center

5. Product range sold/promoted

6. Client relationship and dealer relationship

7. Promotional campaigns undertaken

8. Number of defaulting Clients and Amount overdue

9. Number of policies revived


Performance Parameters for a Hospitality Industry

1. Occupancy rate, spread over a period

2. Revenue generated out of main activity

3. Revenue generated out of allied activities – cousin, bar, shops, parlor, boutique

4. HR budget

5. Cost per customer/per day – for cost control

6. Promotional efforts undertaken

7. Quality control through – customer feedback, customer referrals, repeat


8. Booking register position

9. No of tie-ups, corporate clients

10. Number of complaints received and resolved

11. Time to taken to attend and render the desired service


Performance Parameters for a Transportation Industry

1Average plying/idle time, spread over a period

2. HR cost and fuel cost budget

3. Maintenance cost budget

4. Revenue generated per vehicle/per employee

5. Number of customer complains

6. Cost of complain redress (Average and Total)

7. Number of breakdowns, accidents, insurance claims, average recovery period

8. Employee relationship/loyalty build

9. Average waiting time/loading/unloading

10. Time schedule, fleet schedule management

11. Average load carried V/s Ideal load capacity


Performance Parameters for a Tourism Industry

1. Number of customers, Revenue generated and spread over a period

2. Quality control through – Customer referrals, repeat customers

3. Time taken to attend and render the desired service

4. Cost and revenue per package/tours

5. Package mix

6. Allied services provided – pick-up, drop, food, beverages

7. Promotional campaigns undertaken

8. CRM and Liaison maintained

9. Average number of customers or revenue per package V/s Ideal numbers

10. Discounts offered and revenue spurred

11. Number of complaints received and average time taken to resolve .


Financial Service Organization

1. Monetary assets – primary resource

2. Time period for transaction may range from hours, days to number of years –
unsound base for input assessment

3. Risk and Rewards based trade – therefore knowing the risk component of
transaction one can decid e the reward.

4. Technology plays significant role – Automated teller machines -, Electronic

market places for securities.


Organizations taking up Projects Characteristics

1. Single objective – “to built a flyover or supercomputer”

2. Project organization and project management

3. Management’s focus is project.

4. Need for trade off is vital - scope, schedule and cost.

5. Less Reliable standards

6. Frequent changes in plans.

7. Different rhythm in implementation of project

8. Greater external Environmental Influence


Health Services Organization-Characteristics

1. Availability & Cost is primary concern ,the performance efficiency comes latter.

2. Wide variety in Service Mix of facilities – many options are in offing. (Polyclinics,
Total Health Care Centers)

3. Third party payers – the costs have being subsidized by govt., NGO institutions.

4. Professional’s loyalty is primarily to his profession rather than organization.

5. Quality control possible through peer review or through outside review agency.


Non Profit Making Organization-Characteristics

•1. Absent of profit performance measure –

•2. NGO’s have contributed capital – •

•3.Fund accounting –

•4. Governance – Usually NPO are managed by trusts


The main objective of the organization is to offer social services to citizens or to

Their associates.
 Services offered are of diverse nature (can include health, education, culture,
Sports, leisure, religion, environmental, labour, professional…) and can act at
Various regional contexts (local, national, international…).
 Most of its members contribute to their work voluntarily.
 Usually, NPOs adopt a non-mercantile legal form (i.e. foundation, association,
Sport organization, mutual organization, professional body, federation and so on).
 It has a non-governmental character.
 In the case of obtaining profit, this is not distributed amongst its partners but used
To improve the services offered and/or reinvested in the structure of the organization.
 Although a NPO has access to the same sources of finance than private
Companies, generally most resources come from private individual donations,
Other NPOs, private companies or the public sector.
An NPO enjoys tax advantages (varying according to the type of NPO and the
Country where it operates).


The nonprofit operations are organized into major functions. These functions
usually include central administration and programs.
· Governance - The governance function of a nonprofit is responsible to provide
overall strategic direction, guidance and controls. Often the term "governance"
refers to board matters. However, many people are coming to consider governance
as a function carried out by the board and top management. Effective of
governance depends to a great extent on the working relationship between board
and top management.
· Programs - Typically, nonprofits work from their overall mission, or purpose, to
identify a few basic service goals which must be reached to accomplish their
mission. Resources are organized into programs to reach each goal. It often helps
to think of programs in terms of inputs, process, outputs and outcomes. Inputs are
the various resources needed to run the program, e.g., money, facilities, clients,
program staff, etc. The process is how the program is carried out, e.g., clients are
counseled, children are cared for, art is created, association members are
supported, etc. The outputs are the units of service, e.g., number of clients
counseled, children cared for, artistic pieces produced, or members in the
association. Outcomes are the impacts on the clients receiving services, e.g.,
increased mental health, safe and secure development, richer artistic appreciation
and perspectives in life, increased effectiveness among members, etc.
· Central administration - Central administration is the staff and facilities
that are common to running all programs. This usually includes at least the
executive director and office personnel. Nonprofits usually strive to keep costs of
central administration low in proportion to costs to run programs.

Current Major Challenge: Devolution

"Devolution" is a word used a great deal these days among nonprofit funders and leaders.
Essentially devolution is the short-hand word for a strong trend of cutbacks in federal funding to
nonprofits (especially for programs such as welfare (AFDC and certain SSI programs) and the
resulting changes in responsibility for administering such programs. Legislation passed by the
Congress reduces (and in some cases) eliminates a federal commitment to automatically provide
assistance to the poor. Instead, blocks of funds (usually in reduced levels) will be passed through
to states, allowing them to decide who will receive aid and who will not. Thus, devolution is
associated with the end of what is often called “entitlements” to services previously guaranteed
by the federal government.

While devolution provides opportunity for more local control and possibly less bureaucratic
waste, human services programs will be at great risk due to reduced federal (and therefore state)
funding. Nonprofits (which, on average, receive approximately 30 percent of their revenues from
federal sources) will suffer significant loss of funds which may be very difficult to replace.
Meanwhile, public demand for human services continues to increase.

Devolution brings many challenges to nonprofit leaders. They must operate more effectively in
the face of reduced funding. They must consider substantial changes in the way they have
operated. Concepts such as strategic alliances and restructuring will become commonplace.


1. Finding the Money to Accomplish Our Mission
2. Strategic planning/setting priorities

3. Managing donor and funder expectations

4. Building public trust—in us and/or in the sector as a whole

5. Obtaining and/or incorporating the technology we need to accomplish our


6. Complying with state and federal requirements for our organization

7. Other:- Board-related issues appeared most frequently in the comments of

respondents who selected "Other." "Finding people to take on core leadership
responsibilities and the challenges of moving the organization to the next level in
its lifecycle so that we can hire staff & get an office have just about wiped out the
two founders.

Other management issues participants cited included "change

management" ("I've found too many non-profits whose battle cry is 'We always did
it that way' and more emphasis needs to be place on training leadership to think
outside the box"); "taking on too many new initiatives without adequate resources
(HR, capital, etc.)"; and "burnout of our talented, committed senior staff."



Information abstracted from regional and national studies concerning the challenges facing
nonprofits indicates that several issues are shared as concerns for nonprofit leaders. Board
development and fundraising and are the main issues for nonprofits with a secondary emphasis
on difficulties related to improving operations and more effectively managing resources.


Some fundamental concerns were commonly identified in the studies, which surveyed nonprofit
executive directors and board members. Five major themes clearly emerged from the various
reports' inventories of issues. These suggest areas of the most pressing needs as indicated by
nonprofit leaders:

1. Board Development - Building an active and strategically oriented board of

directors was the most frequent concern. Specific issues identified were:

· Recruiting high-impact board members

· Cultivating a dynamic and effective culture among board members

· Fostering a strategic orientation for boards

2. Marketing/Fundraising - Developing effective marketing programs to recruit and

retain donors was also a high priority. In particular, respondents were concerned about:

· Applying marketing/communications techniques to donor contact activities

· Expanding their current donor base

· Increasing donations from current donors as well as enhancing donor loyalty and retention

3. Information Management - Utilizing effective information management for

measuring and evaluating operations and programs was also very important.

· Establishing a clear set of quality benchmarks for assessing services

· Using IT to reduce costs and create value

· Evaluating programs/services against key performance measures

· Establishing a better model for measuring and reporting outcomes

· Measuring the real benefit of development and marketing investments

· Devising a consistent approach for measuring organizational performance and impact

4. Human Resources - Attracting, developing and retaining productive staff and
volunteers was a critical concern:

· Attracting and retaining skilled staff

· Attracting skilled, motivated volunteers

· Developing a leadership transition and succession plan

· Improving workforce performance

· Providing ongoing training and skill building

5. Collaboration - Pursuing constructive alliances, partnerships, and mergers was also a

significant issue.

· Developing collaborative partnerships with public sector agencies, including government

· Forging collaborative partnerships with the private sector

· Pursuing mergers with overlapping services/agencies

Extrapolating from these topics, a sixth theme is implied as a supplementary concern:

6. Business Proficiency - the need to embrace the business skills and processes
essential to effectively addressing the needs identified in these five major themes.


Several changes in the operating environment of the nonprofit sector are impacting leaders'
perceptions of the issues facing them.

Funding Challenges - Many nonprofit organizations are simultaneously facing a

rapidly changing funding environment and a steadily rising need for services from the
communities they serve. Reduced or tightly focused government funding is placing great
pressure on the sector, which has also experienced a proliferation of new nonprofits during the
past decade, thus increasing the competition for a smaller pool of funds. Countless nonprofit
organizations are feeling the impact of federal reductions to their core funding streams at the
same time foundation endowments and giving are down and many state and municipal
governments are experiencing deficits that are reflected in reductions in spending on social

Accountability Pressures - As a result of a few high profile cases, nonprofits are

facing powerful accountability pressures to provide measurable proof that the services they
provide have an impact on the communities and populations they target. Funders and the public
want to know in detail if the funded organization is effective in doing what it sets out to do and if
it is also efficient at what it does. While gaining and keeping the pubic trust is absolutely
essential, calls for accountability can lead nonprofits to spend more time searching for financial
support and accounting for funded task performance in order to continue receiving funding from
the source. This can cause nonprofits to be more business-like but may also draw attention from
responding in innovative or distinctive ways to community and/or client needs.

Collaboration Fascination - Government and foundation funders are increasingly

requiring the use of interorganizational relationships such as collaboration, partnerships, and
alliances as an element of funded projects. However, while there is a growing body of
knowledge about the factors that support effective negotiation and integration of strategic
partnerships, much less is known about the actual outcomes nonprofits experience and how these
compare to expected outcomes. Many nonprofits expend large amounts of organizational energy
for questionable returns while pursuing interorganizational relationships. Nonprofits often
encounter major barriers to collaboration, such as autonomy issues and "turfism," conflicting
organizational cultures, and trust-building among organizations.


Responding to these difficult circumstances necessitates adaptations that involve more than
merely developing additional financial support.

Leadership Challenges - The health of the nonprofit sector depends on the quality of
its executive leadership. Agency leadership, including board members, must be able to raise
fundamental questions related to strategy, mission, and accountability, as well as the roles that
their organizations play within their communities. For many nonprofits, being responsive to
changes in the environment means a heighten need to:

· Determine the most effective way to serve a client population that may be growing or changing;

· Develop strategies and processes to access and manage new funding streams;

· Decide where and how to make budget cuts;

· Develop technology to capture information for reporting and billing;

· Manage cash flow challenges;

· Consider new partnerships, explore possible collaborations, and consider mergers or


Given the challenging changes in the typical nonprofit's task environment, effective board
leadership becomes particularly crucial. The issues facing the nonprofit sector underscore the
need for responsive, skilled and effective board leadership in maintaining and improving the
quality of organizational performance. It is appropriate that nonprofit boards take a leadership
role in assisting agency management on critical issues such as mission definition and strategic
planning, legal compliance and conflicts of interest, oversight of agency financial management,
resource development, establishing interorganizational collaborations, cultivating community
relationships, and opportunities for capacity-building training.

Management Challenges - Nonprofit managers are challenged to perform multiple

functions and roles as they guide their organizations through today's complex environment. They
must be highly skilled not only in the technical aspects of their organizations' mission, but also in
management areas such as finance, human resources, information technology, program
evaluation, resource development, and many other management responsibilities. Also, an
organization's human resources represent the collective capabilities and experiences of its people.
Unfortunately, nonprofit organizations are often challenged when it comes to managing staff
talent actively. Attracting and retaining skilled staff as well as heightened accountability and
competition create a need to develop the specialized business skills and processes that are
required of for-profit organizations. Consequently, like their counterparts in the business world,
nonprofit managers need to continuously seek out and utilize the latest methods and techniques
of organizational management and leadership.


Restating the six identified needs as positive attributes indicates that resilient nonprofits will

1. A strong governance structure and visionary board members with the right skills and access to

2. Sufficient and flexible funding.

3. A defined set of best practices in service and management functions and an effective way to
measure performance against these benchmarks.

4. A skilled workforce operating in a culture that facilitates opportunities for innovation and

5. Effective community relationships that include collaborative partnerships with other providers,
funders and other organizations and systems.

6. Management capacity to support services, including accounting, human resources, technology

and marketing/development functions.


Seen from this perspective, there are seven actions that nonprofits can take to achieve these
characteristics and address the challenges they face:

1. Undertake an organizational assessment and create a strategic plan to address any capacity
2. Engage board members to ensure quality governance structures, practices and oversight.

3. Embrace and adopt sound marketing and communications strategies.

4. Build business skill sets and integrate basic business practices and tools.

5. Identify and implement appropriate metrics and make better use of technology to enable
evaluation of the success and impact of delivery of services and programs as well as internal

6. Institute progressive human resource practices focusing on skills and team building.

7. Explore and adopt new collaborative business models with complementary organizations.


The current challenges facing nonprofit managers and public policy makers in at
least four areas:

(1) Markets and competition,

(2) Effectiveness and accountability,

(3) Policy and politics, and

(4) Leadership.

The salient characteristics of an effective nonprofit organization are the tendency


(1) Collaborate with other organizations,

(2) diversify income sources and focus on earned revenues,

(3) Measure outcomes,

(4) Build flat, nonhierarchical, team-based workforces with open communications,


(5) Keep clear lines of communication and responsibility open between staff and the
board of directors.


Project Management Control System Framework defines the means
by which as program or project is planned, managed and controlled, including: –

1. Project objectives –

2. Project culture –

3. Cost and progress control Project Methodology Management –

4. Operating rules and policies System –

5. Work product templates –

6. Records and documentation

Project management control systems are the modern tools for

managing project scope, cost and schedule.

They are based on carefully defined process and document controls, metrics,
performance indicators and forecasting with capability to reveal trends toward cost
overrun and/or schedule slippage.

Identifying those trends early makes them more amenable to successful


Traditionally, management systems have utilized data about planned and actual
costs. Modern systems further incorporate, in their analysis of projects and tasks,
the monetary value earned for actual work accomplished. They analyze the Planned
Value of work scheduled (PV), Actual Cost of work performed (AC), and Earned
Value of work performed (EV). Forecasting includes cumulative and incremental
trends in key indicators such as the Estimate at Completion (AC + Estimate to
Complete), Cost Variance (EV – AC), Schedule Variance (EV – PV), Cost Performance
Index (EV/AC), and Schedule Performance Index (EV/PV). Earned Value Management
(EVM) is a systematic approach to the integration and measurement of cost,
schedule and scope accomplishments on a project or task, providing managers the
ability to examine cost data in the context of detailed schedule information and
critical program and technical milestones. EVM systems are in use at CERN and by
leading project delivery contractors in commercial industry and government service.

For Project Success

1. Clearly defined goals done to identify sources of

2. Competent project manager success and failure

3. Top management support

4. Competent project team members – “Ranking of system”

5. Sufficient resource allocation Implementation Success

6. Adequate communications channels

7. Project tracking (plans, schedules, etc.) Factors

8. Feedback capabilities in Project Management

9. Responsiveness to client

10. Client consultation

11. Technical execution

12. Client Acceptance successful project.

13. Trouble-shooting

Effective Project Management - Right Skills The lack of specific project

management skills presents minimal risk for small projects, but poses considerable
risk to higher-profile, higher risk midsize to large projects. The skill requirements for
a strong project manager are extensive.

Management committee structure

The key management committees will be the project management team and the Project Board.
The latter may be called other things, for example a Steering Committee.

You will need to give good consideration to how they are structured and how they are organised
and run.

Project lifecycle

This refers to the entire project from start to end.

It will be broken down into various stages which must be ratified at senior management level.
Note the use of the word ‘lifecycle’ to describe the overall schedule of the entire project, the
start, middle and end.
This should not be confused with ‘lifespan’ which is the period of existence of a ‘product’.
The product ‘lifespan’ will include various phases such as conception through to development,
testing operation and final removal of a product that will be replaced with something else.

Project reporting

All projects will be managed by exception.

That is, the project will be on track unless you report otherwise.

The main reporting will be at milestones but other reports will be required to manage project
A simple template is provided in the product package.


Control of the revision, issue and recall of the schedule and any other documents is paramount.
This is covered under with the use of Configuration Management.



The PMCS involves both software tools for development of the

project databases and the processes and procedures needed to
organize and manage the project.


1. Determine project status

2. Make a comparison of project status to the baseline plan

3. Manage the change process

4. Track Earned Value if required


The Major Components of a PMCS are:

1. The Technical Document Database

2. The Detailed Cost Estimate Database

3. The Integrated Project Schedule Database

4. The Cost/Schedule Management Database

5. A Qualified Accounting System

6. The Change Control Board (CCB) Process

…………………………………………………………………THANK YOU