1

Concept of control
Ensuring that implementation is done as per plans.
Steps :
1. Set standards
2. Communicate standards
3. Compare standards with actual performance
4. Report deviations
5. Take corrective actions.
2
Control Process in General
Four basic elements
Detector (actual measurement)
Assessor (comparison with standard)
Effector (alteration of behavior, if required)
Communication network (transmission of
information)
3
Elements of control process
Control device
(Assessor : compares
With standards)
Detector
(Provides information
About actual)
Effector
(Feedback for altering
Behaviour)
Entity being controlled
4
Concept of MCS
Management Control :
"Mgt control is the process by which managers assure that the resources
obtained are used efficiently and effectively in the accomplishment of
organizational goals : Anthony
Efficiency : doing the things right ie. Relationship between input and output
/P efficiency O/P
Effectiveness : doing the right things ie. Relationship between output and
objectives
O/P effectiveness OBJECTVES
System is a prescribed way or a systematic way of carrying out a set of
activities which are usually repetitive in nature
5
MCS
"MCS is a total system i.e. it covers all aspects of the
firms' operations to assure that all parts of the
operations are in balance with each other: Anthony
"MCS refers to a framework or a set up by which the
managers can ensure control over the actions of the
actions of his subordinates as well as control over
entire operations in the organization. : Saravanavel

Characteristics of MCS
Systematic method
Result oriented
Covers all operations
Based on the concept of Responsibility Centres
Covers both efficiency and effectiveness
Control of managerial performance
Regular process
Ensures goal congruence

Designing MCS for an organization

Pre requisites
1. Control requires plans
2. Clear org structure
3. Active top mgt involvement
4. Participation and motivation of employees
5. Proper MS
. Proper accounting system ( responsibility
accounting)

..Designing
Steps
1. Classifying org into responsibility centres(RC)
2. Fixing responsibility of each RC
3. Deciding key variables for performance assessment
4. Developing MS
5. Finding deviations and relating it to individual responsibility
. Performance reporting to top mgt
. Short term remedial actions and long term measures for
controlling deviation

Formal MCS
Responsibility
Center
performance
Strategic
Planning
Mission,
Goals &
strategies
Rules
Other
nformation
Budgeting
Report
Actual v/s
Plan
Was
Performance
Satisfactory?
Revise Revise
Corrective
action
Measurement
Feedback
Communication
Reward (feedback)
Yes
No
10
General relationship between
Planning and control
Activity
Nature of end Product
Strategy formulation
Management Control
Operational Control
Goals, Strategies, Policies
mplementation of Strategies
Effective and efficient
Performance of individual tasks
11
3 levels of controls
Point Strategy formuIation
(Iong term pIanning
based on environmentaI
anaIysis)
Management controI
(ensuring manageriaI
performance in
accordance to
0bjectives )
Task controI
(ensuring specific tasks
are performed
efficientIy)
1. Nature of end product Goals, strategies &
policies
mplementation of
strategies
Efficient and effective
performance of individual
tasks
2. Degree of
systematization
Unstructured and
unprogrammed
Somewhat systematic
and regular
Most systematic
3. Time frame focus Focuses on long-run Focuses on medium-term Focuses on short-run
activities
4. nputs Rough estimations of
future/external
nternal and Historical
and comprehensive
Uses current accurate
data related to specific
task only
5. Techniques SWOT, ETOP, Porters 5
force, BCG matrix, SAP
Budgeting , comparative
analysis
Variance analysis
. mportance of planning
& control
Planning more important Planning & control
equally important
Control more important
12
SUB-SYSTEMS OF CONTROL
PROCESS : Formal
Formal nfrastructure
Organization structure
Patterns of autonomy
Formal Mgt style
and culture
Autocratic / democratic
Formal values and beliefs
Formal reward system
Formal promotion policy
Monetary incentives
Formal co-ordination /
co-operation
Committees
Formal meetings/conference
Formal conflict resolution
techniques
Formal control
Process
13
SUB-SYSTEMS OF CONTROL
PROCESS : nformal
nformal control is :
1. Ad- hoc ( as and when required)
2. Based on intuition, experience,
rationalization
3. No specific procedure.
14
SUB-SYSTEMS OF CONTROL
PROCESS : nformal
nformal nfrastructure
nformal Organization
Structure (groups)
Networks
nformal Mgt style
and culture
Customs / traditions
Prevailing individual styles
nformal reward system
Appreciation
Recognition / Status
nformal co-ordination /
co-operation
nformal gatherings / outings
nformal communication
nformal conflict resolution
techniques
nformal
control
Process
15
Cybernetic Paradigm of control
Process
Cybernetics is the theory of communication and
control
Elements :
1. Sensors collection of data formally/informal
2. Perception nterpretation of data
3. Factual premises belief about performance
4. Value premises what is desired to be achieved
5. Behavioural repetoire - alternatives
1
Management Control Systems
Cybernetic Paradigm & control
Environment Decision maker Goals
Value
premises
Factual
sensor Perception premises
Comparator
feedback
Behavior choice
Effector Behavioral
Repertoire
1
Cybernetic Paradigm & Control Process
Elements of a control process
1. Set goals and performance measures
2. Measure achievement
3. Compare achievement with goals
4. Compute variances
5. Report variances
. Determine cause(s) of variances
. Take action to eliminate variances
. Follow-up to ensure goals are met
1
Attributes of good control system
(MCS)
1. A positive view of the control process
2. Objectives should be expressed in measurable terms
3. Objectives should have focus and should not be too many in numbers
4. Controls should seek balance among various aspects
5. No dual assignment of responsibility
. True control is achieved by comparing projected performance against the
standard
. Early warning predictors should be tracked
. Use of sampling
. Establish acceptable range of variation
10. Control by exception
11. Confirm severity of a problem; cause of the problem should be identified;
results of the corrective action should be monitored
12. Developing a discerning view of control
1
&nderstanding strategies Concept
of strategy
Strategy describes the general direction in
which an organization plans to move to attain
its goals
Strategy formulation Environmental analysis
pointing out opportunities and threats,
simultaneous internal analysis revealing
strengths and weaknesses, matching core
competencies with external opportunities and
deciding a strategy
20
&nderstanding strategies
Corporate and unit-level strategies
Corporate strategy is concerned more with where to compete
than how to compete; the latter is a matter of unit level
strategy
Classification into 3 types for corporate level
Single industry
Related diversification
Unrelated diversification
Research has shown that, on average, related diversified
firms perform the best, single industry perform next best, and
unrelated diversified firms do not perform well over the long
run. This is because Corporate HQ, in the related diversified
firm, has the ability to transfer core competencies from one
business unit to another.
21
&nderstanding strategies
Corporate level strategies-
summary of 3 generic strategies
Type Single industry Related diversified Unrelated diversified
Pictorial representation
Features Competes in only one
industry
Sharing core
competencies across
businesses
Totally autonomous
businesses in different
markets
Examples Wrigley, Ford Motor P & G, Gillete General Electric
22
&nderstanding strategies
Unit-level strategies
Business unit strategies depend on two interrelated aspects
1) its mission & 2)its competitive advantage
There are a couple of famous models to fix the BU mission
One is the BCG Model and the other one is the GE Planning
Model
These models basically try to match the industry and the unit
in terms of opportunities/threats and strengths/weaknesses
Control system designers need to know ,9 is the BU
mission but not necessarily the BU has chosen that
mission
23
&nderstanding strategies
Business unit mission BCG Model
"Star
HoId
"Question mark
BuiId
"Cash cow
Harvest
"Dog
Divest
Market growth
rate
ReIative Market share
High Low
High Low
High
Low
High
Low
24
&nderstanding strategies
Business unit mission GEModel
ndustry
Attractiveness
Business strength
High
Average
Low
Strong Average Weak
Winners
nvest
Strongly
Winners
nvest
Selectively
Profit producers
Earn/
Protect
Winners
nvest
Selectively
Avg bus
Earn/
Protect
Losers
Harvest/
Divest
? Marks
Dominate/
Delay/Divest
Losers
Harvest/
Divest
Losers
Harvest/
Divest
The Portfolio matrix &
Recommended Business Strategies
25
&nderstanding strategies Gaining
competitive advantage
3 interrelated questions should be considered
What is the industry structure?
How should the BU exploit it?
What will be the basis of the BU's competitive advantage?
Michael Porter has suggested 2 analytical
approaches to develop & sustain competitive
advantage
ndustry analysis & Value chain analysis
2
&nderstanding strategies ndustry
structure analysis
Porters 5 forces model
Threat of
New
Entrants
ntensity of
ndustry
Competition
Threat
From
Substitutes
Suppliers
Bargaining
Power
Customers
Bargaining
power
2
&nderstanding strategies ndustry
structure analysis
Porters 5 forces model
3 observations with regard to industry analysis
More powerful the 5 forces less profitable an industry is
likely to be; conversely in high profitable industries these 5
forces are not strong
Depending on relative strength of the 5 forces the strategic
issues would emerge and would differ from industry to
industry
Understanding the nature of each force helps the firm to
formulate effective strategies
2
&nderstanding strategies
Gaining competitive advantage Porters model
The 5 force analysis is starting point to
develop competitive advantage as it helps
understanding external environment
Response from the firm can be on two fronts
low cost & differentiation
A firm should strive to achieve cost leadership
and/or product differentiation to gain
competitive advantage
2
&nderstanding strategies
Gaining competitive advantage Porters model
Cost-cum-
Differentiation
advantage
Differentiation
advantage
Low cost
Advantage
Stuck-in-
The-middle
ReIative
Differentiation
position
ReIative Cost Position
Superior nferior
Superior
nferior
30
&nderstanding strategies
Gaining competitive advantage
Value chain analysis
Value chain disaggregates the firm into its
distinct strategic activities
t is a complete set of activities involved in a
product beginning with extraction of raw
material and ending with after sales service
The VC framework is a method of breaking
down the chain into specific activities in order
to understand behavior of costs and sources
of differentiation.
31
&nderstanding strategies
Gaining competitive advantage
Value chain analysis
Product
Development
Manufacturing
Marketing
And Sales
Services/
Logistics
Support Activities : - Finance, Human Resources, T
32
&nderstanding strategies
Gaining competitive advantage
Value chain analysis
For each value added activity, key questions are
1. Can we reduce costs in this activity, holding value (revenues)?
2. Can we increase value (revenues) in this activity holding costs
constant?
3. Can we reduce assets in this activity holding costs and value
(revenues) constant?
4. Most importantly can we do 1, 2 & 3 simultaneously?
By systematically analyzing costs, revenues and assets
in each activity, BU can achieve cost-cum-differentiation
advantage.
33
oaI Congruence
Central purpose of a MCS is to ensure a high level of
goal congruence
n a goal congruent process actions people are led to
take in accordance with their perceived self-interest are
also in the best interest of the organization
n evaluating any management control practice, 2 most
important questions are
What actions does it motivate people to take in their own self-
interest?
Are these actions in the best interest of the organization?
34
oaI Congruence-
InfIuencing factors
NFORMAL FACTORS
External
Work ethic overall attitude of the working community
nternal
Organization culture
Management style
nformal organization
Perception and Communication
FORMAL CONTROL SYSTEM
MCS
Rules Physical controls, Manuals, System safeguards etc
35
Goal congruence-
Formal MCS
Responsibility
Center
performance
Strategic
Planning
Goals &
strategies
Rules
Other
nformation
Budgeting
Report
Actual v/s
Plan
Was
Performance
Satisfactory?
Revise Revise
Corrective
action
Measurement
Feedback
Communication
Reward (feedback)
Yes
No
3
Types of organizations -
A. FunctionaI organization
CEO
Manufacturing
Manager
Marketing
Manager
Staff
Manager
Plant 1
Manager
Plant 2
Manager
Plant 3
Manager
Region A
Manager
Region B
Manager
Region C
Staff Staff
3
Types of organizations -
B. Business unit organization
CEO
Manager
BU X
Manager
BU Y
Staff
Plant
Manager
Marketing
Manager
Plant
Manager
Marketing
Manager
Staff Staff
Manager
BU Z
Plant
Manager
Marketing
Manager
Staff
3
Types of organizations -
C. Matrix organization
Chief Executive Officer
Staff
Function A
Manager
Function B
Manager
Function C
Manager
Project X
Manager
Project Y
Manager
Project Z
Manager
3
rganization Structure & impIications
for system design
Designers might be tempted to recommend the
BU structure because of the apparently clear-cut
profit responsibility. However they should not
forget other considerations.
The system designer must always fit the system
to the organization rather than the other way
around
40
Functions of the Controller
Design and operate information and control systems
Preparing financial statements and reports
Preparing and analyzing performance reports
Compiling the annual operating plan (budget)
Supervising internal audit and accounting control
procedures
Developing subordinates
41
Nature of Controllers role
Relation to line organization
Controllership is a staff function
Controller designs system, its use is done by line
managers
Decisions made by controllers are primarily those that
implement policies decided by line management
Controllers play important role in preparation of
strategic plans and budgets.
They are also called to scrutinize reports prepared by
line managers
42
Nature of Controllers role
The BU Controller 2 possible relationships
CC CC
BUM BUM
BUC BUC
CC Corporate Controller, BUM - Business unit manager & BUC Business unit controller
43
Responsibility Centers - Basic
Responsibility Centers (RC) constitute the
structure of a control system and the assignment
of responsibility to organizational units must
reflect the organizations strategy.
RC is an organization unit that is headed by a
manager who is responsible for its activities
RC exists to accomplish some purpose that are
called as its objectives
44
Responsibility Centers Core operation
RC receives inputs. Using capital and assets it converts
this input in an output, that can be either tangible (goods)
or intangible (services)
Management is responsible for ensuring the optimum
relationship between inputs and outputs
Work
nputs Outputs
Resources used
Measured by "cost
Goods or services
45
Responsibility Centers Measuring inputs
and outputs
Cost is a monetary measure of the amount of
resources used by a RC
t is much easier to measure the cost of input
than to calculate the value of outputs. For
example, a college can easily measure how
many students have passed but it is difficult to
measure how much education each of them
acquired
4
Responsibility Centers Measuring inputs
and outputs Efficiency and Effectiveness
Efficiency and effectiveness are the 2 performance
measurement criteria for RC
Efficiency is a ratio of input to output doing things right)
Effectiveness is determined by the relationship between
a RC's output and its objectives doing right things)
These 2 e's are not mutually exclusive; each RC has to
be efficient and effective as well
Profit as a measure of performance measures both
efficiency and effectiveness because profit is the major
objective (effectiveness) and it is also the difference
between output and input (efficiency)
4
Responsibility Centers - Types
nputs
Work
Outputs
(monetary value) (physical)
Optimal relationship
Can be established
Example Manufacturing Function
Above is the relationship between input and output in case of
An IRD PS CTR
Characteristics : - 1. nput can be measured in monetary terms
2. Output can be measured in physical terms
3. Optimum relationship between amount of input
for one unit of output can be established
4
Responsibility Centers - Types
nputs
Work
Outputs
(monetary value) (physical)
Optimal relationship
cant be established
Example R & D Function
Above is the relationship between input and output in case of
An DISCRTIARY PS CTR
4
Responsibility Centers - Types
nputs
Work
Outputs
(monetary value
only for costs
directly incurred)
(monetary value)
nputs not related to
outputs
Example Marketing Function
Above is the relationship between input and output in case of
a R'& CTR
50
Responsibility Centers - Types
nputs
Work
Outputs
(monetary value) (monetary value)
nputs are related to
outputs
Example BU
Above is the relationship between input and output in case of
a PRFIT CTR
51
Responsibility Centers - Types
nputs
Capital
employed
Outputs
(monetary value) (monetary value)
Profits are related to
capital employed
Example BU
Above is the relationship between input and output in case of
an I'STMT CTR
52
Responsibility centers difference between
engineered & discretionary expense center
Point Engineered EC Discretionary EC
Nature of expenditure Engineered costs are those for
which standards can be easily
established
Discretionary costs are those for
which standards cant be easily
established
/p - o/p relationship Optimal relationship can be
established
Optimal relationship cant be
established
Application Manufacturing function Service function
Budget preparation Budget represents unit cost of
performing task efficiently
Budget determined by the
magnitude of the job to be done
Budgetary control Difference between budget and
actual is a measure of efficiency
(since input and output optimum
relationship can be established)
Being "within budget is important
Difference between budget &
actual is not a measure of
efficiency (since input and output
optimum relationship cant be
established)
Doing the task is more important
(doesn't mean that budget is not to
be adhered; emphasis differs)
Financial control During performance More at planning stage
53
Responsibility centers difference between
Profit center & revenue center
Point Profit Center Revenue Center
Meaning A responsibility center that is
responsible for both revenues and
expenses is profit center.
A responsibility center that is
responsible for revenues but not for
the expenses is revenue center.
/p - o/p relationship Optimal relationship is established
between value of output (revenue)
and value of input (expense)
Optimal relationship cant be
established between value of
output (revenue) and value of input
(expense)
Application Business units Marketing offices
Goal Maximizing profit by controlling
both revenue and expenses
Maximizing revenue
54
Responsibility Centers
General control characteristics of Discretionary EC's
Budget preparation based on the magnitude of the task
to be done
Tasks divided into 2 continuing and special
MBO technique used
ncremental Budgeting
ZBB review
Cost variability not in short run
Type of Financial control planning important
Measurement of performance Doing the planned work
is important
55
Responsibility Centers
Administrative and Support Centers control problems & budget preparation
2 important reasons for control problems
Difficulty in measuring output
Lack of goal congruence
Budget preparation
Section covering costs of "being in business
Discretionary activities
Justification for proposed increases in budget
5
Responsibility Centers
R&D centerscontrol problems, budget preparation & performance measurement
2 important reasons for control problems
Difficulty in relating results to output
Lack of goal congruence
Budget preparation
One should understand R & D continuum
Basic research applied research development production engineering
testing
No scientific way of determining R & D budget
Some companies use % of revenue for R&D budget
For basic research, budget can be a lump-sum amount
For testing, number of testing can be a budget base
Performance measurement
Monthly/quarterly reports on budgeted and actual expense
2 types of financial reports one reporting total R & D expense, the other
reporting it separately for each RC
Effectiveness of research is informed though progress reports ( these are not
financial reports)
5
Responsibility Centers
Marketing Centers activities and related controls
Logistic Activities
These RCs are similar to expense centers in
manufacturing plants and can be safely called as
engineered expense centers
Marketing activities control problems
Measuring output is easy, evaluating effectiveness is difficult
because of influence of "other factors on sales
Marketing expenses are often budgeted at % of sales not
because sales volume cause marketing expenses but
because it gives larger affordability
"Order-getting costs are that way discretionary and controls
cannot be easily standardized
5
Responsibility Centers
Profit Centers
2 conditions for delegating profit responsibility
Access to relevant information needed for decision
making
Measurement of effectiveness of the trade-offs made
by managers should be possible
5
Responsibility Centers
Profit Centers
Advantages of profit centers
mproved quality of decisions
Quick decisions
HQ relieved from day-to-day decision making
Effective use of imagination and initiative
Training ground for managers
Enhanced profit consciousness
nformation on profitability of individual units
They respond well to improvement initiatives since
their output is so readily measurable
0
Responsibility Centers
Profit Centers
Difficulties with profit centers
Loss of control
Reduced quality of decisions
ncreased friction amongst units and HQ
n-house competition may get substituted for
cooperation
Additional costs
Non-availability of competent GMs
Too much emphasis on short-run profitability
1
Responsibility Centers
Profit Centers
Measurement of performance Management
performance and economic performance
Measures of economic performance measures
of profitability
Contribution margin
Direct profit
Controllable profit
PBT
PAT
2
Responsibility Centers
nvestment centers
Difficulties in measuring assets employed
Cash- actual cash held at HQ much less than that would have been required as
an independent company
Receivables whether to include at SP or COGS?
nventories how to deal with creditors?
Working Capital in general treatment of current liabilities 2 extreme treatments
Fixed Assets which value to consider? Problems with depreciation
Leased assets preference for leased assets over owned assets so as to reduce
capital charge
dle assets exclusion from computation of assets employed
ntangible assets Capitalization of items like R & D and its repercussion on EVA
if capitalized, very less incentive to cut such expenditure as it would only reduce
a part of if by way of capital charge
3
Responsibility centers Performance
measures of an nvestment center RO v/s EVA
Point Ro EVA
Meaning Ro is the comparison of the
income generated with the
assets employed.
EVA is the residual profit after
taking into account the capital
charge.
Calculation Ro is a ratio. Numerator is
income and denominator is
assets employed.
EVA is a value. t is found out
by subtracting capital charge
from Profit after Tax.
Superiority Conceptually EVA is superior
than Ro
Conceptually EVA is superior
than Ro
Popularity As per one survey carried by
Vijay Govindarajan of Fortune
1000 companies, Ro is more
popular than EVA
As per one survey carried by
Vijay Govindarajan of Fortune
1000 companies, Ro is more
popular than EVA
Simplicity of calculation Ro is comparatively easy to
calculate
EVA is a bit difficult to
calculate given the problems
with calculating the capital
charge
4
Responsibility centers
Performance measures of an nvestment center Ro
Advantages of Ro
t is a comprehensive measure anything that
affects the financial statements affect the Ro.
Simple to calculate, easy to understand and
meaningful in an absolute sense
t is a common denominator that may be applied
to any organizational unit responsible for
profitability regardless of size or type of business
5
Responsibility centers
Performance measures of an nvestment center Superiority of EVA over Ro
4 points
EVA offer same profit objective for comparable investments, unlike Ro which may make
a manager reluctant to accept lower Ro (20%) opportunities than the current Ro (30%)
levels despite being more than CoC (10%). Ro creates a bias towards little or no
expansion in high-profit business units while at the same time low-profit units are making
investments at rates of returns well below those rejected by high-profit units.
Units can increase Ro by actually decreasing its overall profits. This thing will not
happen if EVA is measured.
Different interest rates can be used for different types of assets. For more riskier assets,
higher rates of costs of capital can be used. With Ro this is not possible.
EVA as compared to Ro has a stronger positive correlation with changes in a
company's market value. To induce managers at the BU level to enhance shareholders
value, managers can be told to create and grow EVA.

Strategic Planning Process

1. Reviewing and updating the strategic plan from
last year
2. Deciding on assumptions and guidelines
3. First iteration of the new strategic plan
4. Analysis
5. Second iteration of the new strategic plan
. Final review and approval

Budgetary control
Budget preparation process
Organization
Budget Department
Budget Committee
ssuance of guidelines
nitial budget proposal
Negotiation
Review and approval
Budget revisions
Procedures that provide for systematic updation
Procedures that allow revisions under special circumstances

Budgetary control
Types of budgets & importance
Types
Fixed and flexible budgets
Functional budgets
ncremental & Zero Base budgets
Annual, quarterly, monthly and weekly budgets
mportance
t translates the strategic plan into an annual operating plan with
reasonable details
t provides a basis for translating the strategic decisions into actions
during the forthcoming year
t provides a good basis for controlling the actuals. Variances can be
analyzed and corrective actions can be taken.
t relieves the top management from day-to-day intervention and
botheration as it can look only into activities that are outside the budget

Budgetary control
Zero based budgeting
n contrast to incremental budgeting, ZBB starts the budget
from the scratch (de novo)
Managers are required to justify the items with proper
bases
Thus ZBB is an intensive review of the budgetary
allocations
Certain basic questions are asked like should the activity
under review be performed at all? What should the quality
level be?
t is a good way of doing budgeting and can eliminate a lot
of waste. However it demands some time and energy.
0
Transfer Pricing - basics
f 2 or more profit centers are jointly responsible for
developing, manufacturing and marketing of a product they
should share the revenue when the product is finally sold.
The transfer price is the mechanism for distributing this
revenue.
Objective of TP
To provide each BU with information to determine optimum
tradeoffs between company costs and revenues
To induce goal congruent decisions
To measure economic performance of BU's
t should be simple to understand and easy to administer
1
Transfer Pricing - methods
Fundamental principle is that the TP should be similar to
the price that would have been if the product was sold in
outside market.
Methods
Cost based
Marginal Costs plus markup
Standard cost plus mark up
Actual cost plus mark up
Full cost plus mark up
2
Transfer Pricing - methods
Market price based
Equal to market price
Less than the market price
More than the market price
Profit sharing : Profit of company distributed between
the departments
Negotiated price
3
Transfer Pricing - methods
Two-step pricing
nstead of building the fixed cost and profit
element on a unit level as a part of the TP, the
same is charged to the transferee unit on a
periodical basis
Thus the two-step pricing would mean the first
step to charge the variable cost as the TP and in
the second step a lump-sum charging of the fixed
cost and the profit.
This method helps the transferee division to
make appropriate short-term marketing decisions
4
Transfer Pricing - methods
Dual Pricing (2 sets of prices)
Crediting transferor with outside sales price
But charging the transferee with total standard costs
Difference to be charged to a HQ account that will get
eliminated at the time of consolidation
This method is used when there are conflicts between the
transferor and transferee division and any other method is not
working
5

Cost based
Market Price
egotiated
price/other
Transfer Pricing - methods
Comparative usage of the TP methods by fortune 1000
Companies as per survey by Vijay Govindarajan

Performance Measurement
Balanced Score Card
Developed by Kaplan and Norton
Provides a mechanism for linking strategy to action
creates awareness of the KRA's
Translates strategy into measurable parameters
A comprehensive measure of performance
Four perspectives to measure performance
Customer
nternal
nnovation and learning
Financial
For each of this perspective appropriate performance
measures should be developed

Performance Measurement Balanced

Score Card Difference between financial and non-financial measures
Point Financial measures Non-financial measures
Meaning These are performance measures
that are expressed in terms of
financial parameters
These are performance
measures that are not
expressed in terms of financial
parameters
Examples Return on nvestment, EVA, Profit
Margin etc
Customer satisfaction,
Employee Morale etc
Degree of accuracy in
measurement
These measures can be quite
accurately measured
t is quite difficult to measure
and quantify these measures
Degree of attention Since these measures are easily
quantifiable and comparable,
practically they are widely applied
Since these measures are not
easily quantifiable and
comparable, practically they
are not that widely applied.
However with the advent of
BSC these measures are also
getting importance.

Activity Based Costing (ABC)-

Nature, Benefits
ABC tries to allocate costs on rational basis instead of ad-hoc basis like
labor hours and machine hours or percentage of labor cost/material cost
Cost drivers are identified. These are real causes of cost incurrence. For
example in purchasing activity, number of purchase orders is the cost
driver it causes costs to happen in the purchase department
The concept is quite useful given the fact that these days OHs are
significant elements of costs and the number of products produced by a
firm have increased. ABC gives more accurate costing of the products as
compared to traditional methods.
nformation provided by ABC can be used in policies relating to: -
Full-line versus focused product line
Product pricing
Make or buy decision
Product mix decisions
Elimination of non-value-added activities etc

Activity Based Costing (ABC)-

comparison with traditional costing
Point Traditional Costing ABC
Key concepts Cost Center, basis of
allocation
Activity, cost driver
Basis of OH allocation Machine Hour, Labor
Hour etc
Based on actual
consumption of resource
measured through
different cost drivers
Accuracy in costs Less accurate product
costing
More accurate product
costing
Simplicity Relatively simple to use Relatively difficult to use
Suitability Lesser number of
products; OH cost
relatively less
More number of
products; OH cost
relatively high
0
MCS in service sector
Characteristics of service organizations in
general
Absence of inventory buffer
Difficulty in controlling quality
Labor intensive
Multi-unit organizations
The above characteristics peculiar to service
sector are the causes of differences in the nature
of MCS that is used in the Manufacturing Sector
1
MCS in service sector
Professional service organizations
Special Characteristics
Goals
Professionals
Output and input measurement
Small size
Marketing
MCS
Pricing
Profit Centers and TP
Strategic planning and budgeting
Control of operations
Performance measurement and appraisal
2
MCS in service sector
Financial service organizations
Special Characteristics
Monetary assets
Time period for transactions
Risk and reward
Technology
MCS
General principles of MCS apply but they need to be
adapted to the above mentioned special
characteristics
3
MCS in service sector
Health Care Organizations
Special Characteristics
Difficult social problem
Change in mix of providers
Third-party payers
Professionals
mportance of quality control
MCS
General principles of MCS apply
Because of high cost of equipments, strategic planning process is
important
Annual budget preparation is conventional
Huge quantity of information are available quickly for controlling of
operating activities
Financial performance is analyzed by comparison of revenues and
expenses with budgets
4
MCS in service sector
Nonprofit Organizations
Special Characteristics
Absence of the profit measure
Contributed Capital
Fund Accounting
Governance
MCS
Product pricing
Strategic planning and budget preparation
Operation and evaluation
5
Auditing as a control tool
Auditing is a control tool that ensures through checking,
verification of documents and evidence that the plans/policies of
the management are implemented as desired
Many big organizations have a special internal audit department
that carries internal audit to see to it that the internal controls and
checks as set by the management are being adhered to
There are different types of audits like financial audit, internal
audit, cost audit, management audit etc. Purpose of these audits
are different.
An audit system makes the staff more vigilant. Audits like
concurrent audit in banks actually act a continuous control
system. Findings from an audit can help strengthen future
controls.

Auditing as a control tool Different

types
Point Financial Cost nternal Management
Purpose To verify trueness
and fairness of
financial statements
To check that the
cost accounting
plan is adhered
to
To check that the
internal checks
and controls are
being observed
To investigate
into specific
issues or check
effectiveness of
corporate
planning
Auditor Qualified CA Qualified CWA Not necessarily
CA
Not necessarily
CA
Appointment By shareholders By Government
& Management
By Board of
Directors
By Management
Nature Mandatory as per
statute. Also known
as statutory audit.
Ordered by the
Central Govt.
Otherwise not
mandatory.
Usually optional. Optional.
Emphasis Compliance of
Accounting
Standards in
preparation and
Efficient use of
resources,
control over costs
Propriety/judiciou
sness of
decisions,
detection of
Effectiveness of
management
functions

Management Audit
Management Audit as the name suggests is the audit of the
management itself, that is, the management auditor judges the
effectiveness of the functions performed by the management.
The Management Auditor will check the planning, decision
making, controlling and other such functions performed by the
management.
Management Auditor generally is a senior person with good all-
round knowledge and experience.
He uses tools like questionnaire to gather audit evidence.
f used properly Management Audit can be a good control tool to
provide feedback to the management about its own
effectiveness.