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Course : Masters in Business Administration
(MBA 4 Sem)
Subject : Management Control Systems
Answer the following question.
Q1.Describe and illustrate significance of
human behavior patterns in management control. (10marks)
Answer: Management control systems influence human behavior. Good management
control systems influence behavior in a goal congruent manner; that is, they ensure
that individual actions taken to achieve personal goals also help to achieve
the organization's goals. The concept of goal congruence, describing how it is
affected both by informal actions and by formal systems.
Senior management wants the
organization to attain the organization's goals. But the individual members of
the organization have their own personal goals, and they are not necessarily
consistent with those of the organization. The
Q2.Explain Flexible Budgeting. (10marks)
Answer:
A
flexible budget adjusts to changes in actual revenue levels. Actual revenues
or other activity measures are entered into the flexible budget once an accounting period has been completed, and
it generates a budget that is specific to the inputs. The budget is then
compared to actual expenses for control purposes. The
steps needed to construct a flexible budget are:
1.
Identify all fixed
costs and segregate them in the budget model.
2.
Determine the extent to which all variable
costs change as activity measures change.
3.
Create the budget model, where fixed costs
are “hard coded” into the model, and variable costs are stated as a percentage
of the relevant activity measures or as a cost per unit of activity measure.
4.
Enter actual activity measures into the model
after an accounting period has been completed. This updates the variable costs
in the flexible budget.
5.
Enter the resulting flexible budget for the
completed period into the accounting
system for comparison to actual expenses.
This approach varies from the more common static budget, which contains nothing
but fixed amounts that do not vary with actual revenue levels. Budget versus
actual reports under a flexible budget tend to yield variances that are much more
relevant than those generated under a static budget, since both the budgeted
and actual expenses are based on the same activity measure. This means that the
variances will likely be smaller than under a static budget, and will also be
highly actionable.
A flexible budget can be created that ranges in level of
sophistication. Here are several variations on the concept:
·
Basic flexible budget. At its simplest, the
flexible budget alters those expenses that vary directly with revenues. There
is typically a percentage built into the model that is multiplied by actual
revenues to arrive at what expenses should be at a stated revenue level. In the
case of the cost
of goods sold, a cost per unit may be used, rather than a
percentage of sales.
·
Intermediate flexible budget. Some
expenditures vary with other activity measures than revenue. For example,
telephone expenses may vary with changes in headcount. If so, one can integrate
these other activity measures into the flexible budget model.
·
Advanced flexible budget. Expenditures may
only vary within certain ranges of revenue or other activities; outside of
those ranges, a different proportion of expenditures may apply. A sophisticated
flexible budget will change the proportions for these expenditures if the
measurements they are based on exceed their target ranges.
·
In short, a flexible budget gives a company a
tool for comparing actual to budgeted performance at many levels of activity.
Advantages of Flexible Budgeting
The flexible budget is an appealing concept. Here are several
advantages:
· Usage in variable cost
environment. The flexible budget is especially useful in businesses where costs
are closely aligned with the level of business activity, such as a retail
environment where overhead can be segregated and
treated as a fixed cost, while the cost of merchandise is directly linked to
revenues.
· Performance measurement.
Since the flexible budget restructures itself based on activity levels, it is a
good tool for evaluating the performance of managers - the budget should
closely align to expectations at any number of activity levels.
· Budgeting efficiency.
Flexible budgeting can be used to more easily update a budget for which revenue
or other activity figures have not yet been finalized. Under this approach,
managers give their approval for all fixed expenses, as well as variable
expenses as a proportion of revenues or other activity measures. Then the
budgeting staff completes the remainder of the budget, which flows through the
formulas in the flexible budget and automatically alters expenditure levels.
These points make the flexible budget an appealing model
for the advanced budget user. However, before deciding to switch to the
flexible budget, consider the following countervailing issues.
Disadvantages of Flexible Budgeting
The flexible budget at first appears to be an excellent way
to resolve many of the difficulties inherent in a static budget. However, there
are also a number of serious issues with it, which we address in the following
points:
· Formulation. Though the flex budget is a
good tool, it can be difficult to formulate and administer. One problem with
its formulation is that many costs are not fully variable, instead having a fixed cost component that must be
calculated and included in the budget formula. Also, a great deal of time can
be spent developing cost formulas, which is more time than the typical
budgeting staff has available in the midst of the budget process.
· Closing delay. A flexible budget cannot be
preloaded into the accounting software for comparison to the financial
statements. Instead, the accountant must wait until a financial
reporting period has been completed, then input revenue and other activity
measures into the budget model, extract the results from the model, and load
them into the accounting software. Only then is it possible to issue financial
statements that contain budget versus actual information, which delays the
issuance of financial statements.
· Revenue comparison. In a flexible budget,
there is no comparison of budgeted to actual revenues, since the two numbers
are the same. The model is designed to match actual expenses to expected
expenses, not to compare revenue levels. There is no way to highlight whether
actual revenues are above or below expectations.
· Applicability. Some companies have so few
variable costs of any kind that there is little point in constructing a
flexible budget. Instead, they have a massive amount of fixed overhead that does not vary in
response to any type of activity. For example, consider a web store that
downloads software to its customers; a certain amount of expenditure is
required to maintain the store, and there is essentially no cost of goods sold,
other than credit card fees. In this situation, there is no point in
constructing a flexible budget, since it will not vary from a static budget.
In short, a flexible budget requires extra time to
construct, delays the issuance of financial statements, does not measure
revenue variances, and may not be applicable under certain budget models. These
are serious issues that tend to restrict its usage.
Q3.What do you understand by Investment
Centers? Explain the methods used for measuring investment centre performance. (10marks)
Answer: Investment centers are decentralized divisions
or sub-units for which the manager has
maximum discretion in determining not only short-term operating decision on
product mix, pricing and production methods, but also level and type of
investment. An investment center extends the profit center concept in that the
Q4.Explain the following models and highlight
their usefulness in formulating business unit strategies : The BCG Model. (10marks)
Answer: The Boston
Consulting group’s product portfolio matrix (BCG matrix) is designed to help
with long-term strategic planning, to help a business consider growth
opportunities by reviewing its portfolio of products to decide where to invest,
to discontinue or develop products. It's also known as the Growth/Share Matrix.
The Matrix is divided into
4 quadrants based on an analysis of market growth and relative market share, as
shown in the diagram below.
Q5. Explain the boundary conditions in the
context of profit centre’s. Also explain the process of performance measurement
of profit centers. (10marks)
Answer: In companies
where each of the principal function of manufacturing and marketing is performed by seperate organizational
units, these type of compnies (organizations) are known as functional
organizations.As the companies expand and mature over a period of time offering
diverse products and services, it becomes difficult for top management to pay
equal attention to all products and services. In this scenario
Q6.Consider a Retail Outlet. What should be
the objectives of Management Control system for the retail outlet? Examples
would strengthen your views. (10marks)
Answer:Modes of
entry into an international market are the channels which your organization
employs to gain entry to a new international market. This lesson considers a
number of key alternatives, but recognizes that alteratives are many and
diverse. Here you will be consider modes of entry into international markets
such as the Internet, Exporting, Licensing, International Agents,
Q7.Describe the need for MIS in a business
organization focusing on Management Control System. (10marks)
Answer: Based upon the type
of need it serves, an MIS is an organizational method of providing past,
present, and projected information related to internal operations and external
intelligence. It supports the planning, control, and
Q8. Difference between Responsibility Centers:
Revenue and Expense Centers. (10marks)
Answer: Revenue centers, expense centers and
profit centers are elements of a system to control and measure the performance
of different units or departments of a business, according to Harvard Business
School. Revenue centers generate revenue through sales and marketing
activities. Expense centers are responsible for
Dear students, get assignments and Case studies get
solved by professionals
Do send your query at :
help.mbaassignments@gmail.com
or call us at :08263069601
