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Home Assignment for Management Control Systems

1.  Case on Racy Jones

For “Racy” Jones, attendance at State University will be possible only with financial help. The

university is 160 miles from Racy’s home, so there will be living expenses as well as other costs.

Racy’s father died one year ago, and the two brothers eat up most of the meagre income that their

mother can provide. Fortunately, Uncle Kirby offers to help – if Racy is really serious about

professional education.

Racy’s S.A.T. scores are quite good – much more impressive, in fact, than his high school grades.

Racy’s attention has vacillated between track ( the source of his nickname), hi-fi, love and parental

reform – with book learning coming in big gulps just before tests. The overall record, however, is

good enough to secure admission to State University next fall.

“My father’s death made me take another look at what I wanted to do,’ says Racy. “Running around

the track is fun for me, but its no way to earn a living. So at State University I guess I’ll have to major

in business administration, with only a minor in physical education. Besides, that fits in with Uncle

Kirby’s talk of ‘facing life’s responsibilities,’ and he is going to pay most of the bills the first year.” 

Uncle Kirby, Minister of the Gospel, has a church 200 miles from State University. He has young

children of his own and helping Racy will put an unexpected strain on his family finances.

Consequently Uncle Kirby is loath to see his money “wasted.” 

What little Uncle Kirby knows about Racy’s behaviour to date does not inspire him with confidence.Instead he wants assurance that his money is well spent.

Questions

1.  Assume that Uncle Kirby has asked you for advice on the kinds of controls he should

establish on Racy’s activities at State University. What would you recommend to Uncle

Kirby?

2.  In framing your answer, consider each of the 12 steps for establishing managerial controls

discussed during the session on design of mgmt control systems

3.  Please respond in not more than 1 to 1.5 pages

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Budget data (‘000s) J K L

1987 budgted profits 90 55 50

1987 budgeted current assets 100 200 300

1987 budgeted fixed assets 400 400 500

Actual data ($000s) J K L

1987 profits 80 60 50

1987 current assets 90 190 350

1987 fixed assets 400 450 550

2.  The JKL Company uses EVA for measuring divisional performance. The company charges

each division 5% return on its average current assets and 10% return on its average fixed

assets. Calculate ROI objective and actual ROI for each division in 1987; also calculate EVA

objective and actual EVA for each division for 1987 as well

Refer to the budgeted profits and assets of the 3 divisions of the JKL company provided

above. Listed below are 4 mgmt actions together with the financial impact of these actions

For each of these situations calculate impact on budgeted ROI and EVA for each division.

Situation 1: An investment in fixed assets is made – this action increases the average fixed assets by

$100,000 and profits by $10,000

Situation 2: An investment in fixed assets is made. This action increases the average fixed assets by

$100,000 and profits by $7000

Situation 3: A program to reduce inventories is institutionalized – as a result inventories are reduced

by $50,000. Increased costs and reduced sales resulting from the lower inventory levels reduce

profits by $5000

Situation 4: A plant is closed down and sold. Fixed assets are reduced by $75,000 and profits (from

reduced sales) are decreased by $7,500

What conclusions can you draw from the above situations?