MCS UNIVERSITY PAPER SOLUTION 2009

7/29/2019 MCS UNIVERSITY PAPER SOLUTION 2009

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Q-1: Explain briefly the various stages of management control process

citing salient features of each.

Ans: Management Control is the process by which managers influence other

members of the organization to implement the organizations strategies.

Following are the various stages of Management Control Process:

1) Programming

2) Budgeting

3) Execution

4) Evaluation

Control process in the of non-operating activities such as project consist of the

above phases except that two phases, programming and budgeting are combined

into a single activity.A project generally has a single objective and on-goingoperating activities have multiple objective.A project comes to an end when theobjective is accomplished.

The Stages are discussed below:

1) Programming: Programming is defined as making programs by top/seniormanagement in terms of organization, goals and strategies and deciding the fund

and resources needed to accomplish the programs.Programs can be made aboutdevelopment of new products, research and development activities, merger

takeover, and other activities that are not related much with existing product

lines.

In service organizations, such as a hotel, chain management may draw programs

for each hotel on each region where the hotels are to be set up.

Programming is a long rang plan, covering period of approximately five future

years. The reason is that if programming is made for shorter periods, the result

and benefits of programming cannot be realized within this period. Some

organization like public utilities, prepare long rang plans for even a periods of

twenty years. Because of relatively long time plan, only rough estimates are

possible for revenues, expenses and capital expenditure.


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Following is the Criticality of Programming:

a) The top management is convinced that programming is very important.

Otherwise programming is likely to become a staff exercise that has little

impact an actual decision making.

b) The Organisation is relatively a large and complex. In small, simple

organization, an informal understanding of an organizations future direction is

adequate for making decision about resources allocation, which is the principle

purpose of repairing programme.

c)Considerable uncertainty about the future exists in the organization, butorganization has the flexibility to adjust to change the circumstances.Inrelatively stable organization, a program may be unnecessary; the future issufficiently like the past so that the program would be only an exercise in

extrapolation.If the future is so uncertain that reasonably reliable estimatescannot be made, preparation of formal programme is a waste of time.

2) Budgeting: Budgeting is formal financial plan for each year. It is known as

short range plan. Itis a technique of expressing revenues, expenses, physicaltarget like production and sales, profit, asset and liabilities usually for periods of

one future year.

Budget has functions of motivating manager, coordinating activities,

communicating to persons within an organization, providing standards for

judging actual performance and acting as a control tool.

3) Executing: After the budget preparation, budgeting is used as tool for

coordinating the action of individuals and departments within the organization.In fact within the execution phase, task control is done to ensure the action and

performance match with the end desired result.While managers goals is toachieve budgeted targets, however compliance to budget is not necessary if the

plans given in the budget are found as not the best way of achieving the

objectives.Adherence to budget is not necessarily good, and departure from it isnot necessarily bad.

4) Evaluation: The management control process ends with evaluation phase in

which performance of manager is evaluated.Since it is an after event exercise,the evaluation does affect what has happened. However evaluation phase acts

like a powerful stimulus, as employees know that their performance will be


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subsequently evaluated.Also on the basis of performance evaluation, the futurebudget and plans are revised.

The management control process is behavioural, manifesting itself in interaction

among managers and between managers and their sub-ordinates.Becausemanagers differ from another in technical ability, leadership style, interpersonal

skill, experience, approach to decision making, affinity for member, and in

many other ways, the details of the management control process vary from

company to company and among the responsibility centres within company.Thedifference relates mainly to the way the control system is used.

Programming, budgeting, executing and evaluation are not needed in small,

relatively stable organizations, and it is not worthwhile in organizations that

cannot make reliable estimates about the future or in organizations whose top

management does prepare to manage in this fashion.

Q-2: What is Responsibility Centre? List and explain different types of

responsibility centres with sketches.

Ans: A responsibility centre may be defined as an area of responsibility which

is controlled by an individual.. A responsibility centre is an activity such as adepartment over which a manager exercises responsibility.Responsibility areasmay be departments (drilling or maintenance department), product lines

(chemicals or fertilizers), territories (North or South) or any other type of

identifiable unit or combination of units.The specific types of responsibilityareas depend on the nature of the firm and its activities.It is relatively easy toidentify activities with specific managers.A plant manager is in charge of a

plant and is usually responsible for producing budgeted quantities of specific

products within budgeted cost limit. A sales manager is responsible for gettingorders from customers, and so on.A responsibility centre exists to accomplishone or more purposes, termed as its objectives.The objectives of the companysvarious responsibility centres are to help implement these strategies.


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Types of Responsibility Centres:

Responsibility centres can be classified by the scope of responsibility assigned

and decision-making authority given to individual managers. The following are

four common types of responsibility centres:

1) Cost Centre: A cost or expense centre is a segment of an organization in

which the mangers are held responsible for the cost incurred in that segment but

not for revenues.Responsibility in a cost centre is restricted to cost.Forplanning purposes, the budget estimates are cost estimates; for control purposes,

performance evaluation is guided by a cost variance equal to the difference

between the actual and budgeted costs for a given period.Cost centre managershave control over some or all of costs in their segment of business, but not over

revenues.Cost centres are widely used forms of responsibility centres. Inmanufacturing organizations, the productions and service departments are

classified as cost centre.Also, a marketing department, a sales region or a salesrepresentative can be defined as a cost centre. Cost centre may vary in size from

a small department with a few employees to an entire manufacturing plant.

In addition cost centres may exist within other cost centres.For example, amanager of a manufacturing plant , with the department with a few employees

to an entire manufacturing plant organized as a cost centre may treat individualdepartments within the plant as separate cost centres, with the department

managers reporting directly to plant manager. Cost centre managers areresponsible for the costs that are controllable by them and their subordinates.

However, which costs should be charged to cost centres, is an important in

evaluating cost centre managers.

2) Revenue Centre: A revenue centre is a segment of the organization which is

primarily responsible for generating-sales revenue. A revenue centre manager

does not possess control over cost, investment in assets, but usually has control

over some of the expenses of the marketing department. The performance of a

revenue centre is evaluated by comparing the actual revenue with budgeted

revenue and actual marketing expenses. The Marketing manager of a product

line or an individual sales representative is examples of revenue centres.

For e.g. In 1999 two companies, Servico and Impac Hotel Group, merged to

create Lodgian, Inc., one of the largest owners and operators of hotel in the

United States. Lodgian reorganized itself into six regions, each with a RegionalVice-president, a regional operational manager, and a regional Director of sales


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and marketing. The sales and marketing functions were constituted as revenue

centres, with the goal to significantly improve market share.

In the highly competitive call centre industry environment of 2004, some

companies successfully differentiated themselves by converting their servicescentres into revenue centres. The revenue streams were generated through after

service sales. The call centre agents would address the calling customers

needs and requests, provide the necessary service, and then offer some type of

new product or service that would meet the customer needs.

3) Profit Centre: A profit centre is a segment of an organization whose

manager is responsible for both revenues and costs. Managers of profit centres

have control over both costs and revenues.. In a profit centre, the manager hasthe responsibility and the authority to make decisions that affect both costs and

revenues for the department or division.The main purpose of a profit centre isto earn profit. Profit centre managers aim at both the production and marketing

of a product.The performance of the profit is evaluated in terms of whether thecentre has achieved its budgeted profit. A division of the company which

produces and markets the products may be called a profit centre.Such adivisional manager determines the selling price, marketing programmes and

production policies.Profit centres make managers more concerned with findingways to increase the centres revenue by increasing production or improving

distribution methods. The manager of a profit centre does not make decisions

concerning the plant assets available to the centre. For e.g. the manager of the

sporting goods department does not make the decisions to expand the available

floor space for the department.

Mostly profit centres are created in an organization in which they sell products

or services outside the company. In some cases, profit centres may be selling

products or services within the company.For example, repairs and maintenancedepartment in a company can be treated as a profit centre if it is allowed to bill

other production department for the services provided to them. Similarly, the

data processing department may bill each of companys administrative and

operating departments for providing computer related services.

4) Investment Centre:An investment centre is responsible for both profits andinvestments. The investment centre manager has control over revenues,

expenses and the amount invested in the centre assets. He also formulates the

credit policy which has a direct influence on debt collection, and the inventory


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policy which determines the investment in inventory. The manager of an

investment centre has more authority and responsibility than the manager of

either a cost centre or a profit centre. Besides controlling costs and revenues, he

has investment responsibility too. Investment on asset responsibility means the

authority to buy, sell and use divisional assets.

For e.g. division of a large multinational Company. The division is assessed in

terms of its contribution to overall profits.

Q-3: Every SBU is a profit center but every profit center is not a SBU.

What are the conditions that should be fulfilled for an organization unit to

be converted into a Profit Center? What are the different ways to measurethe performance of Profit Centers? Discuss their relative merit and

demerits.

Ans:In the competitive market environment of todays business cannot surviveunless there is total accountability and associated responsibility and authority.

Distribution sector also needs to be treated as a business entity if financial

viability is to be achieved. The heads of the business units should be

empowered to act and be held accountable for their actions & performance.Such a concept would be achievable if each circle is declared as a profit center

with its own accounting system.The performance parameters as well asbenchmarks can be set for improvement. This would also bring in the sense of

ownership and competition, which are essential ingredients for success of a

business. The MOA stresses upon the need for declaration of a circle as a profit

center and establishing base line parameters as well as bench marks for

measuring improvements consequent upon the commercial, administrative and

technical interventions. The operating expenses of the circle, which contribute

towards the delivery cost of energy to the customer, can also be monitored more

closely as a profit center concept and measures may be initiated for reduction of

the same.

Most business units are created as profit centers since managers in charge of

such units typically control product development, manufacturing & marketing

resources. These managers are in a position to influence revenues and costs and

as such can be held accountable for the bottom line. However, a business unit

managers authority may be constrained in various ways, which ought to bereflected in a profit centers design and operation.


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Functional units

Multibusiness companies are typically divided into business units, each of

which is treated as independent profit-generating units. The subunits within

these business units however, may be functionally organized. It is sometimes

desirable to constitute one or more of the functional unitse.g., marketing,

manufacturing & service operationsas profit centers. There is no guiding

principle declaring that certain types of units are inherently profit centers and

others are not. Managements decision as to whether a given unit should be a

profit center is based on the amount of influence the units managers exercises

over the activities that affect the bottom line.

Conditions for an organization unit to be converted into a profit center

Functional organization is one which each principal manufacturing or marketing

function is performed by a separate organization unit. When such an

organization is converted to one in which each major unit is responsible for the

manufacture and marketing, the process is termed divisionalization. As a rule,

companies create business units because they have decided to delegate more

authority to operating managers. Although the degree of delegation may differ

from company to company, complete authority for generating profits is never

delegated to a single segment of the business.

Many management decisions involve proposals to increase expenses with the

expectation of an even greater increase in sales revenue. Such decisions are said

to involve expense/revenue trade-offs .Additional advertising expense is anexample. Before it is safe to delegate such a trade-off decision to a lower-level

manager, two conditions should exist:

1) The manager should have access to the relevant information needed for

making such a decision.

2) There should be some way to measure the effectiveness of the trade-offs the

managers has made.


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A major step in creating profit centers is to determine the lowest point in an

organization where these two conditions prevail.

All responsibility centers fit into a continuum ranging from those that clearly

should be profit centers to those that clearly should not, management mustdecide whether the advantages of giving profit responsibility offset the

disadvantages, which are discussed below .As with all management control

system design choices; there is no clear line of demarcation.

Different ways to measure performance of profit centers

The classification and establishment of responsibility center may help an

organization to get better performance. However, if we must determine the

performance of each responsibility center, we should take proper means to

measure and evaluate it.

Center performance measurement is the process of accumulating and reporting

data related to center performance. The performance report includes financial

data, operating statistics considered important to performance, and operations

budget for evaluation basis.

Performance evaluation is the judgment process of supervisors about the quality

of the performance of subordinates. The results of performance evaluation are

qualitative judgments such as outstanding, good, adequate, or poor. The

evaluation takes the forms of a memorandum that will provide part of the basis

for salary increases, bonuses, and future promotions.

Performance measures are the relatively objective numbers resulting from a

performance measurement system, and performance evaluations are the

subjective judgment of managers. If the evaluations are fair and reasonable,there should be some correspondence between the measures and the judgments.

Because the responsibility and authority of each center are different, the

measurement approaches of performance of each center are different. In the

following section, we discuss performance measures in responsibility centers.

A profit center may determine which products and how many products should

be produced and sold. But it only controls costs and revenues related to the

profit center other than those of the entire organization. Thus, the performance


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of profit center that is gained by means of its profit that is gained by means of

controlling its operational activity, actually cannot be real profit of the

organization, but only be contribution to profit of the organization or its higher

level responsibility center. Often, profit centers are evaluated by means of

contribution margin income statements, in terms of meeting revenues and costs

objectives.

This mainly takes form of controllable income to measure.

This mainly takes form of controllable income to measure.

Controllable income is the excess of contribution margin over fixed costs

controlled by the profit center. Contribution margin is the excess of revenue of

the profit center over all variable costs of those sales. We may measure theperformance of the profit center or its manager by means of the controllable

income variance that is the difference between the actual and planned number of

the controllable income.

However, in profit centers, we encounter the usual problems related to

measuring profit for the organization as a whole: how are the organizations

revenues and costs allocated to each profit center? If a profit center is totally

separate from all other parts of the organization, its profits can be uniquely

identified with it. However, most profit centers have costs (and perhaps

revenues) in common with other units. The organization faces a cost allocation

problem.

A related problem involves the transfer of goods between a profit center and

other parts of the organization. Such goods must be priced so that the profit

center manager has incentives to trade with other units when it is in the

organization's best interests. The organization faces this transfer-pricing

problem.

It is not easy to determine how to measure performance in a profit center exist.

No matter what process is chosen, its objectives should be straightforward:

Measure employees' performance in ways that motivate them to work in the best

interest of their employers and compare their performance to standards or

budget plans.


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Advantages

A profit centre is that segment of activity of a business which is responsible for

both revenues and expenses and discloses the profit of a particular segment of

activity. It is created as a result of decentralization of operations to measure the

performance of divisional executives. Each profit centre has a profit target and

also enjoys authority to adopt such policies as are necessary to achieve its

targets.

1) The chief merit of profit centre is that it makes its managers responsible for

the profit performanceachieving the budgeted amount of profit during a

period.

2) Under profit centre concept, the whole organization is divided into a number

of divisions; the performance of each division is measured in terms of both the

income that is earned and the costs that are incurred.

3) Headquarters management, relieved of day to day decision making, can

concentrate on broader issues.

4) Managers in each division have freedom in making decisions. They need not

obtain approval from corporate headquarters for every expenditure.

5) The quality of decisions may improve because they are being made by

managers who are closet to the point of decision.

6) The speed of operating decisions may be increased, since they do not have to

be referred to corporate headquarters.

The possible disadvantages of treating divisions as profit centers are as

follows:

1) Divisions may compete with each other and may take decisions to increase

profits at the expenses of other divisions, thereby overemphasizing short term

results.


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2) It may adversely affect co-operation between the divisions and lead to lack of

harmony in achieving organizational goals of the company. Thus it is hard to

achieve the objective of goal congruence.

3) It may lead to reduction in the companys overall total profits.

4) The cost of activities which are common to all divisions may be greater for

decentralized structure than for centralized structure. It may thus result in

duplication of staff activities.

5) Top management loses control by delegating decision marking to divisional

managers. These are risks of mistakes committed by the divisional managers

which the top management may avoid.

6) Series of control reports prepared for several departments may not be

effective form the point of view of top management.

7) It may underutilize corporate competence.

8) It leads to complication associated with transfer pricing problems.

9) It becomes difficult to identify and define precisely suitable profit centers.

10) It confuses divisions result with managers performance.

Q-4 a) Transfer Pricing is not an Accounting Tool. Comment with

illustrations.

Ans: Transfer pricing refers to the amount used in accounting for any transfer

of goods and services between responsibility centres.

This is a narrow definition and limits the term transfer price to the value placedon a transfer of goods or services in transaction in which at least one of the two

parties is involved in the profit centre. Such a price typically includes a profit

element because an independent company normally would not transfer goods or

services to another independent company at cost or less.

Therefore, the mechanism for allocating cost in an accounting system; such cost

do not include a profit element. The term price as used here has the same

meaning as it has when used in connection transaction between independent

companies.


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Objective of Transfer Pricing:

Profit centres are responsible for product development, manufacturing and

marketing each share in the revenue generated when the product is finally sold.

The transfer price should be designed so that it accomplishes the followingobjectives:

1) It should provide unit with the relevant information it needs to determine the

optimum trade-off between company cost and revenues.

2) It should induce goal congruence decision i.e., the system should be designed

so that decision that improve business unit profit will also improve

company profits.

3) It should help to measure the economic performance of the individual

business units.

4) The system should be simple to understand and easy to administer.

Thus, from the objective, it is understandable that the Transfer price is mainly

transferring of goods and services from one unit to another, where much

important is not given to accounting basis but also to all other effects.

b) Market price is ideal transfer price even in Limited Markets. Comment.

Ans: A market price-based transfer price will induce goal congruence if all the

following conditions exist. Rarely, if ever, will all these conditions exists in

practice. The list, therefore, does not set forth criteria that must be met to have a

transfer price. Rather, it suggests a way of looking at a situation to see whatchanges should be made to improve the operation of the transfer price

mechanism.

1) Competent people: Ideally, managers should be interested in the long-run

as well as the short-run performances of their responsibility centres. Staff

people involved in negotiation and arbitration of transfer price also must be

competent.

2) Good Atmosphere: Managers must regard profitability, as measured in theirincome statements, as an important goal and a significant consideration in the


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judgment of their performance. They should perceive that the transfer prices are

just.

3) A Market Price: The ideal transfer price is based on a well-established,

normal market price for the identical product being transferred-that is, a marketprice reflecting the same conditions (quantity, delivery time, and quality) as the

product to which the transfer price applies. The market price may be adjusted

downward to reflect savings accruing to the selling unit from dealing inside the

company. For e.g. there would be no bad debt expense, and advertising and

selling costs would be smaller, when products are transferred from one business

unit to another within the company. Although less than ideal, a market price for

a similar, but not identical, product is better than no market price at all.

4) Freedom to source: Alternatives for sourcing should exist, and managers

should be permitted to choose the alternative that is in their own best interests.

The buying managers should be free to buy from the outside, and the selling

manager should be free to sell outside. In these circumstances, the transfer price

policy simply gives the manager of each profit center the right to deal with

either insiders or outsiders at his/her discretion. The market thus establishes the

transfer price.

The decision as to whether to deal inside or outside is also made by themarketplace. If buyers cannot get a satisfactory price from the inside source,

they are free to buy from the outside.

This method is optimum if the selling profit centre can sell all of its products to

either insiders or outsiders and if the buying centre can obtain all of its

requirements from either outsiders or insiders.

The market price represents the opportunity costs to the seller of selling the

product inside. This is so because the product was not sold outside. From acompany point of view, therefore, the relevant cost of the product is the market

price because that is the amount of cash that has been forgone by selling inside.

The transfer price represents the opportunity cost to the company.

5) Full Information: Managers must know about the available alternatives and

the relevant costs and revenues of each.

6) Negotiation: There must be a smoothly working mechanism for negotiating

contracts between business units.


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If all of these conditions are present, a transfer price system based on market

prices would induce goal congruent decisions, with no need for central

administration.

Q-6: Enumerate the differences among following types of Audits:

a) Financial Audit (Statutory)

b) Cost Audit

c) Efficiency Audit

d) Management Audit.

Ans: a) Financial Audit (Statutory): A financial audit, or more accurately, an

audit of financial statements, is the review of the financial statements of a

company or any other legal entity (including governments), resulting in the

publication of an independent opinion on whether or not those financial

statements are relevant, accurate, complete, and fairly presented. Financial

audits are typically performed by firms of practicing accountants due to the

specialist financial reporting knowledge they require. The financial audit is one

of many assurance or attestation functions provided by accounting and auditingfirms, whereby the firm provides an independent opinion on published

information.

Following are the features of Financial Audit:

1.Simplified input of auditing tasks (audit sheets, recommendations and actionplans)

2. Instant information access and sharing for everyone.

3. Unified auditing methods.

4.Automated report generation.5. Less labour intensive and time-saving during report review meetings.


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b) Cost Audit: Cost Audit is the verification of cost accounts and check on

adherence to the cost accounting plan. Cost Audit is mainly a preventive

measure, a guide for a monetary policy and decision, in addition to being a

barometer of performance.

Cost Audit is useful because it provides information/ data:

On Cost of Production For Price Fixation For Arriving at the Standard cost of the product Identifying the Inefficiencies in different Departments It helps in identifying the weaknesses in the system and also pinpoints the

inefficient activities to different departments. It also aims to simplify thewastages and losses which can be avoided.

c) Efficiency Audit: Efficiency Audit is concerned with the allocation of

resources to different uses in the business and efficient utilisation of resources

allocated to each use. The Cost Auditor helps the top management in financial

planning, performance evaluation, and efficiency in operations and in

establishing coordination between departments.

Efficiency Audit aims at ensuring that:

Every rupee invested in capital or in other field yields optimum return Investment in different functions and aspects of the business has been so

balanced so that the return on investment is optimum.

d) Management Audit: The Management Audit is total examination of anorganisation or a part of it. It Includes:

Check on the effectiveness of managers of their compliance with theCompany or Professional Standards

The reliability of Management data. The quality of Performance of duties Recommendations for Improvement


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CIMA Defines Management Audit as An objective and independent appraisal

of the effectiveness of the corporate culture in the achievement of company

objectives and policies.

Following are the objectives of Management Audit:

To ensure effective utilisation of resources. To identify deficiencies in policies and procedures. To suggest improvement in methods of operation. To analyse internal controls and suggest improvements if any To identify the need for restructuring and suggest ways and means for the

same

To anticipate managerial problems and evolve mechanism to handle themeffectively.

Q-9 Write Short Notes on the following:

1) Zero Based Budgeting

Ans: Zero-based budgeting is an approach to planning and decision-making

which reverses the working process of traditional budgeting. In traditionalincremental budgeting (Historic Budgeting), departmental managers justify only

variances versus past years, based on the assumption that the "baseline" is

automatically approved. By contrast, in zero-based budgeting, every line item of

the budget must be approved, rather than only changes. During the review

process, no reference is made to the previous level of expenditure. Zero-based

budgeting requires the budget request be re-evaluated thoroughly, starting from

the zero-base. This process is independent of whether the total budget or

specific line items are increasing or decreasing.

According to Sarant, Zero Based Budgeting is a technique which complements

and links to existing planning, budgeting and review processes. It identifies

alternative and efficient methods of utilizing limited resources. It is a flexible

management approach which provides a credible rationale for reallocating

resources by focusing on a systematic review and justification of the funding

and performance levels of current programs.


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Following are the Advantages and Disadvantages of Zero Based Budgeting:

Advantages:

1. Efficient allocation of resources, as it is based on needs and benefits rather

than history.

2. Drives managers to find cost effective ways to improve operations.

3.Detects inflated budgets.4. Increases staff motivation by providing greater initiative and responsibility in

decision-making.

5. Increases communication and coordination within the organization.

6. Identifies and eliminates wasteful and obsolete operations.

7. Identifies opportunities for outsourcing.

8. Forces cost centers to identify their mission and their relationship to overall

goals.

9. Helps in identifying areas of wasteful expenditure, and if desired, can also be

used for suggesting alternative courses of action.

Disadvantages:

1. More time-consuming than incremental budgeting.

2. Justifying every line item can be problematic for departments with intangible

outputs.

3. Requires specific training, due to increased complexity vs. incremental

budgeting.

4. In a large organization, the amount of information backing up the budgeting

process may be overwhelming.


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2) Free Cash Flow

Ans: Free Cash Flow is a measure of financial performance calculated as

operating cash flow minus capital expenditures.Free cash flow (FCF) representsthe cash that a company is able to generate after laying out the money requiredto maintain or expand its asset base. Free cash flow is important because it

allows a company to pursue opportunities that enhance shareholder value.

Without cash, it's tough to develop new products, make acquisitions, pay

dividends and reduce debt.FCF is calculated as:

It can also be calculated by taking operating cash flow and subtracting capital

expenditures.

Free Cash Flow of the Firm is calculated as follows:

A measure of financial performance that expresses the net amount of cash thatis generated for the firm, consisting of expenses, taxes and changes in net

working capital and investments.

Calculated as:

This is a measurement of a company's profitability after all expenses and

reinvestments. It's one of the many benchmarks used to compare and analyse

financial health.

A positive value would indicate that the firm has cash left after expenses. A

negative value, on the other hand, would indicate that the firm has not generated

enough revenue to cover its costs and investment activities. In that instance, an

investor should dig deeper to assess why this is happening - it could be a sign

that the company may have some deeper problems.


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3) MCS in the Matrix Organization

Ans: The matrix organization is an organizational structure in which the work is

divided in projects. Each project is a profit center and is looked after by the

project manager. Each project team has functional level employees that report totheir respective functional managers and their project manager.

Matrix Organizational structure assigns multiple responsibilities to the

functional heads. Evaluation of performance of such organizational entities is

very difficult. It poses the problem of casting individual responsibility. This

form of organization is very complex, from the point of view of management

control system.

Usually in an advertisement agency, account supervisors are shifted from oneaccount to another on periodic basis. This practice allows the agency to look at

the account from the perspectives of different executives. However taking in to

consideration the time lag of result, realization in such services is quite large.

This may pose problem of performance assessment of a particular executive.

This does not mean that a control system designer should insist on abandoning

the rotation system of the executives.

Matrix structure offers advantages such as faster decision making process,

efficiency and effectiveness. But simultaneously, it may pose problems such as

added complexity in control function, assignment of responsibility and authority

etc.

Following are the advantages and disadvantages of Matrix organizational

structure:

Advantages:

1. Minimization of project costs, due to sharing of resources.

2. Minimization of conflicts and Stress distribution between the teams.

3. Balance between time, cost and performance.

4. Sharing of authority and responsibility.

5. Information sharing.

6. Resource sharing.


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7. Ideal for project based organization.

8. Better coordination between the team.

Disadvantages:

1. Two bosses can create conflict of authority.

2. Limited applicability.

3. Not suitable for small organizations.

4. Complete responsibility of the manager for success or failure.

5. Suitable only for project based organizations.

At the end, we must not forget that the management control system is for the

organization and not the organization exists for management control system.

One has to mold and remold the management control system to suit the given

organization structure.

Q-8: What do you understand by Goal Congruence? What are the informal

factors that influence goal congruence?

Ans: Each individual has his personal goals. He joins an organization to achieve

then goals. The personal goal may just be to get a job that assures safety and

monetary rewards. The organization, through its top management, sets for itself

pals that are desired to achieve. At times there is a conflict between individual

pals and organizational goals. Such conflict is more clearly evident in nonprofit

organizations such as research and development institutions, and educationalinstitutions. Top management wants these organizational goals to be attained,

out other participants have their own personal goals that they want to achieve.

These personal goals are the satisfaction of their needs. In other words,

participants act in their own self- interest. Here individuals may grow bigger

than the organization and this may lead to goal conflict. The control system

should be designed so as to integrate the personal goals with organizational

goals, and thereby achieve goal congruence. As managers tend to take action

according to their perceived self-interest, the control system should ensure thatthese actions are also in the interest of the organization. Thus, the system should


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discourage individuals acting against the interests of the organization, e.g., a

cost reduction should not be achieved at the cost of quality if the organization

has concern for quality products.

In the language of social psychology, the management control system shouldencourage goal congruence; that is, it should be structured so that the goals of

participants, so far as is feasible, are consistent with the goals of the

organization as a whole. If this situation exists, a decision that a manager

regards as being good from his own viewpoint will also be good decision for the

organization as a whole. As McGregor states, The essential task of

management is to arrange organizational conditions and methods of operations

so that people can achieve their own goals best by directing their own efforts

towards organizational objectives.

Perfect congruence between individual goals and organizational goals does not

exist. One obvious reason is that individual participants want as much salary as

they can get, whereas from the view point of the organization, there is an upper

limit to salaries, beyond which profits will be adversely affected. As a

minimum, however, the system should not encourage the individual to act

against the best interests of the company. For example, if the management

control system signals that the emphasis should be only on reducing costs, and

if a manager responds by reducing costs at the expense of adequate quality or if

he responds by reducing costs in his own responsibility center by measures that

cause a more than offsetting increase in costs in some other responsibility

center, he has been motivated, but in the wrong direction.It is thereforeimportant to ask two separate questions about any practice used in a

management control system:

1. What action does it motivate people to take in their own perceived self-

interest?

2. Is this action in the best interests of the company?


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Documents

MCS UNIVERSITY PAPER SOLUTION 2009