Padmashree Dr. D.Y.

Patil University Department of Business Management

SUBJECT MANAGEMENT CONTROLL SYSTEM

Submitted by SUDEEP ROY (MBA MARKETING) Roll No. 011012

Submitted To Mr. Kiran Khairnar Sir

1) The differences between formal and informal organization? 1. Meaning

Formal Organisation is formed when two or more persons come together. They have a common objective or goal. They are willing to work together to achieve this similar objective.Formal Organisation has its own rules and regulation. These rules must be followed by the members (employees and managers). A formal organisation has a system of co-ordination. It also has a system of authority. It has a clear superior-subordinate relationship. In a formal organisation, the objectives are specific and well-defined. All the members are given specific duties and responsibilities. Examples of formal organisation are:- a company, a school, a college, a bank, etc. Informal Organisation exists within the formal organisation. An informal organisation is a network of personal and social relationships. People working in a formal organisation meet and interact regularly. They work, travel, and eat together. Therefore, they become good friends and companions. There are many groups of friends in a formal organisation. These groups are called informal organisation. An informal organisation does not have its own rules and regulation. It has no system of co-ordination and authority. It doesn't have any superior-subordinate relationship nor any specific and well-defined objectives. Here in informal organisation, communication is done through the grapevine.

2. Formed by Whom?

A formal organisation is formed by the top level management. An informal organisation is formed by social forces within the formal organisation.

3. Rules and Regulations

The members of a formal organisation have to follow certain rules and regulations. These rules are available in writing (documented). They are made by a formal authority (superiors). If the members follow these rules properly, then they will be rewarded. However, if they do not follow these rules, they will be punished.

The members of an informal organisation do not have to follow any rules and regulations.

4. Duties and Responsibilities

In a formal organization, the duties, responsibilities, authority and accountability of each member is well-defined. In an informal organization, there are no fixed duties, responsibilities, authority, accountability, etc. for the members.

5. Objectives or Goals

In a formal organization, the objectives or goals are specific and well-defined. The main objectives of a formal organisation are productivity, growth, and expansion. In an informal organisation, the objectives are not specific and well-defined. The main objectives of an informal organisation are friendship, security, common interest, individual and group satisfaction, etc.

6. Stability

A formal organisation is stable. An informal organisation is not stable.

7. Channels of Communication

A formal organisation uses formal channels of communication. An informal organisation uses informal channels of communication (i.e. grapevine)

8. Organisation Chart

A formal organisation is shown on the organisation chart.

An informal organisation is not shown on the organisation chart.

9. Superior-Subordinate Relationship

In a formal organisation, there exists a superior-subordinate relationship. In an informal organisation, there is no such superior-subordinate relationship.

10. Benefits for Members

The members of the formal organisation get financial benefits and perks like wages or salaries, bonus, travelling allowances, health insurance, etc. The members of informal organisation get social and personal benefits like friend circle, community, groups, etc.

2) Explain the concept cost and profit center in an organization? Cost Center
Cost Center Hierarchy is an important dimension is the Performance Management system. The cost center concept is described in many Managerial Accounting books. I think that going back to where it was originated help us to understand how it should be designed and used in a Business Analytics Data Warehouse. A cost center incurs costs (and expenses) directly but does not generate revenues. For Example: A production or a service department. A cost center is described as an essential element used in the responsibility accounting reporting system. Here are the major concepts about the responsibility accounting and cost center described in the managerial accounting field. Top management can control all costs. Fewer cost controllable as one moves down to lower level of management The evaluation of a managers performance should be based on matters that the manager directly controls. The costs controlled by a cost center can be rolled up to a higher level. e.g. the cost controllable by the regional marketing managers are controllable by the VP of marketing. It is necessary to distinguish between controllable and non-controllable costs at each level. When the level moves up, additional controllable costs should be included. Depending on the degree of responsibility that the manager has, a responsibility center may be a cost center, a profit center, and an investment center.

Cost Centers are also implemented in the ERP and Accounting systems.

Profit Center
1. The Profit Center. Many operating unit managers have responsibility and authority for both production and sales. They make decisions about what products and services to produce, how to produce them, their quality level, price, sales and distribution systems. But these managers may not have the authority to determine the level of capital investment in their facilities. In these cases, operating profit may be the single best (shortterm) performance measure for how well the managers are creating value from the resources the company has put at their disposal. Such a unit, in which the manager has almost complete operational decision-making responsibility and is evaluated by a straightforward profit measure, is called a profit center.

2. The Investment Center. When a local manager has all the responsibilities described above as well as the responsibility and authority for his or her centers working capital

and physical assets, the manager is running an investment center. The performance of such a unit is best measured with a metric that relates profits earned to the level of physical and financial assets employed in the center. Investment center managers are evaluated with metrics as return on investment (ROI) and economic value-added. 3. The Standard Cost Center. A standard cost center is a production or operating unit in which someone other than the local manager determines the outputs that will be produced as well as the expected inputs required to produce each unit of output. Industrial engineers and cost accountants specify the quantity and price standards for the materials, labor, energy, and machine time required to produce each widget, the generic term for a manufactured good. 4.The Revenue Center. A revenue center, typically a market or sales unit, has responsibility for selling the finished goods produced by a manufacturing division (a cost center) or the products offered by a service organization. Because a revenue center typically has discretion in setting the selling price (or in negotiating discounts off the list price), it is held accountable for generating targeted levels of gross revenues. It often compensates its sales force with commissions based on the gross revenues they generate. 5.The Discretionary Expense Center. Staff units, including general and administrative (G&A) departments, such as finance, human resources, and legal; research and development (R&D) departments; and marketing units such as those performing advertising and promotion, are usually treated as discretionary expense centers. The output from these units is not easily measured in financial terms, and the relationship between the resources they expend (inputs) and the outcomes they produce is weak. Companies control these discretionary expense centers by negotiating and eventually authorizing an annual budget and then monitoring whether their actual spending remains within the budgeted amounts

The MCS taxonomy reveals that decentralization can take many forms. Repetitive processes producing well-specified and easily measured outputs can be managed as standard cost centers, where the managers must meet externally generated demands for products according to a cost-minimizing, efficient standard. Marketing departments can be organized as revenue centers, with the objective of meeting targeted goals in sales revenue, market share, or contribution margin.

The Balanced Scorecard Revolutiona When Dave Norton introduced the Balanced Scorecard in the 1990s, we described the limitations of financial metrics, such as profits and ROI, for motivating and evaluating the performance of profit and investment centers. We claimed that financial metrics were no longer sufficient for measuring the annual performance of the managers of these units in creating long-term value

Transforming the Cost Center Empire Glass2 was one of the most provocative cases in the MCS text and case book. The Empire Glass company treated a manufacturing plant, which had no authority for pricing, marketing, or sales activities, as a profit center, not a cost center. Class discussions always started with students actively criticizing this choice. Treating this manufacturing unit as a profit center violated all the rules they had just learned about what constituted a profit center. The Empire Glass plant merely produced products to customer orders. During the course of class discussion, however, students came to realize that the manufacturing plant actually had a substantial influence on sales and margins.

Revisiting the Revenue Center Lets next consider revenue centers, which have historically been measured by the dollar volume and mix of products sold. In building a Balanced Scorecard for a revenue center, we specify, in the customer perspective, objectives for market and account share, and for customer satisfaction, loyalty, and growth in targeted customer segments, accounts, and channels.

Summary The development of strategy maps and Balanced Scorecards has transformed the foundation of management control systems. The leading paradigm of organizational structure and control of just a generation ago, based upon cost, profit, investment, revenue and discretionary expense centers, has been replaced by a robust, powerful framework in which every organizational unitwhether line or staff, whether centralized or decentralizedcan be considered a strategic business unit. The management control system is no longer based on the budget whether for profits, ROI, costs, revenues, or discretionary expenses. Companies now use the more general and powerful strategy management system, built upon the framework of strategy maps and Balanced Scorecards, to motivate, align, and evaluate the performance of diverse organizational units.

3) How M.C.S can help the organization?

A management control system (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. The term management control was given of its current connotations by Robert N. Anthony (Otley, 1994). Robert N. Anthony (2007) defined Management Control as the process by which managers influence other members of the organization to implement the organizations 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. Anthony & Young (1999) showed management control system as a black box. The term black box is used to describe an operation whose exact nature cannot be observed. MCS involves the behavior of managers and these behaviors cannot be expressed by equations. Anthony & Young (1999) showed that management accounting has three major subdivisions: full cost accounting differential accounting and management control or responsibility accounting. According to Horngren et al. (2005), management control system is an integrated technique for collecting and using information to motivate employee behavior and to evaluate performance. According to Simons (1995), Management Control Systems are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities Chenhall (2003) mentioned that the terms management accounting (MA), management accounting systems (MAS), management control systems (MCS), and organizational controls (OC) are sometimes used interchangeably. In this case, MA refers to a collection of practices such as budgeting or product costing. But MAS refers to the systematic use of MA to achieve some goal and MCS is a broader term that encompasses MAS and also includes other controls such as personal or clan controls. Finally OC is sometimes used to refer to controls built into activities and processes such as statistical quality control, justin-time management. According to Maciariello et al. (1994), management control is concerned with coordination, resource allocation, motivation, and performance measurement. The practice of management control and the design of management control systems draws 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 behavior

Management control systems use many techniques such as

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

4) What do you mean by E.V.A?

EVA is based on something we have known for a long time: what we generally call profits, the money left to service equity, is usually not profit at all. Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources . . . it does not create wealth; it destroys it1 Peter Drucker This note explores the concept of Economic Value Added (EVA) and its practical applications as a management control system for performance measurement and incentive compensation. The Concept of Economic Value Added EVA is a remarkably simple, yet powerful measure of performance. A firm employs capital in order to generate revenues and profits. Investors who provide that capitalcreditors as well as shareholdersexpect a fair return on their investments. EVA aims to measure the firms ability to generate profits in excess of the cost of the capital employed to generate those profits. In particular, it is calculated as the difference between after-tax operating profits and the cost of capital invested by both debt holders and equity holders: EVA where: NOPAT = Net Operating Profits After Taxes Capital = Capital invested by debt holders and equity holders Cost of Capital = Weighted average of the after-tax cost of debt and cost of equity NOPAT Cost of Capital * Capital

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While the term EVA is relatively new, the concept is not. EVA is essentially identical to the notion of residual income (net income minus a charge for the cost of equity capital)3 developed by economists such as Alfred Marshall in the 1890s. General Motors implemented a residual income measure for performance evaluation and compensation in the 1920s.4 Over the last two decades, a number of factors (deregulation and integration of capital markets, more liquid securities markets, expansion of institutional investment, advances in information technology) have significantly increased the mobility of capital, forcing firms to compete not only in product markets but also in capital markets, where returning the cost of capitalthe return expected by investorsis a key success factor. At the same time, finance theory has evolved making the estimation of a cost of equity a more accessible task. Taking advantage of these developments and the growing demand for new value-based management practices that could better align the interests of managers with those of shareholders, the consulting firm Stern Stewart & Company, in the 1980s and 1990s, revived the notion of residual income. Stern Stewart developed this

notion into a broader, EVA-based management control system, implemented at dozens of large, publicly traded companies including AT&T, Coca-Cola, and Quaker Oats.5

The appeal of EVA lies in its intuitive interpretation. A positive EVA suggests that the firm has generated profits in excess of the amount required to remunerate investors (at market rates) for the capital they have provided. In short, the firm has paid its operating and capital costs and created additional wealth. Negative EVA, instead, suggests that the firm devours resources (in Peter Druckers terms) without providing a commensurate return for their use.

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