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Q1) what is Goal Congruence? What are the informal factors that influence Goal
Congruence?

Solu:-

Goal Congruence is a Central purpose of a management control system, then, it

is to ensure a high level of what is called Goal Congruence.

In a goal congruence process, the actions people are lead to take in accordance with
their perceived self-interest are also in the best interest of the organization. Perfect
congruence between individual goals and organizational goals does not exist.

Informal factors that Influence Goal Congruence:-

Both formal systems and the informal process influence human behaviour in
organizations. They affect the degree to which goal congruence can be achieved. The
formal control system consists of Strategic plans, budgets and reports. But it is
important for the designer of the formal systems to take into account informal process
such as work ethic, management style and culture. In order to implement the
organization strategies effectively the formal mechanism must be consistent with the
informal ones.

The factors are as follows:-

1) External Factors:

External factors are norms of desirable behaviours that exist in the society of which the
organization is a part. These norms includes a set of attitudes, often collectively referred
to as the work ethic which is manifested in employees loyalties to the organization,
their diligence, their spirit, their pride in doing a good job. Some of these attitudes are
local i.e. city or rest on specific. Other attitudes and norms are industry specific.

Example: Silicon Valleya stretch of Northern California about 30 miles long and 10
miles wideis one of the major source of new business creation and wealth in
American economy.

2) Internal Factors:

A. Culture:

The most important internal factor is organisations own culturethe common beliefs,
shared values norms of behavior, and a assumptions that are implicitly accepted and
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explicitly manifested throughout the organization. Cultural norms are extremely

important since they explain why two organizations, with two identical formal
management control systems, may vary in terms of actual control

Example: Johnson & Johnson has a strong corporate culture, as exemplified by the
companys credo. One cannot fully understand the effect of J&Js. Formal control system
without considering the influence of their credo on the behaviour of its employees. This
was demonstrated during the Tylenol crisis in 1982. After taking poisoned Tylenol
capsules, 7 people died. J&J withdrew all Tylenol capsules from the US Market, even
though all the poisoned capsules were sold in Chicago, the tampering occurred outside
J&J premises, and the individual responsible was not the J&J employee. The steps were
taken by the company to prevent such tampering in future.

B. Management Style:

The internal factor that probably has the strongest impact on management control is
management style. Usually, subordinates attitudes reflect what they perceive their
superiors attitudes to be, and their superiors attitudes ultimately stem from the CEO.

Managers come in all shapes and sizes. Some are charismatic and outgoing; others are
less ebullient. Some spent much time looking and talking to people; other relies more
heavily on written reports.

C. The Informal Organization:

The lines on organization chart depict the formal relation -- the official authority and
responsibilities of each manager. But in the course of fulfilling his responsibilities a
manager interacts with many other people in the organization as well as other
managers, support units, head quarters staff and those who are friends and
acquaintances. This constitutes the informal organization. A manager sometimes may
pay no head to the order from the formal boss because of this informal organization
particularly if he is evaluated on the basis of functional efficiency.

D. Perceptions & Communications:

In working towards the goals of the organization operating managers must know what
the goals are and what action they are supposed to take in order to achieve them. They

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receive this information through various channels both formal and informal. Despite
this range of channels, it is not always clear what senior management wants done. An
organization is a complicated entity and the actions that should be taken by any one
part to further the goals cannot be stated with absolute clarity.

Q2) Briefly define Discretionary Expense Centers, Engineered Expense Center, and
Profit Center & Investment Center? How is budget prepared in Discretionary Expense
Center? How is performance of the manager evaluated in a Discretionary Expense
Center?

ANS) Discretionary Expense Centers 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 monetary 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.

Engineered Expense Center: Engineered Expense Centers are usually found in

manufacturing operations. Their input can be measured in monetary term. Their output
can be measured in physical terms. The optimum dollar amount of input required to
produce one unit of output can be determined. Manager of Engineered Expense Centers
may be responsible for activities such as training & employee development that are not
related to current production; their performance review should include an appraisal of
how well they carry out their responsibilities.

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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
(short term) 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
straight forward profit measure, is called a profit center.

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.

Budget prepared in Discretionary Expense Center:

Management makes budgetary decisions for Discretionary Expense Centers that differ
from those for engineered expense centers. Management formulates the budget for
Discretionary Expense Center by determining the magnitude of the job that needs to be
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done. The work done by Discretionary Expense Centers falls into two general
categories: continuing & special. Continuing work is done consistently from year to
year, such as the preparation of financial statements by the controllers office. Special
work is a one-shot projecteg. Developing & installing a profit budgeting system in
a newly acquired division.

A technique often used in preparing a Discretionary Expense Centers budget is

Management by Objectives, a formal process in which a budgeted proposes to
accomplish specific jobs & suggests the measurement to be used in performance
evaluation. The planning function for Discretionary Expense Centers is usually carried
out in one of two ways: incremental budgeting or zero-base review.

Performance of the manager evaluated in a Discretionary Expense Center:

The primary job of a Discretionary Expense Centers manager is to obtain the desired
output. Spending an amount that is on budget to do this is satisfactory; spending
more than that is cause for concern; & spending less may indicate that the planned
work is not done. In Discretionary Expense Centers the financial report is not a means
of evaluating the efficiency of the manager.

Total control over Discretionary Expense Centers is achieved primarily through no

financial performance measures. E.g. the best indication of the quality of service for
some Discretionary Expense Centers may be the opinion of their users.

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Q3) 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 measure the performance of profit center?
Discuss their relative merits & demerits?

ANS) Strategic Business Unit or SBU is understood as a business unit within the
overall corporate identity which is distinguishable from other business because it serves
a defined external market where management can conduct strategic planning in relation
to products and markets. When companies become really large, they are best thought of
as being composed of a number of businesses (or SBUs).

These organizational entities are large enough and homogeneous enough to exercise
control over most strategic factors affecting their performance. They are managed as self
contained planning units for which discrete business strategies can be developed. A
Strategic Business Unit can encompass an entire company, or can simply be a smaller
part of a company set up to perform a specific task. The SBU has its own business
strategy, objectives and competitors and these will often be different from those of the
parent company

Profit Centres are parts of a Corporation that directly add to its Profit. A profit center
manager is held accountable for both revenues, and costs (expenses), and therefore,
profits. What this means in terms of managerial responsibilities is that the manager has
to drive the sales revenue generating activities which leads to cash inflows and at the
same time control the cost (cash outflows) causing activities.

Profit center management is equivalent to running an independent business because a

profit center business unit or department is treated as a distinct entity enabling
revenues and expenses to be determined and its profitability to be measured. Business
organizations may be organized in terms of profit centers where the profit center's
revenues and expenses are held separate from the main company's in order to

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determine their profitability. Usually different profit centers are separated for
Accounting purposes so that the management can follow how much profit each center
makes and compare their relative efficiency and profit.

After learning about the profit center & SBU, hence we can say that every SBU is a
profit center but every profit center is not a SBU.

The conditions that should be fulfilled for an organization unit to be converted into a
profit center are:

The manager should have access to the relevant information needed for making
such a decision.
There should be some way to measure the effectiveness of the trade-offs the
manager has made.

There are 2 types of measuring the performance of the profit center they are:

The measure of Management Performance, which focuses on how well the

manager is doing. This measure is used for planning, coordinating, & controlling
the profit centers day-to-day activities & as a device for providing the proper
motivation for its manager.
The measure of Economic Performance, which focuses on how well the profit
center is doing as an economic entity. A profit centers economic performance is
always measured by net income ( i.e., the income remaining after all costs,
including a fair share of the corporate overhead, have been allocated to the profit
center). The performance of the profit center manager, however, may be
evaluated by 5 different measures of profitability & they are:

1. Contribution Margin,

2. Direct profit,

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3. Controllable Profit,

4. Income before Income Taxes, or

5. Net Income.

Merits of Profit Centers:

1) The quality of decisions may improve because they are being made by
managers closest to the point of decision.
2) The speed of operating decisions may be increased since they do not have to be
referred to corporate headquarters.

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

concentrate on border issues.

4) Managers, subject to fewer corporate restraints, are freer to use their

imagination & initiative.

5) Profit centers provide an excellent training ground for general management &
for managers.

6) Profit Consciousness is enhanced since managers who are responsible for profits
will constantly seek ways to increase them.

7) Profit centers provide top management with ready-made information on the

profitability of the companys individual components.

8) As the output is readily measured, profit centers are particularly responsive to

pressures to improve their competitive performance.

Demerits of the Profit Centers:

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1) Decentralized decision-making will force top management to rely more on

management control reports than on personal knowledge of an operation,
entailing some loss of control.
2) If headquarters management is more capable or better informed than the average
profit center manager, the quality of decisions made at the unit level may be
reduced.

3) Friction may increase because of arrangement over the appropriate transfer price,
the assignment of common costs, & the credit for revenues that were formerly
generated jointly by two or more business units working together.

4) Organization units that once cooperated as functional units may now be in

competition with one another. An increase in profits for one manager may mean a
decrease for another. In such situations, a manager may fail to refer sales leads to
another business unit better qualified to pursue them; may hoard personnel or
equipment that, from the overall company standpoint, would be better off used
in another unit; or may make production decisions that have undesirable csot
consequences for other units.

5) Divisionalization may impose additional costs because of additional management.

Staff personnel and record keeping required, and may lead to task redundancies
at each profit center.

6) Competent general managers may not exist in a functional organization because

there may not have sufficient opportunities for them to develop general
management competence.

7) There is no completely satisfactory system for ensuring that optimizing the

profits of each individual profit center will optimize the profits of the company as a
whole.

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8) There may be too much emphasis on short-run profitability at the expense of

long-run profitability. In the desire to report high current profits, the profit
center manager may skimp on R&D, training prog, or maintenance. This
tendency is especially prevalent when the turnover of profit center managers is
relatively high. In these circumstances, managers may have good reason to
believe that their actions may not affect profitability until after they have moved
to other jobs.

Q4) what are the objectives of Transfer Pricing? What is ideal transfer price in the
situations of: - (a) Limited Market (b) Shortage of capacity in the industry. When do you
use Cost Based Transfer Prices?

ANS) Objectives of Transfer Pricing:

1) It should provide each business unit with the relevant information it needs to be
determined the optimum trade-off between company costs & revenues.
2) It should induce Goal Congruent decisions--- that are; the system should be
designed so that decisions that improve business unit profits will also improve
company profits.

3) It should help measure the economic performance of the individual business units.

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

Ideal transfer price in the situations of: - (a) Limited Market:

In the case of limited markets, the transfer price that best satisfies the requirements of a
profit center system is the competitive price. Competitive prices measure the
contribution of each profit center to the total company profits.

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Ideal transfer price in the situations of: - (b) Shortage of capacity in the Industry

In the case of the Shortage of Capacity in the Industry, the transfer price would be the
competitive price, and the other option is to develop Cost-based transfer prices.

When to use Cost Based Transfer Prices:

Cost Based Transfer Prices is used, if competitive prices are not available, transfer prices
may be set on the basis of cost plus profit, even though such transfer prices may be
complex to calculate & the results less satisfactory than a market-based price. Two
decisions must be made in a cost-based transfer price system:

1. How to define cost &

2. How to calculate the profit markup.

Q8) Write Short notes on:

I. Zero-based budgeting

Zero based budgeting is a technique of planning and decision-making which reverses

the working process of traditional budgeting. In traditional incremental budgeting,
departmental managers justify only increases over the previous year budget and what
has been already spent is automatically sanctioned. No reference is made to the
previous level of expenditure. By contrast, in zero-based budgeting, every department
function is reviewed comprehensively and all expenditures must be approved, rather
than only increases. Zero-based budgeting requires the budget request be justified in
complete detail by each division manager starting from the zero-base. The zero-base is
indifferent to whether the total budget is increasing or decreasing. Zero-based
budgeting starts from a zero base and every function within an organization are
analyzed for its needs and costs.
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Advantages of Zero-Based Budgeting

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

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

3. Detects inflated budgets.

4. Municipal planning departments are exempt from this budgeting practice.

5. Useful for service departments where the output is difficult to identify.

6. Increases staff motivation by providing greater initiative and responsibility in

decision-making.

7. Increases communication and coordination within the organization.

8. Identifies and eliminates wasteful and obsolete operations.

9. Identifies opportunities for outsourcing.

10. Forces cost centers to identify their mission and their relationship to overall
goals.

Disadvantages of Zero-Based Budgeting

1. Difficult to define decision units and decision packages, as it is time-consuming

and exhaustive.
2. Forced to justify every detail related to expenditure. The R&D department is
threatened whereas the production department benefits.

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3. Necessary to train managers. Zero-based budgeting must be clearly understood

by managers at various levels to be successfully implemented. Difficult to
administer and communicate the budgeting because more managers are
involved in the process.

4. In a large organization, the volume of forms may be so large that no one person
could read it all. Compressing the information down to a usable size might
remove critically important details.

5. Honesty of the managers must be reliable and uniform. Any manager that
exaggerates skews the results.

II. Free Cash Flow

A measure of financial performance calculated as operating cash flow minus capital

expenditures. Free cash flow (FCF) represents the cash that a company is able to
generate after laying out the money required to 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. If free cash flow is positive then the company has done a good job of

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managing its cash. If free cash flow is negative then the company may have to look for
other sources of funding such as issuing additional shares or debt financing.

If a company has a negative free cash flow and has to issue more equity shares, this will
dilute the profits per share. If the company chooses to seek debt financing, there will be
additional interest expense as a result and the net income of the company will suffer.

When investing for dividend growth, we can assume that for a company to
continuously grow its dividend there must be positive cash flow.

Free cash flow is one indicator of the ability of a company to return profits to
shareholders through debt reduction, increasing dividends, or stock buybacks. All of
these scenarios result in an increased shareholder yield and a better return on
investment. The term Free cash Flow is used because this cash is free to be paid back
to the suppliers of capital.

III. Management Control in Matrix Organization

If members of the project team are employees of the sponsoring organization, they have
2 bosses, the project manager & the manager of the functional department to which they
are permanently assigned. Such an arrangement is called Matrix Organization.
However, their basic loyalty is to their functional department. Therefore, project
manager has less authority over personnel than the manager of a production
department, whose employees have an undivided loyalty to that department.

Project managers want full attention given to their projects, while functional
responsibility center managers must take into account all the projects on which the
employees of that center work. This conflict of interest is inevitable; it creates tension.
Hence it is necessary to have a good management control on this type of organization.

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An evolution of organization structure should be in place to handle the work smoothly.

Different types of management personnel & management methods may be appropriate
at different stage of the project. In the planning phase of a construction project,
architects, engineers, schedulers, & cost analysts predominate. In the execution of the
project, the managers are production managers. In the final stages, the work tapers off,
& the principal task may be to obtain the sponsors acceptance, with marketing skills
being a principal requirement.

If the project is conducted by an outside contractor, an additional level of project control

is created. In addition to the control exercised by the contractor who does the work, the
sponsoring organization has its own control responsibilities. The contractor could bring
its own control system to the project, & this system need to be adopted to provide
information that the sponsors needs. This doesnt imply that there are duplicate
systems; the sponsors system should use data from the project system.

IV. Internal Control

Internal control is the process by which managers influence other members of the
organization to implement the organizations strategies. Internal control involves a
variety of activities, including:

Planning what the organization should do.

Coordinating the activities of several parts of the organization.

Communicating information.

Deciding what, if any, action should be taken.

Influencing people to change their behavior.

Internal control doesnt necessarily require that all actions correspond to a previously
determined plan, such as a budget. Such plans are based on circumstances believed to

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exist at the time they were formulated. If these circumstances have changed at the time
of implementation, the actions dictated by the plan may no longer be appropriate.

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