Unit- IV Management Control Systems and Proecess

8/11/2019 Unit- IV Management Control Systems and Proecess

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UNIT- IV

MANAGEMENT CONTROL SYSTEM

&

PROCESS


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RESPONSIBILITY CENTRES

Is an organization unit headed by a single person

(sometimes by a committee) answerable to higher

authority and obliged to perform certain tasks.

Exists to accomplish one or more purposes- termed as itsobjectives.

Types

Revenue Cost Profit Investment


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Broad Considerations for

Identifying Responsibility Centres It is a clearly defined segment of the organisation.

A managershould be responsiblefor attaining results in

relation to operation with in the responsibility centre.

It should be possible to measure the inputs required bythe responsibility centre (men, machine, material, etc.).

If the responsibility centre is a profit centre, the value of

its output should be measured in terms of rupees.

The method of operation should be distinct for each

responsibility centre.


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REVENUE CENTRE

In a revenue centre, output(i.e., revenue) is measured in

monetary terms, but no formal attempt made to relate

input(i.e., cost or expense) to output.

A part of the organization responsible for generatingsales revenue.

Revenue centres are marketing/sales units that do have

authority to set selling prices and are not charged for the

cost of the goods they market.


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EXPENSE CENTRE

Are responsibility centres whose inputs are measured in

monetary terms but outputs are not. Here , the

managers are held responsible for the cost or expense

incurred but not for revenues.


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Expense Centres

Inputs Outputs

Costs in rupees No. of units

WORK


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Types of Expense Centres

Types

Engineered

Expense centre

Discretionary

Expense Centre


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Engineered Expense centre Are those for which the rightor properamount can

be estimated with reasonable reliability.

Are usually found in manufacturing operations.

Characteristics:

The input can be measured in monetary terms.

Their output can be measured in physical terms.

The optimum dollar amount of input required to produce one

unit of output can be determined.

Managers of these centres may be responsible foractivities such as training and employee development

that are not related to current production; their

performance reviews should include an appraisal of how

well they carry these responsibilities.


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Discretionary Expense Centre

The term discretionary does not imply that managementsjudgment as to optimum

Include administrative and support units (e.g., accounting,

legal, human resource, industrial relations, etc.)

The output of these centres cant be measured in monetaryterms.


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Types of Profitability measures

Contribution Margin

Direct Profit

Controllable Profit Income before taxes

Net Income


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TRANSFER PRICING?

Refers to the PRICING OF CONTRIBUTIONS (assets, tangible,intangible and funds) within an organisation.

The choice of transfer price will affect the allocation of the

total profit among the parts of the company.


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OBJECTIVES Main objective is to determine the OPTIMUM LEVEL OF

EACH DIVISION and OF THE FIRM AS A WHOLE

AND

in evaluating DIVISIONAL PERFORMANCE and

DETERMINING DIVISIONAL REWARDS. To provide each division with relevant information required

to make optimal decisions for the organisation as a whole.

To promote GOAL CONGRUENCE- that is, actions by

divisional managers to optimise divisional performanceshould automatically optimise the companysperformance.

To facilitate measuring divisional performance.


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Criteria to be used to evaluate methods for

calculating Transfer Price

Goal Congruence

Rationality

Autonomy Performance evaluation


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TRANSFER PRICING- METHODS

TRANSFER PRICING-

METHODS

Market

Based Pricing

Cost-based

Pricing

Negotiated

Prices


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Market Based Pricing Method

As per this method , the goods & services are transferred

between profit centres at a price prevailingfor those goods

& services in the market.

Advantages:

Business units can operate as independent profit centres with the

managers of these units being responsible for their own

performance as well as that of the business unit.

Tax and customs authorities favor the market price method because

it is more transparent and they can crosscheck the price details

provided by the company by comparing them with market prices onthat date.


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Cost-Based Pricing Method

As per this method the transfer price is calculated on thebasis of cost of a good or service.

Cost data is available in the cost accounting records of the

company.

Method is generally acceptable by tax and custom

authorities since it provides some indication that the

transfer price approximates the real cost of item.


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Approaches to

Cost-Based Pricing Method

Actual costs approach

Standard costs approach

Variable costs approach Marginal costs approach


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Marginal cost

Marginal cost or incremental cost is the additional cost

required to produce a unit.

Decision making based on incremental cost determines

the benefits of the decision for the organisation as awhole.

What will be the transfer price, where one division of a

company who is to transfer a product to the other

division, is working at a level less than its full capacity?i.e. at a level below 100% .


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Negotiated Prices

Negotiated pricing is possible when there are alternative

sources of supply and demand.

When a selling division has a choice of customers, or buying

division has a choice of suppliers, prices can be negotiated.


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Q.Division Z is a profit centre, which produces four products- A, B, C, and D. Each product is

sold in the external market also. Data for the period is as follows:

Particulars A B C D

Market Price per unit Rs.150 Rs.146 Rs.140 Rs.130

Variable cost of production per unit Rs.130 Rs.100 Rs.90 Rs.85Labour hours required per unit 3 4 2 3

Product D can be transferred to division Y, but the maximum quantity that might be required for

transfer of units is 2,500 units of D.

The maximum sales in the external market are:

A 2,800 units

B 2,500 units

C 2,300 units

D 1,600 units

Division Y can purchase the same product at a slightly cheaper price of Rs.125 per unit instead

of receiving transfers of product D from division Z.

What should be the transfer price for each unit for 2,500 units of D, if the total labour hours

available in division Z are:

(1) 20,000 hours

(2) 30,000 hours

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Unit- IV Management Control Systems and Proecess

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