Q.1 ) Explain the benefits accrued to the top management by the internal audit?

Ans : Major advantages Having An Internal Audit Department It dispenses the need to employ external consultants to act as internal auditors hence saving large sum of money. This is even especially true when an internal audit department is properly run with well trained and experienced internal auditors; The internal auditors are intimately acquainted with the business as they are continuously employed in the same concern and have access to much confidential information and to all levels of management. Hence, they really are special personnel who have very in depth inner knowledge which can then contribute to the company; The Internal Audit maintains a group of highly skilled people available to cope with nonrecurring and exceptional jobs which no many employee could deal with efficiently and effectively; It ensures that the organization detailed standard policy and procedures are running smoothly. This compared to the external auditors primary role of the ability to express the true and fair view of the clients financial statements audit; Internal auditors are invaluable in areas like operational audits, constant examination of internal check controls, the detailed application of normal auditing method and detailed review of the various type of management reporting; Last but not least, it provides an excellent training ground for future executives. Trainee personnel obtain intimate knowledge of the business which they can study problems of all kinds at different levels. The following categories of function may be carried out by an internal audit department:

1. Advisory- meaning that the internal auditor may recommend improvements and changes in 2. Executive-the internal audit department may actually deise and install changes and
improvements to existing systems and set up new systems the system in operation and in the setting up of new systems

3. Reporting-the internal audit department prepares routine report on the companys activities
either on a comprehensive, or on an exception basis 4. Routine testing-the department routinely monitors the performance of the companys system,eg. by examining and testing controls such as those over buying procedure and by cash counts or stock counts

Q. 1 a. Explain the considerations involved in performing the function of R&D by top management in view of the challenges of the globalization?

Ans : Globalization means no barriers of trade between the countries across the globe. Anyone can freely trade the goods and services among the countries in the globe. This results into stiff competition in the global market, in this competitive market if the firm has to survive then it must be updated and the products of the firms must have the latest technology in it. In the situation like this if the R&D department is functioned by top management then this will be useful for the future of the organization because, top management can make decisions very quickly due to powers in their hand and the experience that they earn. If R&D decisions made quickly and effectively then one can expect always updated and latest quality product of the firm in the market. Due to the influence of trips (trade related intellactual property rights) the competition in global scenario bacame very tough before the top management there are various patents, copyrights acts available in these provisions to protect the R&D findings of one company thats why there is heavy expenditure is required in R&D activities by the corporates. Also due to intense copetition it is indeed to corporates to udate their products and services with their rivals products and services. Socio cultural differences among the market territories influence the direction of R&D activities for e.g. incase of Annapurna iodized salt invented by HLL made an intensive research on preserving the iodine content in food cooked by indian receipies for that they have introduced stable iodine salt which has been patented in 80 countries which encapsulates iodine in aluminium and magnatium hydroid. Thus, these are the considerations involved in regulating R&D function by the top management especilly in view of challenges faced on account of globalization.

Q. 2 a. Explain subtle difference among the Management audit, Quality audit and Technical audit? Ans : Management Audit

A management audit may be described as a systematic and objective appraisal of the quality of management, aimed both at individual managers and toward the management team as an interlocking system of decision makers. Management audit concerned with the ways and means to perform specific task.

For e.g. it involves the decision taken by the management, reporting and follow up procedures, direction given by the management to the company, leadership etc are examined in the management audit.

Quality Audit

A systematic and independent examination to determine whether quality activities and related results comply with planned arrangements and whether these arrangements are implemented effectively and are suitable to achieve the stated objectives. A quality audit is concerned with the quality of results of specific tasks which involves various products and services. For e.g. it involves the quality testing of the final output of the plant whether it is goods or services.

Technical Audit

Technical audit can be described as systematic and independent examination of technical facilities of the company.

It is concerned with the exmining the technical specifications of the various entities of the company

For e.g. factory layout, production or manufacturing facilities, locations, machineries, processes etc. comes under technical audit.

Q.7 Explain responsibility centre and map the process of evaluation thereof from one stage to another, with the help of illustrations cum experience of the corporates? Answer: Introduction A responsibility centre is an organization unit that is headed by a manager who is responsible for its activities. In a sense, a company is a collection of responsibility centers, each of which is represented by a box on the organization chart. These responsibility centers from a hierarchy, at the lowest level are the centers for sections, work shifts, and other small organization units. Departments or business units comprising several of these smaller units are higher in the hierarchy. From the standpoint of senior management and the board of directors the entire company is a responsibility center, though the term is usually used to refer to units within the company. Nature

A responsibility centre exists to accomplish one or more purpose termed its objectives. If each responsibility centre meets its objectives, the goals of the organization would have been achieved. The output of responsibility center could be tangible like product or intangible like service or advice output of a responsibility center could be input to another responsibility center or could be sold in market place to earn revenue. Relationships between inputs and outputs Management is responsible for ensuring the optimum relationship between inputs and outputs. In some centers, relationship is casual and direct. In production department control focuses on using minimum input necessary to produce required output according to correct specifications, quality standards and in right quantity.

In many situations inputs are not directly related to the outputs. Advertising expenses are intended to increase sales revenue but since revenue is affected by many factors other than advertising, the managements decision to increase advertising budget is based on its judgement rather than data. The value of R&D expenditure may not be known for many years. Measuring Inputs and outputs Inputs can always be measured in terms of cost. Inputs are the resources used by the responsibility centers. Calculating the value of output is much difficult to measure. Annual revenue may be an important measure of output but did not express all that the organization did during the year like R&D, training and advertising etc. It is not possible to measure value of output of HR, PR, R&D etc. In non profit organizations there may be quantitative measures of output. At best we may use surrogates. Efficiency and Effectiveness Efficiency is the ratio of outputs to inputs or the amount of the output per unit of input. Effectiveness is determined by the relationship between a responsibility centers output and its objectives. Efficiently and effectiveness are not mutually exclusive. Every responsibility centre should be both effective and efficient. In summary, a responsibility centre is efficient if it does right things. The role of profit A major objective of any profit oriented organization is to earn satisfactory profit. Thus, profit is an important measure of effectiveness. Since profit is the difference between revenue (a measure of output) and expenses (a measure of input), it is also a measure of efficiency. Thus, profit measures both efficiency and effectiveness. Types and flow of Responsibility centers

There are four types of responsibility centers, classified according to the nature of monetary inputs and outputs that are measured for control process: 1. 2. 3. 4. 1. Revenue centers Expenses centers Profit centers Investment centers Revenue Centers In a revenue centre, output (i.e.revenue) is measured in monetary terms, but no formal attempt is made to relate input (expense or cost) to output. Typically revenue centers are marketing / sales unit that do not have authority to set selling price and are not charged for the cost of goods they market.

2. Expense Centers Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not. There are two types of expense centers. I. Engineered Expense centers It has following characteristics i. Their inputs can be measured in monetary terms. ii. Their output can be measured in physical terms. iii. The optimum rupee value of input required to produce one unit of output can be determined. Engineered expenses centers are usually found in manufacturing operations. They could be engineered expense centers in marketing like warehousing, distribution, trucking in administration and support departments also.

II.

Discretionary Expense center Discretionary expenses centers include administrative and support units, research and development, and most marketing activities. The output of these centers cannot be measured in monetary terms. The term discretionary means management exercise its judgement about what the costs should be taking into account its strategy and competitive environment.

General control consideration

Budget preparation Management formulates budget for a discretionary expense center by determining the magnitude of the job that needs to be done. The work done by a discretionary expense center falls into two categories continuing and special.

Continuing work is done consistently from year to year such as preparation of financial statement by controllers department. Special work is a one slot project. E.g. developing and installing a profit budgeting system in a newly acquired division. MBO is used for budget preparation in a discretionary cost center, where in a budget proposes to do specific jobs and suggest measures to be used in performance evaluation.

The planning function carried out in two ways.

for

discretionary

expense

center

is

usually

a. Incremental Budgeting In this method current level of expenses is taken as a starting point. This amount is adjusted for inflation, anticipated changes in workload of continuing jobs, special jobs and if data are readily available, and the cost of comparable jobs in similar units. b. Zero Based Budgeting A thorough review is made of each expense center. This review attempts to ascertain de novo that is from scratch, the resource actually required to carry out each activity. This analysis establishes a new base; the annual budget simply tries to keep the cash in line with this new base. Cost variability In most discretionary cost centers personnel cost centers personnel cost is the predominated cost. This is insulated from short term fluctuation in sales volume. If you try to adjust it with volume the cost of hiring and training would increase. If we retrench moral of the people goes down.

Types of Financial control The main purpose of the discretionary expense budget is to control cost by allowing the manager to participate in the planning, sharing in the discussion of what tasks should be undertaken, and what level of effort is appropriate for each. Thus financial control is exercised at the planning stage before the costs are incurred.

Measurement of Performance 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 considered satisfactory spending more than that it is cause for concern, spending less may indicate that the planned work is not being done. The financial performance report is not a means of evaluating the efficiency of the manager.

3. Administrative and support centers Control problem of administrative expenses is especially difficult. I. The problem inherent in measuring output, and II. The frequent lack of goal congruence between the goals of departmental staff and the company as a whole. Difficulty in measuring output The principal output in administrative center is Advice and Service functions that are virtually impossible to quantity much less evaluated. Since output cannot be measures, it is not possible to set cost standards against which to measure financial performance. Thus, a budget variance cannot be interpreted as representing efficient or inefficient performance and which to discontinue. These decisions, of course are highly subjective but they are within the policy limits on total research spending.

4. Annual Budgets if a company has decided on long range R&D program, and has implemented this program with a system of project approval, the preparation of the annual R&D budget is mainly the calenderization of the expenses for the budget period. If the budget is in line with the strategic plan, approval is routine and primarily serves to assist cash and personal planning.

5. Marketing Centers Marketing activities are those undertaken to obtain orders for companys products. These activities include test marketing, the establishment, training and supervision of sales force, advertising and sales promotion all of which have characteristic that present management control problem. When it is possible to measure a marketing departments output evaluating the effectiveness of marketing effort is much more difficult. It is because that the factors beyond the marketing departments control may invalidate the assumption on which sales budget were based.

There are two types of Marketing Activities.

i. Order tilling or Logistic activities which takes place after an order has been received.

ii. Order getting activities or true marketing activities.

Flow of one stage to another stage

Manufacturing Function

Engineered Expense Centers

Optimal relationship can be established

Inputs Work Dollar

Output s Physical

Research & Development Function

Discretionary Expense Centers

Optimal relationship cannot be established

Inputs Work Dollar

Output s Physical

Marketing Function

Revenue Centers Inputs are not related to outputs

Inputs Work Dollar only for costs directly incurred

Output s Dollar Revenue

Business Units

Profit Centers Inputs are related to outputs

Inputs Work Dollar Costs

Output s Dollar Profits

Business Unit

Investment Centers

Inputs are related to capital employed

Inputs Capital Employed Dollar Costs

Output s Dollar Profits

Q.10 Mane jay LTD ,engaged in diversified activities consisting of 9 independent profit centres decided to sell one of its division profits centre to a group of its managers .narrate the changes that are needed in control system ,practice and procedure ,giving the reasons. Answers There is no guiding principle declared that certain types of units are inherently profits centres and others are not. Management decisions as to whether a give units should be profits centre is based on the amount of influence(even if not control) the units managers exercise over the activities that affect the bottom line. Marketing A marketing activity can be turned into profit century charging it with the cost of the production sold. this transfers price provide the marketing managers with the relevant information to make a optimum revenue /cost trade offs, and the standard practice of measuring a profits centres managers by centre profitability provides a cheque on how well these trade offs. Have been made the transfer priced charged to the profit cater should be based on the standard cost. Rather than the actual cost. Of the product being sold. Using the standard cost has is separated .the marketing cost performance from that the manufacturing cost performance. When should a marketing activity be given profit responsibility? when the marketing managers is in the best position to make the principle cost revenue trade off .this often occurs where different conditions exist in different geographical areas for example a foreign marketing activity ,in such an activity ,it may be difficult to control centrally such decision as how to market product. How

to set the price, how much to sends on sales promotions, when to spends it ,and on which media ,how to train salespeople or dealers ,where and when to established new dealers. Manufacturing The manufacturing activity is usually an expenses centre, with management being judged on performance versus costs and overhead dudgets.this measure can cause problems however since it does not necessarily indicate how the manager is performing all aspect of his job. Example A manager may skimp on quality control, shipping products of inferior quality in order to obtain standards cost credit. A managers may be reluctant to interrupt production schedule in order to produce a rush corroder to accommodate a customer. Managers who are measured against standards may lack the incentive to manufacture products that are difficult to produce-or to improve the standards themselves. some authors maintain that manufacturing units should not be meet into profits centres unless they sell a large pertain of their outputs to outside customers. the regards the units that sell primarily to other business units as profit centre.

Service and supports units Unit for maintained ,information ,technology ,transformations engendering ,consulting , customer service and similar supports activities can all be made into profits center,these may operate out of headquarters and service corporate division ,or they may fulfil similar function within business units .they charge customer for service rendered ,with the finical objective of generating enough business so that their revenues equal their expenses .the prevalence of such practices is shown (the firms charge based on usage probably treat these units as profit centres ) usually ,the units receiving these service have the option of procuring them from an outside vender ,provide the can offer service of equal quality at a lower price. Paper 2008 Q.11) ABC ltd has two division x and y. ROI and particulars of x and y are given below. PARTICULARS ROI Sales Investment EBIT DIVISION X (RS) 28% 100 Lakhs 25 Lakhs 7lAKHS Analyse and comment upon performance of both divisions. Solution:Profit Profit margin = ----------- *100 Sales Div x div y DIVISION Y (RS) 26% 500 Lakhs 100 Lakhs 20 Lakhs

7 Lakhs Profit margin ---------------*100

26 Lakhs -------------- *100 500 Lakhs = 5.2%

100 Lakhs = 7% Sales Turnover of assets = ---------------Investment (assets) 100 Lakhs Turnover of assets -------------------25 Lakhs = 4 times Profit margin Turnover of assets RoI 7% 4 times 28%

500 Lakhs ----------------100 Lakhs 5 times 5.2% 5 times 26%

Comment Div x perform better than div y. Profit margin of x is 7% & of y is 5.2%. Though sales of x is Rs 100 lakhs which is lower than of y i.e. 500 lakh. But efficiency of div x is more than div y because it is earning more margin. About ROI it is 28% of x & 26% of y which means asset management of x is proper (current assets such as debtors, receivable) is mismanaged working capital is mismanaged. Turnover of y is good for which x have to work. OR Q11. shandilya ltd has adopted Economic value Added.(EVA) technique for appraisal of performance of its three division A,B,& c. company charges 6% for current assets and 8% for fixed asset while computing EVA relevant data are given below. Particulars B* profit Current assets Fixed assets 360 400 1600 Division A A** 320 360 1600 B* 220 800 1600 Division B A** 240 760 1600 B* 200 1200 2000 Division c A** 200 1400 2200

budgeted ** Actual (Rs in carors) On the basis data given below:1) Tabulate budgeted and actual Return on assets for each of the divisions.

2) Tabulate budgeted and actual Economic Value Added for each of divisions. 3) Comment upon both method based on result. Solution:Profit Profit margin = ----------- *100 Sales Div A Budget 360 Profit margin ---------- * 100 2000 = 18% Div B Budget 220 Profit margin ---------- * 100 2400 Actual 240 -------------- *100 2560 Actual 320 -------------- *100 1960 = 16%

= 9% Div C Budget 200 Profit margin ---------- * 100 3200 = 6.25% EVA = Profit cost of op OR EVA = OP PROFIT (Capital employee * WACC) DIV A Budget EVA profit = 360 C.Asset = 400 *6% = 24 240

= 9.36%

Actual

-------------- *100 3600 = 5.55%

F.Asset

= 1600* 8%= 123 ----------152

360-158 = 208 EVA = 208 Actual profit = 320 C.Asset = 360 *6% = 21.6 F.Asset = 1600* 8%= 128 ----------149.6 320 -149.6 = 208 EVA = 170.4 DIV B Budget EVA profit = 220 C.Asset F.Asset = 800 *6% = 48 = 1600* 8%= 128 ----------176 220 - 176 = 44 EVA = 44 Actual Profit = 240 C.Asset = 760 *6% = F.Asset 45.6

= 1800* 8%= 144 ----------189.6

240 -189.6 = 208 EVA = 50.4 DIV C

Budget

EVA

profit = 200 C.Asset F.Asset = 1200 *6% = 72 = 2000* 8%= 160 ----------232 220 - 232 = -32 EVA = -32

Actual

Profit = 200 C.Asset = 1400 *6% = F.Asset 84

= 2200* 8%= 176 ----------260

200 260 = -60 EVA = -60 COMMENT Negative EVA destroys value of company and positive EVA creates wealth for company.

Q.12) GBM Ltd , currently engaged in manufacture of medium engineering products, takes over a company engeged in Telcom Sector. Design an Integrated Management Control System for GBM Ltd. Assuming company has merged into GBM Ltd. Ans:Any organisation,however well aligned its structure is to the choosen cannot effectively implement its strategy without a consistent

strategy,

management control system. While organisations structures defines the reporting relationships & the responsibilities & the authorities of different managers, it need an appropriately designed control system to function effectively.

Now we will discuss planning & control requirements of different corporate strategies for GBM Ltd., Different corporate strategies imply the following differences in the context in which control system need to be designed: As firms become more diversified , corporate level mangegers may not

have significant knowledge of, or experience in, the activities of the companys various business units.If so, corporate level managers for highly diversified firm cannot expect to control the different businesses on the basis of intimate knowledge of their activities, and performance tends to be carried out at arms length. Single-industry & related diversified firms posses corporatewide core channels & transfer of competanciesacross business units, competancies on which the strategies of most of the business units are based. Communication therefore, are critical in such firms. In contrast, there are low levels of interdependence among the business units of unrelated diversified firms. This implies that as firms become more diversified, it may be desireable to change the balance in control systems from an emphasis on fostering emphasis on encouraging encouraging entrepreneurial spirit. Specific tendancies ,in design of control systems Strategic Planning : Given the low level of interdependence, conglomerates of GBM Ltd, tend to use vertical strategic planning systems- that is, business units prepare strategic plans & submit them to senior management to review & approve. Because of the high level of interdependencies, strategic plannig systems for releted diversified & single industry firms tend to be both vertical & horizontal. The horizontal dimension might be incorporated into strategic planning process in a number of different ways. First, a group executives might be given the responsibilities to develop strategic plans for the group as a whole that explicitly identifies synergies across individual individual business units within the group. Second, strategic plans of individual business unit could have an interdependence section, in which the general manager of the business unit identifies the focal linkages with other business units & how those linkages will be exploited. Third, the corporate office could require joint strategic plans for intredependent business units. Finally, strategic plans of corresponding to variations in corporate strategies for GBM Ltd., are given below.. cooperation to an

individual business units could be circulated to managers of similar business units to critique & review. Budgeting : In a single- industry firm, the chief executive officer may know the firms operations intimately & corporate & business unit managers tend to have more frequent contact. Thus, chief executive of single industry firms may be able to control the operations of suborddinates through informal & personaly oriented mechanism, such as frequent personal interactions. If so, this lessons the need to rely as heavily on the budgeting system as the tool for control. On the other hand in conglomerates like GBM Ltd,it is nearly impossible for the chief executive to rely on informal interpersonal interactions as a control tool: much of the communication & control has tobe achieved through GBM Ltd: Business unit managers have somewhat greater influence in developing their budgets since they ,not the corporate office, possess most of the information about their respective product or market environments. Greater emphasis is often placed on meeting the budget since the chief executive has no other informal controls available. Transfer Pricing : Transfer of goods & services between units are more frequent in single industry & related diversified firms than in the conglomerates like GBM Ltd. The usual transfer pricing policy in a conglomerate is to give sourcing flexibility to business units & use arms length market prices, However, in a single-industry or a related diversified firm, synergies may be important, & business units may not be given the freedom to make sourcing decision. Incentive Compensation : The incentive compensation policy tends to differ across corporate strategies in the following ways: Use of formulas: Conglomerates, in general are more likely to use formulas to determine business unit managers bonuses: that is , they may base a larger portion of the bonus on quantitative, financial measures, such as X percent bonus on actual economic value added (EVA) in excess of budgeted EVA. These formula-based bonus plans are employed because senior management typically is not familiar with what goes on in a variety of disperate businesses. the formal budgeting system. This implies the following budgeting system characteristics in

Profitability measures : In case of unrelated diversified firms, the incentive bonus of the business unit managers tends to be determined primarily by the profitability of that unit, rather than the profitability of the firm. Thus by this way we can design the inegrated management control system for GBM Ltd., assuming the other company has merged into GBM Ltd.