MCS

Q.5. ROI of both,* Ortrtons is same

ROI= Profit/Investment

Division A Division B
ROI 3,00,000 :75Yo 4,80,000 = l5Yo

20,00,000 32,00,000

is judged on the basis of the

Ner profit Margin i.e"
9iri,"Jl.Excellence

Division A Division B
Net Profit : 3,00,000 4,90,000.
Margn
40,00,000 96,00,000

Division A has better operational Excelrence.

Marketing Exceilence is judged by
,1" of sales generated per rupee oilnvestment
ryp:" i.e.
Total Assets Turnover: Divisionar sares
/ Divisionar Investment

Division A Division B
Sales Turnover 40,00,000. :) 96,00,000 _a
I
20,00,000 32,00,000
Division B is more effective in its marketing
effort as it generates 3 rupees of sales
per rupee of investment"
 Q.10. Pritam Engg. Co.

(a) For contol in Budgetary Control System Budgeted expenses

for Actual volume
are more meaningfirl. Standard at the normal volume ii idealistic
which may not
be achieved in actual situation. Therefore Actual expense at Actual
volume should
be, compared with Budgeted expenses at actual volume to draw
inferences.
*;;;i;l
(b) Expenses of Management Supervision is not under the
control of production
Supervisor. Actual expenses being lower than budget indicates
Either
Management has not hired the required number of superviiors
or supervisors of
lower caliber were hired at lower .utury.

Production supervisor should be held responsible for control

of Indirect labour,
Idle time, Material tools and Maintenance scrap. The fact that. adequate
3re-not in
supervisors place gets reflected in all tit"r" **p*"rlJog out
{: control. Production Supervisors cannot be held responsible fot
of
ailo"u:tJ"*p"*",
since the policy of allocating the expenses to Production
Deparhent is decided
by Senior Level of Management.

Q.t l. Anand & Company.

Retum on Assets: Profit / Fixed Assets * Current Assets

Division A: 300 :31.25%o

800 + 160

Division B = 220 : tlTo

400 + 1600

DivisionC = 100 :6.25%o

600 + 1000

DivisionD : ll0 :9.l7Yo

400 + 800

Division E : 180 : lSTa

200 + 800

t-
 Economic value added is equal to Profit-Capital charge on Fixed Asset - Capital
charge on Current Assets.

DivisionA : 300-0.10x 800*0.05x 160 =212

B : 22A -0.10 x 400 - 0.05 x 1600 = 100
Division

DvisionC : 100-0.10x600-0.05x 1000 :(10)

DivisionD = 110-0.10x400-0.05x800 :30 o

DivisionE = 180-0.10x200-0.05x800 :l2A

If ROA is the criteria for judging the performance of the Divisions the Manager of
{, Division A will never ifvest in any new project unless it earns 31.25% retum *hereas
Manager of Division C will invest in a new pmject if it eams a return slightly higher than
6.250/o. Within the same Company a project with 31 .24o/o return will be rejected by
Division A where as a project with 6.26% return gets accepted by Division C. This leads
to enoneous Investment decision in the company. EVA corrects this by having uniform
investment criteria for all divisions. Also it is able to take into account the riskiness of the
assets. Current Assets being less risky have lower capital charge whereas Fixed Asset
being more risky witl have higher capital charge.

Q.12. ABC Ltd.

Since Division B has contracted 20,000 units of a component flom Division A, Division
B would have to pay the budgeted fixed cost for 20,000 units and Return on Investment
reserved for 20,000 units.

Division B will also pay Division Standard Variable Cost for Actual number of units
puchased. Accordingly the total budgeted cost of Division B has to pay to Division A
per month would be

Total Cost : Standard Variable cost per unit + Budgeted fixed cost per month + ROI x
Monthly Invesment reserved for Div. B

Standard variable Cost per unit : Material Cost 60

Direct and Variable Cost ?O
80

Fixed costper month :2A x 20,000 : Rs. 4,00,000.

 Return on Investment per unit: Rs. 20.

Total Budgeted Retum : ZO * 20,000 = 4,00,000

Investment : Rs. 20,00,000
ThereforeROI: 4,00,000 =20Yo

20,00,000

Budgeted amount that Division B should pay

to Division A for oftake of 19,600 units
19,600 x 80 + 4,00,000(Fixed cost) + 4,0ti,obo1Re,r*;; =
: 15,68,000 + 8,00,000:23,6g,006
capacity)

Material cost is reduced by 5%: 60 _3 = 57

Actual variable material 5T

Variable labour 2A

;
There is no change in monthly fixed cost
: 4,00,000. However, Investment has gone
by l0%, Total Investment revised l.l x 20,00,b00 up
= iZ,aO,pOa
Desired retum :2ATo x22,00,000 :4,40,000

Total Aetual Cost of Division A

7J x 19,6AA + 4,00,000 + 4,40,0A0:15,09,000.+ g,40,000 = 23,49,000
I
Budgeted Cost : 23,6g,000
Actual Cost :23,49,A00

Material cost is
controllable by the g.prtuling department
and we
operating efficiency in use of Material t* ;.frou"i. r"""ro"ent is could infer the
capital Budgeting committee and perhaps they controlled by the
investment within the.estimated price o,
h;;;; been able to buy the new
tir.y hu',r" pu.h"r.o costly equipment which
reduces the scrap and improves material "
efiic'iency.
 Q.13. Shivangi Engg.

Shivangi Engg' Has grorrn by 41.57%from

1989 to t994which amounts over ga/oannual
growth' when shivangi was small top
managemgnt gave personal attention
the decision' Now the company t""d, to ivelop and expedite
T"t"giut.a system for management.
Personalized attention is neither feasibre nor
desirabre.

(a) Sales Margin = Net profit / Sales f 9g9 1993 1994

18 = 4.59Yo 26 :4.A8%a 24 = 2.99o/o

392 637 802
Net profit is constantly falling which does
not speak high of operating perforrnance
the company. of
(,
= Sales / Equity: ROE / Sales Margrn
(b) Equity Turnover

ROE : PATlEquity SalesMargin :pAT

/Sales

1989 1993 t994

14.7 :3.20 13.9 = 3.40 l0.g : 3.61
4.59 4.08 2.99
Equity turnover has been improving. It indicates
efficient use of assets and ability of
marketing department generated increased
sareu for;t;; investment.
(c) Production Area per Engine : Total production Area in sq. ft.

Total No. of Engines produced.

r989 1993

2,22,40A :4.99 sq.ft. 2,83,300 = 4.90 sq.ft.

44,50A 57,5A0

1994

334,A00 : 5.30 sq.ft.

 .t

o
63,000
(
It indicates that company has provided more space for Production worker.
-
(ii) Whenwe create profit center, we should give full authority to the SBU Head on
decisions concerning Revenue and Cost.

Here, Finance Manager seems to work independently and is seeming material

procurement is under his control.

There seems to be lack of integrated system which shows discrepancy in material

records of Finance and Systems. Also material procurement should be &rder the
conhol of COO so that he could take action on expediting the procurement of those
material which are required for completion of engines which are otherwi se 90Yo
complete. This will ensure completion of the product, its dispatch and generation of
revenue and also reducing the crowding of shop floor for WIp.
{'r
The discrepancy between Operations and Finance Department could be due to lack of
propersystem and periodic review and reconciliation. An updated ERP system would
help.