63% BOD Acie] I Ddc Je BERS pt 8.39 ie & B 9.9.5 MBA (Executive) Paper -9107; MANAGEMENT CONTROL SYSTEMS :3 Hours Maximum Marks : 70 (Write your Roll No. on the top immediately on receipt of this question paper:) Attempt all questions. Make suitable assumptions wherever necessary. Q.1 Answer the following (any two): 1. “Good management control systems influence behaviour in a goal congruent manner”. Comment. IL. Explain and illustrate different types of responsibility centers. TIL Strategic Profitability Analysis t1s475) Q.2 Answer the following 1. Division A of Lambda Company manufactures Product X, which is sold to Division B ‘as a component of Product Y. Product Y is sold to Division C, which uses it as a ‘component in Product Z, Product Z is sold to customers outside of the company. The intracompany pricing rule is that products are transferred between divisions at standard cost plus a 10 per cent return on inventories and fixed assets. From the information provided below, calculate the transfer price for Products X and Y and the standard cost of Product Z. [ Standard Cost per unit | Product X Product Y Product Z Material purchased outside $ 2.00 $3.00 $1.00 Direct labour $1.00 $1.00 $2.00 Variable overhead $1.00 $1.00 32.00 Fixed overhead per unit $3.00 $4.00 $1.00 Standard volume (units) 10,000 10,000 10,000 Inventories (average) $70,000 $15,000 $30,000 Fixed assets (net) $30,000 $45,000 $ 16,000 (10) II, Enumerate the functions of a financial controller [3] Or IIL, Diseuss management controls f ifTerentiated strategies. 15]3 d? loeb hh? re me \= A New Attitude Standing atop a table on the shoy sion, “Starting today,” he said, “things are going to change, Rij money on rework and wasted materials. I don’t want that :noney going out the door, I mecha Tether give i to you People are leaving here with no retirement benefits It breaks my hease sha this happening. I wank to be able to afford to give people these things, From aowon a ‘you deat care about first-time quality there won't bea job for you, Ifyou do care, you'll always have a job hers He continued on a second then work. My visidn to get in there)" Employees wore skeptical but Brian asked them to trust him, As a goodwill gesture, he di cided'the compeny would provide donuts ind coffee every morning for breakfast, although it couldn't really afford the expense. The announcement of change introdwaeas periad of re- P floor, Brian called a meetig ofthe company to lay out his vie ight now we are wasting tremendous “Today this place that one day people will say to you, "You n't a particularly desirable place to us work at Crown Point? Wovw, I'd love Team-Based Management Unlike most of the management team at Crown Poi ence in other busine: int, Brian Stowell's wife, Becky, settings. As a family member and sha, Crown Point faced. Foremost among these stru; hed experi- holder, she was privy to many of sgglea were the restructuring deci- wena challecaar ond ea iutking. Deciding which employees ‘vere the source of quality preblene i ily charged. Twelve months aft Brian's speech, Becky offered : Get rid of the management layers und let employees decide whe trae i hele Beura was worth keeping. She advocated a tonm-hased marageerane ‘approach that empowered employecs with personnel and management ileciyion-making responsibility, ‘The Philosophy was adopted, and vight production line managers wore placed in work teams sfonguide the employees they formerly supervised. Some, managers quit rather than be “demoted.” Othera adapted offortlessiy. Still others tried but were seabie rp work under the new ayste.n, 8 of vp to 12 people, Meet: air grievances, suggest work improvements, 'wo or three individuals would t this problem, ail employees ‘were offered communication traini By 1994 teams had designed evaluate team tnember perform: contage net by management, The score was intentionally subjective in nature, ing and teams were broken ini co-worker revieployees but one thing seemed constant: many employees received repeated critsiem, but ery, few were denied the maximum salary increase. The result was that almost all employees re: ceived the same (maximum) percentage increase, vt ; Since their inception, teams have been vested with the pwwer to hire and fice teammateat The head of human resources first interviews candidates for a team opening. Recommeniey candidates are then interviewed by the team, Over 75 percent of candidates taat HR panses have been rejected subsequently by the team, Gainsharing 72 [097 Crown Point instituted an incentive system designed to reduce labor costa, Labor \yp- ictlly constitutes 26 percent of costs for a cabinet manufacturer. Brian and Becky* proposed sh wing labor cost savings with employees through a program termed gainsharing. The systera worked as follows 1. Brian multiplied sales figures for each month by a set percentoge, based on a reason: able estimate of what the company could afford to pay for labor. This figure was used to determine a maximv n bonus pool. 2. From thie figure, actua labor costs for regular hours, overtime labor costs, and a holi- days/vacation budget w sre subtracted, " 3. The remaining funds » re distributed evenly each month as a percentage among em- ployees, based on wage: earned, 4. Each month was starte ! anew regardless of the previous month's performance. Every Monday afternoon, a n.ceting was held to go over, among other thinge, the results te date for gainsharing bonuses. Over 95 percent of the time since their inception, gain sharing bonuses have been paid out, averaging 11-20 percent of annual compensation from 1997 to 2001 An undesired result of the gainsharing system was animosity toward individuals who worked overtime, Since gainsharing wus based on total company performance and payout was tied to wages earned, individuals who worked overtime received a disproportionate share of the gainsharing bonus, Attrition seemed to take care of the problem as individuals who needed to work overtime (due to consistently unfinished work) were eventually counseled out by other members of their team. 1 Backorder Penalty/Reward System Crown Point prided itself on on-time and complete delivery. Orders that left the shop incom- plete were identified as “backorders,” A backorder required further shipmen: of missing parts and field installation of those parts. As gainsharing bonuses were paid, the aumber of backo- rders seemed to increase, Brian repeatedly pointed out the long-term impact bac'sorders had on the business. He explained that because the busit.ess was so dependent on satisfied cus- tomers and word-of-mouth advertising, it was critical that every order be received complete and on time. The speeches didn’t seem to help. “Becky Stowel, Brians wile, became a fulltime employee in 1994 and vice president of Crown Point in 2001, C4 A C5€ © €Beginning jn 1998, a $250 penalty was applied to the gainsharing pool for every backorder experienced. No impact was noti~>d, 30 the penalty was increased to $600. Again there was no measurable impact. Finally, in 1999 the penalty was increased to $1,000 and a lunch was promised for every employee for every wevk in which no backor ders cecurred. The frequency of backorders declined noticeably, Workers chvered when u week pussed without a backorder, and. lunches were soon being served nearly every Thursday, Not everyone was happy, though, par~ ticularly front office personnel who had the added task of arranging lunch for 85 people every ‘week, And some people wondered whether the $600 weelly lunch bill was justifiable Wage Increases Gainsharing bonuses approached 20 percent in the first year of implementation. The follow- ing year, 1998, Brian and Becky decided to raise wages. Thy y rationalized that employees ‘were better able to secure loans and plan/pay for items when they could count on a secure salary. Wages were raised again 14 months later—in 2000—nd again in 2001. These wage increases had the effect of keeping guinsharing bonuses contained at less than 25 percent on an annual basis, Employees, predictably, were delighted at the increases although some feared the increased labor yates would ultimately result in job losses. Brian assured them that the extra money was a dircet result of continued labor savings due to increased produe- tivity and that job security was vtill a priority. Safety ' praia alts nar Narva iow statvardallp 1004 w aly ar won established under the direction of Becky Stowell and Jeff Stowell, Brian's brother, The team ae ‘wrote rules and guidelines for work, and emplayces were empowered to remove others from the > shop floor for safety vivlations. The safety team determined penalties, including dismissal, for 2 ‘vislators, Everyone was subject to the same rules; even the founder and president was"retrained” » on safety standards, Serving on the safety team became a necessary but sometimes unenviable part of working at Crown Point ax team members sometimes agonized over decisions to fire 3 long been a part of a self-funded, self-managed workers compensation trust made up of a seiect groups of small manufacturers, The group :idministers workvrs compensa. tivn insurance with the state of New Hampshire. Inclusion in the group requires an impecca: ble safety record and commitment to safe work practices. As a tribute to Crown Point's safety record, the company today enjoys the lowest experience mods® within this group. As late as 1992, Crown Point's experience mod was 40 percent above state average, By 2001 it had dropped to 32 percent below state aver: “ / e ‘an “eapetience mod™s 8 umber indicating the multiple at which afm fs above or below the wate average for workers ‘compensation inura: ce. Experlence mou! don both frequency and severity of worker inuty claims The state average fim has an eaperience mod ot | 2 a =we Community Citizenship town Point considers community citizenship an important part of doing business, In 200% Crown’ Point won the Claremont Chamber of Commerce's first annual. Company of the’Yeat’ award. This award was based on quality and quantity of nominations received from community. citizens: Many of the nominations for Crown Point received by the chamber reportedly werd fronr Crown Point employees. ot sap 0. In 2002 a committee of Crown Point employees was formed to vollect funds from employees; matched by the company, for distribution to community initiatives. The company receives nu+ merous requests to receive awards or recognition for community sponsorships. Employees on the citizenship committee take turns accspting these awards on behalf of the company. Communication Largeiy as a result of the team-based structure, communication in the company has flourished. Brian introduced an open-door policy, toured the shop regularly, came to know all employees by name, and participated in many of the daily production team meetings. (Production teama met three times a day to review production and quality progress.) Employees have used their free- dom to approach Brian with their concerns. The weekly shop-wide meetings are used to com- municate financial performance, safety information, and general company announcements, Some of Brian's community business colleagues marvel at the openness of information shared; much of which they consider proprietary, noting they would “never let (their) employees know how much money [they're] making or spending on labor.” | Crown point has not been plaguéd by many of the disputes common among family-owned businesses. Communication among family members has always been good. Brian notes that even though many of the changes he instituted were not supported by his father, Norm chose to take a hands-oi' approach and gave Brian and Becky the freedom to succeed or fail. Other Crown Point has added numerous other benefits for employees since 1993. A 401K retirement plan was implemented in 1996, Initially, the company paid the plan’s administrative costs but did not match employee donations. By 2001 it. was matching contributions to 50 percent of em- ployee donations, up to a maximum of 10 percent of a worker's salary. Ninety-five percent of employees perticipate in the retirement plan—about 20 percent greater thar average for plans of its type, Annual company piénics, a box suite at a nearby urban sports arena, a company- sponsored downhill skiing program, a soft ice cream maker and popcorn popper in the lunch- room, and continued and expanded daily breakfasts are examples of the some of the perquisites reserved exclusively for employees. Jo QO € @6oe@ec «4 cSales and Marketing sy dis, 998 Crown Point, like most other custom cabinet manufacturers, used an exte dealer network (76 in total) to sell its cabinets, Dire sales accounted for less than 25 per faales in 1994, rose to 50 pereent in 1998, and reechaa ae percent in 2001. The reason for the wed pion was simple, Brian felt-the 30 peecent musgin captured by dealers could be better tad internally to fund an in-house desigwsales tong ing increased advertising. The design contra calls from potential customers solicited ben from design professionals and compattors, Prepared quotations, and elosed sales, The teres grew from 1 to 13 people and was grew mone an nsrthied base pay and twosthirls commission erage Point’s marketing budget to trade eat fouefeld trom 1994 to.2001, with much of the increased expenditure allocated to trade journal advertising. A 2002 show of the nationally syndicated home improvement tele “vision program Bob Vila’s Home Again highligh Crown Point’s factory and quality work confab #8 part of a Vermont home renovation proj , bringing invaluable attention to the ‘company, Results A would appear that the goals Brian laid out in his 1999 speech have be quality has improved dramatically, allowing (nvines. The attitude at the plant is tolling. One there: “I do quality work because that’s what the U2, has done so much for me, I want to do more forte nut many in the town wish they could work at ror their help real well.” Another employee stated work for Crown Point,” ‘The financial results have been solid, Sales more nargin as a percent of sales increased 6 percent an crage for cabinetwork plants. Net margin move, than tripled between 199: id is over 15 percent better than the US. ay, «i from breakeven to over 10 percent. And all this occurred while base wage rates Gneluding gai aring) inereased 2.5 fold. ven more remarkable, employee turnover has be reduced to near zero, absentecism ig ' Fanible, and management employee relations ere at ge all-time high. As praise poured in sean Customers, the community, and the employees: i Wondered what it was that turned m) ‘tall around. Could something have been done {lifferently? Were there other ways to get these “ notin haculd the Crown Point experience be tranetentcn a ‘other business settings? Finally, os B ia i) t Be noting that inereasing competition from local Cabinetmakers was a threat to the business, ky Wondered how Crown Point could extract further Productivity gains from an already inspired workforce, Questions _ J) What is the strategy of Crown Point Cabinetry 2, What is responsible for the company’s turnaround? q 4 Is the Crown Point experience transferable to other business settings? » Beeee