Paper Solution 2007

Q1) What do you understand by Goal Congruence? What are the informal factors that influence goal
congruence?

Answer:- This term is used when the same goals are shared by top managers and their subordinates. This is
one of the many criteria used to judge the performance of an accounting system. The system can achieve its goal
more effectively and perform better when organizational goals can be well aligned with the personal and group
goals of subordinates and superiors. The goals of the company should be the same as the goals of the individual
business segments. Corporate goals can be communicated by budgets, organization charts, and job descriptions.

 Goal Congruence- Meaning Individuals work in different hierarchies and handle different
responsibilities & may have different goals. But they must come together as far as Company’s Goal is concerned
(there action must speak Co’s language.)

Goal Congruence

Example 1– The HR manager has devised a HR training program to enhance the skills of its sales personnel,
with an objective to enhance their productivity But if company is in strategic need of attaining a certain sales
volume in a given quarter, it can not do so on account of non availability of personnel.

Example 2– The marketing department has planned an impressive advertising campaign, which promises good
returns, But say due to cash crunch Company’s current financial position may not let to lose the strings

Example 3 – Production Manager may get a good applause for reducing cycle time; But at what cost? Building
up the high inventory i.e. higher investment in current assets. While doing so he just overlooked the financial
interest of the company. • After completing the given activity in more efficient manner the concerned manager
scores the point/s on his score card. • Whether his actions are leading to scoring of points on the organization’s
score card too? if it is so then only one can say the organization is marching towards a common goal.

Every individual working in an organization has got his own motive to do the work. Individuals act in their own
interest, based on their own motivations. And it is always not necessarily consistent with the Co’s goal. In a goal
congruence process, the actions the people are led to take in accordance with their perceived self interest are also
in the best interest of the organization i.e. Goal congruence ensures that the action of manager taken in their best
interest is also in the best interest of the organization.

Informal factors that influence goal congruence:

External Factors
External factors are norms of desirable behavior that exist in the society of which the organization is a part.
These norms include a set of attitudes, often collectively referred to as the work ethic, which is manifested in
employees' loyalty to the organization, their diligence, their spirit, and their pride in doing a good job (rather
than just putting in time). Some of these attitudes are local that is, specific to the city or region in which the
organization does its work. In encouraging companies to locate in their city or state, chambers of commerce and
other promotional organizations often claim that their locality has a loyal, diligent workforce. Other attitudes
and norms are industry-specific. Still others are national; some countries, such as Japan and Singapore, have a
reputation for excellent work ethics.

Internal Factors

 Culture
The most important internal factor is the organization's own culture-the common beliefs, shared values, norms
of behavior and assumptions that are implicitly and explicitly manifested throughout the organization. Cultural
norms are extremely important since they explain why two organizations with identical formal management
control systems, may vary in terms of actual control. A company's culture usually exists unchanged for many
years. Certain practices become rituals, carried on almost automatically because "this is the way things are done
here." Others are taboo ("we just don't do that here"), although no one may remember why. Organizational
culture is also influenced strongly by the personality and policies of the CEO, and by those of lower-level man-
agers with respect to the areas they control. If the organization is unionized, the rules and norms accepted by the
union also have a major influence on the organization's culture. Attempts to change practices almost always
meet with resistance, and the larger and more mature the organization, the greater the resistance is.

 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
spend much time looking and talking to people (management by walking around); others rely more heavily on
written reports.

 The Informal Organization

The lines on an organization chart depict the formal relationships-that is, the official authority and
responsibilities-of each manager. The chart may show, for example, that the production manager of Division A
reports to the general manager of Division A. But in the course of fulfilling his or her responsibilities, the
production manager of Division A actually communicates with many other people in the organization, as well as
with other managers, support units, the headquarters staff, and people who are simply friends and acquaintances.
In extreme situations, the production manager, with all these other communication sources available, may not
pay adequate attention to messages received from the general manager; this is especially likely to occur when
the production manager is evaluated on production efficiency rather than on overall performance. The realities
of the management control process cannot be understood without recognizing the importance of the
relationships that constitute the informal organization.

 Perception and Communication

In working toward the goals of the organization, operating managers must know what these goals are and what
actions they are supposed to take in order to achieve them. They receive this information through various
channels, both formal (e.g., budgets and other official documents) and informal (e.g., conversations). 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 anyone part to further the common goals cannot be
stated with absolute clarity even in the best of circumstances.
Moreover, the messages received from different sources may conflict with one another, or be subject to differing
interpretations. For example, the budget mechanism may convey the impression that managers are supposed to
aim for the highest profits possible in a given year, whereas senior management does not actually want them to
skimp on maintenance or employee training since such actions, although increasing current profits, might reduce
future profitability.

Q2) Briefly define Discretionary Expenses Centre, Engineering Expenses Centre, Profit Centre and
Investment Centre? How is budget prepared in Discretionary Expenses Centre? How is performance of
manager evaluated in a Discretionary expenses Centre?
Answer:
(1) Engineered Expense centers – It has following characteristics
a. Their inputs can be measured in monetary terms.
b. Their output can be measured in physical terms.
c. The optimum rupee value of input required to produce one unit of output can be
determined.
(2) Discretionary Expense center:- Where the output centres cannot be measured in terms of money, they are
known as ‘Discretionary Expense Centre’. The word ‘Discretionary must be properly understood. Example of
such expenses centres are human resource department, accounting department, legal department, industrial
relations department etc. in other words all administrative and support functions fall within the ambit of
discretionary expense centres. In case of discretionary expense centre an optimal relationship cannot be
established between inputs & output
(3) Profit Centres: In the language of Anthony “when financial performance in a responsibility centre is
measured in terms of profit, which is the difference between the revenue and expenses, the responsibility centre
is called a profit centre”. Thus if the performance in a responsibility centre is measure in terms of both the
revenue it earn and and the cost it incure, it is called as profit centre.
Profit as measure of performance is especially useful since it enables senior management to use one
comprehensive measure instead of several measures that points to different directions. The profit centre concept
is powerful one.
(4) Investment Centre: An investment centre is a responsibility centre in which the manager is held responsible
for the use of assets as well as for revenue & expenses. It is therefore the ultimate extension of the responsibility
idea. The manager is expected to earn a satisfactory return on capital employed in the responsibility centre.
Measurement of the investment base or capital employed gives rise to many difficult problems and the idea of
the investment centre being new, there is considerable disagreement as to best solution of these problems.

Budget Preparation in Discretionary Expenses Centre

While preparing a budget for a discretionary expenses centre, management by objectives technique is generally
used,. To quote Anthony,” MBO is a formal process in which a budgeted proposes to accomplish specific tasks
and states a means for measuring whether these tasks have been accomplish”.
In so far budget for Discretionary expenses centres are concerned, two methods are used. They are:
(i) Incremental Budgeting:-
In case if incremental budgeting the expenses incurred during a particular period in a discretionary expenses
centre is taken as given. In other words, the present level of expenses is assumed as the starting point. Proper
adjustment are made to the expenses in order to arrive at budgeted amounts. The adjustment are carried out for
special tasks, for expenses changes in the work load of continuing tasks, for inflation, for cost of compaaraable
work in similar units.
Generally, organizations in India have been found to use this method. The merits of this method are simplicity
and saving in time. The shortcoming are that during business downturns, change in management etc, such
expenses are substantially reduce without making a bad impact on the business. Secondly, this has a tendency to
increase overheads expenses from period to period. Managers of DEC are interested in providing additional
services and as a result they have a tendency to make request for extra resources during budgeting, which is
generally sanctioned. Available evidence suggest that the same is not necessary
(ii) Zero Base Budgeting:-
Using Zero base review involves through analysis. Each discretionary expenses centre is thoroughly analyzed.
The management prepares a schedule that would cover all discretionary expenses over a period of five years or
so. As a result off this exercise, a new base is derived.
The Zero base review does not take things for given. There is no starting point. The review which is extremely
extensive in nature is builds up from scratch the resources that an activity needs. It raises certain fundamental
questions and challenges established norms. The questions raised are:
(i) It is necessary to perform the function at all? Does the same add the value from the view point of end
uses (Customer).
(ii) What should be the level of quality? Are we doing to much?
(iii) Is it desirable to perform the function in this manner?
(iv) What should its cost be?
Intra firm comparisons, interfirm comparisons, and bench marking are also used as a part of approach. Cost and
output measures of the expenses centre are compared with averages of similar units within the firm. This is
known as ‘intra-firm comparison,. Similar comparisons may be made with data which is published by trade
associations and other outside organizations. Such an exercise is called interfirm comparisons. When a
comparison is made with information obtained by visits to a firm in which the performance is believed to be
outstanding, it goes by the name of ‘benchmarking’.
Zero base review is not a rose without thorns. It has its drawbacks also Firstly, such reviews are difficult.
Responsibility centre heads consider such review as unnecessary evil. They make concerted efforts to justify
their present expenditure and of then do their best to foil the entire exercise. The people also speared rumors and
create doubts in the minds of the people regarding the efficacy of the exercise. Secondly, it takes a lot time and
energy and can be nightmare for responsibility centre heads whose operations are being reviewed.
Performance Evaluation in Discretionary Expenses Centre
In case of an Engineered Expenses Centre the financial performance report is used for evaluating the manager’s
efficiency. Managers who spend in accordance with the budget amount or less are considered efficient.
In contrast, the main job of the discretionary centre head is to accomplish the planned output. Accordingly,
actual expenses incurred by him are viewed in relation to the desired output. Expenses incurred may be lower
then the budget and this is an indication that the planned work has not been done. In case, the spending is
according to the budget the situation is looked upon with satisfaction. Where the amount expended is higher
than the budget, it causes concern.
The manager of a Discretionary Expenses Centre plays a vital role in expenditure control. The system should
ensure that his approval is obtained before there is a budget overrun. However, in reality a nominal percentage
of overrun is allowed without prior approval.
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 centers? Discuss their relative merit & demerits.
Answer:- 2009 Question No.3
Q4) What are the objectives of Transfer Pricing? What is ideal transfer price in the situation of:
(a) Limited Market
(b) Shortage of capacity in the industry
Answer:
Transfer price can be very simple or complex depending on the business. Ideally we need a proper negotiation
system, a proper arbitration system, a proper conflict resolution system, a proper product classification system,
competitive managers, good atmosphere, available market price, freedom to source and full information. All of
these have to be present for a market price based transfer price system to induce goal congruence. Ideally, the
buying and selling profit centre manager should be free to source but it may be unfeasible by company policy.
(I) Ideal Transfer Price in the Situation of:
(a) Limited market:
Market for buying & selling profit centres may be limited due to:
(i) The existence of internal capacity might limit the development of external sales. Most of the large
companies in an industry are highly integrated hence production capacity for an intermediate product
is limited. These profit centres can handle only a limited amount of demand. When internal capacity
become tight, the market is flooded with demand for the intermediate product. Even though outside
capacity exists it may be unavailable to the integrated company unless used on a regular basis or it
may have trouble getting it externally when capacity is limited.
(ii) If the company is a sole producer of a differential product then no external source exists.
(iii) If a comaapy has invested in facilities, it is likely to use external sources, unless the external selling
price is equal to variable cost which is unusual. Hence the produced products are captive.
Integrated Oil companies send crude oil from the production unit to the refining unit even if there is an external
market for the crude oil.
Even in the case of limited markets, the best transfer price satisfying all requirement of a profit centre is the
“Competitive Price”. If internal capacity is unavailable the company will buy from outside at the “Competitive
Price”. The difference between the “Competitive Price” and the internal cost is money saved by producing rather
then buying.
Methods of finding ‘Competitive Price’ if there are no External Transaction
(a) If published market prices are available they can be used to establish the “TP”, but these must be actual
figures & consideration & consistent with “TP” for similar quantities i.e. if the company is producing in
bulk, it should find the external wholesale market price instead of the retail price.
(b) Market prices may be set by using ‘Bids’, only if the lowest bidder gets the business. Companies put out
a bid for all products, but purchase only half of the product externally and produce the balance internally.
(c) If the Buying Profit Centre purchases similar products from suppliers, it can duplicate the ‘Competitive
Price’ internally.
(b) Shortage of capacity:
If the selling profit centre sells externally all of its production, i.e. it has excess capacity, which means there is a
shortage of Demand in the industry, then the company may not optimize profits if the buying profit centre
purchases from outside, in spite of the capacity being available internally.
Conversely the selling profit centre will benefit by selling internally when the Buying Profit Centre cannot buy
from outside because there is a shortage of supply in the industry. Here the output of the buying profit centre is
restricted & company profit may not be optimum.
Top management does not interfere, based on the theory that keeping the profit centre independent will set-off
the loss from sub-optimizing company’s profits.
Selling profit centre appeals if buying profit centre continue to buy from outside even when capacity is available
internally & buying profit centre appeals if selling profit centre continue to sell externally even when internal
demand exists.
Buying profit centre deal externally arguing that outsiders provide better service, which leads to rivalry in a
decentralized company. Top management should be aware of the politics involved in “TP” Negotiations. Even is
a constrains on sourcing exists, the market price is always best “TP”.
(II)When use the cost based transfer prices
If companies prices are not available, transfer prices may be set on the basic of cost plus a profits.enen though
such transfer price may be complex to calculate and the result less satisfactory than a market based price there
are tow based decisions must b in a cost transfer price system.
-How a define cost
-How to calculate the profit mark-up.
-The cost basic
- The usual basic is standards costs, actually costs should not be used because production inefficient
 -Will be passé on to the buying centre ,if standards coasts are used ,an incentives is needed to tight
standards and improve standards .
-The profit makeup
-In calculating the profits makeup there also are two decisions
-What are the profits mark-up is based on the The level of profit an allowed.
The seconds problems with the profit allowance is the amount of profits ,senior managements precipitations of
the financial performance of a profit allowance should approximate the rate of return that would be earned if
the business units an independent company selling required to meet the volume needed by the buying profit
centre ,the investment would be calculated at a “standards “level with fixed assets and inventories at current
replacement costs.

Q5) What are the different methods to evaluate the performance of investment centre? Discuss the merit
& demerits of each? Which method would you recommend?
Answer:-
Q6) (a) What are the special characteristics of Professional Service organization? How marketing done in
them? How do we evaluate the performance of a Professional Organization?
Answer:-
(I) Special Characteristics of Professional Service Organization
1. Small in size:
Generally, professional; organizations are small in size and are small in size and are located at one place.
Accordingly, personal observation is possible on the part of senior management and this forms the basis for
motivation of employees. Consequently, the need to have profit centres and formal reports of performance is
less felt. This means that the need to have an intricate management control system is lower. While such
organizations are small, there is still the need to tie remuneration to actual performance, prepare a budget,
regularly compare actual performance against the budget etc.
2. Goals:
While earnings a satisfactory return on assets is the main goal of a manufacturing organization, it is not possible
to calculate the same for non-profit organization as it possesses only a few tangible assets. The skill of its human
resources that is professional staff is its main asset. This being the case, the main financial goal of such
organization is to pay adequate remuneration to its professional staff. Another goal of professional organization
is to expand. While this leads to scale economics through better utilization of staff at corporate headquater it also
reflects the success of the organization as size is an indicator of success.
3. Professionals:
While professional organization are not capital intensive like manufacturing organization but labour intensive in
nature, professionals working in such organizations possess a number of characteristic. There are:
(i) They like to work independently.
(ii) The labour is of special kind
(iii) Those amongst them who also work in the capacity of managers devote only part time attention to
management activities.
(iv) Most of them do not possess a formal management education.
Senior partner of law firms have client, senior partners of consulting frims play an active role in consultancy
assignment, and senior partner of accounting firms take an active part is audit assignments.
As a result of the above characteristic, professionals have low regards for managers.
By virtue of their background, they are interested in doing the job in the best possible manner without having
any regards for the cost. This results in virtually ignoring the financial implications of their decisions. Similarly
this affects the attitude of non-professional and other approved staff.
4. Measurement of Output & Input:-
One of the problems confronting a professional organization is how to measure the outputof its professionals.
This is because traditional measures of performance which are used in manufacturing industry such as tons,
units etc cannot be used in these organizations. While output is the effectiveness of the professional work, this
cannot be measured by:
(a) The number of hours a consultant spends with his client or the number of pages in report.
(b) The number of hours a lawyer spends in the court room or the number of pages a brief has.
(c) The number of patients that is treated by the physician daily.
Although some professional organization employs revenue as a measure of output, it must be appreciated that
this measures volume of services provided by the organization and not their quality.
Whereas, some tasks performed by professional are repetitive in nature, the major portion of the work done by
them can be considered as non-repetitive. Instances of repetitive work are physical stocktaking by auditors,
drafting simple contracts, wills, deeds by lawyers etc. It is possible to develop standards for such tasks and use
them profitably. However, in respect of non repetitive tasks, planning the time required, establishing standards
considered reasonable for performing tasks, and evaluation of performance become a difficult task.
Another problem that arises in performance measurement is the unwillingness of professionals to maintain
records relating to time spent. Although this problem can de resolved if senior management takes the initiatives
in ensuring accurate reporting of time, the problem arises in connection with the amount to be charged per hour
for time spend on a job.
(II) Marketing in Professional Service Organization:
Whereas there exists a strict demarcation between manufacturing and marketing activities in manufacturing
organizations, it is hard to find such dividing line in professional organizations. Professional working in
professional firms is like accounting, law and medical are debarred from openly marketing the firm’s services by
virtue of their professional code of ethics. However, most of the organizations need to engage in marketing as its
an essential activity. Consequently, professional who work for clients, that is devote most of their time and
energy to production make speeches, play golf, establish contacts and similar activities to market the
organizational services.
(III) Measurement of performance and evaluation
While it is possible to arrive at a judgment regarding the performance of the professional at the extremes, it is
difficult to evaluate the performance of the major percentage of professional who figure within either extreme.
The human judgment forms the basis of evaluation of performance. The superior, self, peer, clients and
subordinates may play a role in making such judgment. There are objective measures of performance available
for some situations such as:
(a) Skill of a surgeon can be gauged by the success ratio of an operation.
(b) Skill of a consulting engineer can be measured by the quality of construction.
(c) The investment analysts recommendations can be compared with the market behavior actually
displayed by securities.
However, they have to be duly qualified.
Generally, judgments are made by superiors in professional organizations. Performance appraisals are collected
using formal systems. This are discussed with the concerned professional and forms the basis of personnel
decisions. In the case of the matrix organization the head of the professionals functional unit and his project
leader evaluates his performance. While some systems require non-numerical ratings of given attributes of
performance, there are others which call for numerical ratings of such attributes and a weighted average of the
rating is derived. In the case of numerical ratings, senior management uses its partially to give increments and
promotions.
Internal audit procedures form the basis of quality control in respect of certain professions. Whereas it is
customary for a partner (other than the partner responsible for it) of an accounting firm to review the audit
report, it must be mentioned that the audit reports of the entire firm is ‘peer reviewed’ by another firm.
We have seen that budgeting control of discretionary expenses is useful both for manufacturing organization as
well as for professional firms. The time actually spent can be compared with the planned time and cost
performance can also be measured using the budget. Unfortunately, while evaluating the contribution made by
the professional to the profitability of the professional organization, such financial measures are not important.
What is important is the present appraisal quality and quantity of the work performed.
Q6) (b) What is a Non Profit Organization? How is the performance of the organization evaluated?
Answer:-
(I) Non Profit Organization:
A non profit organization is one that cannot distribute assets or income to, or for the benefit of its member,
officer or director. The organization can, of course, compensate its employees, including officers and members,
for services rendered and for goods supplied. Such organizations are not prohibited from earning a profit but are
prohibited for distributing profits. The principle of earning profit is encouraged so as to provide funds for
working capital and contingencies.
(II) Performance Evaluation:
The evaluation of performance is not possible using financial measures, for these entities do not exist to earn
profit. The performance is therefore evaluated on the basis of comparisons between budgeted expenditure and
actual expenditure.
For any organization, the most important reasons to measure performance are to improve effectiveness and to
acquire information that will allow the organization to drive its agenda forward. If the motivation for doing
evaluation remains outside an organization, the evaluation will have limited impact. To do performance
assessment effectively, an organization must commit to adopting a culture of measurement, because acceptance
must come from senior management, staff, funders, and board members alike.

(a) Board self-evaluation

Members of the Board of Directors should regularly evaluate the quality of their activities on a regular basis.
Activities might include staffing the Board with new members, developing the members into well-trained and
resourced members, discussing and debating topics to make wise decisions, and supervising the CEO. Probably
the biggest problem with Board self-evaluation is that it does not occur frequently enough. As a result, Board
members have no clear impression of how they are performing as members of a governing Board. Poor Board
operations, when undetected, can adversely affect the entire organization.

(b) Staff and volunteer (individual) performance evaluation

Most of us are familiar with employee performance appraisals, which evaluate the quality of an individual’s
performance in their position in the organization. Ideally, those appraisals reference the individual’s written job
description and performance goals to assess the quality of the individual’s progress toward achieving the desired
results described in those documents. Continued problems in individual performance often are the results of
poor strategic planning, program planning and staff development. If overall planning is not done effectively,
individuals can experience continued frustration, stress and low morale, resulting in their poor overall
performance. Experienced leaders have learned that continued problems in performance are not always the result
of a poor work ethic – the recurring problems may be the result of larger, more systemic problems in the
organizations.
(c) Program evaluation
Program evaluations have become much more common, particularly because donors demand them to ensure that
their investments are making a difference in their communities. Program evaluations are typically focused on the
quality of the program’s process, goals or outcomes. An ineffective program evaluation process often is the
result of poor program planning – programs should be designed so they can be evaluated. It can also be the
result of improper training about evaluation. Sometimes, leaders do not realize that they have the responsibility
to verify to the public that the nonprofit is indeed making a positive impact in the community. When program
evaluations are not performed well, or at all, there is little feedback to the strategic and program planning
activities. When strategic and program planning are done poorly, the entire organization is adversely effected.
(d) Evaluation of cross-functional processes
Cross-functional processes are those that span several systems, such as programs, functions and projects.
Common examples of major processes include information technology systems and quality management of
services. Because these cross-functional processes span so many areas of the organization, problems in these
processes can be the result of any type of ineffective planning, development and operating activities.
(e) Organizational evaluation
Ongoing evaluation of the entire organization is a major responsibility of all leaders in the organization. Leaders
sometimes do not recognize the ongoing activities of management to actually include organizational evaluations
– but they do. The activities of organizational evaluation occur every day. However, those evaluations usually
are not done systematically. As a result, useful evaluation information is not provided to the strategic and
program planning processes. Consequently, both processes can be ineffective because they do not focus on
improving the quality of operations in the workplace.
Q7) What is Balance Score Card? Why is it superior to other methods of Performance Appraisal?
Prepare Balance Score Card for any organization you are familiar with.
Answer:
Balance Score Card:
David Chaudron defines BSC as:

• A way of measuring organizational, business

unit or departmental viewpoints.

• A way of Balancing long term and short term

actions.

• A way of Balancing different measures of

success such as: Financial, Customer, Internal
operations and Human Resources systems &
Development.

• A way of tying strategy to measures to action.

In short, BSC is a business management concept that transforms both financial and non-financial data into a
detailed roadmap, that help an enterprise measure performance and meet both short and long term objectives.

(II) Superiority of BSC over other measures:

There are several benefits from implementing a Balanced Scorecard. Originally the Balanced Scorecard was
seen as a useful tool for performance measurement. In this role, the Balanced Scorecard was seen as integrating
financial/non-financial, internal/external and leading /lagging information on firm performance in a coherent
fashion.
Later it was realised that the Balanced Scorecard could play a pivotal role in the strategic management process.
Because the Balanced Scorecard requires management to clarify and obtain consensus on the strategic objectives
of the firm, it can assist in the communication of the chosen strategy, consequently aligning the efforts both of
individuals and of departments. In this role, there is a clear link between the Balanced Scorecard and
management by objectives (MBO). Effective implementation of a Balanced Scorecard project will generally
involve the development of a series of hierarchical (cascaded) scorecards. Given the overall corporate scorecard,
supporting scorecards can be developed for each department within the firm. Within each department, a
scorecard can be developed for each manager (or perhaps even for each individual member of staff) which links
the objectives on each perspective for that manager back to the objectives for each perspective outlined in the
scorecard for the department and finally, back to the objectives listed in the firm’s overall scorecard.
The Balanced Scorecard could be used to assist in corporate restructuring. In recent years, many firms have
migrated away from a traditional hierarchical structure to a flatter, team-based organisational structure. The
Balanced Scorecard can support such changes, as it can help clarify the objectives and the critical success
factors for the newly formed teams.
Apart from the communication and co-ordination roles of the Balanced Scorecard in strategic implementation,
the Balanced Scorecard can be used to link strategy to specific critical success factors in the customer, internal
business process and growth/learning perspectives. By setting both short and long-term targets for driver and
outcome measures and by comparing actual attainment against target, feedback is obtained on how well the
strategy is being implemented and on whether the strategy is working.
Building on the Balanced Scorecard’s use as a strategic management tool, it has been suggested that the
Balanced Scorecard can play a role in the investment appraisal process(5). Traditional methods of investment
appraisal such as discounted cash flow do not cope well with investments which generate indirect rather than
direct financial returns. Examples of these include investments which enhance the future ‘flexibility’ of a firm or
investments in the firm’s infrastructure, such as an enhanced management information system. The Balanced
Scorecard can assist management’s investment appraisal decisions as it provides managers with a mechanism to
incorporate the strategic aspects of the investment into the appraisal process. This could be achieved by using a
weighting system developed from a firm’s Balanced Scorecard measures to evaluate new projects. An index
score would be calculated for each investment opportunity and projects would then be ranked and selected based
on this score

(III) Balance Score Card of Rockwater:

BSC shown below is of Rockwater, a wholly owned subsidiary of Brown & Root, a global engineering and
construction company, which is a worldwide leader in underwater engineering and construction. The measures
have been divided into four broad category. This enable the company to be viewed from four different
perspective.
You will find that all the measures given in the company’s BSC are specifically related to strategy. Rockwater
strategy is to be the preferred provider in the underwater engineering and construction industry. They select the
measures like External (eg. Market share, customer ranking survey) and internal measures (Eg. Project
Performance Index, Safety Incident Index). There are also derived measures namely staff attitude survey, time
spent with customer on new work and outcome measures such as ROCE.
`
Q8) What are the different types of strategies mission at SBU level? How do these missions affect strategic
planning process and budgeting at SBU level?
Answer:-
Business unit strategies deal with how to create and maintain competitive advantage in each of the industries in
which a company has chosen to participate. The strategy of business unit depend on two interrelated aspect: 1)
its mission (what are its objective) and 2) its competitive advantage (“how should the business unit compete in
its industry to accomplish its mission”) .
Business unit mission
In a diversified firm one of the important task of senior management is resource deployment. Make decision
regarding the use of the cash generated from some business unit. Several planning model have been developed
to help corporate level manager of diversified firms to effectively allocate resource. These models suggest that a
firm has business unit in several categories, identifies by their mission the appropriate strategies for each
category differ. Together the several unit make up a portfolio, the component of which differ as to their risk/
reward characteristic just as the component of investment portfolio differ. Both corporate office and business
unit general manager are involved in identified the mission of individual business unit.
Of the many planning model two of the most widely used are Boston consulting group two by two growth share
matrix and general electric company / mc Kinsey & company three-by three industry attractiveness –business
strength matrix while these model differ in the methodology they use to develop the most appropriate mission
for the various business unit, they have same set of mission from which to choose: Build, hold, harvest, &
divest.
Build
This mission implies an objective of increased market share, even at the expense of short term earning and cash
flow.
Hold
This strategic mission is geared to protection of the business unit market share and competitive position. (IBM
Computer)
Harvest
This mission has the objective of maximizing short term earning and cash flow , even at the expense of market
share.
Divest
This mission indicates a decision to withdraw from the business either through a process of slow liquidation or
outright sale.
The mission for existing business units could be either build , hold, or harvest .These mission constitute a
constitute a continuum with “pure build” at one end and “pure harvest” at the other end. To implement the
strategy effectively there should be congruence between the mission chosen and the type of control used. we
develop the control mission “fit” using the following line of reasoning”

• The mission of the business unit influences the uncertainty that general managers face and the short
term versus long term trade off they make.
• Management control system can be systematically varied to help motivate the manager to cope
effectively with uncertainty and make appropriate short term versus long –term tradeoffs.
• Thus different mission often require systematically different management control system.

Strategic planning
While designing a strategic planning process, several design issue need to be considered. A business unit
responds to these issues tend to depend upon the mission its perusing.
When the environment is uncertain the strategic planning process is especially important. Management need to
think about how to cope with the uncertainties and this usually requires a longer range view of planning than is
possible in the annual budget. If the environment is stable there may be no strategic planning process at all or
only a broad brush strategic plan. Thus , the strategic planning process is more critical and more important for
build as compare with harvest , business unit s. nevertheless some strategic planning of the harvest business
units may be necessary because the company overall strategic plan must encompass all of its business to
effectively balance cash flow.
In screening capital investment and allocating resources the system may be more quantitive and financial for
harvest units. A harvest business unit operates in mature industry and does not offer tremendous new investment
possibilities. Hence the required earning rate for such a business unit may be relatively high to motivate the
manager to search for project with truly exceptional returns. Since harvest units tends to experience stable
environment analysis often can be used more confidently. The required information used to evaluate investment
from harvest units is primarily financial.
A build unit is positioned on the growth stage of the product life cycle. Since the corporate office wants to take
advantage of the opportunities in a growing market senior management may set a relatively low discount rate ,
thereby motivating build managers to forward more investment ideas to corporate office. Given the
product/market uncertainties financial analysis of some project , no financial data are more important.
Budgeting
Implication for designing budgeting system to support, varied mission is shown in figure. The calculation of
variance analysis comparing actual result with the budget identifies variances as either favorable or unfavorable.
However a favorable variance neither imply favorable performance nor does an unfavorable or unfavorable
variance, one the one hand and favorable or unfavorable performance, on the other hand, depend upon the
strategic context of the business unit under evaluation.
The following additional differences in the budget process are likely to exist between build and harvest units.
• In contrast to harvest units, budget revisions are likely to be more frequent for build units because their
product/market environment changes more frequently.
• Build unit managers may have greeter input and influence than harvest unit managers in formulating the
budget. This because build managers operate in rapidly changing environment and have better
knowledge than senior management of these changes. For harvest units with stable unit with stable
environment, thus manager knowledge less important.
Q9) Short Note
(d) Internal Control:
ICAI state that “ Internal control is the plan, methods and procedures adopted by the management for the
efficient conduct of the business, adherence to management policies, safeguarding of the assets, prevention and
detection of fraud and error, the accuracy and completeness of records and timely preparation of reliable
financial information.
Objectives of Internal Control
i) Adherence to managerial policies and directives.
ii) Protection of assets against possible losses.
iii) Adherence to management policies and authorization.
iv) Generation of reliable, complete and accurate accounting records.
v) Timely preparation of financial information.
vi) Compliance with statutory requirements.
vii) Prevention and early detection of error and frauds.
Types of Internal Controls
(i) Administrative controls: This control deals with the functioning procedures that influence the
decision making process and managerial authorization of transaction. Example: Delegation of
authority, job descriptions etc.
(ii) Accounting controls: This control covers the accounting systems and procedures. This involves
recognizing, calculating, posting, analyzing, summarizing and reporting transactions.
(iii) Physical controls: This includes providing for protective devices for safeguarding the assets.