MANAGEMENT CONTROL SYSTEM GROUP NO.

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1. Explain the following structures a. Functional b. Divisional c. Matrix 2. Explain feature of standard control system with diagram 3. How is budgeting done in the following a. Standard cost centre b. Discretionary cost centre 4. Explain the nature of the information needed by managers to carry out control activities. 5 Case study: South west airlines

GROUP MEMBERS NAME Disha Bhatt Saurabh Gharde Pradeep Gupta Nikita Khandol Snehal Shirke ROLL NO 07 30 32 70 101

1.Explain the following structures y y y Functional Divisional Matrix

In a functional structure each Manager is responsible for a specified function such as production or marketing.

Chief Executive Officer

Staff

Manufacturing Manager

Marketing Manager

Staff

Staff

Manager Plant 1

Manager Plant 2

Manager Plant 3

Manager Region 1

Manager Region 2

Manager Region 3

Functional organizational structure is best for smaller companies or those that focus on a single product or service. Not designed to change quickly, functional structure works well in a stable environment where your business strategies are less inclined to need changes or updating. Functional structures are the most common type of structural design and have evolved from the concept of high specialization, high control framework of manufacturing organization turned towards high efficient, reports Practical Management website. Structure Functional organizations contain specialized units that report to a single authority, usually called top management. Refereed to as functional units or areas, these specialized units contain personnel with various but related skills grouped by similarities. Each functional unit handles one aspect of the product or service provided: information technology, marketing, development, research, etc. Top management is responsible for coordinating the efforts of each unit and meshing them together into a cohesive whole. 2

Specialists The functional organization structure clusters those with similar knowledge in the same place. Since employees grow within their field, this leads to the development of specialists, especially in technical fields. According to Practical Management, If the organization has properly crafted performance management that promotes the visibility of individual skills, functional structure makes it easier to coach others and climb the hierarchical ladder. The in-depth training and focused career path gives employees clear career goals and the direction to reach them. Performance The goal of functional structure is to put all the human and informational resources necessary for a single activity in one place. This maximizes performance by facilitating sharing of valuable expertise by superiors with their subordinates, reports Practical Management. Sub-organization leaders are experts both in their field and in the resources available, which allows each unit to reach its greatest potential and prevents overuse of limited resources. Specialized training and involved management mean that standout employees are quickly recognized and placed where they will be most effective and managers are always on the lookout for helpful skills and ideas. Disadvantages The same qualities that lead to increased production and specialization lead to complicated communication and decision-making processes. Since the functional units are not accountable to each other and share decision-making power, the process is more bureaucratic and tends to take longer. While the flow of communication within a department is expedient, communication between departments and synchronization of work and project completion is more difficult to manage. Finally, too much focus leads employees to neglect the larger view of the company and its objectives. A Divisional Organizational structure gives a larger business enterprise the ability to segregate large sections of the company's business into semi-autonomous groups. These groups are mostly self-managed and focused upon a narrow aspect of the company's products or services. As with any organization structure, divisions have both strengths and weaknesses.

Chief Executive Officer Staff

Manager Business Unit X

Manager Business Unit Y

Staff

Staff

Plant Manager

Marketing Manager

Plant Manager

Marketing Manager

Definition A divisional organizational structure usually consists of several parallel teams focusing on a single product or service line. Examples of a product line are the various car brands under General Motors or Microsoft's software platforms. One example of a service line is Bank of America's retail, commercial, investing and asset management arms. Unlike departments, divisions are more autonomous, each with its own top executive-often a vice president--and typically manage their own hiring, budgeting and advertising. Though small businesses rarely use a divisional structure, it can work for such firms as advertising agencies which have dedicated staff and budgets that focus on major clients or industries. Advantages Divisions work well because they allow a team to focus upon a single product or service, with a leadership structure that supports its major strategic objectives. Having its own president or vice president makes it more likely the division will receive the resources it needs from the company. Also, a division's focus allows it to build a common culture and esprit de corps that contributes both to higher morale and a better knowledge of the division's portfolio. This is far preferable to having its product or service dispersed among multiple departments through the organization. Disadvantages A divisional structure also has weaknesses. A company comprised of competing divisions may allow office politics instead of sound strategic thinking to affect its view on such matters as allocation of company resources. Thus, one division will sometimes act to undermine another. Also, divisions can bring compartmentalization that can lead to incompatibilities. For example, Microsoft's business-software division developed the Social Connector in Microsoft Office Outlook 2010. They were unable to integrate Microsoft SharePoint and Windows Live until months after Social Connector could interface with MySpace and LinkedIn. Some experts suggested that Microsoft's divisional structure contributed to a situation where its own products were incompatible across internal business units. Alternatives Large organizations that want the focus of a division could instead spin off into a free-standing subsidiary. Smaller organizations can work through major projects via dedicated departments or ad-hoc cross-functional work teams. Making It Work To be successful, divisions must be well managed. Executive leadership is the single most important determinant of success for a company using a divisional structure. The top leaders need to understand what each division is doing and provide leadership to the division chiefs on how to accommodate new strategic directions or more effectively partner across divisions. In addition, the executives should have a solid grasp of resource use. Having a shared pool of centrally-managed resources like administrative support or office equipment can reduce costs and organizational complexity.

The Matrix Organizational structure divides authority both by functional area and by project. In a matrix structure, each employee answers to two immediate supervisors: a functional supervisor and a project supervisor. The functional supervisor is charged with overseeing employees in a functional area such as marketing or engineering. Project supervisors manage a specific and often impermanent project. They absorb employees from various functional areas to complete their project teams. This kind of organizational structure has several advantages. Chief Executive Officer

Staff

Function Manager A Function Manager B

Project X Manager Project Y Manager

Function Manager C

Project Z Manager

Resource Coordination The matrix structure allows supervisors to focus on their areas of expertise. Functional supervisors focus on hiring, training and managing employees in their field, while project supervisors can focus on achieving the goals of their specific projects or products. Specialization Placing employees in functional areas allows them to specialize in a particular field. Instead of being good at a variety of tasks, specialized employees can excel at tasks in their field of focus. Breadth of Skill When isolated in a functional area, employees may have more difficulty benefiting from the skills and experiences of those in other areas. In a matrix structure, employees have constant contact with members of other functional areas via their membership in project teams. Through the project team, employees have the opportunity to develop a wider set of skills than they would in a purely functional structure.

Communication Since employees have constant contact with members of different functional areas, the matrix structure allows for information and resources to travel more fluidly between those functional areas. The collaboration between functional areas allows a project team to better handle complex challenges and objectives. Flexibility The matrix structure allows for human resources to be shared flexibly across different projects or products. Functional areas maintain a stock of talented employees to meet projects' requirements.

Advantages and disadvantages

The advantages of a matrix include:
y y y

Individuals can be chosen according to the needs of the project. The use of a project team which is dynamic and able to view problems in a different way as specialists have been brought together in a new environment. Project managers are directly responsible for completing the project within a specific deadline and budget.

Whilst the disadvantages include:

y y y

A conflict of loyalty between line managers and project managers over the allocation of resources. Projects can be difficult to monitor if teams have a lot of independence. Costs can be increased if more managers (i.e. project managers) are created through the use of project teams.

2.Explain feature of standard control system with diagram The Standard Control System has major influence on the effectiveness of an organizations management control. This Standard control system can be classified into to types: 1. The Management Control System itself 2. The Rules Rules 1. The word rules is use to represent all types of formal instructions and controls, including standing instructions, job descriptions, standard operating procedures, manuals and ethical guidelines. 2. Rules range from the most trivial to most important. 3. Most rules remain in force indefinitely, unless they are modified; however these modifications happen infrequently. 4. The organization members are expected to follow these rules, however they can depart from them, either under specified instructions or when their own best judgement indicates that a departure would be in the best interest of the organization. 5. Some rules are positive and some rules are prohibition against unethical or illegal behavior.

Some specific type of rules are listed below System Safeguards: Various systems are built into the information processing system in order to ensure that the information flowing through the system is accurate & to prevent or minimize fraud of any sort. These measures include y y y y Cross-checking total Requiring evidence of authorization for any transaction that has taken place Counting cash and other portable assets frequently System checks performed by internal and external auditors. 7

Task Control System: We define task control as the process of ensuring that specific tasks are carried out efficiently and effectively. Many of these tasks are governed by rules.

Formal Control Process

Goals and Strategies

Rules

Other Information

Reward

Yes

Strategic Planning

Budgeting

Responsibility Centre Performance

Report actual Versus Plan

Was performance Satisfactory

Revise

Revise

Corrective Action

No
Measurement

Feedback

The above diagram represents a standard control system. A strategic plan implements the organizations goal. The available information is used for making this plan. The strategic plan is then converted into annual budgets that focus on the planned revenues and expenses for individual responsibility centres. 8

They perform the operations assigned to them, and their outcome is measured and reported. Actual results are compared with the budgeted to see if the results are satisfactory. If it was the responsibility centre receives rewards in the form of praise or other reward. If it was not the feedback leads to corrective actions in the responsibility centre an possible revision of plan.

Engineered Expense Centres:It has the following characteristics: y y y Their input can be measured in monetary terms. Their output can be measured in physical terms. The optimum dollar amount of input required to produce one unit of output can be determined.

Engineered expense centres are usually found in manufacturing operations. Warehousing , distribution, trucking, and similar units within the marketing organization may also be engineered expense centres. In an engineered expense centre , output multiplied by the standard cost of each unit produced measures what the finished product should have cost. Moreover, managers of engineered expense centres may be responsible for activities such as training and employee development that are not related to current production; their performance reviews should include an appraisal of how well they carry out these responsibilities .The term engineered expense centre refers to responsibility centres in which engineered costs predominate, but it does not imply that valid engineered estimates can be made for each and every cost item.

Optimal relationship can be established inputs work (dollar) (physical) output Manufacturing function

Fig: Engineered Expense Centers

3.How is budgeting done in the following Standard cost centre Discretionary cost centre

Standard Cost Centre Standard cost centers have the following characteristics y y y Their input can be measured in monetary terms. Their output can be measured in physical terms The optimum amount of input required to produce one unit of output can be determined

Engineered expense center usually are found in manufacturing operations. Warehousing, distribution, trucking and similar units in the marketing organization also may be engineered expense centre and so many certain responsibility center within administrative and support department. Examples are accounts receivable account payable and payroll section in the controller department personnel record and cafeteria in the human resource department shareholder record in the corporate secretary department and the company motor pool. Such units perform repetitive task for which standard cost can be developed Discretionary expense centre: The output of discretionary expenses center cannot be measured in monetary terms. They include administration and support units research and development organization and most marketing activities. The term discretionary does not mean that management judgments are capricious or haphazard. Management has decided on certain policies that should govern the operation of the company. One company may have a small headquarter staff another company of similar size and in the same industry may have a staff that is 10 time as large the management of both companies may be concerned that they made the correct decision on staff size but there is no objective way judging which decision was actually better manager are hired and paid to make such decision after such a drastic change the level of discretionary expenses generally has a similar pattern from one year to the next. The difference between budgeted and actual expense is not a measure of efficiency in a discretionary expense centre it is simply the difference between the budgeted input and the actual input. It in no way measures the value of the output, if actual expense do not exceed the budget amount, the manager has lived within the budget however ,because by definition the budget does not purport to measure the optimum amount of spending we cannot say that living within the budget is efficient performance . 10

Budget preparation The decision that management make about a discretionary expense budget are different from the decisions that it makes about the budget for an engineered expense center. For the latter, management decides whether the proposed operating budget represent the cost of performing task efficiently for the coming period. Management is not so much concerned with the magnitude of the task because this is largely determined by the actions of other responsibility centers, such as the marketing departments ability to generate sales. In formulating the budget for a discretionary expense center, however management principal task is to decide on the magnitude of the job that should be done.

Incremental budgeting: Here the current level expenses in a discretionary expense center is taken as a starting points this amount is adjusted for inflation for anticipated changes in the workload of continuing tasks for special tasks and if the data are readily available for the cost of comparable work in similar units. There are two drawbacks to incremental budgeting. First because managers of these centers typically want to provide more service they tend to request additional resources in the budgeting process and if they make a sufficiently strong case these request will be granted. This tendency is expressed in Parkinsons second law: overhead costs tend to increase period. There is ample evidence that not all this upward creep in cost is necessary. This problem is especially compounded by the fact that the current level of expenditure in the discretionary expenses center is taken for granted and is not re-examined during the budget preparation process. Second when a company faces a crises or when a new management takes over overhead costs are sometimes drastically reduced without any adverse consequences. Despite this limitation most budgeting in discretionary expense centers is incremental. Time does not permit the more thorough analysis described in the next section.

Zero based review: An alternative approach is to make a thorough analysis of each discretionary expense center on a schedule that will cover all of them over a period of five year or so. That analysis provides a new base. There is a likelihood that expenses will creep up gradually over the next five years and this is tolerated at the end of five years, another new base is established. Such an analysis is often called a zero base review. In contrast with incremental budgeting which takes the current level of spending as the starting point this more intensive review attempts to build up de now the resources that actually are needed by the activity. Basic question are raised;(1) should use customer?(2) what should the quality level be ?are we doing too much(3)should the function be performed in this way (4) how much should it cost?

Cost variability: In discretionary expense center costs tend to vary with volume from one year to the next but they tend not to vary with short run fluctuation in volume within a given year. By contrast costs in engineering expense center are expected to vary with short run changes in volume. In part this reflect the fact that volume changes do have an impact throughout the company even though their actual impact cannot be measures the ; in part this reflect the fact that volume changes do have an impact throughout the company even though their actual impact cannot be measured in part this result from a management personnel and personnel related costs are by 11

far the largest expense item in most discretionary expense center the annual budget for these center tend to be a constant percentage of budgeted sales volume.

4. Explain the nature of the information needed by managers to carry out control activities.

Nature of the information needed by managers to carry out control activities In the management control process, information is used for planning, for co-coordinating, and for control. The nature of the information needed by managers to carry out control activities are: Uniformity of Information: With a single source generating the required information. Reliability of Information: resulting from adequate controls established and constantly monitored on all input and output of the system. On Time Response: Communication of established information needs as often and as quickly as desired. In the management control process, information is used for planning, for co-coordinating, and for control. It is appropriate here to make some general comments, particularly on the nature of information that is used for the control process perse Information Reports Vs. Control Reports: To the extent that the manager's needs for information can be predicted, reports can be designed that will meet these needs; one such report is the control report, which essentially report actual performance compared with planned performance. However, in planning, and coordinating the work of the organization, management needs information beyond that contained in control reports. Management therefore also receives -information reports, that is, reports intended to tell management what is going on, but not specifically designed to facilitate the control process. These reports may or may not lead to action. Each reader studies them it) detect whether or not something has happened that-is worth looking into. If nothing of significance is noted, which is often the case; the report is put aside without action. If something does strike the reader's attention, an inquiry or action is initiated. The information on these reports comes both from the accounting system and also from a wide variety of other sources. Included are reports of orders received, the status of accounts, receivable, the status of inventories, general news summaries, stock market prices, actions of competitors, and government regulations. Control Information: The essentials of the management control process that provides a basis for making comments about the type of information that is useful in that, process. The process starts with the preparation of plans. These plans are made within, the context of goals and strategies which have been decided, on, in the strategic planning process, and they take account of -other, relevant information, that bears on the problem of how the organization can operate effectively and efficiently to reach its goals. The plans are expressed as programmes, budgets, objectives, and in other terms. Motivational Reports and Economic Reports: Control reports are of two general types One is intended to report on personal performance, and the other to report on economic performance. Since the first type is intended to motivate managers, it is often called a motivational report. Essentially, such a report compares actual performance for a responsibility centre with what a performance should have been under the prevailing circumstances. Presumably, the budget states the responsibility manager's commitment to a certain level of performance, and reports show how well he has carried out this commitment. 12

An organization must be controlled; hat is devices must be in place to ensure that its strategic intentions are achieved. The elements of control system are as follows: A detector/sensor a device that measures what is actually happening in the process being controlled. An assessor- a device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. An effector- a device (feedback) that alters behaviour if the assessor indicates the need to do so A communication network- devices that transmit information between the detector and the assessor and between assessor and the effector.

Case study:Southwest Airlines Corporation:

Southwest Airlines Corporation Analysis

1. What is Southwests strategy? What is the basis on which Southwest builds its competitive advantage? Southwests strategy is to improve efficiency and pass cost saving to its passengers by offering them low prices.

- The bases on which Southwest builds its competitive advantage is putting employees first, this will make them take real care of customers. The Southwest Airlines strategy is best explained by its co-founder Herb Kelleher during a talk at Wharton: Its an obsession with keeping costs low and treating employees well and a commitment to managing the company during booms with an eye to the busts that will inevitably follow. Do that and most of the rest takes care of itself. As long as this strategy is well known in its industry it has proved hard to copy. Let see what Southwest does and others do not.

There are two main strategic areas: 1. Operating Costs 2. People

1. Operating Costs Southwest Airlines has the lowest fares among its competition Its lowest fares partly came from low operational costs. What Southwest is doing? Southwest flies one airplane type, the Boeing 737 series. The competitors are using all kind of airplanes and models. That saves millions for Southwest in maintenance cost, spare-parts inventories and mechanics 13

training. More, every pilot and crew members will be familiar with every plane. On the other hand, using one type of airplane gives Southwest the opportunity to move the aircrafts through the route network without costly reconfigurations. Southwest is using less congested airports (secondary or downtown) and of course they have lower average fares. Most of Southwest flying is point-to-point rather than competition that is hub-and-spoke. That strategy and short haul approach with an average flight time of 55 minutes minimizes the time that airplane sit on the ground waiting delay-prone hubs. According to Flight Stats, on-time performance in June was eight percentage points higher than the industry, and higher than any of its competitors. As a result 78 percentages of Southwests customers fly nonstop. Southwest have the simplest in-flight services In 2004, it boasted a fleet of 417 Boeing 737 jets and provided service to 60 airports in 31 states throughout the United States. Southwest was well entrenched as the nations low-fare, high customer satisfaction airline. Southwest had the lowest operating-cost structure in the domestic airline industry and consistently offered the lowest and simplest. A common fleet significantly simplifies scheduling, operations, and maintenance. Training costs for pilots, ground crew, and mechanics are lower, because there's only a single aircraft to learn. Purchasing, provisioning, and other operations are also vastly simplified, therefore lowering costs.

2. People: Southwest tries hard to different way. For example, not assigning seats in its flights helps to reinforce its image that it gets passengers to their destinations when they want to get there, on time, at the lowest possible fares. By not assigning seats, Southwest can turn the airplanes quicker at the gate. If an airplane can be turned quicker, more routes can be flown each day. That generates more revenue, so that Southwest can offer lower fares. About 60% of Southwests passenger revenue was generated by online bookings via southwest.com. That southwest.com was the number one airline website by revenue and Nielsen/Net Rating identified it as the largest airline site in terms of unique visitors. 2. How do Southwests control systems help execute the firms strategy? Southwests control system help execute the firms strategy by: y y y y Implementing short haul and medium haul, on-line booking, less time at the gate, hedged fuel and oil

Southwest consistently sought out ways to improve its efficiencies and pass on the cost savings to its passengers. In 2004, Southwest had reduce the headcount per aircraft to 74 from 85 in 2003. It hedged about 85% of its fuel and oil needs as a result saved about $ 455 million. It also entered new airports after a process of due diligence and with a sense of commitment to the people it served. Southwest pilots were among the only pilots of major U.S. airlines who did not belong to a nation union. National union rules limited the number of hours pilots could fly. But Southwests pilots were unionized independently allowing them to fly far more hours than pilots at other airlines. Other workers at SWA were nationally unionized but their contracts were flexible enough to allow them to jump in and help out regardless of the task at hand. From the 14

time the plane landed until it was ready for takeoff took approx 20-25 minutes at SWA and required a ground crew of 4 plus 2 at the gate. By comparison United Airlines was closer to 35 min and required a ground crew of 12 plus 3 gate agents.

Learning The actions people are led to take in accordance with their perceived self interest are also in the best interest of the organization.

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