Management Control & Information Systems (MB 281) : October 2004
Section A : Basic Concepts (30 Marks)
This section consists of questions with serial number 1 - 30.
Answer all questions.
Each question carries one mark.
Maximum time for answering Section A is 30 Minutes.
1. / The concepts of Engineered Costs and Discretionary Costs play an important role in the performance evaluation of which of the following responsibility centres?
(a) Revenue Centre (b) Investment Centre (c) Expense Centre (d) Profit Centre
(e) Both (a) and (b) above. / < Answer >
2. / The term “mission” organization is used to refer to
(a) Professional organization(b) Financial Services organization
(c) Non-profit organization(d) Merchandizing organization
(e) Manufacturing organization. / < Answer >
3. / A business organization holds review meetings for performance appraisal of responsibility centre. These meetings focus on identifying the facilitating and inhibiting factors in the achievement or non-achievement of targets so that necessary remedial actions can be taken after thorough analysis of the reasons for non-achievement. This is an example of
(a) SWOT Analysis(b) Force Field Analysis
(c) ABC Analysis (d) Cost-Benefit Analysis
(e) Value Chain Analysis. / < Answer >
4. / Which of the following is the process used by the organizations to socialize members to its values, procedures, and policies?
(a) Training(b) Indoctrination (c) Planning (d) Cybernetics
(e) Industrial dynamics. / < Answer >
5. / Which of the following control styles uses an authorized control system wherein the top executive maintains decision-making mechanism, with the help of information that is gathered at the lower levels of the organization?
(a) Internal control style(b) External control style (c) Mixed control style
(d) Communication control style(e) Executive control style. / < Answer >
6. / Which of the following statements is not true about Management By Objectives (MBO)?
(a) MBO emphasizes discrete and disaggregated performance
(b) People involved in MBO process are irrespective of whether they have any budget responsibility or not
(c) MBO is a much broader concept than control process used in budgetary control
(d) MBO involves only economic performance
(e) MBO approach has its roots in behavioral science. / < Answer >
7. / Which of the following statements is false with regard to key success variables?
(a) They are those variables in the external environment to which goals, objectives and strategies of managers, are most sensitive
(b) They are also referred to as key success factors
(c) The top management should continuously analyze the reasons for significant changes in them
(d) They are only quantitative in nature
(e) They indicate to the management, the necessity for prompt action. / < Answer >
8. / Which of the following statements is false regarding ethical principle of fairness in the design of control systems?
(a) The concept of fairness is stressed to achieve the environment which is conducive to ethical behaviour
(b) Managerial controls that do not incorporate the concept of fairness tend to create stress and resentment among the employees
(c) The ethics administrator should maintain disciplinary records to ensure that the ethics program is perceived as ‘fair’ by the organizational participants
(d) The concept of fairness need only be confined to the employees of the organization, and not extended to the activities of the stakeholders
(e) Fair wages and salaries should be paid to the employees to provide opportunities for growth. / < Answer >
9. / Which of the following statements is false regarding a non-profit organization?
(a) An organization that is chartered by the state to operate in the interests of the society, is known as a non-profit organization
(b) The primary objective is to render the best possible service to customers
(c) A non-profit organization receives contributed capital which can be divided into two principal categories: plant and endowment
(d) In a non-profit organization, there is restraint on distribution of profits as well as on earning profits
(e) A non-profit organization does not pay enough attention to its pricing policy. / < Answer >
10. / Which of the following creates cushion against the variability of the environment and provides resources for innovation and adaptation in various stakeholders areas?
(a) Managerial Style (b) Organizational Culture (c) Organizational Slack
(d) Organizational Growth(e) Organizational Ethics. / < Answer >
11. / Which of the following analyses helps in identifying a wide range of critical control variables and latent factors, which help in analyzing a particular situation, and initiates prompt actions?
(a) Product (b) Process(c) Strategic
(d) Multivariate(e) Environmental. / < Answer >
12. / Which of the following theories describe(s) the factors that should be considered while designing incentives and which show(s) how these incentives can be written to motivate individuals?
I.Business unit theory.
II.Agency theory.
III. Design theory.
(a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above
(d) Both (II) and (III) above(e) All (I), (II) and (III) above. / < Answer >
13. / Which of the following is the correct sequence of steps involved in the process of strategic planning?
I.Defining the mission of the organization.
II.Assessing organizational resources, risk, and opportunities.
III.Developing organizational objectives.
IV.Formulating the strategy.
V.Implementing the strategy.
VI.Monitoring and adopting strategic plans.
(a) I – II – III – IV – V – VI (b) I – III – IV – V – II – VI (c) I – III – II – VI – IV – V
(d) I – III – II – IV –V – VI (e) I – III – II – IV – VI – V. / < Answer >
14. / The concept of responsibility center serves as the basic foundation stone of management control. Revenue centers are the responsibility centers in which
(a) Outputs are in monetary terms and the focus of management’s efforts is on the revenue generated by the unit
(b) Inputs are measured in monetary terms and the focus of management’s efforts is on control of expenses
(c) Performance is measured in terms of profits
(d) Performance is evaluated in terms of profit and assets employed in earning the profit
(e) Performance is evaluated in terms of profit and revenue generated by the unit. / < Answer >
15. / Which of the following is false about Management Control Systems?
(a) They ensure that the right strategies are carried out to achieve the organization’s goals
(b) They anticipate future conditions
(c) They are self-regulating in nature
(d) They bring unity out of diverse activities of an organization
(e) They help management in decision-making. / < Answer >
16. / When the librarian asked his assistant to find out the most popular book, he identified it on the basis of its dirty or well-used pages. This is an example of
(a) Accretion data (b) Erosion data (c) Archival data (d) Participant observation
(e) Field observation. / < Answer >
17. / The programming process is an organizational process for making long-term resource allocation choices. Which among the following is not true with respect to programming process?
(a) The programming process includes the definition, evaluation and implementation of new programs, in order to achieve long-term goals
(b) The commitment to decisions involving expenditure in the programming process is crucial to the success of the organization
(c) The programming process doesn’t depend on the size and diversity of the organization
(d) The decisions made during the programming process have a significant influence on the ability of the firm to survive and achieve its goals and objective
(e) Planning and programming processes go hand in hand as programs are developed as a part of the long-term planning process. / < Answer >
18. / The capital budgeting appraisal methods or techniques of evaluation of investment proposals will help an organization to decide upon the desirability of an investment proposal. Which among the following is/are non-discounted cash flow method(s)?
I.Payback period method.
II.Accounting rate of return method.
III.Net present value method.
IV.Internal rate of return method.
V.Profitability index method.
(a) Both (I) and (II) above (b) Both (II) and (IV) above (c) (III), (IV) and (V) above
(d) (I), (II) and (V) above (e) Only (V) above. / < Answer >
19. / A control system is a set of formal and informal systems that are supposed to assist the management in steering the organization toward the achievement of its purpose. Every organization has an informal dimension consisting of interpersonal relationships that are not shown on the formal organization chart. Which among the following is not true about informal control systems?
(a) Informal systems promote greater compatibility of personnel and encourage the “willingness to serve” organizational purposes
(b) The informal coordinating mechanisms are networks of relationships that emerge as a result of socialization and mutual adjustment by the employees
(c) An informal control system decreases the organization’s ability to make adaptive responses
(d) The informal control process consists of activities engaged in by members of the organization outside the formal control process, when dealing with non-routine decision-making
(e) Informal actions in an organization include gathering information, showing appreciation, enabling the easy flow of communication through all levels of the organization. / < Answer >
20. / The most common method of identifying key variables is by using the input – throughput – output model. Which among the following is not a production variable?
(a) Capacity utilization(b) Quality control (c) Maintenance time
(d) Market share (e) Spoilage. / < Answer >
21. / Strategic planning provides direction to an organization’s mission, objectives, and strategy, facilitating the development of plans for each of the organization’s functional areas. Which among the following cannot be said about strategic planning?
(a) It helps managers anticipate problems before they arise and deal with problems before they become severe
(b) It shows awareness of changing environment, which is a foundation for organizational change
(c) It helps managers set realistic objectives that are demanding, yet attainable
(d) It is easy to appraise the performance of strategic planning
(e) Strategic planning is a creative and analytical process. / < Answer >
22. / Which of the following statements is not true regarding an effective Management Information System (MIS)?
(a) It is usually linked to all the responsibility centres
(b) It provides only financial information
(c) It highlights critical indicators
(d) Reporting frequency is decided by user's needs
(e) Database is updated regularly. / < Answer >
23. / A computer system at the management level of an organization that combines data, analytical tools, and models to support semi-structured and unstructured decision making is known as
(a) Knowledge management system(b) Artificial intelligence system
(c) Executive support system(d) Expert system (e) Decision support system. / < Answer >
24. / Which of the following is a technique that is designed to evaluate the whole spectrum of functional activities so that areas that are inefficient and of little value are identified?
(a) Programming (b) Parta (c) Zero based budgeting (d) Strategic planning
(e) Budgetary control. / < Answer >
25. / Which of the following is not true for budgetary control?
(a) It is used to measure and compare actual results with the anticipated results
(b) Budgetary control offers an overall picture of performance of various functions of the organization
(c) Budgetary control is handled by the budgetary controller
(d) Budgetary control does not help in pinning down responsibility and accountability for performance to each member
(e) Budgetary control brings about the integration of policy, plans, and actions of the different departments. / < Answer >
26. / In which of the following ways, a firm reacts to its environment, deploys its principal resources and marshals its main efforts in pursuit of its purpose?
(a) Goals (b) Objectives (c) Strategy (d) Policy
(e) Management By Objectives. / < Answer >
27. / There are different types of exchange rate exposures. Which of the following imply(ies) the exchange rate exposure of the firm’s cash flows to changes in the real exchange rate?
I.Economic exposure.
II.Competitive exposure.
III.Transaction exposure.
IV.Translation exposure.
(a) Only (I) above (b) Both (I) and (II) above (c) Both (I) and (III) above
(d) Both (II) and (III) above (e) Both (II) and (IV) above. / < Answer >
28. / Which of the following organizations depend more upon the values and beliefs in order to steer their performance?
(a) Bureaucratic Organizations (b) Formal Organizations (c) Market Organizations
(d) Clan Organizations (e) Centralized Organizations. / < Answer >
29. / Different time estimates relating to an activity of a project are as follows:
(in weeks)
Activity / Optimistic Time / Most likely Time / Pessimistic Time
(t0) / (tm) / (tp)
A-B / 4 / 7 / 10
The expected time for the completion of this activity is
(a) 6.0 weeks(b) 6.5 weeks(c) 7.0 weeks(d) 7.5 weeks (e) 8.0 weeks. / < Answer >
30. / In which of the following Audit Tools, the researchers have little control over content of response?
(a) Survey (b) Questionnaire (c) Interview (d) Focus Group
(e) Both (a) and (d) above. / < Answer >
END OF SECTION A
Section B : Problems/Caselets (50 Marks)
This section consists of questions with serial number 1 – 7.
Answer all questions.
Marks are indicated against each question.
Detailed workings/explanations should form part of your answer.
Do not spend more than 110 - 120 minutes on Section B.
1. Hitec Computers manufactures and sells three related PC models:
i.PC : Sold mostly to college students.
ii.Portable PC: Smaller version of PC positioned as home computer.
iii.Super PC: Sold mostly to business executives.
Budgeted and actual data for 2003 are as follows:
Budget for 2003
Particulars / Selling Price per unit (In Rs.) / Variable Cost per unit (In Rs.) / Contribution Margin per unit
(In Rs.) / Sales Volume
(In Units)
PC / 40,000 / 20,000 / 20,000 / 8,000
Portable PC / 30,000 / 14,000 / 16,000 / 3,000
Super PC / 70,000 / 40,000 / 30,000 / 2,000
Total / 13,000
Actuals for 2003
Particulars / Selling Price per unit (In Rs.) / Variable Cost per unit (In Rs.) / Contribution Margin per unit
(In Rs.) / Sales Volume
(In Units)
PC / 30,000 / 16,000 / 14,000 / 9,000
Portable PC / 18,000 / 12,000 / 6,000 / 4,000
Super PC / 50,000 / 30,000 / 20,000 / 1,400
Total / 14,400
Hitec Computers derived its total unit sales budget for 2003 from the internal management estimate of a 20% market share and an industry sales forecast by computer manufacturers' association of 50,000 units. At the end of the year, the association reported actual industry sales of 65,000 units.
You are required to:
a.Compute the sales volume variance for individual products and also the total sales volume variance.
b.Compute the sales mix variance for individual products and also the total sales mix variance.
(4 + 6 = 10 marks) < Answer >
2.One of the largest corporate houses in India is planning to diversify its business portfolio. For last twenty years they are in the business of tyres. In the last board meeting they have short-listed three sectors to venture into. Now they are deliberating the ideas of investing either in a pharma project or in a textile project or in a paper project. They are contemplating three general domestic economic scenarios while evaluating the projects viz., boom, normal and recession. The probabilities of their occurrence are 20%, 35% and 45% respectively. Cash flows related to these projects in the different economic scenarios are as follows:
(Rs.in crores)
Year / Pharma Project / Textile Project / Paper Project
Boom / Normal / Recession / Boom / Normal / Recession / Boom / Normal / Recession
0 / –12.0 / –12.0 / –12.0 / –15.0 / –15.0 / –15.0 / –10.0 / –10.0 / –10.0
1 / 3.5 / 3.0 / 2.5 / 4.0 / 3.5 / 3.0 / 3.0 / 2.5 / 2.0
2 / 4.2 / 4.0 / 3.0 / 4.5 / 3.7 / 3.3 / 3.5 / 3.0 / 2.5
3 / 4.7 / 4.0 / 3.0 / 4.5 / 4.0 / 3.5 / 4.0 / 3.3 / 2.8
4 / 4.1 / 3.5 / 2.5 / 4.5 / 3.5 / 3.1 / 4.0 / 2.8 / 2.4
5 / 3.3 / 3.0 / 1.5 / 3.5 / 3.0 / 2.5 / 3.5 / 2.5 / 1.5
Cost of capital of the company is 10%.
You are required to find out the NPV of each project and tell the company in which project it should invest.
(15 marks) < Answer >
Caselet 1
Read the caselet carefully and answer the following questions:
3.According to you, what control problems exist in the given case?
(5 marks) < Answer >
4.Who or what is to blame for the existing control problems?
(4 marks) < Answer >
5.How would you gain control and prevent this situation from developing again?
(6 marks) < Answer >
Mills Brothers
Mills Brothers was one of Chicago’s most prestigious retail chains. During September 1973, Mills Brothers opened another in a growing chain of discount stores with the name of Violet. When the store opened, it appeared that it would be the pride of the Violet Division. The general operation of the store was the responsibility of the manager, assistant manager and personnel manager.
The manager, Rita Mellon was 30 years old and had been with Mills Brothers for six years. She worked herself up through the ranks from stock clerk to her present position. She had a Bachelor of Science degree in animal husbandry. The assistant store manager, Jake Freidman, was 26 years old. He had worked for Violet since his graduation from college, where he majored in History. He also started as a stock clerk. Ari Meyer, the personnel manager, was 28 years old and had worked in various capacities for Mills Brothers ranging from stock clerk to receiving manager. He had taken some college business courses and was currently enrolled in night school.
The profitability of the new store appeared to be growing steadily until January 1977, when the results from the year-end inventory were published. The sales volume was as expected. However, there was a steep decline in the net profits.
Inventory shortages in every department were found. They were far above all predictions and acceptable limits. Missing material in some departments accounted for over 15 percent of the cost of goods sold. Results from the physical inventory were easily matched with purchases and cash register receipts, since all cash registers were part of the store’s perpetual inventory system.
Upon disclosure of the year-end financial results, Rita called the security department. She asked members of the security staff if they knew why so much merchandise was missing. The response of the head of the security was vague. In a nice way he told Rita to check the figures again. She did review the inventory and financial figures and then returned to the security department and demanded an explanation.
The head of security said that he had experienced a similar situation before but that “to steal that much merchandise, shoplifters would need trucks.” Rita asked each department manager about the apparent inventory shortage. In every department the answer from the manager was essentially, “I don’t know”.
Mills Brothers executives demanded an explanation of the shortages. They also initiated an investigation into the high labour turnover in the store. It was found that there was general dissatisfaction among employees, who felt a growing dislike for the store managers. The major complaints by employees were low pay and harassment by the assistant manager. Jake had been promoted to his position with the recommendation of the store manager. Further investigation showed that Rita had attempted to intimidate the department managers by subtly threatening to discharge them if they did not work more than the required 40 hours. (Department managers did not use time cards.)
Caselet 2
Read the caselet carefully and answer the following questions:
6.How valuable is information in the given case? What is the trade-off between the value and cost of information?
(5 marks) < Answer >
7.Intowhat type of information system would you categorise a pharmacy information system, and why?
(5 marks) < Answer >
Pharmacy Information Systems
Inappropriately prescribed medications cost Americans over $4.5 billion in hospital expenses and billions of dollars in physician’s bills, not to mention the fear and pain that can result from a bad drug reaction. Allergic reactions and harmful combinations of medications can kill. The problem is of great concern to patients, their families, physicians and pharmacists.
Increasingly, pharmacies are taking steps to battle the problem. They are finding that affordable computers and software enable them to protect their customers’ health, assist them in consultations with physicians, and provide them with a good competitive advantage. At first, as the price of computers fell, many pharmacies adopted computers for inventory and billing. Software that dealt specifically with drug interactions was developed much later, as a logical growth of the computer usage in this industry. About half of the nation’s 25 largest drug chains are now adding drug interaction or customer information programs to their computer networks.
The new systems allow the pharmacist to check the compatibility of a drug with other medications the customer may be using, as well as with the customer’s record of dietary restrictions and allergies, before a new prescription is filled. When problems turn up, the physician can be consulted. Pharmacists report that inappropriate combinations of prescriptions often result when patients consult different physicians. The information system is being developed so that eventually pharmacists can check not only their own records but those in the computers at other pharmacies across the state and maybe even across the nation.
Currently the information is transferred by the patient. For example, in Massachusetts, the Massachusetts Medical Society Auxiliary provides doctors with Medex cards that they give to patients. Each patient’s card contains a list of prescriptions and any reactions the patient has had to them. The patient submits the card to the pharmacists with prescriptions. Computerizing the records at one drugstore will greatly improve the ability of doctors and pharmacists to meet the needs of their patients.
Although the use of computers and software to prevent serious drug interactions in prescription users is attractive, the system is not without problems. Privacy of records is a major concern. Most pharmacies note that it is impossible to secure terminals and data from computer thieves. Legal liability is another problem. For example, if a person whose records are on the pharmacy’s computer system takes a drug that causes a severe interaction, who is responsible?
Druggists using the new information systems report an increase in customer loyalty in filling their prescriptions. “It’s a good selling point,” says one. “It allows us to practice even more professionally than we did before. It’s good for business. It’s beyond me how anybody couldn’t want it.”
The concerns over the use of computers in medicine go well beyond the neighbourhood pharmacy. Physicians and hospitals that have not bought or used computer-based technology in the diagnosis and treatment of patients may find themselves liable in a court of law. Several court decisions have gone against doctors whose failure to use the latest available technology resulted in serious injury to patients.
END OF SECTION B
Section C : Applied Theory (20 Marks)
This section consists of questions with serial number 8 - 9.
Answer all questions.
Marks are indicated against each question.
Do not spend more than 25 -30 minutes on section C.
8.D.P. Morgan, a security firm, wants to implement a proper control system in its organization. It has sought the help of an outside consultant for the same.
Suppose you are the outside consultant appointed by the firm. What management control implications will you consider, before implementing such a system? Discuss.
(10 marks) < Answer >
9.An FMCG company is rapidly losing market share to its competitors. Its Managing Director has decided to use benchmarking to improve the situation. But when he sought the advice of a renowned consultant, he advised him to use benchtrending instead, because of its greater benefits.
What is the difference between benchmarking and benchtrending? Outline the various steps in strategic benchtrending and process benchtrending.
(10 marks) < Answer >
END OF SECTION C
END OF QUESTION PAPER
Suggested Answers
Management Control & Information Systems (MB 281) : October 2004