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Q.1. State and explain the factors that affect Management Control?

Ans:

Management Control is The process by which managers influence other members of the

organization to implement the organizations strategies.

The factors that affect Management Control are:

Beliefs systems These systems give direction to the organization control by formulating its

mission, strategy and core values. These systems consist of a set of organizational definitions

which are formulated, formally communicated and frequently reconfirmed by senior

management to provide values, purpose and direction to the organization. Beliefs systems are

used to inspire and direct the search for new opportunities. This type of system can be denoted as

behavioural.

Boundary systems These systems indicate risks to be avoided and actions which

organizational members are expected not to take. They provide sets of working arrangements,

codes of conduct and rules and procedures. Boundary systems are used to set limits on

opportunity-seeking behaviour. This type of system can be denoted as instrumental.

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Diagnostic control systems These systems measure and monitor the execution of the mission

and strategy with predefined performance indicators. On the basis of the feedback and feed

forward information provided by these systems, managers take corrective and preventive actions

to keep the organization on track. These systems also foster the achievement of predefined

targets by using rewards. Diagnostic control systems are used to motivate, monitor and reward

achievement of specified goals. This type of system can be denoted as both instrumental and

behavioural.

Interactive control systems These systems are formal communication systems that managers

use to involve themselves in activities of employees and employees use to communicate bottom-

up ideas and initiatives. These systems foster dialogue between the various organizational levels.

Interactive control systems are used to stimulate organizational learning and the emergence of

new ideas and strategies. This type of system can be denoted as behavioural.

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Q.2. What factors influence the success of Management Control System?

Ans:

The following factors are necessary for the success of a Management Control System:

1. Responsibility structure, Content, Integrity, Manageability and Alignment

For the success of the Management Control System, the organization needs to have a

clear and formalized responsibility structure, in which a clear parenting style and clear

tasks and responsibilities have been defined. These are then applied consistently at all

management levels. The management control system has a content which enable

organizational members to use financial and non-financial performance information. This

information has a strategic focus through the use of critical success factors and key

performance indicators. The performance information is integer which means it is

reliable, timely and consistent. It is also manageable: management reports andmanagement control systems are user-friendly and more detailed performance

information is easily accessible through information and communication technology

systems. Finally, other management systems in the organization, such as the human

resources management system, are well aligned with the management control system, so

what is important to the organization is regularly evaluated and rewarded.

2. Accountability

The effectiveness of the performance management system is also determined by the

degree in which organizational members actually feel responsible for their results and

their willingness to use the system to obtain performance information which may help to

improve the results. A noncommittal organizational climate is a real threat for the desired

performance-orientation of an organization. The degree in which one feels responsible is

expressly different from the degree in which one is made responsible. To stimulate

feelings of responsibility, an organization has to take two elements into consideration:

relevance of controls and freedom to act. The degree in which organizational members

feel responsible for their results is connected to the relevance of the performance

indicators which measure their responsibility area. The more relevant these indicators are

in the opinion of the organizational members, the stronger the stimulus will be for them

to get involved themselves. For example, an operational manager will generally not be

stimulated to take action when the results of the overall company are lagging. However,

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when it is made clear to him that the lagging results of his own unit are the cause of this,

he will be strongly motivated to take responsibility and work on improving the results. It

shows that the defined CSFs and KPIs have to be evaluated regularly on their relevancy

for control purposes by asking the question: Do they still give an accurate picture of the

performance of a managers responsibility area and its link with overall organizational

performance? After all, there may have been many internal and external changes since

the indicators were originally formulated and the content of the performance information

may thus no longer be representative. Taking responsibility for results requires that

organizational members are given a certain leeway so that they have the opportunity to

influence their results favourably and the freedom to take action. This implies that people

have to be authorized by their managers to take independently and swiftly action on

problems without having to ask permission first. It also asks for involvement of organizational members in defining the right KPIs for their responsibility areas.

3. Management Style

A manager with an effective style is able to explicitly steer on results while

simultaneously giving support to employees to help them in obtaining the desired results.

Steering entails making clear agreements, monitoring, discussing progress issues and

calling upon the own responsibility of employees. Support asks for a coaching

management style which is aimed at enlarging peoples insight into their possibilities for

influencing their own results and at stimulating their feelings of responsibility. When the

management style is restricted to only steering, a directive style without much regard for

the importance of individual responsibility will be the result. However, when the

management style is limited to only supporting and coaching, decreased commitment and

disorientation will be the result. The combination of result-oriented steering and coaching

equals the style of result -oriented coaching. To stimulate this man agement style, an

organization has to take three elements into consideration: visible commitment, clear

steering and support. Visible commitment entails that management uses the performance

management system in such a way that it is clear and visible to the other members of the

organization. To focus the attention of organizational members maximally on the desired

performance, forceful steering by management is necessary. Forceful steering is

characterized by setting clear goals, drafting clear improvement plans, monitoring

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progress in a disciplined way and swiftly formulating additional corrective actions if

necessary. While steering is primarily focused on increasing accountability, support is

aimed at stimulating the sense of individual responsibility of organizational members.

4. Action Orientation

Action orientation is the degree in which performance information actually stimulates

action taking to improve performance. Action orientation is a good predictor of the

effectiveness with which performance management is being applied. After all, if

performance information does not lead to action, the added value of this information will

be nil. To stimulate action orientation, an organization has to take three elements into

consideration: integration, corrective action management and preventative action

management. Integration is the degree in which performance information is integrated in

daily operational management. Corrective action management entails organizationalmembers taking immediate action on lagging results in order to influence these results

favourably. Preventative action management entails organizational members taking

preventive action on unfavourable prognosis in order to prevent problems from actually

occurring.

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made. For example, "Knowledge and skills are the keys to success" or "give man bread

and feed him for a day, but teach him to farm and feed him for life". These example

values may set the priorities of self-sufficiency over shelter.

4. Strategy: Strategy, narrowly defined, means "the art of the general." A combination of

the ends (goals) for which the firm is striving and the means (policies) by which it is

seeking to get there. A strategy is sometimes called a roadmap which is the path chosen

to plough towards the end vision. The most important part of implementing the strategy is

ensuring the company is going in the right direction which is towards the end vision.

Organizations sometimes summarize goals and objectives into a mission statement and/or a

vision statement . Others begin with a vision and mission and use them to formulate goals and

objectives.

Many people mistake the vision statement for the mission statement, and sometimes one is

simply used as a longer term version of the other. However they are meant to be quite different,

with the vision being a descriptive picture of future state, and the mission being an action

statement for bringing about what is envisioned (i.e. the vision is what will be achieved if the

company is successful in achieving its mission). For an organisation's vision and mission to be

effective, they must become assimilated into the organization's culture. They should also be

assessed internally and externally. The internal assessment should focus on how members inside

the organization interpret their mission statement. The external assessment which includes all

of the businesses stakeholders is valuable since it offers a different perspective. These

discrepancies between these two assessments can provide insight into their effectiveness.

Management Control:

Management control can be defined as a systematic effort by business management to compare

performance to predetermined standards, plans, or objectives in order to determine whether

performance is in line with these standards and presumably in order to take any remedial action

required to see that human and other corporate resources are being used in the most effective and

efficient way possible in achieving corporate objectives. Also control can be defined as "that

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gathering and exporting sales data. If the firm has identified appropriate measurements,

regular review of these reports helps managers stay aware of whether the firm is doing

what it should do. In addition to there, certain qualitative bases based on intuition,

judgement, opi nions, or surveys could be used to judge whether the firms performance is

on the right track or not.

3. Benchmarking: It is a process of learning how other firms do exceptionally high-quality

things. Some approaches to bench marking are simple and straightforward. For example

Xerox Corporation routinely buys copiers made by other firms and takes them apart to

see how they work. This helps the firms to stay abreast of its competitors improvements

and changes.

4. Key Factor Rating: It is based on a close examination of key factors affecting

performance (financial, marketing, operations and human resource capabilities) andassessing overall organisational capability based on the collected information.

From these definitions it can be stated that there is close link between planning and controlling.

Planning is a process by which an organisation's objectives and the methods to achieve the

objectives are established, and controlling is a process which measures and directs the actual

performance against the planned goals of the organisation. Thus, goals and objectives are often

referred to as Siamese twins of management. The managerial function of management and

correction of performance in order to make sure those enterprise objectives and the goals devised

to attain them being accomplished.

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Q.4. Write a note on Financials Goals: ROI, RI.

Ans:

Return on Investment (ROI)

It is the measure of the earning power of assets. The ratio reveals the firm's profitability on its

business operations and thus serves to measure management's effectiveness. It equals net income

divided by average total assets; also called rate earned on total assets. Other versions of ROI

exist, such as net income before interest and taxes divided by average total assets. Return on

investment is a commonly used measure to evaluate divisional performance.

Residual Income (RI)

It is the operating income that an investment centre is able to earn above some minimum return

on its assets. It is a popular alternative performance measure to Return on Investment (ROI). RIis computed as:

RI = Net Operating Income - (Minimum Rate of Return on Investment Operating Assets)

Residual income, unlike ROI, is an absolute amount of income rather than a rate of return. When

RI is used to evaluate divisional performance, the objective is to maximize the total amount of

residual income, not to maximize the overall ROI percentage figure. For example, assume that

operating assets are $100,000, net operating income is $18,000, and the minimum return on

assets is 13%. Residual income is $18,000 - (13% $100,000) = $18,000 - $13,000 = $5000. RI

is sometimes preferred over ROI as a performance measure because it encourages managers to

accept investment opportunities that have rates of return greater than the charge for invested

capital. Managers being evaluated using ROI may be reluctant to accept new investments that

lower their current ROI, although the investments would be desirable for the entire company.

Advantages of using residual income in evaluating divisional performance include:

1. It takes into account the opportunity cost of tying up assets in the division;

2. The minimum rate of return can vary depending on the riskiness of the division;

3. Different assets can be required to earn different returns depending on their risk:

4. The same asset may be required to earn the same return regardless of the division it is in;

and

5. The effect of maximizing dollars rather than a percentage leads to goal congruence.

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Q.5. Define ROI; give its advantages and disadvantages. Is ROI an end of financial

objectives? Explain.

Ans:

Return on Investment

A performance measure used to evaluate the efficiency of an investment or to compare the

efficiency of a number of different investments.

The return on investment formula:

Advantages

There are three apparent benefits of an ROI measure:

1. It is a comprehensive measure i.e. anything that affects financial statements is reflected in

this ratio.2. ROI is easy to calculate, easy to understand, and meaningful in an absolute sense.E.g.an

ROI of less than 5% is considered low on an absolute scale, and an ROI over 25% is

considered high.

3. It is a common denominator that may be applied to any organizational unit responsible

for profitability, no matter what its size or in what business it practices. The performance

of different units may be compared directly to each other .Also, ROI data is available for

competitors that can be used as a basis for comparison, which is not possible for EVA

approach for comparison.

Disadvantages

1. The ROI approach provides different incentives for investments across business units.

For example a business unit that is currently achieving a ROI of 30% would be most

reluctant to expand unless it is able to earn a ROI of 30% or more on additional assets; a

lesser return would decrease its overall ROI below its current 30% level. Thus this

business unit might forgo investment opportunities whose ROI is above the cost of

capital but below 30%. Similarly a business unit that is currently achieving a low ROI say

5%, would benefit from anything over 5% on additional assets. As a consequence, ROI

creates a bias towards little or no expansion in the high profit business units, while at the

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same time, the low profit units are making investments at rates of return well below those

rejected by high profit units.

2. Decisions that increase a centres ROI may decrease its overall profits. For instance in an

investment centre whose current ROI is 30%,the manager can increase its overall ROI by

disposing of an asset whose ROI is 25%.However if the cost of capital tied up in the

investment centre is less than 25% the absolute rupee profit after deducting capital costs

will decrease for the centre.

ROI - not the end of financial objectives

It must be noted that return on investment is a ratio. The term ratio refers to the numerical or

quantitative relationship between two items/variables. The underlying principle of ratio analysis

is that it makes related information comparable. However ratios by themselves mean nothing.Thus, the return on investment must be compared with:

1. A norm or a target

2. Previous ROI achieved in order to assess trends, and

3. The ROI achieved in other comparable companies

Thus, ROI should be considered only as a tool for analysis rather than as the end of financial

objectives. There are more objectives that a financial manager of a firm should aim at fulfilling.

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Q.6. What is EVA? How is it superior and what are its drawbacks? Process of

implementation and improvement in EVA, explain with a numerical.

Ans:

1. EVA is a financial performance metric developed by STERN STEWART & CO. This

financial performance measure captures the true economic profit of an organisation in

terms of wealth creation for the shareholders. EVA is net operating profit minus an

appropriate charge for the opportunity cost of all capital invested in the company.

2. EVA = NOPAT (Net operating profit after tax)-(Capital x Cost of Capital)

3. Net operating Profit after tax (NOPAT) is the profit earned by a business or company

from its operating activities after tax deduction. It is a good measure of profitability as it

does not include items such as income from investments and goodwill amortisation,

which are non-operating items by nature.4. Capital is the amount invested in the business or company.

5. The cost of capital is the opportunity cost of all the capital invested in the business, that

is, it is the minimum rate of return if the money is invested in other investment

opportunities of comparable risk. It is calculated as the weighted sum of the cost of debt

and the cost of equity.

Therefore, EVA is an estimate of the amount by which earnings of the company exceed or fall

short of the return that the shareholders and lenders could have got had they invested money

elsewhere. Consequently, a positive value of EVA indicates that the company is in good

financial health. EVA indicates the wealth a business has created or destroyed as it takes into

consideration all capital costs, including the cost of equity.

The EVA approach is superior to the ROI approach in the following way

1. First, with EVA all business units have the same profit objective for comparable

investments. The ROI approach on the other hand, provides different incentives for

investments across business units. For example a business unit that is currently achieving

a ROI of 30% would be most reluctant to expand unless it is able to earn a ROI of 30% or

more on additional assets; a lesser return would decrease its overall ROI below its current

30% level. Thus this business unit might forgo investment opportunities whose ROI is

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above the cost of capital but below 30%. Similarly a business unit that is currently

achieving a low ROI say 5%, would benefit from anything over 5% on additional assets.

As a consequence, ROI creates a bias towards little or no expansion in the high profit

business units, while at the same time, the low profit units are making investments at

rates of return well below those rejected by high profit units.

2. Decisions that increase a centres ROI may decrease its overall profits. For instance in an

investment centre whos current ROI is 30%, the manager can increase its overall ROI by

disposing of an asset whose ROI is 25%. However if the cost of capital tied up in the

investment centre is less than 25% the absolute rupee profit after deducting capital costs

will decrease for the centre.

Advantages of EVA1. It makes a number of adjustments to conventional earnings in order to eliminate

accounting anomalies and bring them closer to true economic results.

2. It allows the design of incentive compensation system for managers based on

improvement in EVA. Under an EVA bonus plan the only way managers can earn more

money is by creating greater value for shareholders.

3. It provides better goal congruence than ROI.

4. EVA helps in achieving goal congruence between managers and shareholders as it links

the compensation and incentives of mangers and other employees with the EVA

measures.

5. It facilitates communication and cooperation among divisions and departments by

providing a common language for employees across all corporate functions. This helps to

improve organisational culture.

6. EVA helps to link the strategic planning function with the operating divisions, and it

eliminates the mistrust that typically exists between the operations and finance dept.

7. It provides significant information beyond traditional accounting measures like Earning

per share EPS, Return on Assets (ROA), Return on Equity (ROE). It streamlines and

speeds up the decision making process.

Drawbacks of EVA

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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.

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 Companys 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.

Significance of Goal Congruence

1. Ensures frictionless working

2. Ensures achievement of organizations goal/strategic objective

3. Ensures coordination & motivation of all concerned

4. Ensures consistency in the working of all concerned

5. Gives fair chance to its employees to achieve their personal goals

6. Enhances the loyalty towards the company

7. Satisfies prime requirement of MCS

Managerial Styles

1. Autocratic

An Autocratic style means that the manager makes decisions unilaterally, and without

much regard for subordinates. As a result, decisions will reflect the opinions and

personality of the manager; this in turn can project an image of a confident, well managed

business. On the other hand, strong and competent subordinates may chafe because of

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limits on decision-making freedom, the organization will get limited initiatives from

those on the front lines , and turnover among the best subordinates will be higher . There

are two types of autocratic leaders: the Directive Autocrat makes decisions unilaterally and closely supervises

subordinates; the Permissive Autocrat makes decisions unilaterally, but gives subordinates

latitude in carrying out their work

2. Paternalistic

A more Paternalistic form is also essentially dictatorial; however, decisions take into

account the best interests of the employees as well as the business. Communication is

again generally downward, but feedback to the management is encouraged to maintain

morale. This style can be highly advantageous when it engenders loyalty from theemployees, leading to a lower labor turnover, thanks to the emphasis on social needs. On

the other hand for an autocratic management style the lack of worker motivation can be

typical if no loyal connection is established between the manager and the people who are

managed. It shares disadvantages with an autocratic style, such as employees becoming

dependent on the leader.

3. Democratic

In a Democratic style, the manager allows the employees to take part in decision-making:

therefore everything is agreed upon by the majority. The communication is extensive in

both directions (from employees to leaders and vice-versa). This style can be particularly

useful when complex decisions need to be made that require a range of specialist skills.

For example, when a new ICT system needs to be put in place and the upper management

of the business is computer-illiterate. From the overall business's point of view, job

satisfaction and quality of work will improve, and participatory contributions from

subordinates will be much higher. However, the decision-making process could be

severely slowed down unless decision processes are streamlined. The need for consensus

may avoid taking the 'best' decision for the business unless it is managed or limited. As

with the autocratic leaders, democratic leaders are also two types i.e. permissive and

directive.

4. Laissez-faire

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In a Laissez-faire leadership style, the leader's role is as a mentor and stimulator, and staff

manages their own areas of the business. Thus it is only successful with Inspirational

leadership that understands the different areas of initiative being taken by subordinates,

and Strong and creative subordinates who share the same vision throughout the

organization.

It is a style that is best for strong, entrepreneurial subordinates in an organization with dynamic

growth in multiple directions. This style brings out the best in highly professional and creative

groups of employees; however in cases where the leader does not have broad expertise and

ability to communicate a strong vision, it can degenerate into disparate and conflicting activities.

Lacking a strong maestro as leader, there is a risk in both focus and direction.

Levels of Strategy

1. Corporate-Level Strategy

Corporate-level strategies address the entire strategic scope of the enterprise. This is the

big picture view of the organization and includes deciding in which product or service

markets to compete and in which geographic regions to operate. For multi-business

firms, the resource allocation process cash, staffing, equipment and other resources are

distributed typically established at the corporate level. In addition, because market

definition is the domain of corporate-level strategists, the responsibility for

diversification, or the addition of new products or services to the existing

product/service line-up, also falls within the realm of corporate-level strategy. Similarly,

whether to compete directly with other firms or to selectively establish cooperative

relationship strategic alliances alls within the purview corporate-level strategy, while

requiring on-going input from business-level managers.

2. Business-Level Strategies

Business-level strategies are similar to corporate-strategies in that they focus on overall

performance. In contrast to corporate-level strategy, however, they focus on only one

rather than a portfolio of businesses. Business units represent individual entities oriented

toward a particular industry, product, or market. In large multi-product or multi-industry

organizations, individual business units may be combined to form strategic business

units (SBUs). An SBU represents a group of related business divisions, each responsible

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Q.8. What do you understand by MBO? Give its advantages, disadvantages, problems

related to and relevance of MBO in Indian Business?

Ans:

Management by Objective

An effective management goes a long way in extracting the best out of employees and make

them work as a single unit towards a common goal. The term Management by Objectives was

coined by Peter Drucker in 1954.

What is Management by Objective?

The process of setting objectives in the organization to give a sense of direction to the employees

is called as Management by Objectives. It refers to the process of setting goals for the employees

so that they know what they are supposed to do at the workplace. Management by Objectivesdefines roles and responsibilities for the employees and help them chalk out their future course

of action in the organization. Management by objectives guides the employees to deliver their

level best and achieve the targets within the stipulated time frame.

Need for Management by Objectives (MBO)

1. The Management by Objectives process helps the employees to understand their duties at

the workplace.

2. KRAs are designed for each employee as per their interest, specialization and educational

qualification.

3. The employees are clear as to what is expected out of them.

4. Management by Objectives process leads to satisfied employees. It avoids job mismatch

and unnecessary confusions later on.

5. Employees in their own way contribute to the achievement of the goals and objectives of

the organization. Every employee has his own role at the workplace. Each one feels

indispensable for the organization and eventually develops a feeling of loyalty towards

the organization. They tend to stick to the organization for a longer span of time and

contribute effectively. They enjoy at the workplace and do not treat work as a burden.

6. Management by Objectives ensures effective communication amongst the employees. It

leads to a positive ambience at the workplace.

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7. Management by Objectives leads to well defined hierarchies at the workplace. It ensures

transparency at all levels. A supervisor of any organization would never directly interact

with the Managing Director in case of queries. He would first meet his reporting boss

who would then pass on the message to his senior and so on. Everyone is clear about his

position in the organization.

8. The MBO Process leads to highly motivated and committed employees.

9. The MBO Process sets a benchmark for every employee. The superiors set targets for

each of the team members. Each employee is given a list of specific tasks.

Unique features and advantages of the MBO process

The principle behind Management by Objectives (MBO) is for employees to have a clear

understanding of the roles and responsibilities expected of them. They can then understand howtheir activities relate to the achievement of the organization's goal. MBO also places importance

on fulfilling the personal goals of each employee. Some of the important features and advantages

of MBO are:

1. Motivation Involving employees in the whole process of goal setting and increasing

employee empowerment. This increases employee job satisfaction and commitment.

2. Better communication and Coordination Frequent reviews and interactions between

superiors and subordinates help to maintain harmonious relationships within the

organization and also to solve many problems.

3. Clarity of goals

4. Subordinates tend to have a higher commitment to objectives they set for themselves than

those imposed on them by another person.

5. Managers can ensure that objectives of the subordinates are linked to the organization's

objectives.

Limitations of Management by objectives Process

1. It sometimes ignores the prevailing culture and working conditions of the organization.

2. More emphasis is being laid on targets and objectives. It just expects the employees to

achieve their targets and meet the objectives of the organization without bothering much

about the existing circumstances at the workplace. Employees are just expected to

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perform and meet the deadlines. The MBO Process sometimes does treat individuals as

mere machines.

3. The MBO process increases comparisons between individuals at the workplace.

Employees tend to depend on nasty politics and other unproductive tasks to outshine their

fellow workers. Employees do only what their superiors ask them to do. Their work lacks

innovation, creativity and sometimes also becomes monotonous.

How To Make MBO Effective?

1. Support from all: In order that MBO succeeds, it should get support and co-operation

from the management. MBO must be tailored to the executive's style of managing. No

MBO programme can succeed unless it is fully accepted by the managers. The

subordinates should also clearly understand that MBO is the policy of the Organisationand they have to offer cooperation to make it successful. It should be a programme of all

and not a programme imposed on them.

2. Acceptance of MBO programme by managers: In order to make MBO programme

successful, it is fundamentally important that the managers themselves must mentally

accept it as a good or promising programme. Such acceptances will bring about deep

involvement of managers. If manages are forced to accept NIBO programme, their

involvement will remain superfluous at every stage. The employees will be at the

receiving-end. They would mostly accept the lines of action initiated by the managers.

3. Training of managers: Before the introduction of MBO programme, the managers

should be given adequate training in MBO philosophy. They must be in a position to

integrate the technique with the basic philosophy of the company. It is but important to

arrange practice sessions where performance objectives are evaluated and deviations are

checked. The managers and subordinates are taught to set realistic goals, because they are

going to be held responsible for the results.

4. Organizational commitment: MBO should not be used as a decorative piece. It should

be based on active support, involvement and commitment of managers. MBO presents a

challenging task to managers. They must shift their capabilities from planning for work to

planning for accomplishment of specific goals. Koontz rightly observes, "An effective

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programme of managing by objective must be woven into an entire pattern and style of

managing. It cannot work as a separate technique standing alone."

5. Allocation of adequate time and resources: A well-conceived MBO programme

requires three to five years of operation before it provides fruitful results. Managers and

subordinates should be so oriented that they do not look forward to MBO for instant

solutions. Proper time and resources should be allocated and persons are properly trained

in the philosophy of MBO.

6. Provision of uninterrupted information feedback: Superiors and subordinates should

have regular information available to them as to how well subordinate's goal performance

is progressing. Over and above, regular performance appraisal sessions, counselling and

encouragement to subordinates should be given. Superiors who compliment and

encourage subordinates with pay rise and promotions provide enough motivation for peak performance.

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Q.9. What is decentralization? What are responsibility centres? Distinguish between

engineered expense centre and discretionary expense centre.

Ans:

Decentralization is the process of dispersing decision-making governance closer to the people

and/or citizens. It includes the dispersal of administration or governance in sectors or areas like

engineering, management science, political science, political economy, sociology and

economics. Decentralization is also possible in the dispersal of population and employment.

Law, science and technological advancements lead to highly decentralized human endeavors.

A central theme in decentralization is the difference between:

1. A hierarchy, based on authority: two players in an unequal-power relationship; and

2. An interface: a lateral relationship between two players of roughly equal power.

The more decentralized a system is, the more it relies on lateral relationships, and the less it can

rely on command or force. In most branches of engineering and economics, decentralization is

narrowly defined as the study of markets and interfaces between parts of a system. This is most

highly developed as general systems theory and neoclassical political economy. Decentralization

is the policy of delegating decision-making authority down to the lower levels in an organization,

relatively away from and lowers in a central authority. A decentralized organization shows fewer

tiers in the organizational structure, wider span of control, and a bottom-to-top flow of decision-

making and flow of ideas. In a centralized organization, the decisions are made by top executives

or on the basis of pre-set policies. These decisions or policies are then enforced through several

tiers of the organization after gradually broadening the span of control until it reaches the bottom

tier. In a more decentralized organization, the top executives delegate much of their decision-

making authority to lower tiers of the organizational structure. As a correlation, the organization

is likely to run on less rigid policies and wider spans of control among each officer of the

organization. The wider spans of control also reduce the number of tiers within the organization,

giving its structure a flat appearance. One advantage of this structure, if the correct controls are

in place, will be the bottom-to-top flow of information, allowing decisions by officials of the

organization to be well informed about lower tier operations. For example, if an experienced

technician at the lowest tier of an organization knows how to increase the efficiency of the

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production, the bottom-to-top flow of information can allow this knowledge to pass up to the

executive officers.

A responsibility center is an organization unit that is headed by a manager who is responsible

for its activities and results. In Responsibility Accounting revenues and costs information are

collected and reported by responsibility centers.

There are four types of responsibility centers, according to the nature of the control over the

inputs and outputs:

1. Revenue center

2. Cost or Expense center

3. Profit center

4. Investment center

Engineered Discretionary

Should be measurable in monetary terms,

outputs in physical quantities.

More difficult to measure in physical quantities

or precisely on monetary terms.

Compare it to actual costs and the difference

is indicative of efficiency or lack thereof.

Difference between budgeted expenses and

actual expenses does not indicate efficiency.

Multiply standard cost per unit x no. of unitsproduced or processed = this is the ideal cost.

Discretionary means, management allocatesthem based on established polices (not

arbitrarily).

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Q.10. Profit Centre, types of profit centres, manufacturing, R&D with reference to profit

centres and budget preparation.

Ans:

Profit centre

A profit centre is a section of a company treated as a separate business. Thus profits or losses for

a profit centre are calculated separately. A profit centre manager is held accountable for both

revenues, and costs (expenses), and therefore, profits. What this means in terms of managerial

responsibilities is that the manager has to drive the sales revenue generating activities which

leads to cash inflows and at the same time control the cost (cash outflows) causing activities.

This makes the profit centre management more challenging than cost centre management. Profit

centre management is equivalent to running an independent business because a profit centre

business unit or department is treated as a distinct entity enabling revenues and expenses to bedetermined and its profitability to be measured.

The software provides two types of profit centres: Service-type Profit Centres Retail-type Profit Centres

A Service-type Profit Centre is used for operations that perform service; combinations of

labour and parts. Service Profit Centres are further categorized into Service Categories.

A Retail-type Profit Centre is used for retail sales only. Retail Profit Centres are further

categorized into Sales Departments.

Manufacturing with reference to profit centres

In large companies, especially manufacturing companies, it has become a fairly common

occurrence to break the company into small pieces, with each piece operating as a profit centre

that has to compete for business. In this manner, a large business can suddenly find itself

operating as a small business. For example, say the Acme Company produces a finished product

that is composed of five smaller parts. Instead of operating as one large company that produces

all five parts needed for the finished product, Acme has decided to split into six separate units

one that assembles and sells the finished product, and five smaller companies that each produce

one of the parts needed for the finished product. Beyond Acme, there are other companies that

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produce those same five parts needed to produce the finished product. Each of the five part

manufacturers is now operating as a separate profit centre, reporting to Acme's corporate office.

Each has to determine its own methods of operation, and each has to determine how it is going to

show a profit. There may be internal agreements in place that mandate that each of the five units

will continue to work together to produce the finished product, or Acme may throw things wide

open by stating that there is no corporate mandate forcing the five divisions to continue to work

together.

If the latter model is chosen, the corporation may have decided that, while the company could

continue making steady but small profits if it kept using the five units together as it had for

decades, there was a chance that the company could make huge profits if it made each of the five

units accountable for its own bottom line and opened up the manufacturing process to bothinternal and external competition. In such a radical environment, it was conceivable that one of

the five units could go bankrupt and cost the company money, but senior management believed

that the hugely increased profits in the other four units, and the resulting higher profit margin

realized by the sale of the finished product, would more than offset the loss of one unit. Thus,

each of Acme's five units, formerly divisions within the larger company that were not

accountable for directly generating profits, were now separate entities that had to show a profit to

continue operating. Each of the units had gone from a cost centre mentality buying materials to

produce part of a product that showed up on the company's overall bottom line to a profit

centre mentality, responsible for showing a profit based solely on the production and sale of its

one part.

Research & Development

The value of R&D as strategic infrastructure can be judged based on parameters such as

inimitability, durability, appropriability, substitutability, and competitive superiority. The

monetary value of the on-going R&D projects can be arrived at by calculating the net cash flows

for two different time periods - from the beginning of the R&D project to its end, and from the

beginning of the utilization of the R&D outputs to the end of the forecasted economic life of the

project. Conducting an R&D audit is one of the ways of monitoring and controlling an

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organization's research and development activities. The R&D audit would typically cover issues

such as alignment of R&D objectives with the overall objectives of the organization, budget

allocation, expense tracking, recruitment of competent personnel, treatment of commercially

unviable projects, coordination of R&D activities with concerned departments, and availability

of necessary inputs and equipment. Management control of new product development is done

through tools/techniques such as the Stage- Gate framework, t he balanced scorecard, and

concurrent engineering. The Stage- Gate framework has six stages, each representing a set of

activities that are included as a part of the new product development project. These stages

incorporate aspects such as customer preferences, quality of product, and product-market fit. The

gates in the framework are the points at which the project is evaluated for quality through a

stringent reviewing process. They help in differentiating between valuable and less valuable

projects.

Budget Preparation

Budgets can be defined as a quantitative statement, for a defined period of time, which may

include planned revenues, expenses, assets, liabilities, and cash flows. Budgeting refers to the

process of designing, implementing, and operating budgets. Budgeting, as a control tool,

provides an action plan to ensure that the organization's actual activities are least deviated from

the planned activities. Budgets are used to give an overview of the organization and its

operations. They are useful in resource allocation where resources are allocated in such a way

that the processes which are expected to give the highest returns are given priority. Budgets are

also forecast tools and make the organization better prepared to adapt to changes in the

environment. They should be developed in such a way that they take into account the strategic

requirements of each of the functions. Budget formulation consists of a series of activities:

creating a budget department or appointing a budget controller, developing guidelines for budget

preparation, developing budget proposals at the department/ business unit level, developing the

budget for the entire organization, determining the budget period and key budget factors,

benchmarking the budget, reviewing and approving the budget, monitoring progress, and

revising the budget.

Steps in Budget Formulation Creating a budget department or appointing a budget controller

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Developing guidelines for budget preparation Developing budget proposals at department/business unit level Developing the budget for the entire organization Determining the budget period and key budgets factors Benchmarking the budget Budget review and approval Monitoring progress and revising the budgets

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Q.11. Transfer Pricing and its objectives, methods of transfer pricing and its determination

with one numerical example.

Ans:

Transfer Pricing

Definition

The price that is assumed to have been charged by one part of a company for products and

services it provides to another part of the same company, in order to calculate each divisions

profit and loss separately. Transfer pricing is a mechanism for distributing revenue between

different divisions which jointly develop, manufacture and market products and services. An

economic theory behind optimal transfer pricing with optimal defined as transfer pricing that

maximizes overall firm profits in a non-realistic world with no taxes, no capital risk, no

development risk, no externalities or any other frictions which exist in the real world. In practicea great many factors influence the transfer prices that are used by multinational corporations,

including performance measurement, capabilities of accounting systems, import quotas, customs

duties, VAT, taxes on profits, and (in many cases) simple lack of attention to the pricing.

Objectives of Transfer Pricing

Transfer pricing systems are designed to accomplish the following objectives:

1. To achieve goal congruence. The transfer prices should be such that actions which will

have the effect o f increasing a divisions reported profit will also have the effect of

increasing the companys reported profit. This maximizes the likelihood that the division

managers will act in the companys best interests.

2. To ensure that divisional autonomy is maintained. In principle the top management of a

company could simply issue precise instructions to divisions as to what goods to transfer

to each other, in what quantities, and at what prices. This would seem to solve the

problem of transfer pricing at a stroke, and to achieve optimization (for the company as a

whole) by diktat. However, most organizations are unwilling to go down this road,

because of the enormous benefits of allowing divisional autonomy. It would be very

difficult to make division managers accountable for their profits if they were not given a

free hand in making important decisions.

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market price, the implication is that corporate profits are maximized when the upstream division

sells the product on the external market, even if this leaves the downstream division idle.

Sometimes, there are cost savings on internal transfers compared with external sales. These

savings might arise, for example, because the upstream division can avoid a customer credit

check and collection efforts, and the downstream division might avoid inspection procedures in

the receiving department. Market-based transfer pricing continues to align managerial incentives

with corporate goals, even in the presence of these cost savings, if appropriate adjustments are

made to the transfer price (i.e., the market-based transfer price should be reduced by these cost

savings).

However, many intermediate products do not have readily-available market prices. Examples are

shown in the table above: a pharmaceutical company with a drug under patent protection (an

effective monopoly); and an appliance company that makes component parts in the PartsDivision and transfers those parts to its assembly divisions. Obviously, if there is no market

price, a market-based transfer price cannot be used.

A disadvantage of a market-based transfer price is that the prices for some commodities can

fluctuate widely and quickly. Companies sometimes attempt to protect divisional managers from

these large unpredictable price changes.

Cost-based Transfer Prices

Cost-based transfer prices can also align managerial incentives with corporate goals, if various

factors are properly considered, including the outside market opportunities for both divisions,

and possible capacity constraints of the upstream division.

First consider the case in which the upstream division sells the intermediate product to external

customers as well as to the downstream division. In this situation, capacity constraints are

crucial. If the upstream division has excess capacity, a cost-based transfer price using the

variable cost of production will align incentives, because the upstream division is indifferent

about the transfer, and the downstream division will fully incorporate the companys incremental

cost of making the intermediate product in its production and marketing decisions. However,

senior management might want to allow the upstream division to mark up the transfer price a

little above variable cost, to provide that division positive incentives to engage in the transfer.

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If the upstream division has a capacity constraint, transfers to the downstream division displace

external sales. In this case, in order to align incentives, the opportunity cost of these lost sales

must be passed on to the downstream division, which is accomplished by setting the transfer

price equal to the upstream divisions external market sales price.

Next consider the case in which there is no external market for the upstream division. If the

upstream division is to be treated as a profit centre, it must be allowed the opportunity to recover

its full cost of production plus a reasonable profit. If the downstream division is charged the full

cost of production, incentives are aligned because the downstream division will refuse the

transfer under only two circumstances: First, if the downstream division can source the intermediate product for a lower cost

elsewhere;

Second, if the downstream division cannot generate a reasonable profit on the sale of thefinal product when it pays the upstream divisions full cost of production for the

intermediate product.

If the downstream division can source the intermediate product for a lower cost elsewhere, to the

extent the upstream divisions full cost of production reflects its future long-run average cost, the

company should consider eliminating the upstream division. If the downstream division cannot

generate a reasonable profit on the sale of the final product when it pays the upstream divi sions

full cost of production for the intermediate product, the optimal corporate decision might be to

close the upstream division and stop production and sale of the final product. However, if either

the upstream division or the downstream division manufactures and markets multiple products,

the analysis becomes more complex. Also, if the downstream division can source the

intermediate product from an external supplier for a price greater than the upstream divisions

full cost, but less than full cost plus a reasonable profit margin for the upstream division,

suboptimal decisions could result.

Negotiated Transfer Prices

Negotiated transfer pricing has the advantage of emulating a free market in which divisional

managers buy and sell from each other in a manner that simulates arms -length transactions.

However, there is no reason to assume that the outcome of these transfer price negotiations will

serve the best interests of the company or shareholders. The transfer price could depend on

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which divisional manager is the better poker player, rather than whether the transfer results in

profit-maximizing production and sourcing decisions. Also, if divisional managers fail to reach

an agreement on price, even though the transfer is in the best interests of the company, senior

management might decide to impose a transfer price. However, senior managements imposition

of a transfer price defeats the motivation for using a negotiated transfer price in the first place.

Example

The Firebird Pen Company is organized into two divisions. Division 1 manufactures the ink

cartridges. Division 2 manufactures the remaining components and assembles the pens. One

ink cartridge system is required to produce one pen. Demand and cost functions are estimated as

follows:

Demand for Firebird pens: PF = 1,000 0.1 * QFMarginal cost for Division 1: MC1 = 10 + 0.01 * Q1

Marginal cost for Division 2: MC2 = 99.5 + 0.05 * Q2

(Note: MC2 excludes the cost of the ink cartridge purchased from Division 1.)

The problem is: (a) How many ink cartridge systems will be demanded by Division 2, and (b) at

what level should the transfer price be set?

Solution

Step 1: Find the firms marginal revenue for each final unit produced. The firms total revenue

(TRF) is:

TRF = PF*QF = (1,000 0.1 * QF) * QF = 1,000 * QF 0.1 * (QF)2

So the firms marginal revenue is: MRF = dTRF/dQF = 1,000 0.2 * QF

Step 2: Find the firms overall MC function. Since exactly one cartridge is required for each pen,

the total MC is the sum of the MC for each division:

MCF = MC1 + MC2.

Substituting in for MC1 and MC2 gives:

MCF = [10 + 0.01 * Q1] + [99.5 + 0.05 * QF]

Since Q1 =QF, this simplifies to MCF = 109.5 + 0.06 * QF

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Step 3: Find how many final units is profit maximizing for the firm overall. This is the quantity

where MRF = MCF, or

1,000 0.2 * QF = 109.5 + 0.06 * QF

Solving for QF yields: QF = 3,425 pens.

Step 4: Find the right transfer price. We want to induce the upstream division to make

Q1 = 3,425 cartridges for the 3,425 pens. We were given that MC1 = 10 + 0.01 * Q1, so

plugging in for Q1 we have

MC1 = $10 + 0.01 * (3,425) = $44.25

Thus, Division 1 should produce 3,425 cartridges at a transfer price of $44.25 / cartridge.

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Q.12. What is Management Audit, explain its purpose, objectives and Scope of

Management Audit. Also define the concept of Efficiency Audit in detail.

Ans:

Management Audit is analysis and assessment of competencies and capabilities of a company's

management in order to evaluate their effectiveness, especially with regard to the strategic

objectives and policies of the business. The objective of a management audit is not to appraise

individual executive performance, but to evaluate the management team in relation to their

competition. The basis of Management Audit is structured interviews and reference checks

conducted by external experts to be documented in expert opinions. Management Audits focus

on personal attributes and business skills.

Personal attributes can be subdivided into: Ethical values and attitudes Intellectual Capability Charisma

Business skills can be subdivided into: Professional and methodical competencies Leadership behaviour Entrepreneurship

Need for Management Audit

Change in Top Management: It is most useful for the Managing Director or CEO

joining a new company to get the objective and qualified picture as to the strengths,

chances and risks of his management team. Mergers & Acquisitions: The accomplishment of management audits represents the

objective as well as credible tool to identify the best qualified managers out of competing

management teams. Succession Planning: Both internal and external candidates are audited to choose the

best.

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more objective evaluations, and lead to an analysis of all the information and data now gathered.

Organizational performance is profiled, then efficiency and effectiveness are evaluated and

compared against industry norms. While many criteria can be measured quantitatively, team

members have to use sound judgment and objectivity when evaluating issues that cannot be

measured. In turn, the organization's management has to be receptive to the audit process and

demonstrate clear acceptance of audit findings. The study team then develops conclusions and

recommendations which are communicated to the organization's management. These final two

stages conclusions/recommendations and communication are essential to the management

audit process. The audit is expected to identify corporate strengths and weaknesses, sources of

problems, and potential problem areas. Recommendations for correction are presented to top

management. The final report comes in the form of an overall plan of action, which includes

prioritized recommendations, the specific units and individuals expected to carry out therecommendations, a schedule for action, and expected results. When conducted with

thoroughness, objectivity, and timeliness, the management audit becomes a powerful tool for

corporate and organizational executives who seek to improve effectiveness and efficiency.

Efficiency Audit

Efficiency audit which is aimed at confirming that there is a positive relationship between the

level of services provided and the resources used to achieve that level, highlighting examples of

unrewarding expenditure. Efficiency audit is carried out with a view to ascertaining whether an

establishment pursues optimal values with adequate consideration for economy, efficiency and

effectiveness in its quest for resource management. It is also referred to as comprehensive audit

or efficiency audit. The techniques for carrying out a efficiency audit can be outlined as follows: Analysis of performance indicators such as financial ratios and unit costs of the

establishment, with comparative figures for the previous periods and in respect of similar

establishments. A trend analysis should be done, and significant differences highlighted

through the trend analysis should be investigated further. This initial analysis is aimed at

identifying the areas that need specific attention. Management and systems review for the purpose of investigating the ways in which

objectives are established, policies implemented and results monitored. This will enable

the efficiency auditors to ascertain how efficiently these processes have been carried out

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without necessarily having to concern themselves with the review of the objectives and

policies themselves. Analysis of planning and control processes for the purpose of ascertaining how the

establishment has been monitoring performance against the plan, reviewing and reporting

its operating results, and how members and officers have been alerted on the need for

remedial action whenever required. An example is checking how the Vote Book has been

used in controlling planned expenditure. Efficiency assessment which may involve specific investigation into a few activities with

high unit cost, or poor performance measures or suspected poor management with a view

to ascertaining the reasons for the adverse performance indicators and identifying the

appropriate remedial action.

Effectiveness review for the purpose of ascertaining whether or not the activities orprogrammes are achieving the objectives for which they have been undertaken. This

usually involves discussions with service managers and committee members on the

details of each particular activity especially regarding why the activity is undertaken, why

it is done in the way it has been done, what other alternatives have been considered and

why such other alternatives have been rejected and how is performance measured. Reporting on the efficiency audit it is very important at this stage to discuss the draft

report in detail with the officers (service managers) and committee members before it is

finalised and presented.

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Q.13. What is the concept of BSC. Mention about structure, key value drivers, benefits of

BSC with diagram.

Ans:

Definition

The Balanced Scorecard (BSC) is a strategic performance management framework that allows

organisations to manage and measure the delivery of their strategy. The concept was initially

introduced by Robert Kaplan and David Norton in a Harvard Business Review Article in 1992

and has since then been voted one of the most influential business ideas of the past 75 years

Concept of BSC

The Balanced Scorecard is a strategic performance management framework that has been

designed to help an organisation monitor its performance and manage the execution of itsstrategy. In a recent world-wide study on management tool usage, the Balanced Scorecard was

found to be the sixth most widely used management tool across the globe which also had one of

the highest overall satisfaction ratings. In its simplest form the Balanced Scorecard breaks

performance monitoring into four interconnected perspectives: Financial, Customer, Internal

Processes and Learning & Growth.

Balanced Scorecard Value Drivers

The Financial Perspective covers the financial objectives of an organisation and allows

managers to track financial success and shareholder value. The Customer Perspective covers the customer objectives such as customer satisfaction,

market share goals as well as product and service attributes. The Internal Process Perspective covers internal operational goals and outlines the key

processes necessary to deliver the customer objectives. The Learning and Growth Perspective covers the intangible drivers of future success

such as human capital, organisational capital and information capital including skills,

training, organisational culture, leadership, systems and databases.

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Structure

When it was first introduced the Balanced Scorecard perspectives were presented in a four-box

model (see Figure above). Early adopters created Balanced Scorecards that were primarily used

as improved performance measurement systems and many organisations produced management

dashboards to provide a more comprehensive at a glance view of key performance indicators in

these four perspectives. However, this four box model has now been superseded by a Strategy

Map (see Figure below for the generic template), which is at the heart of modern Balanced

Scorecards. A Strategy Map places the four perspectives in relation to each other to show that theobjectives support each other. For more information see also our white papers What is a modern

Balanced Sc orecard and How to create a strategy map

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Benefits of BSC

Research has shown that organisations that use a Balanced Scorecard approach tend to

outperform organisations without a formal approach to strategic performance management. The

key benefits of using a BSC include (see Figure below):

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1. Better Strategic Planning The Balanced Scorecard provides a powerful framework forbuilding and communicating strategy. The business model is visualised in a Strategy Map

which forces managers to think about cause-and-effect relationships. The process of

creating a Strategy Map ensures that consensus is reached over a set of interrelated

strategic objectives. It means that performance outcomes as well as key enablers or

drivers of future performance (such as the intangibles) are identified to create a complete

picture of the strategy.

2. Improved Strategy Communication & Execution The fact that the strategy with all

its interrelated objectives is mapped on one piece of paper allows companies to easily

communicate strategy internally and externally. We have known for a long time that a

picture is worth a thousand words. This plan on a page facilities the understanding of

the strategy and helps to engage staff and external stakeholders in the delivery and review

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of strategy. In the end it is impossible to execute a strategy that is not understood by

everybody.

3. Better Management Information The Balanced Scorecard approach forces

organisations to design key performance indicators for their various strategic objectives.

This ensures that companies are measuring what actually matters. Research shows that

companies with a BSC approach tend to report higher quality management information

and gain increasing benefits from the way this information is used to guide management

and decision making.

4. Improved Performance Reporting companies using a Balanced Scorecard approach

tend to produce better performance reports than organisations without such a structured

approach to performance management. Increasing needs and requirements for

transparency can be met if companies create meaningful management reports anddashboards to communicate performance both internally and externally.

5. Better Strategic Alignment organisations with a Balanced Scorecard are able to better

align their organisation with the strategic objectives. In order to execute a plan well,

organisations need to ensure that all business and support units are working towards the

same goals. Cascading the Balanced Scorecard into those units will help to achieve that

and link strategy to operations.

6. Better Organisational Alignment well implemented Balanced Scorecards also help to

align organisational processes such as budgeting, risk management and analytics with the

strategic priorities. This will help to create a truly strategy focused organisation.

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14. Explain the concept of non-profit organisations; discuss the MCS adopted in such

organisations.

Ans:

Definition & Meaning

Non-profit organization (abbreviated as NPO) is neither a legal nor technical definition but

generally refers to an organization that uses surplus revenues to achieve its goals rather than to

distribute them as profit or dividends. An incorporated organization which exists for educational

or charitable reasons, and from which its shareholders or trustees do not benefit financially. Any

money earned must be retained by the organization, and used for its own expenses, operations,

and programs. Many non-profit organizations also seek tax exempt status, and may also be

exempt from local taxes including sales taxes or property taxes. Well-known non-profit

organizations include Habitat for Humanity, the Red Cross, and United Way, also called not-for-profit organization.

Nature & Goals

Some NPOs may also be a charity or service organization; they may be organized as a not-for-

profit corporation or as a trust, a cooperative, or they exist informally. A very similar type of

organization termed a supporting organization operates like a foundation, but they are more

complicated to administer, hold more favourable tax status and are restricted in the public

charities they support.

India NPO

In India, NPOs are known commonly as Non-Governmental Organizations (NGOs).

They can be registered in four ways:

1. Trust

2. Society

3. Section-25 Company

4. Special Licensing

Registration can be done with the Registrar of Companies (RoC).

The following laws or Constitutional Articles of the Republic of India are relevant to the NGOs:

1. Articles 19(1)(c) and 30 of the Constitution of India

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2. Income Tax Act, 1961

3. Public Trusts Acts of various states

4. Societies Registration Act, 1860

5. Section 25 of the Indian Companies Act, 1956

6. Foreign Contribution (Regulation) Act, 1976

Problems Faced by NPO

Capacity building is an on-going problem experienced by NPOs for a number of reasons. Most

rely on external funding (government funds, grants from charitable foundations, direct

donations) to maintain their operations and changes in these sources of revenue may influence

the reliability or predictability with which the organization can hire and retain staff, sustain

facilities, create programs, or maintain tax-exempt status. For example, a university that sellsresearch to for-profit companies may have tax exemption problems. In addition, unreliable

funding, long hours and low pay can result in employee retention problems. During 2009, the US

government acknowledged this critical need by the inclusion of the Non-profit Capacity Building

Program in the Serve America Act. Further efforts to quantify the scope of the sector and

propose policy solutions for community benefit were included in the Non-profit Sector and

Community Solutions Act, proposed during 2010. Founder's syndrome is an issue organizations

face as they grow. Dynamic founders with a strong vision of how to operate the project try to

retain control of the organization, even as new employees or volunteers want to expand the

project's scope or change policy. Resource mismanagement is a particular problem with NPOs

because the employees are not accountable to anybody with a direct stake in the organization.

For example, an employee may start a new program without disclosing its complete liabilities.

The employee may be rewarded for improving the NPO's reputation, making other employees

happy, and attracting new donors. Liabilities promised on the full faith and credit of the

organization but not recorded anywhere constitute accounting fraud. But even indirect liabilities

negatively affect the financial sustainability of the NPO, and the NPO will have financial

problems unless strict controls are instated.

Internet used by todays NPO

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Many NPOs often use the .org or .us (or the CCTLD of their respective country) or .edu top-level

domain (TLD) when selecting a domain name to differentiate themselves from more commercial

entities which typically use the .com space. In the traditional domain noted in RFC 1591, .org is

for "organizations that didn't fit anywhere else" in the naming system, which implies that it is the

proper category for non-commercial organizations if they are not governmental, educational, or

one of the other types with a specific TLD. It is not designated specifically for charitable

organizations or any specific organizational or tax-law status, however; it encompasses anything

that is not classifiable as another category. Currently, no restrictions are enforced on registration

of .com or .org, so you can find organizations of all sorts in either of these domains, as well as

other top-level domains including newer, more specific ones which may apply to particular sorts

of organizations such as .museum for museums or .coop for cooperatives. Organizations might

also register by the appropriate country code top-level domain for their country

MCS Adopted in todays NPO

Non-profit organizations are formed by filing bylaws and/or articles of incorporation in the state

in which they expect to operate. The act of incorporating creates a legal entity enabling the

organization to be treated as a corporation by law and to enter into business dealings, form

contracts, and own property as any other individual or for-profit corporation may do. Non-profits

can have members but many do not. The non-profit may also be a trust or association of

members. The organization may be controlled by its members who elect the Board of Directors,

Board of Governors or Board of Trustees. Non-profits may have a delegate structure to allow for

the representation of groups or corporations as members. Alternatively, it may be a non-

membership organization and the board of directors may elect its own successors. The two major

types of nonprofit organization are membership and board-only. A membership organization

elects the board and has regular meetings and power to amend the bylaws. A board-only

organization typically has a self-selected board, and a membership whose powers are limited to

those delegated to it by the board. A board-only organization's bylaws may even state that the

organization does not have any membership, although the organization's literature may refer to

its donors as "members. The Model Non-profit Corporation Act imposes many complexities and

requirements on membership decision-making. Accordingly, many organizations have formed

board-only structures. The National Association of Parliamentarians has generated concerns

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about the implications of this trend for the future of openness, accountability, and understanding

of public concerns in non-profit organizations. Specifically, they note that non-profit

organizations, unlike business corporations, are not subject to market discipline for products and

shareholder discipline of their capital; therefore, without membership control of major decisions

such as election of the board, there are few inherent safeguards against abuse. A rebuttal to this

might be that as non-profit organizations grow and seek larger donations, the degree of scrutiny

increases, including expectations of audited financial statements.

Marketing

Many of the NGOs have hired full time marketing executives who go on a regular basis and

pitch to various clients and also follow up with what is done to the funds of donors. In this way

what it does is that it maintains relation with various corporate who then donate on a regular

basis. They also approach many schools and with the help of teachers and parents motivatestudents to donate and here due to higher number of students the total amount collected is huge.

Finance

While not-for-profit organizations are permitted to generate surplus revenues they must be

retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling

members or boards. Many have paid staff including management, while others employ unpaid

volunteers and even executives who works without compensation (or that work for a token fee,

such as Rs1000 per year). Where there is a token fee, in general, it is used to meet legal

requirements for establishing a contract between the executive and the organization.

Example of an NPO in India

Help Age India

Help Age India is secular, not-for-profit organization registered under the Societies' Registration

Act of 1860. We were set up in 1978, and since then have been raising resources to protect the

rights of India's elderly and provide relief to them through various interventions.

We voice the needs of India's 90 million (current estimate) "grey" population, and directly

impact the lives of lakhs of elders through our services every year. We advocate with national & local government to bring about policy that is beneficial to

the elderly.

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We make society aware of the concerns of the aged and promote better understanding of

ageing issues. We help the elderly become aware of their own rights so that they get their due and are

able to play an active role in society.

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Q.15. What are service organisations, explain basic characteristics and MCS adopted in

such organisations.

Ans:

Organizations whose economic activity output is not a physical product or construction, is

generally consumed at the time it is produced and provides added value in forms (such as

convenience, amusement, timeliness, comfort, or health), that are essentially intangible are

commonly termed as service organizations.

Service organizations have four main characteristics that distinguish them from product

companies, namely: Intangibility

Different services with goods. If the item is an object, device or object, then the service is

a deed, performance, or business. If the goods can be owned, the service can beconsumed, but do not possess. While most services can be linked and supported by a

physical product like a telephone in the telecommunications, aircraft in air transportation,

food in restaurant service, the essence of what customers are buying is the performance

by the manufacturer about it. Services are intangible, which can be seen, felt and

embraced, heard, or touched before purchase and consumption. Intangible concept of

service has two meanings, namely:

1. Something that can be touched and cannot be considered.

2. Something that cannot easily define formulated or understood spiritually.

Thus, we cannot evaluate the quality of service before it felt / to burn. When customers

buy a service, it uses only, use, or rental services. The client does not necessarily have

purchased services. Therefore, to reduce uncertainty, customers will notice the signs or

evidence of the quality of these services. They conclude the service quality of the place

(place), people (people), equipment (hardware), communications equipment

(communications equipment), the symbols and the prices they observe. Therefore, traders

who use service is to manage the evidence and tangibilize the intangible . In this case,

marketing services are faced with the challenge of providing physical evidence and a

comparison with the abstract submission. Inseparability

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The goods are produced, sold and consumed. As for services on the other hand, are

generally sold first, then produced and consumed simultaneously. The interaction

between providers and clients is a special feature in the marketing of services. Both

parties have an impact on results (come out) services. Relationship with suppliers and

customers, the effectiveness of individuals who provide services (personal contact) is

important. Thus, the key to success is a service company in the process of recruitment,

compensation, training, and pengembangan employees. Variability

Services are highly variable because it is the result of non-standardized, meaning that

there are many varieties, quality and type, depending on who, when and where services

are produced. Buyers of services are very concerned about this high variability and often

they ask for other opinions before deciding vote. In this case, the service can perform thethree stages of quality control, namely:

1. Investing in the selection and training of staff well.

2. Does standardization process of the implementation of service (process service

performance).

This can be done by preparing a blue print (blue-print) which describes the services and

events in a flowchart of service processes to determine the factors that could cause

failures of these services. Monitor customer satisfaction through suggestion and

complaint systems, customer surveys and comparison shopping, so that poor service can

be detected and corrected. Instant

The service is perishable and cannot be saved. Train empty seats, hotel rooms are not

occupied, or during certain hours without the patient in the practice of a physician, will /

go away, because it can be stored for use at another time. This is not a problem if the

application is always easy to prepare the service request before. When demand fluctuates,

facing various problems related to idle capacity (when demand is low) and customers are

not served by their risk disappointed / switch to ano