responsibility centres

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ANSWERS TO UNIV Qs ON RESPONSIBILITY CENTRES

May 2010

Q2, May 2010 (a) Briefly describe Engineered Expense Centres and Discretionary Expense

Centres. (b) How is budget prepared in each and how performance evaluated in each.?

Suggested Answer: Expense centres are those responsibility centres whose inputs are measured in monetary terms, but whose outputs are not measured in monetary terms. There are 2 types of expense centres:

A. Engineered Expense Centres B. Discretionary Expense Centres

A. Engineered Expense Centres are those expense centres for which the right or

proper amount of input can be estimated, e.g., direct material cost, direct labour cost, cost of components, cost of utilities, etc.

The main features of Engineered Expense Centres are:

1. Input can be measured in monetary terms 2. Output can be measured in physical terms 3. Optimum rupee amount of input required to produce a unit of output can be

determined 4. Usually found in manufacturing operations

Optimal relationship established INPUTS OUTPUTS (Rupees) (Physical)

Schematic diagram of Engineered Expense Centre

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Budget preparation and performance evaluation in engineered expense centres:

1. Obtain the output in physical terms 2. Multiply the output in physical terms by standard cost per unit of output, to give

the budgeted cost. This gives what the finished product should have cost. (Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company.

3. Find the difference between the budgeted cost and actual costs which are the known actual input costs . This difference is called the variance This difference gives the extent to which the company has performed favourably or adversely.

B. Discretionary Expense Centres (also called Managed Expense Centres) are

those expense centres for which it is not feasible to estimate the right or proper amount of input.

Optimal relationship is not established INPUTS OUTPUTS (Rupees) (Physical)

Schematic diagram of Discretionary Expense Centre Discretionary Expense Centres mainly include:

(i) Administrative and support services (such as accounting, legal, human

resources, industrial relations, public relations), (ii) Research & Development Operations, (iii) Marketing Activities.

The term discretionary refers to the managements discretion in judgement regarding the policies such as:

(a) Whether to match or exceed the marketing efforts of the competitiors (b) The level of service to customers (c) Appropriate amount of R&D spending

Discretionary does not mean adhoc.

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On the basis of such discretion, a budget is prepared for discretionary expense centres. Management formulates the discretionary budget usually in one of the following ways:

1. Incremental method for continuing expenses: in such a case, current level is taken as starting point and incremental build-up is provided for inflation and additions (e.g., preparing financial statements of the company)

2. One-shot method for special work (e.g., developing and installing a profit-budgeting system in a newly acquired division.

3. A technique often used is management by objectives to accomplish specific jobs and performance evaluation.

4. Zero-Base Review: Thorough analysis of existing budget and make a fresh budget to be reviewed every year. Time consuming but many advantages (particularly for newly acquired companies). These efforts have led to down sizing, right sizing, restructuring, process re-engineering.

The difference between budget and actual is not a measure of efficiency (unlike, as in Engineered Expense Centres). There is no budget to compute efficiency. Additional info on Zero Base review: Discretionary Expense Centre: Some noteworthy outcomes of Zero-Base Review

1. In 2002, Nissan Motors Co., under its restructuring, disposed of non-core businesses, changed supplier relationships, trimmed cross shareholdings in partner firms, set tough performance targets and eliminated lifetime employment and seniority based promotions. (#42 in Fortune 500, CEO: Carlos Ghosn)

2. IBM decided to sell its personal computing div to Lenovo Group(leading PC brand in China and Asia) to exit from low margin business. IBM holds 18% stake and has made Lenovo preferred supplier of personal computers to IBM. (IBM#19, Lenovo #370 in Fortune 500)

3. ABB slashed corporate staff after every acquisition. (#19 in Fortune 500) ____________________________________________________________________

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Q4, May 2010

(a) What is a Strategic Business Unit? (b) What are the conditions required for creating an SBU? (c) How is performance of SBU measured? (d) What are the advantages and disadvantages of creating SBUs?

Suggested Answer:

(a) What is a Strategic Business Unit? A business unit is a part of an organization that operates as a distinct function, department, division, or stand-alone business. In managing and controlling organizations, such business units are assigned responsibilities for performance and control Thus, a responsibility center is a sub-unit of an organization whose manager is responsible for a specified set of activities. A responsibility center may be a

(a) Revenue center (b) Expense or Cost center (c) Profit center, or (d) Investment center

Revenue Center: In a revenue center, output (i.e., revenue) is measured in monetary terms, but no formal attempt is made to relate input. A sales office is an example of a revenue center. The manager responsible for managing the sales office is accountable for explaining variances in the revenue and costs of operating the office. (Please note that the difference between the revenue and the cost of operating the sales office is not the profit, since this does not include the main cost of the goods sold). Expense or Cost Center: Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not measured in monetary terms. A small manufacturing set-up is an example of a expense or cost center; the production supervisor may be responsible for variation in actual costs as compared to budgeted or standard costs. Profit Center: A Business Unit, which is responsible for both revenues and expenses, and thus profit, is a Profit Center. The focus is on profit as measured by the difference between revenues and expenses The Profit center, is however, not responsible for investment. Investment Center: An investment center is an autonomous sub-unit of an organization which is responsible for profit and investment. In such business units, the profit is compared with the assets employed in earning it. Such business units are referred to

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as strategic-business-units or SBUs. The head of the SBU is accountable for the in the overall performance, usually measured by return on capital employed, which in turn depends on the revenue, costs, and investment. Thus, an investment center is a special type of profit center, rather than a separate parallel category.

(b) What are the conditions required for creating an SBU? The following conditions are required for creating an SBU:

1. There should be a manager or head responsible for achieving results in relation to operations of the SBU.

2. The manager should have access to all the relevant information needed to make the decision

3. The head of a SBU should have the authority to decide on the investment. 4. Both inputs and outputs should be amenable to clear measurement. 5. The SBU should be engaged in conversion of inputs into desired outputs for the

organization (i.e., there should be a value addition.) 6. The recipients of goods and services produced by the SBU should be clear and

distinct. These may be some other unit or units within the organization (in which case suitable transfer price will be needed to work out the revenue) or external markets or both.

7. There should be some way to measure the effectiveness of the trade-offs the manager has made. These measures are variations in the overall performance, usually return on capital employed, return on total assets.

( c ) How is performance of SBU measured? There are two types of measurements used in evaluating a SBU:

1. Measure of management performance. This focuses on how well the manager is doing. This measure is used for planning, co-ordinating and controlling the day-to-day activities and for providing proper motivation to the manager.

2. Measure of economic performance. This focuses on how well the SBU is doing as an economic activity.

(It can sometimes so happen that the SBU manager is doing an excellent job, but the unit may be a losing proposition due to adverse economic conditions or intense competition) Measurement of economic performance in SBUs is made in two ways:

1. Return on Investment (ROI) , and 2. Economic Value Added (EVA) (i.e., Net Profit minus capital charge),

[Capital Charge is (Cost of capital) multiplied by (Capital Employed)]

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( d ) What are the advantages and disadvantages of creating SBUs? Advantages of creating a SBU:

1. useful insights into where profits are earned within a complex business 2. supports budgetary control at a detailed level, including setting profit objectives 3. can improve the motivation of those responsible for the profit centre 4. comparisons can be made between similar profit centres (e.g., shops in a chain) 5. Improves quality and speed of decision-making at local level (likely to be closer

to customer needs, as compared to Head Office) 6. Finance can be allocated more efficiently where it makes the best return 7. HO relieved of day-to-day decision making 8. fewer corporate restraints 9. excellent training ground 10. profit consciousness enhanced 11. SBUs provide ready-made info (as compared with functional organization) 12. Particularly responsive to competitive performance

Disadvantages of creating SBUs:

1. loss of control at HO level decentralized decision-making forces top management to rely more on MCS rather than on personal knowledge of an operation

2. lowering of quality (of decision making) if HO is more capable or better informed 3. likely friction (sometimes demotivating) over transfer prices, common costs,

credit for revenues that were formerly generated jointly by two or more business units

4. BU managers decisions may be in their interest, not of the organisation 5. may impose additional costs for record keeping, staff. 6. m ay be too much emphasis on short-run profitability 7. no system to optimize both unit profitability and that of the company as a whole 8. can be time-consuming to set-up and monitor

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Q6, May 2010 How is an investment centre different from a profit centre? What are the different methods of judging their performance? Which is a better method? Suggested Answer: Difference between Profit Center and Investment Center: Profit Center: A Business Unit, which is responsible for both revenues and expenses, and thus profit, is a Profit Center. The focus is on profit as measured by the difference between revenues and expenses The Profit center, is however, not responsible for investment. Investment Center: An investment center is an autonomous sub-unit of an organization which is responsible for profit and investment. In such business units, the profit is compared with the assets employed in earning it. Such business units are referred to as strategic-business-units or SBUs. The head of the SBU is accountable for the in the overall performance, usually measured by return on capital employed, which in turn depends on the revenue, costs, and investment. Thus, an investment center is a special type of profit center, rather than a separate parallel category. Performance measurement of a Profit Center: Profit Center: There are two types of measurements used in evaluating a Profit Center:


2. Measure of economic performance. This focuses on how well the Profit Center is doing as an economic activity.

(It can sometimes so happen that the Profit Center manager is doing an excellent job, but the unit may be a losing proposition due to adverse economic conditions or intense competition) The economic performance is always measured by net income (i.e., profit after tax). However, the performance is evaluated by five different measures at different stages:

1. Contribution Margin i.e., Revenues minus Variable expenses 2. Direct Profit i.e., Contribution Margin (from 1 above) minus Fixed expenses of the

Profit Center

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3. Controllable Profit i.e., Direct Profit (from 2 above) minus controllable corporate charges

4. Profit before taxes i.e., Controllable Profit (from 3 above) minus corporate allocations

5. Profit after taxes i.e., Profit before taxes (from 4 above) minus taxes Investment Center: There are two types of measurements used in evaluating a SBU:





[Capital Charge is (Cost of capital) multiplied by (Capital Employed)] Which is a better method? ROI and EVA are more comprehensive than just profit (revenue minus expenses). Between ROI and EVA, EVA is better since it goes a step beyond ROI. The capital charge , [i.e.,( the cost of capital)multiplied by the (Capital Employed)] is deducted from the Net Profit.

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Q3, Nov 2010 What is a responsibility center? List and explain the different types of responsibility centers with sketches. Suggested Answer: A business unit is a part of an organization that operates as a distinct function, department, division, or stand-alone business. In managing and controlling organizations, such business units are assigned responsibilities for performance and control Thus, a responsibility center is a sub-unit of an organization whose manager is responsible for a specified set of activities. A responsibility center may be a


Revenue Center: In a revenue center, output (i.e., revenue) is measured in monetary terms, but no formal attempt is made to relate input. A sales office is an example of a revenue center. The manager responsible for managing the sales office is accountable for explaining variances in the revenue and costs of operating the office. (Please note that the difference between the revenue and the cost of operating the sales office is not the profit, since this does not include the main cost of the goods sold). Inputs not related to outputs INPUTS OUTPUTS (Rs. for costs directly incurred) (Rs. Revenue)

Schematic diagram of Revenue Centre (e.g., Marketing Function)

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Expense or Cost Center: Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not measured in monetary terms. A small manufacturing set-up is an example of a expense or cost center; the production supervisor may be responsible for variation in actual costs as compared to budgeted or standard costs. There are 2 types of expense centres:


Engineered Expense Centres are those expense centres for which the right or proper amount of input can be estimated, e.g., direct material cost, direct labour cost, cost of components, cost of utilities, etc.

Optimal relationship established INPUTS OUTPUTS (Rupees) (Physical)

Schematic diagram of Engineered Expense Centre (e.g., Manufacturing Function)

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Discretionary Expense Centres (also called Managed Expense Centres) are those expense centres for which it is not feasible to estimate the right or proper amount of input.

Optimal relationship is not established INPUTS OUTPUTS (Rupees) (Physical)

Schematic diagram of Discretionary Expense Centre (e.g., R&D Function)

----------------------------- Profit Center: A Business Unit, which is responsible for both revenues and expenses, and thus profit, is a Profit Center. The focus is on profit as measured by the difference between revenues and expenses The Profit center, is however, not responsible for investment. Inputs related to Outputs INPUTS OUTPUTS (Rs. Costs) (Rs. Profits)

Schematic diagram of Profit Centre (e.g., Business Unit)

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Investment Center: An investment center is an autonomous sub-unit of an organization which is responsible for profit and investment. In such business units, the profit is compared with the assets employed in earning it. Such business units are referred to as strategic-business-units or SBUs. The head of the SBU is accountable for the in the overall performance, usually measured by return on capital employed, which in turn depends on the revenue, costs, and investment. Profits related to Capital Employed INPUTS OUTPUTS (Rs. Costs) (Rs. Profits)

Schematic diagram of Investment Centre (e.g., Strategic Business Unit)

________________________________ Thus, an investment center is a special type of profit center, rather than a separate parallel category.

Capital

Employed

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Q4, Nov 2010 Every SBU is a profit center, but every profit center is not a SBU. What are the conditions that should be fulfilled for an organization unit to be converted into a Profit Center? What are the different ways to measure the performance of Profit Centers? Discuss their relative merits and demerits. Suggested Answer:

(a) Every SBU is a profit center, but every profit center is not a SBU.Explain. Profit Center: A Business Unit, which is responsible for both revenues and expenses, and thus profit, is a Profit Center. The focus is on profit as measured by the difference between revenues and expenses The Profit center, is however, not responsible for investment. Investment Center: An investment center is an autonomous sub-unit of an organization which is responsible for profit and investment. In such business units, the profit is compared with the assets employed in earning it. Such business units are referred to as strategic-business-units or SBUs. The head of the SBU is accountable for the in the overall performance, usually measured by return on capital employed, which in turn depends on the revenue, costs, and investment. Thus, an investment center is a special type of profit center, rather than a separate parallel category, and hence Every SBU is a profit center, but every profit center is not a SBU. (b) What are the conditions that should be fulfilled for an organization unit to be converted into a Profit Center? The following conditions are required for creating a Profit Center:

1. There should be a manager or head responsible for achieving results in relation to operations of the profit Center.

2. The manager should have access to all the relevant information needed to make the decision

3. Both inputs and outputs should be amenable to clear measurement. 4. The Profit Center should be engaged in conversion of inputs into desired outputs

for the organization (i.e., there should be a value addition.) 5. The recipients of goods and services produced by the Profit Center should be

clear and distinct. These may be some other unit or units within the organization

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(in which case suitable transfer price will be needed to work out the revenue) or external markets or both.

6. There should be some way to measure the effectiveness of the trade-offs the manager has made. These measures are variations in the overall performance, usually net income.

( c ) What are the different ways to measure the performance of Profit Centers? Discuss their relative merits and demerits Performance measurement of a Profit Center: Profit Center: There are two types of measurements used in evaluating a Profit Center:




1. Contribution Margin i.e., Revenues minus Variable expenses (merit: managers should focus on maximizing contribution since fixed costs are beyond control demerit:premise that fixed costs are beyond control is not right; many fixed costs are partially controllable)

2. Direct Profit i.e., Contribution Margin (from 1 above) minus Fixed expenses of the Profit Center (merit: incorporates all expenses incurred by the profit center; demerit:does not recognize the motivational benefit of charging headquarters costs)

3. Controllable Profit i.e., Direct Profit (from 2 above) minus controllable corporate charges (merit: cost includes the controllable corporate costs demerits: difficulty in comparing with other companies data in trade journals)

4. Profit before taxes i.e., Controllable Profit (from 3 above) minus corporate allocations (merits: corporate costs will be questioned demerits:allocation of corporate costs may not be proper)

5. Profit after taxes i.e., Profit before taxes (from 4 above) minus taxes (merits: suitable for foreign subsidiaries since tax varies in different countries and PAT is a true reflection of the profit

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demerit: since tax rates are a constant oercentage, no value added after knowing the pretax profit; also since decisions affecting tax are taken at Headquarters, the business unit should not be judged on this basis)

Q8, Nov 2010 Organizations with Business Divisions (Profit Centers) format have experienced that Divisional Controllers experience divided loyalty in carrying out their functions, causing a possible dysfunction. How could such a situation be resolved? Define the role of a Controller which suits your suggestion. Suggested Answer: Corporate Controller: Corporate Controller is the person who is responsible for designing and operating the management control system. In many companies, the title of the Controller is Chief Finance Officer (CFO). The Controller performs the following functions:

1. Designing and operating information and control systems. 2. Preparing financial statements and financial reports for shareholders and other

external parties. He also files tax returns. 3. Preparing and analyzing performance reports, interpreting these reports for

managers, and analyzing program and budget proposals from various segments of the company and consolidating them into an overall annual budget.

4. Supervising internal audit and accounting control procedures to ensure the validity of information, establishing adequate safeguards against theft and fraud, and performing operational audits.

5. Developing personnel in the controller organization and participating in the education of management personnel in matters relating to the controller function.

Earlier, the Controller was responsible for processing the information required by the management control system. Currently, this is carried out by Chief Information Officer (CIO), who reports to CFO or senior management. The Controller function is a staff function. The Controller is responsible for the design and operation of the management control system. The nature of the work of Controller is more in the form of design, developing and analyzing systems and recommendations to management. However, the use and action with respect to this information is the responsibility of the line function. The responsibility for actually exercising control runs from the CEO down through the line organization. Business Unit Controller: Business Unit Controllers inevitably have divided loyalty. On one hand, they owe some allegiance to the Corporate Controller, who is responsible for the overall operation of the management control system. On the other hand, they also owe allegiance to the managers of their own business units, for whom they provide staff assistance.

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In some companies, the Business Unit Controller reports to the Business Unit Manager, and has a dotted line reporting to the Corporate Controller. An example is General Electric Company, USA. Dotted Line Reporting In other companies, the Business Unit Controller reports to the Corporate Controller, and has a dotted line reporting to the Business Unit Manager. An example is ITT, USA, a diversified company in engineering products and technology solutions. Solid Line Reporting

Corporate Controller

Business Unit Manager

Business Unit Controller

Corporate Controller

Business Unit Manager

Business Unit Controller

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Regardless of the reporting relationships, it is expected that the BU Controller will not condone or participate in the transmission of misleading information or in the concealment of unfavourable information.

Q2, May 2011 Briefly describe responsibility center, engineered expense center, discretionary expense center, revenue center, profit center. How is the performance of the Head of these centers evaluated? Responsibility Center: A business unit is a part of an organization that operates as a distinct function, department, division, or stand-alone business. In managing and controlling organizations, such business units are assigned responsibilities for performance and control Thus, a responsibility center is a sub-unit of an organization whose manager is responsible for a specified set of activities. A responsibility center may be a


------------------------------ Revenue Center: In a revenue center, output (i.e., revenue) is measured in monetary terms, but no formal attempt is made to relate input. A sales office is an example of a revenue center. The manager responsible for managing the sales office is accountable for explaining variances in the revenue and costs of operating the office.

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Expense or Cost Center: Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not measured in monetary terms. A small manufacturing set-up is an example of a expense or cost center; the production supervisor may be responsible for variation in actual costs as compared to budgeted or standard costs. There are 2 types of expense centres:


Engineered Expense Centres are those expense centres for which the right or proper amount of input can be estimated, e.g., direct material cost, direct labour cost, cost of components, cost of utilities, etc.

Budget preparation and performance evaluation in engineered expense centres:

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1. Obtain the output in physical terms 2. Multiply the output in physical terms by standard cost per unit of output, to give

the budgeted cost. This gives what the finished product should have cost. (Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company.

3. Find the difference between the budgeted cost and actual costs which are the known actual input costs . This difference is called the variance This difference gives the extent to which the company has performed favourably or adversely.

Discretionary Expense Centres (also called Managed Expense Centres) are those expense centres for which it is not feasible to estimate the right or proper amount of input. Management formulates the discretionary budget usually in one of the following ways:

1. Incremental method for continuing expenses: in such a case, current level is taken as starting point and incremental build-up is provided for inflation and additions (e.g., preparing financial statements of the company)

2. One-shot method for special work (e.g., developing and installing a profit-budgeting system in a newly acquired division.

3. A technique often used is management by objectives to accomplish specific jobs and performance evaluation.

4. Zero-Base Review: Thorough analysis of existing budget and make a fresh budget to be reviewed every year. Time consuming but many advantages (particularly for newly acquired companies). These efforts have led to down sizing, right sizing, restructuring, process re-engineering.

The difference between budget and actual is not a measure of efficiency (unlike, as in Engineered Expense Centres). There is no budget to compute efficiency.

------------------------------------- Profit Center: A Business Unit, which is responsible for both revenues and expenses, and thus profit, is a Profit Center. The focus is on profit as measured by the difference between revenues and expenses The Profit center, is however, not responsible for investment. Performance measurement of a Profit Center: Profit Center: There are two types of measurements used in evaluating a Profit Center:


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1. Contribution Margin i.e., Revenues minus Variable expenses 2. Direct Profit i.e., Contribution Margin (from 1 above) minus Fixed expenses of the

Profit Center 3. Controllable Profit i.e., Direct Profit (from 2 above) minus controllable corporate

charges 4. Profit before taxes i.e., Controllable Profit (from 3 above) minus corporate

allocations 5. Profit after taxes i.e., Profit before taxes (from 4 above) minus taxes

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Investment Center: An investment center is an autonomous sub-unit of an organization which is responsible for profit and investment. In such business units, the profit is compared with the assets employed in earning it. Such business units are referred to as strategic-business-units or SBUs. The head of the SBU is accountable for the in the overall performance, usually measured by return on capital employed, which in turn depends on the revenue, costs, and investment. Thus, an investment center is a special type of profit center, rather than a separate parallel category. There are two types of measurements used in evaluating a SBU:





[Capital Charge is (Cost of capital) multiplied by (Capital Employed)]

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Q3. May 2011 Every SBU is a profit center, but every profit center is not a SBU. Explain under what conditions Production, Marketing and Service departments can be converted into Profit Centers. Suggested Answer: Every SBU is a profit center, but every profit center is not a SBU Profit Center: A Business Unit, which is responsible for both revenues and expenses, and thus profit, is a Profit Center. The focus is on profit as measured by the difference between revenues and expenses The Profit center, is however, not responsible for investment. Investment Center: An investment center is an autonomous sub-unit of an organization which is responsible for profit and investment. In such business units, the profit is compared with the assets employed in earning it. Such business units are referred to as strategic-business-units or SBUs. The head of the SBU is accountable for the in the overall performance, usually measured by return on capital employed, which in turn depends on the revenue, costs, and investment. Thus, an investment center is a special type of profit center, rather than a separate parallel category. Hence, every SBU is a profit center, but every profit center is not a SBU. Conditions for converting Production department into a Profit Centre : A Production department is usually an expense center, with management being judged on performance standard costs and overhead budgets.This measure does not indicate how well the manager is performing all aspects of his job. For example,

1. Manager may compromise on quality and still remain within standard costs 2. Manager may avoid interruption of ongoing production to satisfy a customer,

although it would have been better to interrupt and manufacture another batch. This means losing opportunities to increase revenues, and still remain within standard budgets.

3. Manager may lack incentive to make more difficult products or to improve standards.

Hence where standard costs are the basis of performance measurement, it is advisable to make a separate evaluation of activities like quality control, production scheduling and make-or-buy decisions. One way to measure the activity of production in its entirety is to convert it into a Profit Center, and give it credit for the selling price minus estimated marketing expenses.

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Conditions for converting Marketing department into a Profit Centre : A marketing activity can be turned into a profit center by charging it with the cost of the products sold. This transfer price provides the marketing manager with the relevant information to make the optimum revenue/cost trade-offs, and the standard practice of measuring a profit centers manager by the centers profitability provides a check on how well these trade-offs have been made. The transfer price should be based on standard costs (not actual costs). The marketing activity should be given a profit responsibility when the marketing manager is in the best position to make the principal cost/revenue trade- offs, i.e., he is well equipped with the information of the appropriate costs and revenues to be able to make these decisions. This often happens in case of foreign market activity, i.e., when different conditions exist in different geographical areas, where decisions cannot be made centrally but have to be made locally. In these conditions, when thw marketing anager knows the appropriate cost of the product, he can suitably structure the price so that there is a favourable trade-off. Conditions for converting Service departments into a Profit Centre : Units for maintenance, information technology, transportation, engineering, consulting, customer service and similar support activities can be made into profit centres. These units operate out of headquarters or service corporate divisions or within business units. They charge customers for services rendered, with the financial objective of generating enough revenues to cover their expenses, thus making them self-dependent. Units receiving these services have the option of procuring them from an outside vendor. A well known example is that of Singapore Airlines. It created a services business unit which provided aviation-engineering services to about 80 international carriers. In 2001-02, when the airlines industry faced significant problems, Singapore Airlines earned a profit arising out of the profits of this service division.

___________________________ Q4, Nov 2012

(a) Describe the differences in process of budgeting of Engineered Expense and Discretionary Expense Centers.

(b) Discuss the special challenges faced in controlling R&D activities and possible management initiatives.

Suggested answer:

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(a) Refer Q2 (b), May 2010 above (b) Discuss the special challenges faced in controlling R&D activities and possible

management initiatives.

I. Challenges in Controlling R&D activities: The following are the main challenges in controlling R&D activities:

1. Difficulty in relating results to inputs: The results of R&D activities are difficult to measure quantitatively. Although there may be an ouput like new Patent or product or new process, it may be difficult to appraise in the annual budget and give a reliable input output measure. Thus, it is difficult to measure goals, specially on annual basis

2. Lack of Goal Congruence: The R&D manager typically wants to invest in the best R&D Facilities, but the top management has to work on a trade-off between investment and expenses versus revenues, either current or deferred.

3. R&D Continuum: Activities in R&D lie along a continuum spanning a long period of several years ; from basic research, pilot tests, and so on finally to product testing. For example: (1) it took 26 years from the time DNA structure was defined to make the first product (2) it took Xerox Corp 24 years (1936 to1960) from basic research to introducing the copying machine In such cases annual budgets and assessing performance against them becomes challenging.

4. Element of chance: In R&D, there is also an element of chance in success, which makes it challenging to control its activities.

II. Possible management initiatives: Budgets and Measurement of Performance:

Despite all the above challenges, the management needs to take some initiatives to control R&D performance. R&D Budgets are generally in the form of a program to be spread over long term plan. The annual budget is generally a break-up of this plan on year-to year basis. At the end of the year, the actual expenditure is compared with the budget. However, there is no linkage of the expenditure incurred with the achievement of a result. The measurement is indirectly made through the written progress report on the status of the R&D program.

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Univ theory Qs on Responsibilty Centers from May 2010 to Nov 2012 (6 papers) May 2010 Q2, May 2010

(a) Briefly describe Engineered Expense Centres and Discretionary Expense Centres.

(b) How is budget prepared in each and how performance evaluated in each.? Q4, May 2010 What is a Strategic Business Unit? What are the conditions required for creating an SBU? How is performance of SBU measured? What are the advantages and disadvantages of creating SBUs? Q6, May 2010 How is an investment centre different from a profit centre? What are the different methods of judging their performance? Which is a better method? Nov 2010 Q3, Nov 2010 What is a responsibility center? List and explain the different types of responsibility centers with sketches. Q4, Nov 2010 Every SBU is a profit center, but every profit center is not a SBU. What are the conditions that should be fulfilled for an organization unit to be converted into a Profit Center? What are the different ways to measure the performance of Profit Centers? Discuss their relative merits and demerits. Q8, Nov 2010 Organizations with Business Divisions (Profit Centers) format have experienced that Divisional Controllers experience divided loyalty in carrying out their functions, causing a possible dysfunction. How could such a situation be resolved? Define the role of a Controller which suits your suggestion. May 2011 Q2, May 2011

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Briefly describe responsibility center, engineered expense center, discretionary expense center, revenue center, profit center. How is the performance of the Head of these centers evaluated? Q3. May 2011 Every SBU is a profit center, but every profit center is not a SBU. Explain under what conditions Production, Marketing and Service departments can be converted into Profit Centers. Q5. May 2011 What do you understand by Investment Center? Explain two different methods by which the performance of these centers are measured. Also discuss their merits and demerits. Nov 2011 No questions April 2012 Q4, April 2012

(a) Explain the different types of Responsibilty Centers. (b) What is a profit Center? What are the general conditions for creating Profit

Centers? Q5, April 2012

(a) What are the different alternatives available for measuring the performance of a business unit?

(b) What is EVA? How it is different from ROI? Q6 (d), April 2012 Write short note on Strategic Business Unit. Nov 2012 Q4, Nov 2012

1. Describe the differences in process of budgeting of Engineered Expense and Discretionary Expense Centers.

2. Discuss the special challenges faced in controlling R&D activities and possible management initiatives.

Q9, Nov 2012 Every SBU is a profit center, but every profit center is not a SBU. Explain. Under what conditions production, marketing and service departments are converted into Profit Centers?

responsibility centres

Documents

managed expense centres

types of expense centres

responsibility centres

discretionary budget

physical terms

term discretionary

budgeted cost

cost of components