Paper Solution 2009

Q1) Explain briefly the various stages of management control process citing salient features of each. ns!er" 1). Programming Programming is defined as making programs by top/ senior management in terms of organizational goals and strategies and deciding the funds and resources needed to accomplish the programs. Programs can be made about development of new products, research and development of activities merger, takeover and other activities that are not related much with the existing product lines. In service organizations such as hotel chain management may draw programs for each hotel or each region where hotels are to be set up. Programming is long range plan, covering period of approximately five future years. The reason is that it programming is made for shorter period, the results and benefits of programming can not be realized within this period. some organization like public utilities prepare long range plans for even a period of twenty years .because of the relatively long time plan, only rough estimates are possible revenues ,expenses and capital expenditure. Programming is time consuming and expensive. The most significant expense is the time devoted to it by management, but it also involves a special programming staff and considerable paperwork. following characteristics Its top management is convinced that programming is important .otherwise programming is likely to be or to become, a staff exercise that has little impact on actual decision making. It is relatively large and complex in small, simple organizations, an informal understanding of the organizations future directions for making decision about resource allocations, which is principal purpose of preparing programs. If the future is so uncertain that reasonably estimates cannot be made preparation of a formal program is a waste of time. formal programming process is not worthwhile in some organization. it is desirable in organization that have the

2). #u$geting !"udget is formal financial plan for each year .a budget ,known as shorter angel plans ,is a techni#ue of expressing revenues ,expenses ,physical targets like production and sales ,profit ,assets and liabilities usually for a period of one future year$ . %. "udget has the functions of motivating managers, coordinating activities, communicating to persons within organization, providing standards for &udging actual performance s and acting as control tool. '. "udgeting involves operating managers as well as senior manager. (taff personnel have considerable input to the programming process, but relatively less input to the budgeting process ). The program structure consists of program and ma&or pro&ect. It includes both capital expenditure and operating items and it covers a period of several years. The budged is structured by responsibility centre *which may or may not cut across program+ the focus is on operating revenues and expenses and it typically is for a single year. ,. "udget preparation is done under greater time pressure and is more hectic than programming -. program is abroad brush sketch of the future. budget has more details both because it is a fairly specific guide to operating decisions and also because it will be used subse#uently to evaluate the performance of individual manager. .. Programming decision can have conse#uences of great magnitude. "udgeting decision are typically much less significant, because they are made within the context of the current level of operating activities, except as those activities will be affected by program decision. /. "ehavioral consideration is much more important in the budget preparation process than in the programming process. The approved pro&ect is a bilateral commitment0 the program is not a commitment, because the budget will be used to evaluate performance. %. Executing"& fter the budget preparation, budgeting is used as a tool for coordinating the actions of individual and department within the organization. In fact within the execution phase task control is done to ensure that actions and performance match with the planned or desired result. 1hile performing the mangers goal is to achieve budgeted targets. 2owever compliance to budget is not necessary if the plans given in the budget are found as not the best way of achieving the ob&ective. fter execution actual performance and result are compared with the budgeted plans and targets and variance reports are prepared which highlight the variance between the ' and the causes for such variances. 3ariance reports should separate controllable item from non4controllable item, determine the effects of changes in

volume on revenues and cost and if possible, should mention changes in other circumstances affecting the variances '. Evaluation"& 5anagement control Process ends with the evaluation phase in which the performances of managers are evaluated. (ince it is an after4 event exercise, the evaluation does not affect what has happened. 2owever, evaluation phase acts like a powerful stimulus as employees know that their performances will be subse#uently evaluated. lso on the basis of performance evaluation, the future budget and plans are revised. Q2) (hat is )esponsibility *entre+ ,ist an$ explain $ifferent types of responsibility centers !ith S-etches. nswer64 . ) )esponsibility *entre n organization is composed of a number of financial responsibility centres. These responsibility centres are created by management based on the needs of the business enterprise. responsibility centres may be define as an organizational unit which is headed by a responsible person namely a manager. 2e is responsible for the activities of the unit. The responsibility centres is responsible for performing some function which is its output. In performing these functions, it uses resources or 7inputs8. The costs assigned to a responsibility centre are intended to measure the input that it consumes in a specific period of time, such as a week or a month. .#) /ypes of )esponsibility *entres" *i+ 9xpenses :entre *ii+ ;evenue :entre *iii+ Profit :entre *iv+ Investment :entre .i) Expenses *entre"& 9xpense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not. There are two types of expense centers. . Engineere$ Expense centers < It has following characteristics a. Their inputs can be measured in monetary terms. b. Their output can be measured in physical terms. c. The optimum rupee value of input re#uired to produce one unit of output can be determined.

Engineere$ Expense *enters =ptimal relationship can be established

Inputs

=utputs

;upees

P)0*ESS

Physical

". 1iscretionary Expense center"& 1here the output centres cannot be measured in terms of money, they are known as 7>iscretionary 9xpense :entre8. The word 7>iscretionary must be properly understood. 9xample of such expenses centres are human resource department, accounting department, legal department, industrial relations department etc. in other words all administrative and support functions fall within the ambit of discretionary expense centres. In case of discretionary expense centre an optimal relationship cannot be established between inputs ? output

1iscretionary Expense *enters =ptimal relationship cannot be established

Inputs

=utputs

;upees

P)0*ESS

Physical

.ii) )evenue *entres" ;evenue is a monetary measure of output. 1here the output of responsibility centre is measured in terms of money, we have what is known as revenue centres. ccording to nthony, !in a revenue centre, outputs are measured in monetary terms, but no formal attempt is made to relate inputs *i.e. expense or cost+ to outputs$. 9xamples of revenue centres are marketing organization where no responsibility for profit exists. =rders booked and sales are compared with the budget to measures their performance. The primary yard stick for &udging the efficency of revenue centres is revenue earned vis a vis the budget. 2owever, the head of the revenue centre is held responsible for expenses incurred by his responsibility centre. Aenerally, revenue centre managers do not have responsibility for estabilishing selling prices. Thus, in a revenue centre, there is no relationship between inputs and outputs. Bollowing figures shows the features of revenue centres.

)evenue *enters Input @ot ;elated to =utput

Inputs

=utputs

;upees only for cost directly incurred

P)0*ESS

;upee for revenue

.iii) Profit *entres" In the language of nthony !when financial performance in a responsibility centre is measured in terms of profit, which is the difference between the revenue and expenses, the responsibility centre is called a profit centre$. Thus if the performance in a responsibility centre is measure in terms of both the revenue it earn and and the cost it incure, it is called as profit centre.

Profit as measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that points to different directions. The profit centre concept is powerful one.

Profit *enters Input are ;elated to =utput

Inputs

=utputs

;upees :ost

P)0*ESS

;upee Profit

.23) 2nvestment *entre" n investment centre is a responsibility centre in which the manager is held responsible for the use of assets as well as for revenue ? expenses. It is therefore the ultimate extension of the responsibility idea. The manager is expected to earn a satisfactory return on capital employed in the responsibility centre. 5easurement of the investment base or capital employed gives rise to many difficult problems and the idea of the investment centre being new, there is considerabsle disagreement as to best solution of these problems.

2nvestment *enters Input are ;elated to :apital 9mployed

Inputs

=utputs

;upees :ost

*apital Employe$

;upee Profit

Q.%

Every S#4 is a profit center but every profit center is not a S#4+ (hat are the con$itions that

shoul$ be fulfille$ for an organi5ation unit to be converte$ into a profit center+ (hat are the $ifferent !ays to measure the performance of profit centers+ 1iscuss their relative merit 6 $emerits. nswer6 . ) Every S#4 is a profit centre but every profit centre is not a S#4 "usiness units are suitable candidate for being establish as profit centres. 2ead of such units have control over production, marketing, development of new product etc and are in a position to exercise control over costs ? revenues. 2owever to gain maximum advantage from profit centre, the head of such a unit should have complete autonomy as the :9= of an independent ccompany. This is practically not feasiable as the organization would be losing the advantage of size and synergy, moreover, it would lead to the abdication of top management responsibility. 5ost business units are created as profit centers since managers in charge of such units typically control product development, manufacturing ? marketing resources. these managers are in a position to influence revenues and costs and as such can be held accountable for the !bottom line.$ 2owever, a business unit manager8s authority may be constrained in various ways, which ought to be reflected in a profit center8s design and operation. .#) *on$itions that shoul$ be fulfille$ for an organi5ation to be converte$ into a profit centre Bunctional organization is one which each principal manufacturing or marketing function is performed by a separate organization unit. when such an organization is converted to one in which each ma&or unit is responsible for both the manufacture and marketing ,the process is termed divisionalization. lthough the degree of delegation may differ Brom company to company, complete authority for generating profits is never delegated to a single segment of the business. 5any management decisions involve proposals to increase expenses with the expectation of am even greater increase in sales revenue. such decisions are said to involve expense/revenue trade offs .additional advertising expense is an example. 2owever three condition given below must be fulfilled before such a trade off decision or decision involving specialized knowledge and skills can be delegated safely to a manager lower down in the organizational hierarchy6 s a rule, companies create business units because they have decided to delegate more authority to operating managers.

%. ;elevant information must be available with the manager for making trade4offs between expenses ? revenue. '. It is not possible to manufacture and market the product in the absence of specialized manufacturing aand marketing knowledge and skills and the knowledge ? skills should be available with the manager. ). It is possible to measure the effectiveness with which the manager is carrying out these Trade4offs and decision involving specialized knowledge and skills. ma&or step in creating profit centers is to determine the lowest point in an organization where these two conditions prevail. ll responsibility centers fit into a continuum ranging from those that clearly should be profit centers to those that clearly should not ,management must decide whether the advantages of giving profit responsibility offset the disadvantages. .*) 1ifferent !ays to measure the performance of profit centre an$ there relative merits 6 $emerits .i) 1irect Profit64 >irect profit is the excess of sales value over the marginal cost of sales and fixed cost attributable to the profit centre. Particulars (ales Cess6 5arginal cost :ontribution Cess6 Bixed :ost >irect profit mount .)s.000) -DD 'DD )DD %DD 'DD

The merits of the method are that it is simple, easy to understand, and conceptually sound. 2owever, it has its weakness also. The techni#ue fails to consider the motivation arising from the charging of costs of corporate head#uarters. .ii) *ontribution 7argin64 :ontribution margin is arrived at after deducting the marginal cost of sales from the sales value. It is the excess of sales value over the marginal cost of sales and shows the amount of money contributed by the organizational unit towards the recovery of fixed cost ? generation of profit. Particulars (ales Cess6 5arginal cost :ontribution that he should aim at ensuring spread between sales value and variable cost. mount .)s.000) -DD 'DD )DD

The logic underlying this method is that since fixed expenses cannot be controlled by the manager, it is vital

.iii) 2ncome #efore 2ncome /ax64 income before tax represents the excess of sales revenue over the cost of mount .)s.000) sales. It is computed by deducting Particulars from the sales value the following expenses6 (ales Cess6 5arginal cost :ontribution Cess6 Bixed :ost * Incurred in Profit centre+ >irect profit Cess6 :ontrollable corporate charges Cess6 =ther allocated corporate overheads Income "efore Income Tax *a+ 5anagerial cost of sales *c+ :ontrollable corporate charges overheads 5erits64 *a+ This act as a motivational tool for responsibility centre manager *b+ It reflect as true performance of the entity and facilitate interfirm comparisons. *c+ llocation of corporate overheads helps to keep in check head office expenditure as they would be sub&ect to #uestion by profit centre managers. >emerits64 *a+ (uitable methods of allocating corporate overheads to profit centre are difficult to find. *b+ It is not possible to control the costs incurred by corporate service entities like legal, human resource development, finance ? accounts etc. .iv) *ontrollable Profit6 :ontrollable profit is arrived after deducting following items of expenses from the Particulars mount .)s.000) sales revenue6 (ales Cess6 5arginal cost :ontribution Cess6 Bixed :ost * Incurred in Profit centre+ >irect profit Cess6 :ontrollable corporate charges :ontrollable Profit *a+ 5arginal cost of sales -DD 'DD )DD %DD 'DD -D %-D *b+ *d+ -DD 'DD )DD %DD 'DD -D %-D )D %'D Bixed cost of the profit centre =ther controllable allocated

*b+ Bixed cost of the profit centre *c+ :ontrollable corporate charges The expenses that are incurred by the corporate head#uarter is of two types controllable and non controllable. The profit centre manager is in the position to control the first category of expenses if not fully to a great extant. The logic underlying this method is that the measurement system should include only those costs that can be influenced by the profit centre manager. The drawback of this method are that the profit derived under this method cannot be compared with date published by trade association or with published accounts .v) 8et 2ncome64 This techni#ue uses the net income figure to measures the profitability of a responsibility centre. @et income is the surplus left after deducting all expenses, allocated corporate overheads, and income tax from sales revenue. 5erits6 *a+ >ecisions related to installment sales/hire purchase, ac#uisition of fixed assets and disposal of fixed assets are made by profit centre managers. These decision influence income tax. :onse#uently this leads to motivation of the manager to minimize income tax. *b+ The effective rate of income tax is the same among all profit centres.

>emerits6 *a+ :orporate head#uarters makes many decisions which have income tax implication and the performance of managers of profit centres should not be affected by such decision. *b+ @o advantage arises from the consideration of income tax as income tax as income after tax happens to be constant percentage of income before tax.

Particulars (ales Cess6 5arginal cost :ontribution Cess6 Bixed :ost * Incurred in Profit centre+ >irect profit Cess6 :ontrollable corporate charges :ontrollable Profit Cess6 =ther allocated corporate overheads Income "efore Income Tax Cess6 Income tax E -DF @et Income

mount .)s.000) -DD 'DD )DD %DD 'DD -D %-D )D %'D .D .D

Q') .a) 9/ransfer Pricing is not an ccounting /ool:. *omment !ith illustrations. nswer6 %. (ome companies use the term !TP$ to refer to the amount used in accounting , for transfer of goods ? services between responsibility centres. "ut in 5:(, !TP$ is used to the value placed on transfer of goods and services in transaction where at least one of the two parties is a profit centre.

'. Transfer price involves a profit since an independent company would not transfer goods ? services to another independent company at the cost or less, hence we exclude the mechanics of allocating cost in a cost accounting system since such costs do not include the profit element. ). Transfer price in 5:( is to be used in the same way as in transaction between independent companies. ,. The fundamental principal is that, the transfer price should be similar to the price that would be charged if the product was sold externally or purchase from outside vendors. -. The profit included in transfer price is a notional profit, but in pure accounting it is a real profit since it includes transactions with external perties. .. Transfer price is more of an internal mechanism of allocating profit as compared to accounting which is more of an external mechanism of real profit. /. Transfer price depends upon the accounting profit sice all future decisions would be based on the current profit of the company. 2ence Transfer pricing is not an ccounting Tool. Q') .b) 7ar-et price is i$eal transfer price even in limite$ mar-et. *omment nswer64 Transfer price can be very simple or complex depending on the business. Ideally we need a proper negotiation system, a proper arbitration system, a proper conflict resolution system, a proper product classification system, competitive managers, good atmosphere, available market price, freedom to source and full information. ll of these have to be present for a market price based transfer price system to induce goal congruence. Ideally, the buying and selling profit centre manager should be free to source but it may be unfeasible by company policy. Cimited market6 5arket for buying ? selling profit centres may be limited due to6 *i+ The existence of internal capacity might limit the development of external sales. 5ost of the large companies in an industry are highly integrated hence production capacity for an intermediate product is limited. These profit centres can handle only a limited amount of demand. 1hen internal capacity become tight, the market is flooded with demand for the intermediate product. 9ven though outside capacity exists it may be unavailable to the integrated company unless used on a regular basis or it may have trouble getting it externally when capacity is limited. *ii+ *iii+ If the company is a sole producer of a differential product then no external source exists. If a comaapy has invested in facilities, it is likely to use external sources, unless the external selling price is e#ual to variable cost which is unusual. 2ence the produced products are captive. Integrated =il companies send crude oil from the production unit to the refining unit even if there is an external market for the crude oil. 9ven in the case of limited markets, the best transfer price satisfying all re#uirement of a profit centre is the !:ompetitive Price$. If internal capacity is unavailable the company will buy from outside at the

!:ompetitive Price$. The difference between the !:ompetitive Price$ and the internal cost is money saved by producing rather then buying.

Q;) <=> ,t$. has t!o $ivision " $etails are given belo!"

an$ #. )eturn on 2nvestment for both $ivisions is 1;?. /here

Particulars 1ivision .)s.) 1ivision # .)s.) 1ivisional Sales '0@00@000 9A@00@000 1ivisional 2nvestment 20@00@000 %2@00@000 Profit %@00@000 '@B0@000 naly5e an$ comment on $ivisional performance of each !ith respect to 0perational Excellence 6 7ar-eting Effectiveness. (olution6 Table showing evaluation of >ivisional Performance Particulars >ivisional (ales >ivisional Investment Profit Profit 5argin ssets Turnover ;=I :omments6 *b+ The profitability of >ivision >ivision ,D,DD,DDD 'D,DD,DDD ),DD,DDD /.-F ' times %-F >ivision " G.,DD,DDD )',DD,DDD ,,HD,DDD -F ) times %-F

*a+ The ;=I for both >ivisions is the same at %-F is higher at /.-F with respect to the Profitability of >ivision " of -F. which is ' times which earned only ;s.,DDDDDD. *c+ The assets turnover ratio of >ivision " is better at ) times rather then >ivision *d+ >ivision " has earned greater profit of ;s. ,HDDDD as compare to >ivision ;s.)DDDDD. *e+ (ales in absolute terms of >ivision " ;s.G.DDDDD were greater then sales of >ivision *f+ ssets invested in >ivision " were ;s.)'DDDDD as compared to >ivision which had only ;s.'DDDDDD.

*g+ The division would be better evaluated if they were measured on the basis of 93 rather then ;=I

Thus Brom the above >ivision >ue to inefficency >ue to excess input cost.

performance is good. s with same ;=I i.e. %-F it provides high profit

margin the >ivision ". The profit margin of division " is lower because any of the following reasons like6

This profit margin can be improved by following actions6 Ieeping same sales and reduce cost Increase sales keeping same cost Increase sales and reduce cost.

QC) 0rgani5ations !ith #usiness 1ivision format have observe$ that 1ivisional *ontroller experience $ivi$e$ loyalty in carrying out their functions@ causing a possible $ysfunction. Do! coul$ such a situation be resolve$+ 1efine role of controller !hich suits your suggestion. nswer64 In a business unit form of organization, the finance and accounting function is headed by a business unit controller. The business unit controller reports to the business unit manager. 2e also reports to the corporate controller. This create what is known as divided loyalty. 1hile dealing with organization structures we have come across what is known as dotted line relationships.

In some organization, business unit controller reports directly to corporate controller and have a dotted line relationship with business unit managers. This indicates that the corporate controller is the business unit controller immediate boss.

In sharp contrast to above, we have companies where business unit controller reports directly to business unit manager and have what is known as dotted line relationship with the corporate controller. In India, the business unit manager generally report directly to the business unit manager and has a dotted relationship with the corporate controller. The reporting relation described above has its own merits ? demerits. In case the business unit controller reports directly to the corporate controller, the business unit manager may view him with suspicious and as a result may not repose his trust and confidence in him. =n the contrary, if the business unit controller reports directly to the business unit manager, the former may not be in a position to discharge his responsibility in a faithful manner to the company. QB) (hat you un$erstan$ by Eoal *ongruence+ (hat are the informal factors that influence the Eoal *ongruence+ nswer64 This term is used when the same goals are shared by top managers and their subordinates. This is one of the many criteria used to &udge 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. :orporate goals can be communicated by budgets, organization charts, and &ob descriptions.

Eoal *ongruence& 7eaning Individuals work in different hierarchies and handle different

responsibilities ? may have different goals. "ut they must come together as far as :ompany8s Aoal is concerned *there action must speak :o8s language.+

Eoal *ongruence 9xample %< The 2; manager has devised a 2; training program to enhance the skills of its sales personnel, with an ob&ective to enhance their productivity "ut if company is in strategic need of attaining a certain sales volume in a given #uarter, it can not do so on account of non availability of personnel. 9xample '< The marketing department has planned an impressive advertising campaign, which promises good returns, "ut say due to cash crunch :ompany8s current financial position may not let to lose the strings 9xample ) < Production 5anager may get a good applause for reducing cycle time0 "ut at what costJ "uilding up the high inventory i.e. higher investment in current assets. 1hile doing so he &ust overlooked the financial interest of the company. K fter completing the given activity in more efficient manner the

concerned manager scores the point/s on his score card. K 1hether his actions are leading to scoring of points on the organization8s score card tooJ if it is so then only one can say the organization is marching towards a common goal.

9very 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. nd it is always not necessarily consistent with the :o8s 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. Aoal congruence ensures that the action of manager taken in their best interest is also in the best interest of the organization.

2nformal factors that influence goal congruence" External Factors 9xternal factors are norms of desirable behavior that exist in the society of which the organization is a part. These norms include a set of attitudes, often collectively referred to as the work ethic, which is manifested in employeesL loyalty to the organization, their diligence, their spirit, and their pride in doing a good &ob *rather than &ust putting in time+. (ome of these attitudes are local that is, specific to the city or region in which the organization does its work. In encouraging companies to locate in their city or state, chambers of commerce and other promotional organizations often claim that their locality has a loyal, diligent workforce. =ther attitudes and norms are industry4specific. (till others are national0 some countries, such as Mapan and (ingapore, have a reputation for excellent work ethics. 2nternal Factors Culture

The most important internal factor is the organizationLs own culture4the common beliefs, shared values, norms of behavior and assumptions that are implicitly and explicitly manifested throughout the organization. :ultural norms are extremely important since they explain why two organizations with identical formal

management control systems, may vary in terms of actual control.

companyLs culture usually exists

unchanged for many years. :ertain practices become rituals, carried on almost automatically because Nthis is the way things are done here.N =thers are taboo *Nwe &ust donLt do that hereN+, although no one may remember why. =rganizational culture is also influenced strongly by the personality and policies of the :9=, and by those of lower4level managers with respect to the areas they control. If the organization is unionized, the rules and norms accepted by the union also have a ma&or influence on the organizationLs culture. greater the resistance is. Management Style ttempts to change practices almost always meet with resistance, and the larger and more mature the organization, the

The internal factor that probably has the strongest impact on management control is management style. Osually, subordinatesL attitudes reflect what they perceive their superiorsL attitudes to be, and their superiorsL attitudes ultimately stem from the :9=. 5anagers come in all shapes and sizes. (ome are charismatic and outgoing0 others are less ebullient. (ome spend much time looking and talking to people *management by walking around+0 others rely more heavily on written reports.

The Informal Organization

The lines on an organization chart depict the formal relationships4that is, the official authority and responsibilities4of each manager. The chart may show, for example, that the production manager of >ivision reports to the general manager of >ivision production manager of >ivision . "ut in the course of fulfilling his or her responsibilities, the actually communicates with many other people in the organization, as well

as with other managers, support units, the head#uarters staff, and people who are simply friends and ac#uaintances. In extreme situations, the production manager, with all these other communication sources available, may not pay ade#uate attention to messages received from the general manager0 this is especially likely to occur when the production manager is evaluated on production efficiency rather than on overall performance. The realities of the management control process cannot be understood without recognizing the importance of the relationships that constitute the informal organization. Perception and Communication

In working toward the goals of the organization, operating managers must know what these goals are and what actions they are supposed to take in order to achieve them. They receive this information through various channels, both formal *e.g., budgets and other official documents+ and informal *e.g., conversations+.

>espite this range of channels, it is not always clear what senior management wants done. be stated with absolute clarity even in the best of circumstances.

n organization is

a complicated entity, and the actions that should be taken by anyone part to further the common goals cannot 5oreover, the messages received from different sources may conflict with one another, or be sub&ect to differing interpretations. Bor example, the budget mechanism may convey the impression that managers are supposed to aim for the highest profits possible in a given year, whereas senior management does not actually want them to skimp on maintenance or employee training since such actions, although increasing current profits, might reduce future profitability. Q9) Short 8otes .i) >ero #ase$ #u$geting"& P"" is an analytical approach to budgeting. It involves a method of budgeting where by all activities are duly reevaluated each time a budget is formulated. 9ach functional budget starts with the assumption that the function does not exist and is at zero cost. Aenerally, the conventional budgetary system uses the previous period actuals and budget as bases in order to set budget targets according to experience gained during the preceding period and expectation for the budget period. P"" differs radically from conventional budgeting. It raises such #uestions as 7why8. The concept does not give consideration to previous years actuals results and budget as base for planning in future. P"" proceeds on the assumption that the functions does not exist and its cost is 7@IC8 or8 Pero8. It reviews, critically analysis, and seeks &ustification for the aactivities and expenses of the preceding year and to put succinctly, commences planning from 7zero base8. 2ence, the name 7Pero "ase "udgeting8. Onder this all the activities of organization are re4valued whenever a budget is prepared. It carries out an evaluation of both existing and new activities and tries to answer #uestion such as6 *a+ made in existing operation in order to finance new pro&ect of high priority. .ii) Free *ash Flo!" measure of financial performance calculated as operating cash flow minus capital expenditures. Bree cash flow *B:B+ represents the cash that a company is able to generate after laying out the money re#uired to maintain or expand its asset base. Bree cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. 1ithout cash, itLs tough to develop new products, make ac#uisitions, pay dividends and reduce debt. B:B is calculated as6 re existing activities &ustifiedJ *b+ 1hat is the efficency ? effectiveness of existing operationJ *c+ (hould reduction need to be

It can also be calculated by taking operating cash flow and subtracting capital expenditures. Bree :ash Blow of the Birm is calculated as follows64 measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments. :alculated as6

This is a measurement of a companyLs profitability after all expenses and reinvestments. ItLs one of the many benchmarks used to compare and analyze financial health. positive value would indicate that the firm has cash left after expenses. negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening 4 it could be a sign that the company may have some deeper problems. .iii) 7*S in the 7atrix 0rgani5ation" The matrix form of organization is a combination of the functional and divisional structures. 1hile product lines are arranged along one arm of the matrix, across the other arm could be arranged either functional or geographical division. 5atrix organizational structure assigns multiple responsibilities to the functional heads. 9valuation of performance of such organizational entities is very difficult. Though they offer economies of using scares functional staff, it poses problems of casting the individual responsibility. This form of organization is very complex, from the point of view of management control system. t the end we must not forget that the management control system is for the organization and not the organization exists for management control system. =ne has to mold and remold the management control system to suit the given organization structure

Osually in an advertisement agency, account supervisors are shifted from one account to another on periodic basis, this practice allows the agency to look at the account from the perspectives of different executives. 2owever taking in to consideration the time lag of result realization in such services is #uite large. designer should insist on abandoning the rotation system of the executives. 5atrix structure offers advantages such as faster decision making process, efficiency and effectiveness but simultaneously it may pose problems such as added complexity in control function, assignment of responsibility and authority etc. The matrix form of organization have drawbacks too. It is difficult to manage the structure easily. The configuration dilutes priorities and creates conflicts product lines and functional lines over the allocation of resources. Birms that follow this structure are T:(, (hell etc. nd this may pose problem of performance assessment of a particular executive. This does not mean a control system