FM 02

JUNE 2014 EXAMINATION
FM 02/eFM 02
MANAGEMENT CONTROL SYSTEM
Time: Three Hours
Maximum Marks: 100
Note:
1.
2.
3.
4.
The paper is divided in three sections: SECTION-A, SECTION-B and

SECTION-C.
There are seven questions in SECTION-A. Students are required
to attempt ANY FOUR.
SECTION-B has five questions, attempt ANY THREE.
All the questions of SECTION-C (Case Study) are compulsory.
Section-A (10 Marks each)

1.
What is the role of informal control process in the development of
management control
system?
2.
What are the principles applicable to the formation & use of company
objectives as an essential feature of the management control process?
3.
How Computer Integrated Manufacturing influences Management
Control Process?
4.
In a company that operates on a calendar year basis, the
programming process is
completed just prior to the preparation of the
annual budget. With reference to the
given statement describe the
strategic planning process.
5.
What are the variables to be considered in designing an incentive
compensation
package for business unit managers? How are you going to
deal with the variables?
6.
What are the characteristics of the control system in the external
control style?
7.
Write short notes on:

a)
What insights of the business does the value chain provide?
b)
Approaches to investigate variances
Section-B (15 Marks each)
June 2014/FM 02
Page 1 of 4
8.
What are corporate level strategies & business unit strategies, & what
are the key strategic issues? What are the two interrelated aspects on which
the strategy of a business unit is dependent?
9.
What are the general methods for determining transfer prices? What
are the potential limitations to transfer prices based on cost?
10. A company produces two products & budgets at 60% level of activity
for the year 2012.
It gives the following information:
Product
Product
A
B
Raw materials cost per Rs.7.50
Rs.3.50
unit
Rs.4.00
Rs.3.00
Direct wages per unit
Rs.2.00
Rs.1.50
Variable overheads per Rs.6.00
Rs.4.50
unit
Rs.20.00 Rs.15.0
Fixed overheads per 4,000
0
unit
6,000
Selling price per unit
Production
&
sales
(units)
The managing director is not satisfied with the budgeted results as
stated above & wants to improve the performance. The managing director
proposed that the sales
quantities of products A & B could be increased
by 50% provided the selling price was
reduced by 5% in case of product A
& 10% in case of product B. The price reduction
should
be
made
applicable to the entire quantity of sales of each of the two products.
You are required to present the overall profitability under the original
budget & revised budget after taking the increased sales into consideration.
11. There are a number of ethical issues that have strong implications for
control systems within an organization. Explain.
12. Samson & Company started operations 8 years ago in Eastern India.
Business grew
rapidly & soon product demand outstripped production
facilities. The company opened
a new plant of identical size & capacity in
the western India 2 years ago. Each plant
serves its geographical area
& is operated as a separate division. Below are the operating data for the
most recent year:
Eastern
Western
division
division
Sales
10,00,000
10,00,000
June 2014/FM 02
Page 2 of 4
Manufacturing
expenses
Marketing expenses
Administrative
expenses
Current assets
Fixed assets (Gross)
Accumulated
depreciation
5,00,000
6,00,000
1,00,000
2,00,000
1,00,000
2,00,000
2,00,000
10,00,000
8,00,000
2,00,000
20,00,000
4,00,000
Since the eastern division plant was built, construction costs have
doubled. The entire
difference is manufacturing expenses is due to
higher depreciation costs of Western
India plant.
You are required to:
a)
Compute return on investment for each division based on total
net assets.
b)
Compute return on investment for each division based on total
gross assets.
c)
What is your evaluation of the two divisions?
Section-C (15 Marks)
Case Study (Compulsory)
Excel Ltd. has two departments X & L. Department X produces component
parts while department L produces finished goods. Component part xp
manufactured by X is used in the finished product. The cost structure of xp
component is as under (based on a normal capacity of 1,00,000 units of the
part p.a.).
Direct materials
Direct labour
Manufacturing overheads:
Variable
Fixed
Total
Selling
&
administration
overheads:
- Variable (per unit)
- Fixed (total)
Rs.
30
6
9
10
Rs.55
3
Rs.4,00,0
00
Presently, the part xp is being sold by department X in the market at a price

of Rs.65, though the market price varies between Rs.64 to Rs.66. The normal
capacity is 1,00,000 parts per year but in the forthcoming year, the company
June 2014/FM 02
Page 3 of 4
is expecting to sell 75,000 parts. When part is sold internally, the variable
selling expenses are avoidable.
Department L is expected to use 25,000 units of the part in the
forthcoming year which it has been buying from the market at Rs.64 per
part. It is prepared to buy 25,000 units from department X at a price of Rs.50
per unit.
13.
Case Questions:
You are required to:
a)
Determine the minimum transfer price of xp that may be
acceptable to department X
b)
Determine the maximum transfer price that department L should
pay
c)
Should this transfer from X to L take place? Give reasons.
d)
Should department X sell 25,000 units of the part of Rs.50 to
department L.
e)
Assuming that 25,000 units of xp are transferred from X to L at
Rs.57 per unit, compute the ROI of department X for the
forthcoming year. Further assume that average capital employed
in department X is Rs.25 lakh.
June 2014/FM 02
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JUNE 2014 EXAMINATION

The paper is divided in three sections: SECTION-A, SECTION-B and

Section-A (10 Marks each)

Write short notes on:

Presently, the part xp is being sold by department X in the market at a price

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