A PROJECT REPORT ON                Responsibility AccountingSUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS           ...
A PROJECT REPORT ON                TITLE OF THE PROJECTSUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS        FOR MAST...
DECLARATIONI hereby declare that this dissertation submitted in partial fulfillment of therequirement for the award of MAS...
PROJECT GUIDE CERTIFICATE FORMI Mr. Ashvani Ravindra Bhagat, the undersigned Roll No. 03 studying in the ThirdYear of MMS ...
Smt. K. G. Mittal Institute of Management, IT and Research                     Marwari Vidyalaya Sanchalit   (Approved By ...
ACKNOWLEDGEMENTThis project has been a great learning experience for me. I take this opportunity tothank Dr. / Prof. DEEPA...
Responsibility Accounting are a set of practices that have become recognized as one ofthe essential features of effective ...
Chapter No. 18
Introduction       A responsibility centre is an organizational unit which is headed by a responsible personnamely a manag...
Responsibility centres constitute the structure of a control system. The assignment of theresponsibility to organizational...
implement the strategy for accomplishing the goals of the organization centres. The entireorganization is responsible for ...
Since for the purpose of achieving the overall goal in a piecemeal way; to variousresponsibility centers, overall responsi...
i. As realistic goals are fixed for a responsibility centre, its achievement by the employees      becomes easy. Their con...
Chapter No. 2                                    Responsibility CentresResponsibility StructureThe responsibility structur...
measuring the performance of a responsibility center. They are:• The efficiency measure • The process measure • Effectiven...
Types of Responsibility CentresRevenue centersRevenue centers are those organizational units in which outputs are measured...
In discretionary expense centers, the output cannot be measured in monetary terms.Discretionary expense centers include ad...
possible budget for accomplishing activities that should be undertaken.Cost variability: The costs, in a discretionary exp...
organizational level. At the operational level, the staff activity is controlled by the plantmanager, and at the business ...
transferring goods from the company to the customer, and receiving the appropriate pay fromthe customer. These are mostly ...
•   Managers are motivated to perform more effectively, as they are responsible forincreasing the profit of their unit.• M...
on which media to spend.Manufacturing: This is an expense center and the management of activities here is based onperforma...
center manager, focus on the contribution margin tends to direct the attention of the profit centermanager away from the g...
Since the profit center can earn profit only when it has recovered all its costs, includingallocated corporate overhead co...
Cost centersThe objective of cost center is to minimize the variance between standard costs and actual costs.A cost center...
income statements are useful in analyzing the profitability of segments and measuring theperformance of segment managers. ...
capacity.Example         As an example, a segmented report is shown, where the segments have been defined asdivisions. Rep...
Traceable and Common Fixed Costs        One of the most puzzling aspects of segmented income statements is probably thetre...
Example of common fixed cost includes the following:   The salary of general manager who controls all the segments. The s...
The costs assigned to a segment should include all costs attributable to that segmentfrom the companys entire value chain....
Arbitrarily dividing common costs among segments       The third business practice that leads to distorted segment costs i...
Average operating assets       Rs 80,000Net operating income           Rs18,000Minimum required rate of return15%       Th...
performance measurement schemes. The residual income approach encourages managers tomake investments that are profitable f...
Average operating assets (1) Rs 80,000       Rs 25,000        Rs105,000Net operating income (2)     Rs 18,000       Rs 4,5...
Chapter No. 4                      ROLE IN PRACTICING A PERFORMING                                MANAGEMENTA responsibili...
A responsibility centre corresponds to an inferior level of responsibility for theenterprise and, in the same time, it is ...
Figure no. 1. Responsibility centres structuring into profit and costs centres.       Regarding the costs calculation depe...
revenues (for example, the sells department) or investment centres, which reflects the revenuesfrom the outlet selling, an...
Figure no. 2. Complete Commercial Cost’s BudgetA. The complete commercial cost’s budget can be determined by using the fol...
BDE - Direct Expenses’ Budget; BOIE -Outlet Indirect Expenses’ Budget.Direct Expenses’ Budget (BDE) includes the raw mater...
n - The necessary number of operations for the product’s fabricationOutlet Indirect Expenses’ Budget (BOIE) - is determine...
- Expenses regarding the depreciation of the technologic installations and transportation meansof the ward;- Expenses rega...
- Expenses regarding water, sanitation and for the husbandry needs of the ward; - Expensesregarding the office materials f...
Expenses regarding the acquisition of books, magazines and subscriptions; -           Expensesregarding the business trave...
centers separately. To help in such assessment, a mechanism called transfer pricing has beendeveloped. Transfer pricing he...
Good atmosphereIn order to achieve goal congruency, managers of profit centers, especially the buying profitcenters, shoul...
congruency are:• Limited markets• Excess or shortage of capacity in the industryLimited marketsMarkets for buying and sell...
down by pressures within the company and should try to take decisions that optimize the profitof the company.METHODS OF CA...
Companies that use this method price the goods and services they transfer between their profitcenters at a price equal to ...
• Marginal costs approachApart from this, companies also have to decide on the treatment of fixed costs, and research andd...
formulating hypothesis or suggested solutions, collecting, organizing and evaluating data,reaching conclusions, testing co...
A well defined questionnaire that is used effectively can gather information on both overallperformance of the test system...
responsibility.HO2: the Lubrizol India Pvt. Ltd. do not authorize the managers of responsibility centers withclear powers....
hypotheses.The population and the sample of studyThe population of the study is represented by all the Lubrizol India Pvt....
which was 72% and this value is acceptable as it is higher than 60% so the results could begeneralized.2- Normality Distri...
acceptable. So the Lubrizol India Pvt. Ltd. divide the organizational structure to centers ofresponsibility. And table sho...
As the calculated T is bigger than tabulated T, this means rejecting the null hypothesisand accepting the alternative one ...
T                 T tabulated       Sig T     Result of null    Mean      Stdcalculated                                   ...
6.805               1.96       0 Rejection            3.37     0.39As the calculated T is bigger than tabulated T this mea...
T calculated    T tabulated      Sig T   Result of null Mean         Std                                       hypothesis ...
Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar
Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar
Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar
Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar
Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar
Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar
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Project Report on Responsibility Accounting under the Guidance of Dr. Kinnarry Thakkar

  1. 1. A PROJECT REPORT ON Responsibility AccountingSUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR MASTER OF MANAGEMENT STUDIES TO UNIVERSITY OF MUMBAI BY ASHVANI RAVINDRA BHAGAT ROLL NO. 03 2011-2013 UNDER THE GUIDANCE OF Dr. Kinnarry Thakkar SMT. K. G. MITTAL INSTITUTE OF MANAGEMENT MAHALAXMI, MUMBAI – 400 034 1
  2. 2. A PROJECT REPORT ON TITLE OF THE PROJECTSUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR MASTER OF MANAGEMENT STUDIES TO UNIVERSITY OF MUMBAI BY FULL NAME OF THE STUDENT ROLL NO. 2010-2012 UNDER THE GUIDANCE OF DR. / PROF. SMT. K. G. MITTAL INSTITUTE OF MANAGEMENT MAHALAXMI, MUMBAI – 400 034 2
  3. 3. DECLARATIONI hereby declare that this dissertation submitted in partial fulfillment of therequirement for the award of MASTER OF MANAGEMENT STUDIES(MMS) of the University of Mumbai is my original work and has not beensubmitted for award of any other degree or diploma fellowship or other similartitle or prizes.I further certify that I have no objection and grant the rights to SMT. K. G.MITTAL INSTITUTE OF MANAGEMENT to publish any chapter or project ifthey deem fit in journals or magazines and newspaper etc. without my permission.NAME: ASHVANI RAVINDRA BHAGATCLASS: MMS II SEM IVBATCH: 2011-2013ROLL NO.: 03DATE: 17th MARCH , 2012PLACE: MUMBAISIGNATURE(ASHVANI BHAGAT) 3
  4. 4. PROJECT GUIDE CERTIFICATE FORMI Mr. Ashvani Ravindra Bhagat, the undersigned Roll No. 03 studying in the ThirdYear of MMS is doing my project work under the guidance of Dr./ Prof. DEEPACHAVAN wish to state that I have met my internal guide on the following datesmentioned below for Project Guidance:-SR. NO. DATE SIGNATURE OF THE INTERNAL GUIDE______________________ ______________________Signature of the Candidate Signature of Internal Guide 4
  5. 5. Smt. K. G. Mittal Institute of Management, IT and Research Marwari Vidyalaya Sanchalit (Approved By AICTE, New Delhi, Government of Maharashtra, DTE, Affiliated to University of Mumbai) CERTIfICATEThis is to certify that the dissertation submitted in partial fulfillment of therequirement for the award of MMS of the University of Mumbai is a result of thebonafide work carried out by Mr. ASHVANI RAVINDRA BHAGAT under mysupervision and guidance. No part of this report has been submitted for award o fany other degree, diploma fellowship or other similar titles or prizes. The workhas also not been published in any scientific journals/ magazines.DATE: 17th MARCH 2012 NAME: ASHVANI R. BHAGATPLACE: MUMBAI ROLL NO.: 03------------------------------ ---------------------------Dr. Vidya Hattangadi Dr. /Prof (Project Guide)(Director)Smt. K. G. Mittal Institute Of Management 5
  6. 6. ACKNOWLEDGEMENTThis project has been a great learning experience for me. I take this opportunity tothank Dr. / Prof. DEEPA CHAVAN, my internal project guide whose valuableguidance & suggestions made this project possible. I am extremely thankful tohim/her for his/her support. He/She has encouraged me and channelized myenthusiasm effectively.I express my heart-felt gratitude towards my parents, siblings and all those friendswho have willingly and with utmost commitment helped me during the course ofmy project work.I also express my profound gratitude to Dr. Vidya Hattangadi, Director of SMT.K. G. MITTAL INSTITUTE OF MANAGEMENT for giving me the opportunityto work on the project and broaden my knowledge and experience. My sincerethanks to Prof. Deepa Chavan for her valuable guidance and advice incompleting this project.I would like to thank all the professors and the staff of SMT. K. G. MITTALINSTITUTE OF MANAGEMENT especially the Library staff who were veryhelpful in providing books and articles I needed for my project.Last but not the least, I am thankful to all those who indirectly extended their co-operation and invaluable support to me. EXECUTIVE SUMMARY 6
  7. 7. Responsibility Accounting are a set of practices that have become recognized as one ofthe essential features of effective management in organizations of all sizes, in both the publicand the private sectors, throughout the world. Management controls may be briefly defined as the organization, policies, andprocedures used to help ensure that government programmers achieve their intended results;that the resources used to deliver these programmers are consistent with the stated aims andobjectives of the organizations concerned; that programmers are protected from waste, fraud andmismanagement; and that reliable and timely information is obtained, maintained, reported, andused for decision making. Effective management controls are clearly essential to the success and well-being ofgovernment organizations, both as a safeguard against waste, abuse, and fraud and as a means ofensuring that the policies laid down by top management are properly implemented by theorganization. However, even the most carefully designed control systems have their limitations,partly because, while they allow top managers to control the organization, they do not controlthe top managers themselves. Continuing vigilance is required to ensure that the systems arenot undermined by instances of fraud or by failure to respond to changes in circumstances andoperating procedures 7
  8. 8. Chapter No. 18
  9. 9. Introduction A responsibility centre is an organizational unit which is headed by a responsible personnamely a manager. He is responsible for the activities of the unit. An organization is composedof a number of responsibility centre. These responsibility centre. These responsibility centres arecreated based on the need of the organization. The responsibility centres from a hierarchy withsection, department, work shifts etc existing at the lowest level and department and a businessunit at a higher level. The costs assigned to the responsibility centre are intended to measure theinputs that it consumer in a specified period of time. Management control on the behavior ofmanagers in responsibility centres. The performance of responsibility centres is judged by the criteria of efficiency andeffectiveness. Revenue in the revenue centres are measured and controlled separately fromexpenses centres. In discretionary expenses centres, budget describe the amounts that can bespent but it is not possible to determine the optimum level of these expenses. Therefore,Financial controls are not intended to measure its effectiveness. The principal types ofdiscretionary expense centres are Administrative and Support centres, Research andDevelopment centre and Marketing centres. A responsibility centre can be defined as an organizational unit which is headed by aresponsible person namely a manager. He is responsibility for the activities of the unit.Responsibility centre is responsible for performing certain function which is its output. Acompany is a collection of responsibility centre, each of which is represented by a box on theorganization chart. These responsibility centres from a hierarchy. The responsibility centre at thelower level are work shifts and small organizational units. Higher in the hierarchy are thedepartment or business unit. The entire Company is a responsibility centre from the point ofview of senior management and the board of directors. These responsibility centre use resources or inputs while performing their functions. Thecosts assigned to a responsibility centre are intended to measure the input that it ensures in aspecified period of the time such as a week or a month. Management control focuses on thebehavior of manager in responsibility centres. An organization is composed of a number ofresponsibility centres. These centres are created by the management based on the needs of thebusiness organisations. 9
  10. 10. Responsibility centres constitute the structure of a control system. The assignment of theresponsibility to organizational subunits should reflect the organizational strategy. Aresponsibility centre is an organizational unit which is headed by a management and he isresponsible for its objectives. These are two types of responsible centre which are important i.e.revenue centre and expense centre.Objectives of Responsibility Accounting:The objectives of responsibility accounting are the following: a. Overall organizational goals are broken down into small goals, each of the small goals is meant for better achievement of a responsibility center. b. With the attached responsibility each responsibility center is tied up & there is adequate authority so that responsibility can be discharged. c. At the end of a period, evaluation is done of the performance of each responsibility center & comparison of the performance is done with the predetermined targets. d. Thorough study is made of the achievements which are above or below the targets & remedial measures are adopted. e. Assessment is made of the contribution made by each responsibility center & examination is done of how far it’s possible for the contribution to fulfilling its share in the ultimate organizational growth. f. Emphasize is given on the control of cost through planning. g. Use is made of the principle of ‘management by exception’ for the purpose of recording only those data where the actual performance of responsibility center falls short of the set target & where the variance is beyond the reasonable limit.Nature of Responsibility centre: Responsibility centres are created by conscious acts of management. It is a unit of anorganization. The aims of such units is to achieve certain objectives. The objectives are to 10
  11. 11. implement the strategy for accomplishing the goals of the organization centres. The entireorganization is responsible for achieving its objectives. A responsibility centre uses certaininputs and then generates the output. The input includes labor, material and others services. Theresponsibility centres process these resources by using plant and machinery, furniture, vehiclesand working capital. The output is created out of these inputs. The output may be in the form ofintangible goods or tangible goods. The output generated from finance, logistics, insurance,marketing are in the form of services. The output of the responsibility centre may be sold in themarket in exchange of money. It can be also be used by another responsibility centre of theorganization. The amount of money generated by a responsibility centre is called as Revenue.Pre-requisites of effective responsibility accounting: The pre-requisites of the effective responsibility accounting are the following: a. Under the supervision of a manager should be each responsibility center & for the purpose of operating, it must be separable & identifiable. b. The independent measurement of performance of each center must be capable of being done. c. Each responsibility center should have clearly set targets. d. Each responsibility center’s budget should set targets which should be neither too high nor too low i.e., the budget should be one which can be realised. e. The top management should fully support the system. f. All managers of responsibility centers should participate in the formulation of plans & policies relating to responsibility centers for the purpose of providing motivation. g. For sincere performance of each responsibility center the organizational environments must be conducive.Advantages of Responsibility Accounting: For the purpose of exercising control, responsibility accounting is an important tool in thehands of management. For the purpose of effecting efficient control on operations & achievingthe organizational goal, responsibility accounting system should be introduced by theorganizations which have large dimensions & complex & operations which are decentralized. 11
  12. 12. Since for the purpose of achieving the overall goal in a piecemeal way; to variousresponsibility centers, overall responsibility & authority are decentralized, continuouscommunication should be there between the overall responsibility center & various sub-responsibility centers. Thus a communication system is automatically established byresponsibility accounting. The following advantages can be expected from responsibility accounting system: a. Allocation is made of all the activities of the organization, all the items of income & expenditure including capital expenditure to the well defined responsibility centers. Profit of each responsibility center is also identified. It should be understood by the manager of the centre what has to be performed by him with what resources & in what time period. He gets the things done by making his own way without any interference. Thus much importance is given to human resources. b. The managers of responsibility centers worked independently which helps in achieving the ultimate goal. c. There is a relationship between efforts & achievement, thereby, loopholes, if any, in the operations gets easily detected. d. The overall goals of the organization & individual goals of responsibility centers are communicated to all so that by keeping a view on that, guidance can be given the managers in their respective centers to the operations. e. Among the managers & their subordinates, cost-consciousness gets generated which results in automatically reducing cost. f. It becomes easy to detect the weak areas in the organization. So for the purpose making the weak areas strong, corrective measures are taken. g. By recording the negative variances between the actual performance & target, introduction of management by exception can be done. h. For the purpose of exercising best managerial control over the affairs of the organization & achieving the desired goal, responsibility accounting system & budgetary control system can work together. 12
  13. 13. i. As realistic goals are fixed for a responsibility centre, its achievement by the employees becomes easy. Their contribution can be assessed by themselves for the purpose of achieving the goal of the organization as a whole. A sense of belonging to the organization is created among the employees by the systematic responsibility accounting as the reward of the employees for accomplishment is not unsatisfactory. j. As managers of responsibility centers are allowed to sit with the top management for exchanging of views & opinions, appropriate decision making is almost assumed. As against expected advantages there are also some apprehended disadvantages.Disadvantages of Responsibility Accounting: The following are the apprehended disadvantages of responsibility accounting: a. Solely upon the sincere efforts put in by the managers of the responsibility centers, the success of the responsibility accounting depends. Whether the system will succeed or not shall be decided by the personal factors of the managers. b. The place of good management cannot be ever taken by the responsibility accounting because the latter is only a tool in the hands of the former. c. Although theoretically, the manager of each organization is given free hand, in actual practice, neglect of employees’ reaction, interference etc. is often noticed. Thus, in the way of proper discharging of responsibility, this stands. d. In modern organizations, among the departments, inter-relations & inter-departments are mostly observed. So it becomes almost impossible to demarcate responsibility centers by clear-cut outlines. e. Manager of the responsibility center prepares & communicates performance reports. The desired result will not be achieved by the responsibility accounting system, if there is any shortcoming in the report. f. Remuneration, future prospects, rewards, good working condition, welfare work & many others account for the individual interest of employees. Co-operation from the employees may be required where there is a clash between individual interest & the organizational interest. 13
  14. 14. Chapter No. 2 Responsibility CentresResponsibility StructureThe responsibility structure of an organization consists of responsibility centers and relatedperformance measurement systems. These responsibilitycenters work towards the achievement of the organizational goals. This hierarchical placementof the responsibility center helps the top management to ensure that decisions made in one partof the organization are congruent with decisions made in other parts. The responsibilitystructure includes an accounting system. A responsibility accounting system helps managers torecord the plans and performances of the center for which the manager is accountable. Themeasurement of the performance of a responsibility center is done through cost, profit, revenue,investment and quality goals set by the organization. There are three different methods of 14
  15. 15. measuring the performance of a responsibility center. They are:• The efficiency measure • The process measure • Effectiveness measureThe ‘efficiency measure’ measures performance in terms of inputs received over a specifiedperiod of time for a given level of output. The process measure pertains to the productionprocess, and the ‘effectiveness’ measure gauges the output of the organization in terms of itsgoals and objectives. The above mentioned methods of performance evaluation help inassessing the progress of each subunit, and this is done with those variables for which themanager has reasonable amount of control in mind.Overall Effectiveness Measures: Return on Investment (ROI)The most important objective of a firm is to achieve a good return on investment. The logicbehind the hierarchy of responsibility centers and the responsibility accounting system is tomake all the decentralized subunits of an organization responsible for various elements of ROI.The performance of responsibility centers in an organization is based on cost, quality, revenueand investment.Donaldson Brown of General Motors divided ROI into a number of elements for easyunderstanding. These elements are helpful in establishing performance measures for varioussubunits of a division that are goal congruent and would have an influence over the performancemeasures. ROI= Net profit/invested capitalROI can be divided into two components- net profit, which is a percentage of the sales revenue,and the turnover of investments in relation to the sales revenue.Profit margin = net profit/sales revenueInvestment turnover = sales revenue/invested capital 15
  16. 16. Types of Responsibility CentresRevenue centersRevenue centers are those organizational units in which outputs are measured in monetaryterms. These centers are marketing organizations and they are not directly responsible forprofits. Revenue centers are also called expense centers, as the revenue center managers are heldresponsible for expenses incurred by the unit. The main objective of revenue centers is tomaximize revenues. For example, a marketing organization is a sales revenue center. Such acenter is devoted to increasing the revenue, and assumes no responsibility for production.In this center, the manager is responsible for the level of revenue or outputs of a center,measured in monetary terms, but is not responsible for the costs of the goods or services that thecenter offers.Expense centersIn expense centers, inputs or expenses are measured in monetary terms whereas the outputs arenot measured in monetary terms. There are two types of expense centers-engineered expensecenters and discretionary expense centers. There are two types of cost involved in engineeredexpense centers and discretionary expense centers respectively-engineered costs anddiscretionary costs. Engineered costs are costs that can be estimated to a reasonable extent bythe management. Examples are direct labor and direct material. Discretionary costs, on the otherhand, are costs that cannot be estimated by the management.Engineered expense centersIn these centers, inputs or expenses are measured in monetary terms and outputs are measured inphysical terms. These centers are usually found in the manufacturing units that use a standardcost system. There are certain responsibility centers within administrative and supportdepartments that actually are engineered expense centers. In these centers, the cost of theproduct is determined by multiplying the output of each unit with its standard cost. Its efficiencyis measured by comparing the actual cost with the standard cost.Discretionary expense centers 16
  17. 17. In discretionary expense centers, the output cannot be measured in monetary terms.Discretionary expense centers include administrative and support units like legal, accounting,industrial and public relations units. Here, the efficiency is not the difference betweenbudgeted and actual expense, but the difference between the budgeted input and actual input. Indiscretionary expense centers the management decides on certain policies that should govern thecompanys operation. These relate to the amount of money that should be spent on R&D,financial planning, public relations, etc. The decisions related to such activities depend on theway a company operates.Control characteristics for expense centersThe management control systems for expense centers are discussed, taking into considerationfactors like budget preparation, cost variability, financial control and measurement ofperformance.Budget preparation: The decisions regarding the budget of expenses for a discretionaryexpense center is different from that for an engineered expense center. In engineered expensecenters, the costs are determined by the management, taking into view the operating budgetrequired to perform the task effectively in the future. However, in a discretionary expensecenter, the principal task is to decide on the magnitude of the job that has to be performed.These tasks are of two types-continuing and special. Continuing tasks take place year after year(like financial statements) while special tasks are one-time tasks, for example, developing aprofit budgeting system for a newly acquired division.Management by objectives is a useful technique in preparing budgets for a discretionaryexpense center. Management by objectives is a technique where the objectives of performanceare jointly determined by subordinates and their superiors. The progress towards theseobjectives is periodically reviewed and the rewards are allocated on the basis of performance.Another method used to understand the appropriate level of spending in a discretionary expensecenter is sensitivity analysis. According to this technique, the budget has a section whichexplains the activities that can be undertaken if the budget is increased. Sensitivity analysis ismostly not taken by companies as they think that it is important for a manager to prepare the 17
  18. 18. possible budget for accomplishing activities that should be undertaken.Cost variability: The costs, in a discretionary expense center, tend to vary from one year toanother according to the volume. However, these are not influenced by short-term fluctuationsin volume within a year. In engineered expense centers, costs vary with short-term fluctuationsin volumes. Financial control: The financial control in a discretionary expense center is differentfrom that in an engineered expense center. Here, the operating costs are minimized by setting astandard for the costs and comparing the actual costs with this standard. In discretionaryexpense centers, costs are controlled by determining the tasks that have to be undertaken and theamount of effort that is required for each task. Financial control is, hence, determined at theplanning stage.Measurement of performance: The financial performance report of a discretionaryexpense center does not help in evaluating the efficiency of the manager, whereas in engineeredexpense centers the financial report helps in evaluating the efficiency of the manager. If the twocenters are not properly distinguished, the management may consider the performance report ofa discretionary center as an indication of its efficiency.Administrative and support centersAdministrative centers include the senior corporate management, the business unit managementand the managers responsible for their staff units. Support centers provide services to otherresponsibility centers.Problems related to control in administrative and support centers include difficulty in measuringoutput, as they basically provide service and advice to the responsibility centers. Therefore, itbecomes difficult to set cost standards. Hence, their performance cannot be branded as efficientor inefficient. Secondly there is lack of congruence between goals of staff units andresponsibility centers. The suggestions that staff departments may provide regarding thedevelopment of systems, programs or functions may be too costly when one thinks of theadditional profits that these would generate. The severity of the problems is also related to the 18
  19. 19. organizational level. At the operational level, the staff activity is controlled by the plantmanager, and at the business unit level, by the business unit manager. When compared to theplant level, there is more discretion of tasks at the business unit level. Support centers charge aparticular price for the services they provide to other responsibility centers.Budget preparation: The budget for a support center consists of expenses, and is prepared bycomparing with the current year’s actuals. This budget consists of the following components-the basic costs of running a center (for which there is no need of management decisions), costsincurred by the discretionaryactivities of the center, and a section containing proposed increases in budget (other than thoserelated to inflation).Research and development centersControl problems in research and development: The problems in research and development are:Difficulty in measuring quality: The inputs for an R&D activity can be measured whereas theoutputs are difficult to measure. For R&D activities, the time taken for a particular researchcannot be estimated as it may take months or sometimes years for a particular activity. Also theoutput is difficult to measure because of its technical nature.Lack of goal congruence: As in administrative centers, goal congruency is lacking in R&Dcenters, too. Conflict may arise between the research manager and the business unit manager.The research manager may want to build the best research and development center, no matterwhat the expense be, while it may not be possible for the company to afford it. Also, theresearchers may not have sufficient knowledge about the business, in some cases. The researchand development costs cannot be controlled on a year-to-year basis because a research projectmay take years to show results and the organization would have to bear the cost of the projectfor that period of time, mainly the cost on labor.Marketing centersThere are two types of marketing activities in every organization: order filling (logistics) andorder getting. Order getting is an actual marketing activity. Order filling activities include 19
  20. 20. transferring goods from the company to the customer, and receiving the appropriate pay fromthe customer. These are mostly engineered expense centers. Order getting activities include testmarketing, training sales force, advertising, sales promotion, etc. Though the output of amarketing organization can be measured, it is difficult to evaluate the marketing effort, as themarketing department has no control over economic conditions or competitors’ actions. Theseactions may be different from what was expected when the sales budgets were established. Insuch situations, it is difficult to achieve management control. Also, it becomes difficult tomeasure the efficiency and effectiveness of these costs.Profit centersWhen financial performance of a responsibility center is measured in terms of the organization’sprofit, then it is called a profit center. In a profit center, performance is measured in terms of thenumerical difference between revenues (outputs) and expenditure (inputs). A profit center isgiven the responsibility of earning profits. It is involved in the manufacture and sale of outputs,and it measures how well the center is doing economically. The profit center also determines theefficiency of the manager in charge of the center. A profit center helps in motivating managersto perform well in areas they control and also encourages managers to take initiatives. The profitcenter helps the organization to make the best use of specialized market knowledge of thedivisional managers, and entrusts the local managers the responsibility of tradeoffs.Profit centers have been used as a major management control tool. The major advantages ofprofit centers are:• These help in increasing the speed of making operating decisions as they do not have to bereferred to corporate headquarters.• As the decision-making authority lies with the managers they can make better decisionsrelated to the task they are performing, because they can understand the nature of the workbetter.• Since profit centers make their day-to-day decisions themselves headquarters canconcentrate on broader issues of the organization. 20
  21. 21. • Managers are motivated to perform more effectively, as they are responsible forincreasing the profit of their unit.• Managers use their imagination, take initiatives to perform more effectively, to increasethe profit of their unit.However, there are certain difficulties associated with the creation of profit centers. Themanagement cannot have considerable control over the different profit centers when decisionsare centralized. The top management has to depend on management control reports which maynot be as effective as the personal knowledge of an operation. There may be no place forcompetent general managers in a functional organization because of lack of opportunities forthem to develop creative management skills.Organizational units compete with one another, and this may, sometimes, result in conflictbetween different centers and reduction in cooperation between different units and sharing ofresources.Types of profit centersFunctional units can be classified as different types of profit centers. A multibusiness companycan be divided into independent profit generating units such as marketing, finance,manufacturing etc. The decisions regarding whether a particular functional unit can be a profitcenter depends on the responsibility center managers ability to influence, if not control, otheractivities that affect the companys bottom line. The different types of profit centers arediscussed below:Marketing: A marketing activity becomes a profit center if it is charged with the cost of theproducts sold. A marketing activity can be given the responsibility of making profit when themarketing manager has the authority to make principal cost/revenue trade off in terms ofmarketing a product, spending on sales promotion, the appropriate time for this expenditure and 21
  22. 22. on which media to spend.Manufacturing: This is an expense center and the management of activities here is based onperformance against standard costs and overhead budgets. Problems in measurement may occurbecause of inadequate quality control, shipping of inferior quality products, and so on, to obtainstandard cost credit. At times, there may arise the need to accommodate an order in-betweenproduction schedules, and the manufacturing managers may be reluctant to interrupt theseschedules. In manufacturing units, when performance is measured against standards, there maybe no incentives for manufacturing products that are difficult to produce. These factors maydemotivate the managers, and eventually, they may not try to improve standards. Hence, whilemeasuring the performance of manufacturing activities against standard costs, it is important totake into consideration quality control, production scheduling and the make or buy decisions.Measuring profitability: Profitability measurements in a profit center can be of two types-management performance and economic performance. Management performance focuses onthe manager’s performance while economic performance relates to how well a profit center isperforming as an economic entity. Management performance is a measure used for planning,controlling and coordinating the day-to-day activities of the profit center. The performancemeasures of profit centers can be different and hence, the necessary purpose for the informationshould not be obtained from a single set of data. For example, the management performancereport can show excellent performance of a profit center manager. But the economic andcompetitive forces for that particular report can show poor economic performance. As a result,the center may run into losses and may even have to close shop.Types of profitability measures: The parameters that can be used for measuring the profitability of a profit center arecontribution margin, direct profit, controllable profit, income before taxes and net income.Contribution margin: This performance measure is used on the premise that, since fixedexpenses are not controllable by the manager, the focus should rest on maximizing thedifference between revenues and variable expenses. The problems of using contribution marginis that since many of the center’s expenses may vary according to the discretion of the profit 22
  23. 23. center manager, focus on the contribution margin tends to direct the attention of the profit centermanager away from the goals of the center.Direct profit: This measure helps in understanding the contribution of the profit center to thegeneral overhead profit of the corporation. It encompasses all the expenses directly incurred byprofit centers or related to profit centers, irrespective of whether the expenses are controllableby the profit center manager. However, it does not include corporate expenses.Controllable profit: The headquarters expenses in an organization can be divided into twocategories-controllable and uncontrollable. Controllable expenses include expenses that arecontrolled by the business unit manager. The advantage of including such costs in themeasurement system is that the profit will be calculated after the deduction of expenses that canbe influenced by the profit center manager. Hence, these are controllable profits. Asuncontrollable headquarters expenses are taken into consideration while calculatingcontrollable profits, controllable profits cannot be compared directly with published data orwith trade association data, which report the profits of other companies in the industry.Income before taxes: In this method, all corporate overhead profit is allocated to the profitcenter. The amount of expense incurred by each profit center forms the basis of allocation ofprofit. Such allotment has its own drawbacks. Firstly, the costs in departments like finance, andHR are not controllable by the profit center and hence, profit centers should not be heldaccountable for such costs. Also, it is difficult to quantify the amount that has been spent onhuman resources in each profit center. However there are certain advantages in allocating costs.Corporate service units often have a tendency to spend lavishly to make their units as excellentas possible without paying due attention to the value they create for the company. Once suchcosts are allocated to profit centers, the profit center managers will try to keep a check on theexpenditure. The performance of profit centers is easily comparable to that of competitors’performance who pay for similar services. 23
  24. 24. Since the profit center can earn profit only when it has recovered all its costs, includingallocated corporate overhead costs, the profit center manager will be motivated to make long-term marketing decisions such as pricing, product mix, and so on, because the center will haveto recover its share of corporate overhead costs.For profit centers to function with the allocated costs in mind, it is important that they areallocated budgeted costs, and not actual costs. This ensures that the profit center managers willperform without complaining about the arbitrariness of the allocated costs, since there would beno variances in the allocated overheads in the performance reports.Net income: The performance is measured by taking into consideration the net income after thepayment of taxes. The disadvantage of using this method is that many decisions that have animpact on the income taxes are made at headquarters, and profit center managers should not bejudged by these decisions. If the income after tax payment is constant percentage of the incomebefore tax payment, then there would be no need to measure performance based on this method.This method would be useful if profit centers influence decisions like installing credit policiesor disposing of equipment. This method is also useful to motivate the manager to minimizetaxes in case the taxable income differs from income, as measured by using generally acceptedaccounting principles. The performance of profit centers can be measured by comparing actualresults with one or more of the measures discussed above with budgeted amounts. In addition,data on competitors and industry provide a good crosscheck on the appropriateness of thebudget.Investment centersAn investment center has control over sales revenues and operating costs, and the assets used togenerate profit. An investment unit manager must be in a position to influence the size of theinvestment and profit variables. An investment center is a measure of economic performance,and it analyzes all elements of profit and investment. The objective of this center is to maximizeprofit, given the amount of investment required to generate the profit. 24
  25. 25. Cost centersThe objective of cost center is to minimize the variance between standard costs and actual costs.A cost center is a production or service function, activity or item of equipment the costs ofwhich may be attributed to cost units. Cost centers are basically related to costs, and not to therevenues or assets and liabilities of the organization. A cost center is a separateorganizational unit for which separate cost allocation is done. A cost center forms the basis forbuilding up cost records for cost measurements, budgeting and control. From a functional pointof view, a cost center is a production cost center (where only production is undertaken like aassembly department), a service cost center (offering service to production departments likepersonnel, accounting etc.,) or an ancillary manufacturing center (producing packing materials). Chapter No. 3 Segment Reporting and ProfitabilityDecentralization and segment reporting A segment is a part or activity of an organization about which managers need to knowcost, revenue or income data. Examples of segments include divisions of a company(responsibility centers), sales territories, projects, product families, individual stores, programs,operational departments, individual customers, services categories and product lines. Effective decentralization requires segment reporting, so the companywide incomestatement, reports are needed for individual segments of the organizations. These segmented 25
  26. 26. income statements are useful in analyzing the profitability of segments and measuring theperformance of segment managers. A different kind of income statement is required for evaluating the performance of a costcenter, a profit center or an investment center. This income statement should emphasize on thesegment rather than the performance of the company as a whole. A contribution margin or aresidual contribution margin, format income statement is used to evaluate the performance ofdifferent types of segments. In a contribution margin format income statement cost of the segment consists only ofthe direct costs (variable and fixed costs). To prepare an income statement for a particularsegment variable costs are traced for the resources which use depends of the degree of theactivity of the segment and the fixed costs don´t depends of the degree of the activity, but arerelated with the segment. This fixed cost are designated by traceable fixed and are assigned tothe segments but non-traceable or common fixed costs are not assigned to segments.Segment Contribution Margin The segment contribution margin is obtained by deducting the variable and the traceablefixed costs from the segment revenues. It represents the margin that is available after a segmenthas covered all of its own costs. The segment contribution margin can be the best gauge of thelong-run profitability of a segment, since it includes only those costs that are caused by thesegment. If a segment cannot cover is own costs, then that segment probably should not beretained (unless it has an important side effects on other segments or is strategic relevant). From a decision making point of view, the segment contribution margin is most useful inmajor decisions that affect capacity such as dropping a segment, including decisions relating toshort-run changes in volume, such as pricing special orders that involve utilization of existing 26
  27. 27. capacity.Example As an example, a segmented report is shown, where the segments have been defined asdivisions. Report also has a column of total company performance for the period. We can seethat divisional segment margin is Rs60,000 for business product division and Rs40,000 for theconsumer product division. This report is very useful for companys divisional managers theymay want to know how much each of their divisions is contributing to the companys profit.Segments defined as divisions (values in mRs):Total __Segments_____ _ Company Division A Division BRevenues (ex: sales) 100,000 60,000 40,000Variable expenses:Cost of goods sold 36,000 24,000 12,000Other variable expenses 10,000 6,000 4,000Total variable expenses 46,000 30,000 16,000Margin 54,000 30,000 24,000Traceable fixed expenses 34,000 18,000 16,000Divisional Contribution margin 20,000 12,000 8,000Common fixed expenses (nottraceable to the individual divisions)17,000Net operating income 3,000 27
  28. 28. Traceable and Common Fixed Costs One of the most puzzling aspects of segmented income statements is probably thetreatment of fixed costs. While preparing segmented income statements the fixed cost is dividedinto two parts, one is traceable fixed cost and other is common fixed cost. Only traceable fixedcosts are assigned to the segment. If a cost is not traceable then it is not assigned to segments.Following paragraphs define explain these two types of fixed costs.Traceable fixed cost: A traceable fixed cost is a fixed cost that is incurred because of the existence of asegment. If the segment had never existed, the fixed cost would have not been incurred; and ifthe segment were eliminated, the fixed cost would disappear.Examples:Examples of traceable fixed costs: The salary of the Division A manager is a traceable fixed cost of the Division A.  Therenting of the equipment to produce exclusively the “Product Line P”, is a traceable fixed costof the Product Line P. The depreciation of a car for rent is a traceable fixed cost of the “renting business” in a rent acar company.Common fixed cost: A common fixed cost is a fixed cost that supports the operations of more than onesegment, but is not traceable in whole or in part to any one segment. Even if a segment wereentirely eliminated, there would be no change in true common fixed cost.Examples: 28
  29. 29. Example of common fixed cost includes the following: The salary of general manager who controls all the segments. The salary of CEO atTELECOM is also an example of common fixed cost. No single segment can be regarded as thesole reason of this cost. The salary of receptionist at an office shared by a number of doctors is a common fixed costof the doctors. The cost is traceable to the office, but not to any one of the doctors individually. Identifying traceable and common fixed costs is crucial in segment reporting, since thetraceable fixed costs are charged to the segments and common fixed costs are not charged tosegments. In actual situations, it is sometimes hard to determine whether a cost should beclassified as traceable or common. The general guideline is to treat as traceable costs only thosecosts that would disappear over time if the segment itself disappeared. Fixed cost that is traceable to one segment is, usually, a common cost for anothersegment. For example, one Trading Company might want a segmented income statement thatshows the segment margin for each territory where is operating and for each client. The fixedterritory manager salary is a traceable fixed cost of one territory, but it is a common fixed costof the client segment of that territory. So, traceable and common cost is relative concepts.Problems to Proper Cost Assignment in Segmented Reporting: For segment reporting to accomplish its intended purposes, costs must be properlyassigned to segments. If the purpose is to determine the profits being generated by particularsegment or division, then all of the costs attributable to that division or segment--and only thosecosts--should be assigned to it. Unfortunately, three practices greatly hinder proper costassignment:Omission of costs: 29
  30. 30. The costs assigned to a segment should include all costs attributable to that segmentfrom the companys entire value chain. The value chain consists of major business functions thatadd value to a companys products and services. All of these functions, from research anddevelopment, through product design, manufacturing, marketing, distribution, and customerservice, are required to bring a product or service to the customer and generate revenues.Inappropriate methods for allocating costs among segments: Cost distortion, occurs when costs are improperly assigned among a companys segment.Cross-subsidization can occur in two ways; first, when companies fail to trace costs directly tosegments in those situations where it is a feasible to do so; and second, when companies useinappropriate bases to allocate costs. Costs that can be traced directly to a specific segment of a company should not beallocated to other segments. Rather, such costs should be charged directly to the responsiblesegment. For example, the rent for a branch office should be charged directly against the branchoffice rather than included in a companywide overhead pool and then spread throughout thecompany.Some companies allocate costs to segments using arbitrary bases such as sales value or cost ofgoods sold. For example, under the sales value approach, costs are allocated to the varioussegments according to the percentage of company sales generated by each segment. If a segmentgenerates 20% of total company sales, it would be allocated 20% of the companys overheadsexpenses as its fair share. This same basic procedure is followed if cost of goods sold or someother measure is used as the allocation base. For this approach to be valid, the allocation basemust actually drive the overhead cost. Or at least the allocation base should be highly correlatedwith the cost driver of the overhead cost. For example, when sales value is used as the allocationbased for SG&A expense, it is implicitly assumed that overheads expenses change in proportionto change in value sales. If that is not true, the allocated expenses to segments will bemisleading. 30
  31. 31. Arbitrarily dividing common costs among segments The third business practice that leads to distorted segment costs is the practice ofassigning no traceable costs to segments. For example, some companies allocate the costs of thecorporate headquarters building to products on segment reports. However, in a multiproductcompany, no single product is likely to be responsible for any significant amount of this cost.Even if a product were eliminated entirely, there would usually be no significant effect on anyof the costs of the corporate headquarters building. There is no cause and effect relation betweenthe cost of the corporate headquarters building and the existence of any one product. As aconsequence, any allocation of the cost of the corporate headquarters building to the productsmust be arbitrary.Residual Income Residual income is the net operating income that an investment center earns above theminimum required return on its operating assets. Residual income is a consistent approach tomeasuring an investment centers performance. Economic Value Added (EVA) is an adoption ofresidual income that has recently been adopted by many companies. When residual income orEVA is used to measure managerial performance, the objective is to maximize the total amountof residual income or EVA.Example For the purpose of illustrating, consider the following data for an investment center of acompany.Basic Data for Performance Evaluation 31
  32. 32. Average operating assets Rs 80,000Net operating income Rs18,000Minimum required rate of return15% The company has long had a policy of evaluating investment center managers based onROI, but it is considering a switch to residual income. The following table shows how theperformance of the division would be evaluated under each of the two methods:Alternative PerformanceMeasures ROI Residual Income1. Average operating assets Rs 80,000 Rs 80,0002. Net operating income Rs 18,000 Rs 18,000ROI, (2) ÷ (1) 22,5%Minimum required return (15% Rs 12,000Rs80,000) Rs 6,000Residual incomeComparison of return on investment (ROI) and residual income: One of the primary reasons why controllers of companies would like to switch from ROIto residual income has to do with how managers view new investment under the two 32
  33. 33. performance measurement schemes. The residual income approach encourages managers tomake investments that are profitable for the entire company but that would be rejected bymanagers who are evaluated by ROI formula. To illustrate consider the data mentioned above and further suppose that the manager ofthe division is considering purchasing a machine. The machine would cost Rs 25,000 and isexpected to generate additional operating income of Rs 4,500 a year. From the stand point of thecompany, this would be a good investment since it promises a rate of return of 18% [(Rs4,500 /Rs25,000) ×100], which is in excess of the companys minimum required rate of return of 15%.If the manager of the division is evaluated based on residual income, he would be in favor of theinvestment in the machine as shown below.Performance evaluated using residual income Present New Project OverallAverage operating assets Rs 80,000 Rs 25,000 Rs 105,000Net operating income Rs 18,000 Rs 4,500 Rs 22,500Minimum required return Rs 12,000 Rs 3,750 Rs 15,750 Rs 6,000 Rs 750 Rs 6,750Residual income Since the project would increase the residual income of the division, the manager wouldwant to invest in the new machine. Now suppose that the manager of the division is evaluated based on the return oninvestment (ROI) method. The effect of the machine on the divisions ROI is computed asbelow:Performance evaluated using residual income Present New project Overall 33
  34. 34. Average operating assets (1) Rs 80,000 Rs 25,000 Rs105,000Net operating income (2) Rs 18,000 Rs 4,500 Rs 22,500ROI, (2) ÷ (1) 22,5% 18% 21,4% The new project reduces the ROI from 22, 5% to 21,4%. This happens because the 18%rate of return on the new machine, while above the companys15% minimum rate of return, isbelow the divisions present ROI of 22,5%. Therefore the new machine would drag thedivisions ROI down even though it would be a good investment from the standpoint of thecompany as a whole. Basically, a manager who is evaluated based on ROI will reject any project whose rateof return is below the divisions current ROI even if the rate of return on the project is above theminimum rate of return for the entire company. In contrast, any project whose rate of return isabove the minimum required rate of return of the company will result in an increase in residualincome. Since it is in the best interest of the company as a whole to accept any project whoserate of return is above the minimum rate of return, managers who are evaluated on residualincome will tend to make better decisions concerning investment projects than manager who areevaluated based on ROI. So, in financial point of view, residual income leads managers to takedecisions more aligned with overall company interest. Residual income is more convergent thanROI. 34
  35. 35. Chapter No. 4 ROLE IN PRACTICING A PERFORMING MANAGEMENTA responsibility centre corresponds to an inferior level of responsibility for the enterprise and, inthe same time, it is the base for calculating the performances of the one responsible with theaccomplishment of the undertaken tasks. From the economic viewpoint, the responsibilitycentres can be classified into profit centres and costs centres. The profit centres can beconsidered those divisions of an enterprise, which are realizing in fact the outlet, such as thebasis wards. The costs centres are those divisions of an enterprise, which are determining onlythe expenses (costs). From budgeting the profit and cost centres, meaning the responsibilitycentres, we can forecast the complete posts regarding the determination of the supplying prices.The budget laying down methodology supposes the following steps: A. Elaborating the outletcost’s budget; B. Elaborating the general administrating expenses budget; C. Elaborating themarketing expenses budget. Enterprise’s goals achievement is materialized for each structural level, which imposesthe forecasts’ study on enterprise’s divisions, called responsibility centres. The responsibility centre is regarded as “an interconnected elements ensemble, which isforming an entirety, having a certain autonomy level in using and optimizing the resourcesavailable”. 35
  36. 36. A responsibility centre corresponds to an inferior level of responsibility for theenterprise and, in the same time, it is the base for calculating the performances of the oneresponsible with the accomplishment of the undertaken tasks. Usually, a responsibility centre can be assimilated to a managerial entity having precisestructural characteristics. It is defined as an ensemble in one physic person’s responsibility, asan official service provided with self-means, which are allowing it to accomplish its attributionsand goals. Considering that available grouping of the responsibility centres are not valid if the unitsspecific and their structure relieve a diversity of possibilities. Some authors delimitate partial and global responsibility centres depending on the mainpurchases. From the economic viewpoint, the responsibility centres can be classified into:- Profit centres;- Costs centres. The profit centres can be considered those divisions of an enterprise, which are realizingin fact the outlet, such as the basis wards. It is the strategic link where we can calculate theprofit as a difference between the revenues and expenses. The costs centres are those divisions of an enterprise, which are determining only theexpenses (costs) - in this case we can control only the costs’ level. The responsibility centresstructure can be illustrated as it follows in the next diagram: 36
  37. 37. Figure no. 1. Responsibility centres structuring into profit and costs centres. Regarding the costs calculation depending on costs’ centres, we have to specify that, thestructure is particular depending on the outlet’s specific and enterprise’s organizationalframework. The costs centres represent “the enterprise’s technique, productive, organizationaland managing frame’s divisions, depending on which is organized the planning and analyticsupervising of the outlet expenses”. The concrete result of the outlet process is individualized incosts’ calculation, designated as “costs’ bearers, represented through products, works andservices obtained in the outlet process, which have generated the exploitation expenses forwhich the cost is determined and the activity’s supervising is realized also”. The costs’calculation structure regards the costs’ centres (productive wards) in which the costs areallocated on different bearers. The costs bearer accomplishes the individual costs identifying function, as well as thecontrol function regarding the enterprise’s activity volume. Excepting the costs and profit centres there are revenues centres, as divisions generating 37
  38. 38. revenues (for example, the sells department) or investment centres, which reflects the revenuesfrom the outlet selling, and as well, the investments done for the outlet finality. The profit centres are the ones that generate revenues able to cover entirely the activity’sexpenses, and finally obtaining an over income, meaning a profit. The cost centres have only maximum limits for the expenses that are ensuing from anormal activity. From budgeting the profit and cost centres, meaning the responsibility centres, we canforecast the complete posts regarding the determination of the supplying prices. The budgetlaying down methodology supposes the following steps:A. Elaborating the outlet cost’s budget (ward cost), which includes- Raw materials direct expenses’ budget;- Salaries and accessories direct expenses budget;- Outlet indirect expenses budget (outlet administrating expenses);B. Elaborating the general administrating expenses budgetC. Elaborating the marketing expenses budget.Synthetically the complete commercial cost’s budget can be presented as it follows: 38
  39. 39. Figure no. 2. Complete Commercial Cost’s BudgetA. The complete commercial cost’s budget can be determined by using the followingmathematical models:1) BCCC = BOC + BGAE + BMEWhere:BCCC - Complete Commercial Cost’s Budget; BOC - Outlet Cost’s Budget;BGAE - General Administrating Expenses’ Budget; BME - Marketing Expenses’ Budget.Outlet Cost’s Budget (BOC) - it includes the direct outlet expenses’ budget and indirect outletexpenses’ budget, and is calculated as it follows:2) BOC = BDE + BOIEWhere: 39
  40. 40. BDE - Direct Expenses’ Budget; BOIE -Outlet Indirect Expenses’ Budget.Direct Expenses’ Budget (BDE) includes the raw materials direct expenses’ budget and the directsalaries expenses’ budget. So:3) BDE = BRMDE + BSDEWhere:BRMDE - Raw Material Direct Expenses’ Budget; BSDE - Salaries Direct Expenses’ Budget.Raw Material Direct Expenses’ Budget (BRMDE) - is determined based upon the technologicalconsumption’s norms and the acquisition/outlet’s costs of the raw materials and direct materials.4) BRMDE = Q * ? nci * ciWhere:Q - Fabricated product quantity;nci - Technological consumption norm for i material; ci - Acquisition/outlet cost for the imaterial; n - Used materials’ number.The budget’s measure determined before considers the finished good obtained quantity. For theaverage (per unit) determination of the budget we report the obtained amount at the outlet’svolume.Salaries Direct Expenses’ Budget (BSDE) - it is established considering the time norms forrealizing the operations necessary for costs’ bearers outlet and the hourly tariffs correspondingto each operation.5) BSDE = Q * ?nti *tiWhere:nti - time norm corresponding for the i operation; ti - hourly tariff for the i operation; 40
  41. 41. n - The necessary number of operations for the product’s fabricationOutlet Indirect Expenses’ Budget (BOIE) - is determined for each ward separately. It supposesthe added of the installations maintenance and functioning expenses with the general expensesof the ward, as it follows:6) BOIE = BMFE + BWGEWhere:BMFE - Installations Maintenance and Functioning Expenses’ Budget; B WGE - Ward’s GeneralExpenses’ Budget.At the enterprise’s level the total outlet indirect expenses’ budget is obtaining through theaddition of the outlet indirect budget with the outlet wards budgets. Mathematically:7) BTOIE = BOIE1 + BOIE2 + … + BOIEn = ? BOIEiWhere:BTOIE - Total Outlet Indirect Expenses’ Budget; BOIEi - Outlet Indirect Expenses’ Budget for thei ward; n - The enterprise’s wards number.If we consider the two elements of the outlet indirect expenses’ budget, then the formula aboveis becoming:8) BTOIE = ? BOIEi = ? (BMFEi +BWGEi)Where:BTOIEi - Installations Maintenance and Functioning Expenses’ Budget for the i ward; B WGEi -Ward’s General Expenses Budget for the i ward.Installations Maintenance and Functioning Expenses’ Budget (BMFEi) - includes: -Technological installations and transportation means’ maintenance and functioning,technique reviews and current reparations expenses for the ward; 41
  42. 42. - Expenses regarding the depreciation of the technologic installations and transportation meansof the ward;- Expenses regarding the depreciation of the special destination installations and the inventoryobjects of the ward;- Expenses regarding the energy, fuel and other expenses with the materials used fortechnological goals of the ward;- Other expenses regarding the installations’ maintenance and functioning and thetransportation means of the ward.Ward’s General Expenses Budget (BWGE) - includes two budgets: the general interest expenses’budget of the ward and husbandry expenses’ budget.The first one includes:- Expenses regarding the salaries and the salaries’ accessories of the managing, technique,economic and other specialty personnel;- Expenses regarding the current reparations of the buildings and other means of generalinterest of the ward, as well as the capital reparations of the buildings and ward’s fixed means;- Expenses regarding the buildings and other ward’s fixed means’ depreciation; - Expensesregarding labor protection inside the ward;- Other general interest expenses of the ward. The second budget includes:- Expenses regarding maintenance and cleaning of the husbandry buildings of the ward; -Expenses regarding the energy for husbandry use; 42
  43. 43. - Expenses regarding water, sanitation and for the husbandry needs of the ward; - Expensesregarding the office materials for the ward’s needs;- Expenses regarding the magazines, books, publications and subscriptions for the ward’s needsand the Post’s expenses;- Other husbandry expenses of the ward.B. General Administrating Expenses’ Budget (B GAE) includes the entirety of the generalinterest expenses and the enterprise’s husbandry expenses.1) BGAE = BEGIE + BEHEWhere:BEGIE - Enterprise’s General Interest Expenses’ Budget; BEHE - Enterprise’s HusbandryExpenses Budget.the Enterprise’s General Interest Expenses’ Budget (B EGIE) - are included: - Expensesregarding the salaries and salaries accessories of the managing, technique, economic, otherspecialty, administrative, service and security personnel of the enterprise; - Expenses regardingthe buildings current reparations; Expenses regarding the depreciation of the enterprise’s fixed means; - Expenses regarding theresearches, experiences, studies, investments and general interest innovations;- Expenses regarding the general labor protection; - Expenses regarding enterprise’s interestrates;- Other enterprise’s expenses (personnel transportation’s cost, buildings’ taxes, insurancepolicies).The Enterprise’s Husbandry Expenses’ Budget (BEHE) includes: - Expenses regarding theoffice’s materials; 43
  44. 44. Expenses regarding the acquisition of books, magazines and subscriptions; - Expensesregarding the business travels, detaches or transfers in the country with or without trips abroadfor the company’s interest;- Expenses regarding the energy consumption for husbandry goals; - Post’s expenses of theenterprise;- Expenses regarding the water, sanitation for management and husbandry purposes; - Othersexpenses for enterprise’s husbandry. Depending on the services number and complexity (finances, marketing, personnel)offered by the management can be laid down two or more budgets. Regarding the smallcompanies it can be only one budget.C. Marketing Expenses’ Budget (BME) includes the entirety of expenses generated by theoutlet selling process, such as:- Expenses regarding the products’ transportation and manipulation, products that are deliveredto the internal customers;- Internal transportation, manipulation, storage, reconditioning and clearance expenses of theproducts delivered for export;- Wrapper expenses for the delivered products; - Advertising expenses. Chapter No. 5 Transfer Pricing When an organization has a decentralized structure, it has several separate profitcenters1. Goods and services are transferred internally from one profit center to another, beforethe final product/service is brought to the market. Companies find it useful to account for thevalue of goods and services exchanged, even if the exchange is only internal and does notinvolve the market at all. This helps the company to assess the contribution of each of the profit 44
  45. 45. centers separately. To help in such assessment, a mechanism called transfer pricing has beendeveloped. Transfer pricing helps to determine the value of goods and services transferredbefore calculating the profits of the company. A transfer price is defined as “the price that isassumed to have been charged by one part of a company for products and services it provides toanother part of the same company, in order to calculate each divisions profit and lossseparately.” In this chapter we will discuss the objectives of transfer pricing, various methodsof transfer pricing and ways of administering these prices.PRINCIPLE OF TRANSFER PRICINGThe fundamental principle of transfer pricing is that the “transfer price should be similar to theprice that would be charged if the product were sold to outside customers or purchased fromoutside vendors”.Goal CongruenceWhile designing the mechanism for transfer pricing, the interests of profit centers should neithersupersede the interests of the overall organization, nor should there be a clash of interestsbetween the organization and its profit centers. In other words, there should be goal congruencybetween profit centers and parent organization. Some of the prerequisites for achieving goalcongruency are: • Competent people • Good organizational atmosphere • Details of market prices • Freedom to source • Availability of informationOrganizations need managers who can balance long-term and short-term goals. Managers areoften accused of sacrificing long-term gains for shortterm profits. This approach can provedisastrous for the organization. Transfer pricing can be misused for manipulating profits, andthis gives a wrong picture of the position of the company. Hence, organizations should havecompetent people skilled at negotiation and arbitration, who are capable of determining theappropriate transfer prices. This makes goal congruency possible. 45
  46. 46. Good atmosphereIn order to achieve goal congruency, managers of profit centers, especially the buying profitcenters, should ensure that the transfer prices charged by the selling profit centers are just. Thiswill create an atmosphere of trust between selling profit center and buying profit centers.Details of market pricesWhen a product is transferred from one profit center to another, the normal market price for theidentical product can be taken as the basis for establishing the transfer price. The market priceshould reflect the same conditions in terms of quantity, quality, time for delivery, etc. ascharacterize the product to which the transfer price applies. The market price can be adjusted toreflect savings due to lower expenses on advertising and marketing as the product is sold withinthe company.Freedom to sourceManagers of selling profit centers should be given freedom to sell their goods in the externalmarket, while managers of buying profit centers should be allowed to buy their goods from theexternal market. Thus the market becomes the main determinant of the transfer price.Availability of informationManagers should be fully aware of market conditions and should have all the necessaryinformation available to them, before they take any decision. For example, managers should beaware of the alternatives available and the relevant costs of and revenues derivable from eachalternative.Scope for negotiationThere must be a mechanism for negotiating contracts, and managers who take transfer pricingdecisions should be trained in negotiation.If all the above conditions are met, then companies can devise a mechanism for transfer pricingbased on the market price. But quite often these conditions are not fulfilled, and it becomesdifficult to achieve goal congruency. Some situations that are not favorable for achieving goal 46
  47. 47. congruency are:• Limited markets• Excess or shortage of capacity in the industryLimited marketsMarkets for buying and selling the goods of the profit centers may be either very small ornonexistent. Some of the reasons for this are:Firstly, the profit center may have spare internal capacity, but may not wish to make anyexternal sales. Secondly, if the company is the sole producer of a differentiated product thenoutside capacity does not exist. Thirdly, a company that has invested heavily in facilities willnot want to source goods from outside unless the selling price in the market is as low as its ownvariable cost.Excess or shortage of industry capacityThere may be situation of excess capacity or shortage of capacity in the industry. The sellingprofit center does not sell in the outside market when there is excess capacity in the industry.The buying profit center may purchase from outside vendors even though there is capacityavailable inside the company. Thus the company, as a whole, may not be optimizing its profits.In a situation of insufficient capacity in the industry, the buying profit center may be unable toobtain products it needs from the external market, whereas the selling profit center is able tomake profits by selling the product in the external market. This situation occurs when demand ishigh and industry capacity is low. Here also, the company, as a whole, may not be able tooptimize profits.Sourcing constraintsWhen there is an excess or shortage of industrial capacity, the sourcing decisions taken by thecompany are vital. A company may allow its buying profit center to buy goods from outside, ifthe profit center is getting a better deal in terms of quality, price and service. In the same way, aselling profit center may be allowed to sell its products in the open market if it gets a betterprofit by selling in the market. Whatever be the case, the management should not get bogged 47
  48. 48. down by pressures within the company and should try to take decisions that optimize the profitof the company.METHODS OF CALCULATING TRANSFER PRICEMethods used for calculating the transfer price differ from company to company. Companiesshould evaluate all the methods before adopting one that is most suitable for them. Thefollowing criteria should be used to evaluate the methods for calculating transfer price.Goal congruence: As already discussed, transfer prices should balance between goals ofenterprise as a whole and its profit centers. Rationality: Transfer prices should not interfere withthe process by which the buying center manager rationally strives to minimize costs and theselling center manager rationally strives to maximize revenues.Transfer PricingAutonomy: Each profit center manager should be free to satisfy his center’s needs eitherinternally or externally at the best possible price. Performance evaluation: Transfer pricingshould aid in objective evaluation of the activities of the profit center. It should be used as a toolfor making proper decisions. It should also aid in appraisal of managerial performance and ofthe enterprise as a whole.The three methods of calculating transfer price that are used commonly are:• Market-based pricing method• Cost-based pricing method• Negotiated pricing methodMarket-Based Pricing Method 48
  49. 49. Companies that use this method price the goods and services they transfer between their profitcenters at a price equal to that prevailing for those goods and services in the open market. Thisis similar to ‘arm’s length’ pricing as intracompany transfers are priced the same as those forexternal customers. Market-based pricing method has two main advantages for a company.Firstly, business units can operate as independent profit centers with the managers of these unitsbeing responsible for their own performance as well as that of the business unit. When managersare made responsible for performance of the business unit, it increases their motivation and italso becomes easier for the headquarters to assess the actual operating performance of itsbusiness units. Secondly, tax and customs authorities favor the market price method because itis more transparent and they can crosscheck the price details provided by the company bycomparing them with market prices on that date. In practice, however, the use of a market priceas a benchmark is difficult because often there is no competitive market which can provide acomparable price. For some types of complex capital equipment, an external market may notexist at all. In some cases, prices may be distorted by monopoly elements. Moreover, adefinitive market price may be difficult to determine because of variance in prices from onemarket to another due to changes in exchange rates, transportation costs, local taxes and tariffsetc. In addition, a company may set its selling price depending on the supply and demandconditions prevalent in a specific market. In sum, these factors mean that a unique market pricefor companies to follow does not always exist.Cost-Based Pricing MethodThe cost-based pricing method calculates transfer price on the basis of the cost of a good orservice. The cost of a good or service is available in the cost accounting records of the company.This method is generally accepted by the tax and customs authorities since it provides someindication that the transfer price approximates the real cost of item. Cost-based approaches are,however, not as transparent as they may appear. A company can easily manipulate its costaccounts to alter the magnitude of the transfer price. Companies that adopt the cost-basedtransfer pricing method have to choose between alternative approaches, which are listed below:• Actual costs approach• Standard costs approach• Variable costs approach 49
  50. 50. • Marginal costs approachApart from this, companies also have to decide on the treatment of fixed costs, and research anddevelopment costs. These issues can prove problematic for the company that adopts a cost-basedtransfer pricing method. Cost-based methods usually create difficulties for the selling profitcenter, as their incentive to be cost-effective may fall, if they know that they can recoverincreased costs simply by raising the transfer price. Without an incentive to produce efficiently,the transfer price may erode the competitiveness of the final product in the market place.Negotiated Pricing MethodIn this approach, buying and selling business units freely negotiate a mutually acceptabletransfer price. Since each unit is responsible for its own performance, this will encouragecost minimization and encourage the parties to seek a transfer price which yields them anappropriate profit return. However the tax authorities have their reservations about this methodbecause companies that use this method have greater scope of manipulating transfer prices, tominimize their tax liability. Chapter No.6 RESEARCH METHODOLOGYResearch is a systematic method of finding solutions to problems. It is essentially aninvestigation, a recording and an analysis of evidence for the purpose of gaining knowledge.According to Clifford woody, “research comprises of defining and redefining problem, 50
  51. 51. formulating hypothesis or suggested solutions, collecting, organizing and evaluating data,reaching conclusions, testing conclusions to determine whether they fit the formulatedhypothesis”Sampling Design.A sample design is a finite plan for obtaining a sample from a given population. Simple randomsampling is used for this study.Universe.The universe chooses for the research study is the employees of Lubrizol India Pvt Ltd.Sample Size.Number of the sampling units selected from the population is called the size of the sample.Sample of 50 respondents were obtained from the population.Sampling Procedure.The procedure adopted in the present study is probability sampling, which is also known aschance sampling. Under this sampling design, every item of the frame has an equal chance ofinclusion in the sample.Nature of Research.Descriptive research, also known as statistical research, describes data and characteristics aboutthe population or phenomenon being studied. Descriptive research answers the questions who,what, where, when and how.Although the data description is factual, accurate and systematic, the research cannot describewhat caused a situation. Thus, descriptive research cannot be used to create a causalrelationship, where one variable affects another. In other words, descriptive research can be saidto have a low requirement for internal validity.Questionnaire. 51
  52. 52. A well defined questionnaire that is used effectively can gather information on both overallperformance of the test system as well as information on specific components of the system. Adefeated questionnaire was carefully prepared and specially numbered. The questions werearranged in proper order, in accordance with the relevance.SampleA finite subset of population, selected from it with the objective of investigating its propertiescalled a sample. A sample is a representative part of the population. A sample of 50 respondentsin total has been randomly selected. The response to various elements under each questionswere totaled for the purpose of various statistical testing.Presentation of Data.The data are presented through tablesResearch HypothesisBased on the theoretical frame and the previous studies, the following hypotheses were formed:HO1: the Lubrizol India Pvt. Ltd. do not divide the organizational structure into centers of 52
  53. 53. responsibility.HO2: the Lubrizol India Pvt. Ltd. do not authorize the managers of responsibility centers withclear powers.HO3: the costs and the revenues are not distributed to the centers of responsibility according toeach center’s capability and powers in the Lubrizol India Pvt. Ltd.HO4: the Lubrizol India Pvt. Ltd. do not link previously the estimated budgets with the centersof responsibility.HO5: the estimated budgets are not used for control and performance evaluation in the LubrizolIndia Pvt. Ltd.Research For achieving the objectives of the study, the descriptive analytical method was used. Inaddition, the suitable statistical procedures, MS Excel were used for testing the hypotheses andfor presenting and analysis of the data.Methods for Collecting DataThe researcher depended on two kinds of data during collecting itSecondary data: the related studies of auditing about the subject of the study were reviewedfrom different references, magazines, studies, periodicals, etc. for developing the theoreticalbackground of the study.Primary data: the researcher made a comprehensive field survey for the population of the studyby using a questionnaire to collect data and test the hypotheses of the study. The questionnaireconsisted of two parts. The first part aimed at collecting general data to identify thecharacteristics of the sample of the study. The second part aimed at getting data related to study 53
  54. 54. hypotheses.The population and the sample of studyThe population of the study is represented by all the Lubrizol India Pvt. Ltd. of the sample wasrepresented by a random sample consists of 50 assistants of the general managers. 55questionnaires were distributed but 50 were retrieved with a percent 91%. Table (1) The description of the sampleScientific qualification N PortionDiploma 3 6%Bachelor 35 70%Master 10 20%Doctorate 2 4%AgeLess than 25 years 7 14%25-34 8 16%35-44 26 52%More than 45 years 9 18%Practical experienceLess than 5 3 6%5-9 years 9 18%10-14 years 28 56%More than 15 10 20%Job titleAssistant of general manager 2 4%Head of department 8 16%Branch’s manager 18 36%Head section 15 30%Employee 7 14%Statistical analysis of dataThe following statically methods were used to analyze data and test the hypothesis according toSPSS:1- Testing the reliability of the tool of the study: It was used to measure the internal reliability ofthe questionnaire’s items and the internal consistency among the responses of the respondents 54
  55. 55. which was 72% and this value is acceptable as it is higher than 60% so the results could begeneralized.2- Normality Distribution Test: It was used to test the normality of the distribution of data. Andthe results showed that the data was distributed normally. It is illustrated from the table that thesignificance level 5% for all the hypotheses of the study which was bigger than the level ofsignificance Z, was distributed normally. Normality Distribution TestHypothesis 1st 2nd 3rd 4th 5th 6th 7th 0.737 1.176 0.855 1.079 0.945 0.835 0.8293- Testing the hypothesis One Sample T-Test at the level of significance 5% was used to test the hypotheses ofthe study, and according to the rule of the acceptance of the hypotheses if the calculated Twas less than the tabulated one. The descriptive analysis, which includes frequencies meansand the standard deviations of accepting or rejecting the hypothesis, was used. • The first hypothesis: The Lubrizol India Pvt. Ltd. do not divided the organizational structure to centers of responsibility. This hypothesis was tested through the first seven items of the questionnaire, and the results were as follows: Results of testing the first hypothesisT calculated T tabulated Sig Result of null Mean Std hypothesis 11.95 1.96 0 Rejection 3.76 0.451As the calculated T is bigger than tabulated T, this means rejecting the null hypothesis andaccepting the alternative one and the mean of the hypothesis is more than 3 which means it is 55
  56. 56. acceptable. So the Lubrizol India Pvt. Ltd. divide the organizational structure to centers ofresponsibility. And table shows the mean and the standard deviation of the items of the firsthypothesis The items of the first hypothesisN Item Mean Std 1 There is an organizational structure divided 3.96 1.02 into administrative units according the nature of the activity. 2 There is clarity in dividing the work in the 4.02 0.84 administrative units. 3 There is a clear description to the centers of 4.28 0.755 responsibility. 4 There is a coordination and clarity in the 4.2 0.67 relation between the centers of responsibility 5 There is a specialized manager for each 3.88 0.98 center of responsibility. 6 Every center of responsibility has one type 2.44 0.97 of activity 7 The operations inside the center of 3.7 1.05 responsibility are characterized by homogeneity • The second hypothesis: The Lubrizol India Pvt. Ltd. do not authorize the managers of responsibility centers with clear powers. And this hypothesis was tested through the items (8 - 13) of the questionnaire. And the results were as follows: Results of testing the second hypothesis T calculated T tabulated Sig T Result of null Mean Std hypothesis 12.085 1.96 0 Rejection 3.97 0.57 56
  57. 57. As the calculated T is bigger than tabulated T, this means rejecting the null hypothesisand accepting the alternative one and the mean of the hypothesis is more than 3 which means itis acceptable according Lickert scale. So the Lubrizol India Pvt. Ltd. authorized the managers ofresponsibility centers with clear powers. The table showed the mean and standard deviation ofthe items of the second hypothesis: The items of the second hypothesisN Item Mean Std 8 The manager is told his duties in the center of 3.86 0.92 responsibility 9 The manager of the center is granted 3.92 0.98 appropriate authorities to do his work. 10 There is a description and identification of the 3.94 0.99 responsibilities and the authorities of every job 11 The employees of the center of responsibility 4 0.92 have the needed expertise to do their work in the center 12 The manager of the center is given enough 4.02 0.74 time to do their work. 13 The employees’ accountability suits their 4.08 0.96 responsibilities. • The third hypothesis: The costs and the revenues are not distributed to the centers of responsibility according to each center’s capability and powers in the Lubrizol India Pvt. Ltd. This hypothesis through the items (14 - 18) of the questionnaire, and the results were as follows: Results of the third hypothesis 57
  58. 58. T T tabulated Sig T Result of null Mean Stdcalculated hypothesis 11.9 1.96 0 Rejection 3.92 0.54As the calculated T is bigger than tabulated T, this means rejecting the null hypothesis andaccepting the alternative one and the mean of the hypothesis is more than 3 which means it isacceptable according Lickert scale. So there is a distribution of the costs and the revenues to thecenters of responsibility according to each center and its powers in the Lubrizol India Pvt. Ltd.Table showed the mean and the standard deviation of the items of the third hypothesis The items of third hypothesisN Item Mean Std14 All the revenues regarding the center of responsibility are identified and 3.68 0.97 recorded. 15 All the costs regarding the center of responsibility are identified and 4.04 1.009 recorded. 16 There is clarity in the system of comparing the revenues with the costs of the 3.8 1.1 center of responsibility 17 There is a clear policy regarding the indirect costs’ distribution to the 4.1 0.88 centers of responsibility 18 There is a clear and identified system of the costs distribution and the 3.9 0.839 revenues. • The fourth hypothesis: The Lubrizol India Pvt. Ltd. do not link previously the estimated budgets with the centers of responsibility. This hypothesis was tested through the items ( 19-23) of the questionnaire and the results were as follows: Results of the fourth hypothesisT calculated T tabulated Sig T Result of null Mean Std hypothesis 58
  59. 59. 6.805 1.96 0 Rejection 3.37 0.39As the calculated T is bigger than tabulated T this means rejecting the null hypothesis andaccepting the alternative one and the mean of the hypothesis is more than 3 which means it isacceptable according Lickert scale which means that the Lubrizol India Pvt. Ltd. link theestimated budgets with each of the center of responsibility previously. Table 10 showed themean and the standard deviation of the items of the 4th hypothesis The items of the fourth hypothesisN Item Mean Std 19 A clear and a realistic objective is identified 3.8 0.92 for every center of responsibility in the organization complies with the performance standards. 20 Necessary adjustments on the estimated 3.62 0.87 budgets of the centers are carried out wherever there is the need 21 The estimated budgets are prepared 3.48 1.03 regarding every center separately. 22 The organization trains the employees of the 3.65 0.92 centers and encourage them to achieve these centers’ objectives 23 All the employees of the center participate in 2.42 1.21 preparing the center’s budget according to their job • The fifth hypothesis: The estimated budgets are not used for control and performance evaluation in the Lubrizol India Pvt. Ltd. This hypothesis was tested through items ( 24- 28) of the questionnaire and the results were as follows: Results of testing the fifth hypothesis 59
  60. 60. T calculated T tabulated Sig T Result of null Mean Std hypothesis 11.243 1.96 0 Rejection 3.79 0.49 As the calculated T is bigger than tabulated T, this means rejecting the null hypothesisand accepting the alternative one and the mean of the hypothesis is more than 3 which means itis acceptable according Lickert scale. So the estimated budgets are used for control andevaluating the performance in the Lubrizol India Pvt. Ltd. And table 12 showed the mean andstandard deviation of the items of the 5th hypothesis.N Item Mean Std 24 Comparing the employees Actual 3.72 0.99 performance with the planned one in every center facilitates the communication between the administrative levels. 25 Comparing the employees Actual 3.64 0.66 performance with the planned one in every center helps in evaluating the employees’ performance 26 Comparing the employees Actual 3.9 0.9 performance with the planned one in every center provides appropriate information in the proper time. 27 Comparing the actual performance of the 3.88 0.91 employees supports the policies of control. 28 Comparing the employees Actual 3.84 0.97 performance with the planned one in every center aims to 60

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