Page 101 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Self Assessment

Multiple Choice Questions:
14. The centres in which inputs or expenses are measured in monetary terms and outputs are
measured in physical terms are called ....................................... .

(a) Discretionary expense centres (b) Engineered expense centres
(c) Principle expense centres (d) Regulatory expense centres
15. Costs such as direct labour and direct material that can be estimated to a reasonable extent
by the management are called ...................................... .
(a) Engineered cost (b) Discretionary costs
(c) Labour costs (d) Product costs



Case Study Nataraj Company

ataraj Company is a highly diversified company which grants its division
executives a significant amount of authority in operating the divisions. Each
Ndivision is responsible for its own sales, pricing, production, and cost of
operations and the management of accounts receivables, inventories, accounts payables
and use of existing facilities. Cash is managed by Corporate headquarters, all cash in
excess of normal operating needs of the divisions is transferred periodically to corporate
headquarters for redistributions or investment.
The division executives are responsible for presenting requests to corporate management
for investment projects. The proposals are analyzed and documented at corporate
headquarters. The final decision to commit funds to acquire equipment, to expand existing
facilities, or for other investment projects is necessitated by Nataraj’s Capital allocation
policy.
The corporation evaluates the performance of division executives by the return on
investment (ROI) measures. The asset base is comprised of fixed assets employed plus
working capital exclusive of cash.
The ROI performance of division executive is the most important appraisal factor for
salary changes. In addition, the annual performance bonus is based on the ROI results,
with increase in ROI having a significant impact on the amount of the bonus.

The Nataraj Corporation adopted the ROI performance measure and related compensation
procedures about 10 years ago. The company did so to increase the awareness of divisional
management of the importance of the profit asset relationship and to provide additional
incentive to the division executives to seek investment opportunities.
The company seems to have benefited from the program. The ROI for the corporation as
a whole increased during the first years of the program. Although the ROI has continued
to grow in each division, the corporate ROI has declined in recent years. The corporation
has accumulated a sizeable amount of cash and short – term marketable securities in the
past 3 years.

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