Page 63 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Since financial controls have little value in managing basic research activities, alternative
procedures are often employed. In some companies, basic research is included as a lump sum in
the research programme and its budget. In some, the specific allowance is made for basic research,
but there is an understanding that scientists and engineers can devote the part of their line for
basic research subject only to the informal agreement of their supervisor.
For projects involving product testing, however, it is possible to estimate the time and financial
requirements - perhaps not as precisely as possible but with sufficient accuracy to permit a
reasonably valued comparison of actual and budget amounts.
As the project moves along the continuum from basic research, to applied research, to
development, to production engineering, to testing the amount spent per year tends to increase
substantially.
R&D Programme: There is no scientific way of determining the optimum size of an R&D Budget.
Many companies use a percentage of average revenues as a base. The specific percentage applied
is determined in part by comparing with competitors’ R&D expenditures and in part by the
company’s own spending history. Depending on the circumstances, senior management may
authorize a large amount in budget if it appears that there has been a significant breakthrough.

The R&D programme consists of list of programmes plus a blanked allowance for unplanned
work; it is usually reviewed annually by senior management. The review is often conducted by
a research committee consisting of CEO, the research director, and the production and marketing
manager. The committee makes broad decisions on the projects to be undertaken, which to
expand, which to cut back and which to discontinue. The total amount of budget is allocated to
different projects, which is highly subjective.
For measurement of performance, the types of financial reports on R & D are prepared. The first
type compares the latest forecast of total cost with the approved amount of each active project
and circulated to executives who control research spending. The second report (financial) consists
of comparison between budgeted expenses and actual expenses in each responsibility centre.
Neither type of reports informs management the effectiveness of the research efforts.

Benchmarking and Cost Management: Benchmarking is the continuous process of comparing
and measuring an organization’s business processes against those of business leaders anywhere
in the world. The objective is to identify and understand best practices; and the best practice is
simply, the best way to execute a process.
We have seen that in engineered expense centre/standard cost centre, finance control is exercised
by setting a standard for performing the task and reporting actual costs against this standard.
While setting the standard, we can get comparable standards from other operating units/
competitors in the process are called benchmarking.
Similarly, in discretionary expense centre, some of the logistic activities e.g. transportation of
the goods from the company to its customers, billing and related credit function and collection
of accounts receivable, can be controlled through setting up standards and budgets that are
adjusted to reflect the costs at different levels of volume. While setting up standards,
benchmarking with other units/competitor unit is possible.
The true power of benchmarking lies in the ability to apply the insight gained from another
organization’s best practices – with the full understanding that it is adapting them or not adapting
them. No single best practice works anywhere. In fact, the term “best practices” is something of
a misnomer.

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