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MANAGEMENT CONTROL SYSTEMS

AJANTA CHOUDHURY - 02 ASHISH RATHI - 18 NAOMI RODRICKS - 55 Click to edit Master subtitle style - 60 PRITHA PUJARI

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Q.1.

Under which condition management is better advised not to create profit centre. Explain the advantage of creating the profit centre.

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DEFINITION

When a responsibility centres financial performance is measured in terms of profit. i.e. by the difference between the revenues and expenses, the centre is called a profit centre.

GENERAL CONSIDERATIONS

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A functional organization is one in which each principal manufacturing or marketing function is performed by a separate organization unit. such an organization is converted to one in which each major unit is responsible for both the manufacture and the marketing, the process is termed divisionalization.

When

CONDITIONS FOR DELEGATING PROFIT RESPONSIBILITY

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Two conditions should exist:

1. The manager should have access to the relevant information needed for making such a decision.

2. There should be someway to measure the effectiveness of the trade-offs the manager has made.

ADVANTAGES OF PROFIT CENTRES

Establishing

organization units as profit centers provides the following advantages:

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The quality of decisions may improve. The speed of operating decisions may be increased. Headquarters management are relieved of dayto-day decision making.

ADVANTAGES OF PROFIT CENTRES

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Profit centers provide an excellent training ground for general management. Profit consciousness is enhanced. Profit centers provide top management with ready-made information on the profitability of the companys individual components. Profit centers are particularly responsive to pressures to improve their competitive performance.

 However,

the creation of profit centers may cause difficulties:

DIFFICULTIES WITH PROFIT CENTRES

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Loss of control. Quality of decisions may be reduced. Friction may increase Competition Divisionalization may impose additional costs. Competent general managers may not exist in a functional organization. Too much emphasis on short-run profitability Optimize the profits of the company as a whole.

the Salient feature of cost based & market price based transfer pricing method?

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2)Describe

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vTransfer

Pricing :If

two

or

Salient Feature of Cost Based Transfer pricing method

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Salient Feature of Market Based Transfer pricing method

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the economic value added? How is it a superior method over the ROI method?

3)Explain

 Economic

value added is a dollar amount rather than a ratio. It is found by subtracting a capital charge from the net operating profit. This capital charge is found by multiplying the amount of assets employed by a rate. Net profit Capital charge

Economic value added(eva)

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EVA=

Where Capital charge= Capital employed (ROI Cost of Capital)

EVA versus ROI

Same

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profit objective for comparable

investments.
Investments

that produce a profit in

excess of the cost of capital will increase EVA and therefore be economically attractive to the manager.
Different

interest rates may be used for

different types of assets.

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4)What

is Free Cash flow? Enumerate the method of Calculation?

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FREE CASH FLOW:

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Free cash flow is the cash flow actually available for distribution to investor after the company has made all the investment in fixed assets and working capital necessary to sustain ongoing operation. The value of operation depends on all the future expected free cash flows, defined as after- tax operating profit minus the amount of new investment in working capital and fixed assets necessary to sustain the business.

USES OF FCF:

Pay interest to debt holders, keeping in mind that the net cost to the company is the after tax interest expense. Repay debt holders, that is pay off some of debt.

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Pay dividends to shareholders. Repurchase stock from shareholders.

Computation of Free Cash Flow

v

Suppose the company had a 2011 NOPAT of Rs 170.3million and depreciation is only the non cash charge which is Rs 100 million then its operating cash flow in 2011 would be NOPAT plus any non cash adjustment on the statement of cash flows.

Operating cash flow =NOPAT +depreciation (non cash adjustment) = 17.03 + 100 = Rs 270.3 million

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Company has Rs 1,455million operating assets, at the end of 2010, but Rs1,800 at the end of 2011.it made a net investment in operating assets of Net investment in operating assets = Rs 18, 00 Rs 1,455 345million =Rs

If net fixed assets rise from Rs.870 million to Rs.1000 million however company reported Rs.100million of depreciation. So its gross investment in fixed assets would

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Even

though company had a positive NOPAT, its very high investment in operating assets resulted in a negative free cash flow. free cash flow is what is available for distribution to investor, not only was there nothing for investors, but investor actually had to provide additional money to keep the business ongoing. negative current FCF not necessarily bad provided it is due to the high growth or to support the growth. There is nothing wrong with profitable growth; even it causes negative free cash flow in the short

Because

This case examines Nucor's development from an unprofitable conglomerate to a highly efficient enterprise. Nucor became the largest steel producer in the U.S. by 1999 which also marked the end of Ken Iversons tenure Iverson is given the credit for

Nucor corporation (B)

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Getting Nucor off the ground. Establishing its culture. The companys early development.

Board wanted a fundamental shift in Nucors strategy and as a result Aycock brought about number of changes and fundamental shifts in Nucors strategy.

acquisitions, entering into global markets, building blast furnaces, diversifying into non steel areas,

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1) Do you agree that Nucor must undergo a deep change to survive and prosper in the twenty-first century? How do you evaluate the specific shifts in strategy?

Strategy used by Iverson

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Decentralization structure at all division operated autonomously.

Management

was obligated to manage the company in such a way that employees will have the opportunity to earn according to their productivity. outsourced advertising, public and legal relations. technologies pursue and implement cost-saving

Nucor

Aggressively Employ Create More It

incentive compensation that motivate aboveaverage output a low-cost culture

attention to own business than to competitors was their strategy. kept maintaining low cost and efficiency,

NUCORs COMPETITION
Mittal U.S.

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Steel competitors

Steel

Foreign China India Japan

European

imports

21st century shift in strategy Exit certain product categories

more acquisitions Mittal Steel in China, Latin America strategy

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Make

Acquire

Dominate the domestic market the quality of Nucor steel Foreign Joint venture backward integration

Expand Boost

Differentiation
Continue

Innovative

Reduce

dependence on acquired scrap steel and iron ore

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2)Can Nucor preserve its unique culture and control systems under its new strategic direction?

No it cant preserve its unique culture and control systems because:

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Global expansion. in management layers

Increase

at different locations.

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3) Would you like to work for Nucor under David Aycock?

 Nucor

had to break from the past to meet the companys aggressive growth goals. and domestic rivals have been turning up the heat.

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Foreign

Nucor

needs innovate and explore new moves, in order to survive/sustain which was accepted by Aycock. kept Nucor a domestic company whereas Aycock believed in globalization. Aycock also believed that Nucors future growth hinged on its ability to enter South America and Asia using local partners. on the other hand, was always open to change and kept exploring new alternatives contrast to Iversons mini-mill concept, Aycock wanted to build blast furnaces, the hallmark of

Iverson

Aycock

In