The document discusses various tools of management control systems, including strategic planning, budgeting, valuation, transfer pricing, and auditing responsibility centers. Strategic planning involves long-term goal setting and strategy formation by top management. Budgeting translates strategic goals into measurable targets and monitors performance against the targets. Valuation assesses asset utilization and financial performance. Transfer pricing sets internal prices for goods and services transferred within organizations. Auditing responsibility centers evaluates the effectiveness of individual business units.
4. Introduction
• Long term Process
• Involves decisions of top management
• Effective only when suitable
infrastructure supports it
• Strategic planning determines the
effectiveness of management
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5. Strategic Planning
Characteristics
• Setting goals
• Strategy formation
• Needs long term perspective
– Complex process, requires evaluation of multiple variables
– Not a regular exercise but as required
– Uses internal as well as external data
– Setting goals through communicating (process, policy,
objective) down the line
– It is a creative process
– End result oriented
– At the top level it is conceptual, no measurement
standards
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6. How it’s Done
• Ensures success comes from within the
organization
• Key tool-capitalizing on the knowledge and
skills in the organization
• Document do’s and don’ts
• Carried out through team building,
personalized skills and effective
organizational communication
• Top management does this, typically 2/3 top
people
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7. Benefits
• Create a vision statement
• Develop organization mission
• Identify critical success factors
• Define goals
• Identify barriers
• Translate goals into business plans
• Translate goals and barriers into action plan with
responsibility & accountability
• Feedback & update process
• Using team building, interpersonal and
communications skills for individual & org success
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8. Strategic Planning
Significance
• Helps internalize strategic processes
• No unpleasant surprises for managers
as goals and processes are scrutinized
closely
• Environmental issues are factored in
• Corporate culture gets considered
• This being the overall plan, helps
coordinate the other planning/
budgeting processes
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9. Process of Strategic Planning
Reviewing & Updating the
Strategic plan
Decide on assumptions & guidelines
Next
Create strategic plan iteration
Analysis of plan
Final review &
Approval
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10. Reviewing & Updating
Strategic Plan
• Review existing plan (last year’s)
• Update with environmental and
internal changes
• Taken up any time it is required
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11. Deciding Assumptions &
Guidelines
• Incorporate necessary strategic elements
• Data regarding current business situation
incorporated , keep revenue implications minimal
• Goals & objectives are aligned with business needs
• Short and long range business plans synchronized
• Decision to add or drop a line of business
• Labor, salary, wages guidelines account
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12. First Iteration of Strategic Plan
• Formulate business plan
• Validity of data and assumptions
carried out by business unit members
and then unit managers
• Top management to vet if in
accordance with organizational needs
• Income statements, balance sheet
items are scrutinized, justifications
confirmed
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13. Analysis of Plans
• Meetings between business units and
top management
• Analyses gaps in planning
• Discuss means to cover the gaps,
acquisition if necessary
• Strength and integration of current
business units considered
• Internal strength is estimated
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14. Second Iteration of Strategic
Plan
• Change in plans in view of recent
developments
• Generally short term changes
• New technologies and other changes
in the environment
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15. Final Review & Approval
• Approval of top management
including board of directors
• Approval before budgeting
• Budget is the key to implementing the
strategic plan
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16. Allocation of Resources
• Plan implementation can start only after resources
are allocated
• Some uncertainty will remain in long-term plans
• Line of involvement of managers & accountability
needs to be set up
• Accountability to be set up
• Approval and endorsement steps should be minimal
• Personnel should be trained & educated about
strategic business processes being enabled
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17. Investment decision Making-
Bower’s Model
• Based on discrepancies between plan and actual
process of implementation
• Based on discrepancies key variables are
determined and moderated
• 3 level functioning of strategic planning
– Lower level-basic data
– Middle level-synchronizes it
– Top level- design the action plan
• Rewards and line of authority is set up by top
management
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19. Budgetary Control
• Use of short and long term
organizational budget to control &
guide business processes
• Compare with actual results,
calculating variance and taking
corrective action (if required)
• Appropriate authority, responsibility
and accountability should rest with
assigned manager
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20. Budgetary Control-
Advantages
• Corporate intent in measurable monetary terms
• Bridges the gap between plan and performance
• Promotes specialization and focuses business
processes (budget is divided based on functions
and cost allocation)
• Budget creation requires integration of functions.
Promotes coordination and integration between
business policies
• Brings objectivity to business by tagging monetary
value
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21. Need for Budgetary Control
• Budget helps provide management
control, strategy implementation
• Reduces uncertainty
• Increases coordination between SBUs
• Identifying weaknesses and focuses on
strengths
• Keeps expenses under check
• Identifying deviations
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22. Objectives of Budgetary
Control
• Establishes and ensures strategy is
implemented
• Creates measurable standards and
comparable standards
• Provides a common thread of
coordination
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23. Organizational Set up
• Budget center
• Budget manual
• Personnel & operational set up
– Controller of budget
– Budget committees
– Budget period
– Determining key budget factors
– Budget reports
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24. Formation of Budget
• Guidelines
• Budget Proposal
• Negotiations
• Review & approval
• Revision of budget
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25. Administration of Budget
• Determination of objectives
• Establishing the objectives
• Availability of accounting & verifiable records
• Budget org chart and fixing responsibility
• Establishing budget committees
• Preparation of budget manual
• Selecting budget period
• Locating key budget factors
• Determining cost allocations
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26. Types of Budget
• Responsibility budget
• Program budget
• Operation budget
– Sales, production, production, selling, distribution
costs
• Function budget
– Sales, research, purchase, finance, etc.
• Financial budget
– Source & utilization of cash, budgeted P&L and balance
sheet
• Capital budget
– Capital expenditure and investments
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27. Budgeting Process
• Top-up budgeting
• Bottom down budgeting
• Budget report & variance analysis
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28. Capital Budgeting
• Process of capital budgeting
• Techniques of capital budgeting
– Non discounted techniques
– Discounted techniques
• Concepts of capital rationing
– External factors
– Internal factors
– Risk factors
• Limitations of capital budgeting
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29. Capital Budgeting
Non discounted techniques
• Payback period method
– (Cash outlay of project) / (annual cash
inflow)
• Accounting rate of return method
– ARR= (average income)/(average
investment)
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30. Capital Budgeting
Discounted techniques
• Net present value
– PV= discounted inflow if it was available
now
• Internal rate of return
– IRR= PV inflow/PV outflow
• Profitability index method
– PI=(PV inflow)/(PV of outflow)
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31. Limitations of Capital
Budgeting
• Alternatives may not be mutually
exclusive
• Estimation of future inflow is hazardous
always
• Goodwill, relationships and such
factors cannot be accounted for
• Urgency of decision making could
skew the estimates
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33. Assets & Liabilities
• Income=liability=distribute to owners
• Expenses=basic functions of business
to create assets
• Management control maximizes
efficiency such that value of business is
increased and assets of the
stakeholders
• Maintain a balance between
increasing value, decreasing costs
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34. Measuring Liability Employed
• Valuation Based on Earnings
– Based on book value, does not reflect
market value
• Capital charges
– Profit carried over to capital & reserves
– Deferred expenses difficult to value (as
they arise in current year but accrue in a
later time)
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35. Measuring Asset Employed
• Is the decision regarding employment of asset correct?
• Have the assets deployed been used correctly?
– Cash
• Actual receipts-payments, handled centrally and allocated to units, 3
to 4 times annual sales
– Receivables
• Influenced by sales & credit period, collection pattern
– Inventories
• Similar to receivables, value would depend on inflow and outflow
– Overall working capital
• Gross or net valuation, gross-only current assets, net-excess of current
assets over current liabilities
– Property, plant & equipment
• Book vale less depreciation
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36. Book Value: Gross & Net
• Disposition of assets
– Dispose of low value assets first before replacement
• Depreciation
– Straight line or reducing balance method
• Leased assets
– Type of debt, lower capital cost
• Idle assets
– Affect ROI, lowers it
• Intangible assets
– R&D expenses for example
• EVA vs. ROI
– EVA=net profit-capital charges, ROI-cost of capital
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37. Evaluation of Economic
Performance
• Economic analysis provides
diagnostics
• Helps understanding business
strategies
• Measures levels of success achieved
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39. Objectives of Transfer Pricing
• Provide relevant information to the value
chain to determine optimum trade off
between cost & revenue
• Induce goal congruence by providing a
competent atmosphere, freedom to source
out & negotiate
• Measure economic performance of a profit
center
• Single mechanism that’s easy to administer
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40. Fundamental Assumptions
• Dependent on assumptions of two managerial
decisions
– Sourcing decision: make or buy
– Price at which item to be transferred if a “make”
decision is made
• Transfer price approximately market price not
including costs that do not apply
• When competitive price not available take cost +
profit
• Cost based transfer could be made based on
standard cost + profit margin or a two step pricing
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41. Ideal Situation for Transfer
Pricing
• Integration of business along value line
• Not diversified to unrelated businesses
• Works best in horizontally integrated
business
• There is common basis for calculating
fixed & variable costs
• Multi-location business,
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42. Limitations
• Ideal when external market exists for
components in the value chain (not
often, it is not so)
• If captive capacity exists. Internal
prices are far better than external
market prices
• Investing in large facilities are often a
strategic decision. Negotiating with
external market would not make sense
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43. Methods of Transfer Pricing
• Full cost based
– Full cost minus mark up
• Marginal cost based
– Variable cost is used as reference cost of
transfer
• Negotiated
– Negotiated between the units, based on
external market price
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44. Problems with Transfer Pricing
• Problem of integration of fixed costs in the upstream value
chain
– Profit centers higher in the value chain are not aware of
cost & profit coming up to them. They will be reluctant to
negotiate own profits to optimize company’s profit
• Profit sharing
– Product transferred to marketing at standard variable cost
– Business units share the contribution realized from sale
• Two sets of transfer pricing
– Each unit sold, a standard variable cost of production is
charged, a periodic charge fixed costs associated with
facilities associated with facilities reserved by the buying
unit
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45. Administering Transfer Prices
• Negotiations
– Between heads of the two units involved
• Arbitration & conflict resolution
– Top management intervenes as arbitrators,
formally or informally
• Product classification
– Some products that can be benchmarked
against market price will have transfer price fixed
by top management, others by negotiation
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46. Theoretical Basis of Transfer
Pricing
• Economic model
– Fixed model of 1956 by Hirschleifier. Does not
provide for negotiations and applies in specific
assumptions
• Linear programming model
– Uses companywide optimum production
patterns, marginal costs and demand curves, not
very practical
• Shapely value
– Method of dividing profits between participants
based on contribution
• Practical application of admin regulations &
guidelines Debasis Das JSB 606 46
48. Audit of Responsibility
Centers
• It is necessary because
– Responsibility are the key functions of
business, auditing these tells you a lot
about business health
– A management audit enables business to
set up standards and propose
compliance as the business requires
– Responsibility centers create value in the
business. Functions of the end to end
chain is also required
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49. Role of Audit
• A deep look into the business
processes
• Look at opportunities to improve
• Find if there are risks
• Strategize for future
• Check if desired path is being followed
• Create a required reward system
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50. Process of an Audit
• Establish an audit team
– 3 or 4 persons conversant with the process
– Internal or external
• Create an audit plan
– Right timing, adequate resources are
essential
• Execute the audit
– Team must clearly understand the
purpose
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51. Scheduling an Audit
• Seasonal fluctuations of a business
– Schedule audit at a time that is a normally
active period
• Time when most people are available
– Peak work period is a bad time
• Choose the period that reflects overall
performance
– Should reflect the period when
organization performs at its best
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52. Audit Plan
• Proper utilization of manpower and
resources
• Balance right number of people and
resources w/o affecting normal
business
• Clear and time bound picture to be
made available
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53. Tools & Techniques
• Surveys
– Types, advantages, disadvantages, using survey properly
• Questionnaire
– Closed & open ended questionnaire, how to, structure, advantages,
disadvantages
• Focus groups
– Participants from a homogenous group with moderator, focused
response, participants and moderator need to be skilled
• Interviews
– Structured, semi-structured, unstructured interviews, free information flow,
could be expensive
• Direct observations
– Freedom of expression, observer need to have expertise
• Which method to be used?
– Normally a mix to be used, depends on time, resources and expertise
availability
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54. Continuous Improvement
Through Audit
• Improvement in processes need
continuous improvements
• Audits provide input as to what needs
to change
• Audit is the starting point of problem
solving & analysis
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55. Gaining Strategic Advantage
• Characteristics of continuous change
– No improvement can be done in one step,
implementation should be on a continuous basis
– Need for improvement change continuously
– Change is not precise always
– Priorities change
– Feedback of performance needed to decide corrective
action
• Acquiring competitive advantage
• Improvement through trigger point
• Action planning
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56. Acquiring Competitive
Advantage
• Audits should help understand
strengths, weaknesses, threats &
opportunities
• Identify capabilities that could be
converted to strengths
• Findings should help discussions on
changes planned
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57. Improvement through a
Trigger Point
• When organizations face significant
changes
– Mergers, acquisitions
– New entrants
– Technology change
• Can happen at any point
– functional, entry, maturity or saturation
points
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58. Action Planning
• Action must follow an audit
• Action plans must include
– person to prepare an action plan
– Time of action plan
– Content of action plan
– Person in charge of the action plan
– Actions to be taken and people who
have to carry them out
– Role of auditor in the follow up action
plan
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60. Role of Information in
Operational Management
• Information is a natural outcome of
business processes
• Business process is about information
interchange by people responsible for
the process
• A business process supports the system
of an operation, provides information
that supports the business
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61. Type of information for
Operation
• Formal & informal operation
• Budget information
• Task information
• Audit information
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62. Approaches to Control of
Operations
• Total quality control
– Documentation of processes
– Responsibility of quality
– Product design
– Dealing with suppliers
• Decision support systems
– Streamlines task delivery
– Second line of options
– Helps understand processes & be proactive
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63. Continuous Process
Improvements
• Process modification is the key to
process improvement
• With continuous improvement process
can be refined to deliver better quality
and improve cost and delivery times
• Focus on limited areas at a time
• People need training and education
to participate whole-heartedly
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64. Tools in Continuous Process
Improvement
• Target costing
– Planning phase, development phase, production
phase
• Advantages of target costing
– Fix the cost of design & product in great detail
– Direct right products to right group of consumers
– Failure of products is reduced
– Helps set realistic goals
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65. Benchmarking-1
• Continuously compare with standard and best practices
• Choose the best practices
– Planning phase
– Analysis phase
– Bench trending
• Determine market by size, preference, competitors
• Direction of industry, technology and geopolitics
• Determine strengths of potential competitors
• Performance data of competitors
• Baseline business performance
• Identify a set of activities that will improve strength of
business
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66. Benchmarking-2
• Bench trending is carried out
– Requirements of the process understood
– Flowchart of process is described
– Specific objectives identified
– Bench trending methods of competitors
identified
– Best suited practices are chosen and
adopted
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67. Bechmarking-3
• Communication & integration
– Information gathered from benchmarking
and bench trending must be integrated
and implemented
• Implementation
– Set realistic goals
– Teams take care of implementation
– Processes streamlined & linked
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69. Production Controls
• Nature of the production process
• Degree of mechanization involved
– Continuous process
– Discrete or assembly line process
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70. Production Issues in Discrete
Processes
• Production of finished goods as per design
• Finished components per time standards
• Synchronization of production processes to avoid excess of
one type
• Right balance of production capacity of different production
chains of various components
• Ensuring work layout is appropriately designed
• Specify maximum stacking of input/outputs
• Number of persons that can be present on shop floor
• Defining spoilage and wastage
• Defining quality norms
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71. Measuring Production
Performance
• Productivity, efficiency of converting
input to output
• Productivity measurements
– Labor productivity
– Material productivity
– Multi factor productivity
– Total productivity
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72. Production Control Reports
• Production efficiency
• Production planning
• Daily production
• Downtime analysis
• Shift handover
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74. Types of Marketing Control
• Strategic control
– Premise control, implementation control,
strategic surveillance, special alert control
• Annual plan control
• Profitability control
• Efficiency & effectiveness control
– Marketing effectiveness
• Customer philosophy, marketing orientation,
info about marketing, strategic orientation,
operational efficiency
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75. Marketing Audit
• Tool for improving marketing
effectiveness
• Roles it performs
– Introduces or changes marketing
orientation & practices
– Act as a framework for organizational
analysis & control
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76. External & Internal Audits
• External audit
– Audit of external environment
– Auditors must know the organization & the industry
– Opportunities & threats will be identified
– Help identify marketing resources, skills, assets
• Internal audit
– Audit of internal environment
– Strengths & weaknesses of the organization & its products
– Identifies & analyses positioning, pricing and target
strategies
– Analysis of marketing activities and channels
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77. Characteristics of effective
Marketing Audit
• Systematic
• Comprehensive
• Independent
• Periodic
• Conducting an audit
– Extensive analysis of present and past marketing
activities
– Forecast of growth relative to market changes
– Suggestions for improvement of quality of plans &
marketing performance
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78. Sales Control
• Sales budgets
– Sales revenue, selling expense, departmental
administrative budgets
– (rolling budgets followed often)
• Methods of budgeting for selling expenses
– Affordability, percentage of sales, competitive
parity, objective & task and return oriented
methods
• Control through budgets
– Establishes objectives & responsibilities,
coordination between different business
segments
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79. Sales Quotas
• Can be set as sales volume or value, profit,
expenses or activities
• For individuals or a team or a territory
• Product categories or class of customers
• Punishments or rewards follow on
achievement
• Quotas should be fair, challenging
• Can be from sales forecast, negotiations
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80. Importance of Sales Quotas
• Performance of targets
– Must be communicated properly. Challenging targets
stretch performance, unrealistic target could be de-
motivating
• Standards
– Basis for judging performance
• Control
– Helps judge variance and hence control is easier
• Change of direction
– May be necessary for strategic/operational reasons
• Motivating the sales force
– Specific targets help sales force perform better
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81. Sales & Cost Analysis
• Gathering, classifying and studying
sales data
• Helps sales managers plan & direct
sales efforts
• Helps identify strengths and
weaknesses of the organization
• Cost analysis helps identify ways to
increase efficiency of sales efforts
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82. Sales Variance Analysis
• Value method or profit method
• Variances calculated at sales value &
profit value respectively
• Sales volume variance is divided into
sales price variance and sales volume
variance
• Sales volume variance is divide into
sales quantity and sales mix variance
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83. Market Share Analysis
• Compare sales with total sales of
industry
• Regular analysis required
• Develop action plan
• Forecast demand
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84. Sales Expense-to-Sales
Variance Analysis
• Fixed and variable expenses
• Sales and marketing expense budgets take
these into account
• Amount of sales and expenses are
compared with targets to find variability
• Fixed budget basis, fixed expenses are taken
into account
• With flexible budget take fixed and variable
components into account
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85. Sales Reporting
• Reports form sales force
– Call reports, expense reports, sales work
plan, potential new business reports, lost
sales report
• Report from sales management
– Periodic sales forecasts & actual sales
– Sales promotions, expected results, actual
results
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86. Credit Control
• Credit to customers & channel
partners should be guided by a
formulated policy
• Analyze accounts receivables & bad
debts as also amount and type of
receivables, credit rating of customers
and channel partners
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88. Credit Rating
• Amount of credit that can be given
• Rate customers/channels partners
through no-risk to high-risk categories
• W/o the rating in place, it is either no
credit or same credit to all customers,
both are high risk
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89. Performance Evaluation
• Formal & planned system for
evaluation of sales personnel
• Tool for motivation
• Discovering areas that can be
improved
• Bad performers can be counseled,
repeated bad performers should be
taken out of the system
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90. Compensation & Incentives
• Usually salary & incentives
• Incentives are linked to what can be
attributed to the efforts of an
individual
• Salary component is higher when it
takes team effort, organization is a
leader in the market, uncertain and or
risky environment
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91. Sales Force Management
Audit
• Cross functional audit of selling
function
• Involves environment, planning system,
organizational evaluation and sales
functions
• Identify problems, prevent recurrence
of problems
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92. Distribution Control
• Channel integration
– Vertical management systems
• Channel leader oversees functions of channel
members
• Corporate VMS, Administered VMS, Contractual VMS
– Horizontal management systems
• Cooperating organizations pool their resources
• Channel management
– Recruit and select right channel members
– Motivating channel members & increasing profitability
– Periodically evaluate channel member performance
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93. Evaluation of Channel
Performance
• Macro level performance
– Channel efficiency, productivity, effectiveness and equity
• Micro level performance
– ROI, liquidity, financial leverage, growth pattern &
potential of the individual member
• Managing channel conflicts
– Structural, attitudinal, faulty channel design, goal
divergence or incompatibility
• Conflict resolution strategies
– Negotiations & bargaining, problem-solving strategies,
persuasion, political strategies and cooperation
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94. Marketing communication
Control
• Advertising
– Measuring ad effectiveness
– Measuring effectiveness of Internet advertising
• Sales promotion
– Measuring effectiveness of sales promotion
• Direct marketing
– Evaluation of direct marketing campaigns
• Public relations
– Measurement of PR output
– Measurement of PR outtake
– Measurement of PR outcome
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95. Marketing Control in
Branding
• Brand equity
– Value of a brand to consumers and the organization, helps
attract new customers, retain old customers, higher equity
less promotional expenses
– Brand assets, brand strength and brand value
• Brand measurement
– Perception, performance and financial measurements
• Brand portfolio management
– Less than 20% of brands contribute to profit
– Brand Audit
• Review brand to find market share, percentage
contribution, positioning
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96. Information Systems for
Marketing Control
• Marketing DSS
– Helps marketing data analysis and
decision making
– Benefits
• Increases effectiveness, breakdown of
complex problems, analysis capabilities,
identifying deviations early
• Marketing intelligence
– Correlation between marketing activities and
business outcomes
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97. Sales Force Automation as
Control Tool
• Surveillance & control
– Close supervising and monitoring
behavior of the sales force
– Standardization in conduct of business
• Accountability
– Increased interaction between manager
& the sales force
– Voice questions easily and get answers
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98. Mobile CRM
• Mobile, remote access or wireless
component application extension of
the corporate CRM
• Mobile sales force automation (SFA)
• Mobile field service management
(FSM)
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99. Enterprise-wide Applications
• Improves overall control over business
operations
– Customer relationship management
– Enterprise resource planning
– Sales force automation
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101. Analysis of Variance-1
• Financial aspects: Expenses &
Income(Revenue)
• Variance: variances in revenue and
income
• Volume variance and price variance
• Expenses: manufacturing & non
manufacturing
• Manufacturing costs: variable, semi-
variable & fixed
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102. Analysis of Variance-2
• Costs: determine extent & dimension to which
revenues are affected by business operations
• Costs are measured against standard costs set up
by management
• Variance analysis helps by
– Identifying key factor that may affect operational profit
– Focus on key variables, if variance is negative
– Segregate the causal factor
– Identify sequence of impact on the variables and impact
on operational profit
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103. Analysis of Variance-3
Total
variance
Non Mfg MFG costs Revenue
Cost
Semi Selling
Variable Fixed
variable Volume price
costs costs
costs
a. Admin
b. Selling
c. R&D
d. Mktg Market share
Selling volume
a. Material
b. Direct labor
c. Variable
overheads
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104. Standards in Standard
Costing
• Current standards
– Prevailing short time standards
• Ideal standards
– Standards under ideal conditions
• Expected/attainable standards
– Realistic attainable standards
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105. Setting Standards
• Set up committee of key people from key
functions and all management levels
• Identify costs for which standards are
needed
– Labor costs where standard quantity and
standard price is determined
– Direct labor costs involving standard time
& rate
– Overhead costs where standard variables
overhead and standard overhead are
considered
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107. Material Cost Variance
• Material cost variances
• Material price variances
• Material usage variance
• Material mix variance
• Material yield variance
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110. Other Variances
• Selling price variance
• Market penetration and industry
volume variance
• Expense variance
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111. Variance in Practice
• Time period comparison
• Focus on margin
• Evaluation standards
– Predetermined standards
– Historical standards
– External standards
• Full cost system
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112. Limitations of Variance
Analysis
• Why the variance cannot be
determined
• Is a variance significant?
• When aggregating plus or minus
variances can balance out
• Variances can happen due to
extraneous factors such as inflation
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113. Tight vs. Loose Control
• Variance analysis helps in tight control,
it directly measures performance
• In tight control, employees are given
specific goals and are monitored to
perform as expected
• Loose control chooses the right people
and it is expected they would do their
best. Variance analysis acts as just an
indicator
Debasis Das JSB 606 113
114. Reward for good
Performance
• Rewards induce good performance
• Good variance indicates good
performance
• Reward system integrated with overall
goal realization of the organization
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115. Purpose of Reward System
• Recognition of good work
• Creates sense of belonging
• Good communication line
• Aspirations of employees need to be
reflected in the appraisal system
• Acts as a morale booster
Debasis Das JSB 606 115
118. Designing a Reward System
• Understanding what is a reward for the
management and the managers
• Linking reward to the control system
provides autonomy to the manager
• Values & culture of an organization
influence the reward system
• Targets should be attainable
• Both formal and informal rewards
should be considered
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