MIS \ MCS —Page 1
ASSIGNMENT
PART – 1: MIS
Question 1. Define MIS, Explain the characteristics of M.I.S. and critically evaluate,
‘Information’ as a tool for competitive advantage with suitable examples.
Answer 1. MIS- Management Information System is the system, which makes available the right
information to the right person, at the right place, at the right time, in the right form and at the right
cost.
According to DAVIS and OLSON:
“MIS is an integrated user-machine system for providing information to support operations,
management and decision-making functions in an organization. The system utilizes computer
hardware and software, manual procedures/ models for analysis, planning, control, decision-making
and database.”
KROBER AND WATSON:
They have defined MIS as “an organized set of processes that provide information to managers to
support the operations and decision-making within an organization.”
In short we can say that MIS is basically an integrated system which transforms the data (inputs)
into reports (outputs) for facilitating decision-making through processing and using various
components of the information system viz. Hardware, software, Database, Procedures and
Personnel.
Characteristics of MIS:
 Management oriented/ Directed: MIS starts from an appraisal of management
needs and overall business objectives. It is possible that middle management or
operating management is focus of the system, so that their needs are the corner
stone on which system is built.
 Business Driven/ Justified: MIS is driven by business and not the other way
around. The plans of MIS must be linked to overall business plans of the enterprise.
The strategies of the corporation must set the MIS priorities.
MIS \ MCS —Page 2
 Integrated: Integration
of information subsystems provide more meaningful
management information. For Ex: In order to develop an effective production
scheduling system, we must balance such factors as: Set-up Costs
Work force
Overtime rates
Production Capacity
Inventory levels
Capital requirements
Customer Services
 Common Data flows: Because of the integration concepts of MIS, there is an
opportunity to avoid duplication and redundancy in data gathering, storage and
dissemination.
 Heavy planning Element: Complex, enterprise-wide information systems do not
occur overnight, they take from three to five years to get fully established firmly
with a company.
 Multi- Disciplinary Activity/Subject: MIS draws heavily upon various disciplines
like Management Accounting, Management science /Theory, Organization.
Behavior /theory, operations research, computer Science etc. As MIS can’t be
developed without making use of the various theories, principles, formulae, So
MIS is viewed as Multi-Disciplinary Subject.
 Federation of Sub Systems: MIS is viewed as a federation of sub-system,
developed, implemented as needed but conforming to an overall plan For Ex. Each
organization will consist of sub-systems like production, inventory, finance,
marketing etc. There could be functional sub systems as well as activity subsystems.
 As an evolving subject:
MIS come to play a much larger role in the
organizational life, as compared to the 1950’s. It has moved into managerial control
and further into influencing the “core” institutional activities.
MIS \ MCS —Page 3
‘Information’ as a tool for competitive advantage:
We can classify the uses of information as a tool for competitive advantage as follows:
Functional uses:
 Information helps lower cost in any / all parts of value chain
 Information helps transform the physical processing component of activities into
information component leading to value addition.
 Information bestows organizations with speed and ability to move quickly into the
market.
 It helps organization:
 Meet benchmarking standards.
 Improve customer service.
 Improve quality and precision of design and product.
 Information can help to simplify:
 Products
 Product processes
 Production cycle time
 Information and information system help in:
 Facilitating product delivery
 Adding value to quality
 Improving product quality
 Information helps organizations to enhance:
 Quality of their operations
 Quality of their products
 Quality of their services
Strategic uses:
 Information gives organizations new ways to out perform their rivals.
 The new intensity of information makes it possible for more precise development of
strategies, planning, forecasting and monitoring.
 Information facilitates availability of extensive data.
 Information enables organizations to “think globally act locally”.
 It yields strategic opportunities and enables change the rules of the competition very
fast.
 It helps organizations become more flexible and responsive.
 A firm can use four basic competitive strategies to deal with competitive forces:
 Product differentiation
 Focused differentiation
 Developing right linkages to customers and suppliers
 Becoming a low cost product
In short companies that anticipate/understand the power of information will be in control of event.
Companies that do not respond will be forced to accept changes that others initiate and will find
themselves at a competitive disadvantage.
But it must be remembered that lasting competitive advantage would be derived only from using
information in conjunction with business operational change to add value to a company.
MIS \ MCS —Page 4
Question 4. Define ‘Network’, ‘Internet’, and ‘Extranet’. Illustrate the Internet capabilities
and discuss the benefits of and problems with the Internet.
Answer 4.
Network:
Computer Network, according to the INFORMATION TECHNOLOGY ACT, 2002,
means “interconnection of one or more computers through use of satellite, microwave, terrestrial
line or other communication media, and terminals or a complex consisting of two or more
interconnected computers, whether or not the inter-connection is continuously maintained.”
Computer networking is the process of providing connectivity between/among two or more
computers/ computer systems to enable users to communicate with each other, share hardware/
software resources and not get constricted by the stand-alone systems.
A network is made possible/functional due to the following constituents: Node: - It is an end point in a computer network.
Access Path: - It is a connection between the two-end users that allows them to
communicate.
Protocol: - The rules established to govern the way that data are transmitted in
a computer network.
A network typically contains diverse hardware and software components that need to work together
to transmit/ receive information. Different components in a network can communicate by adhering
to a common set of rules that enable them to ‘talk’ to each other. This set of rules and procedures
governing transmission between two points in a network is called PROTOCOL. Each device in a
network must be able to interpret the other device’s protocol.
Intranet:
Over the years, the Internet, which is basically networks, has also led to the development of
“Intranet”. The Intranet is not really the Internet, but the application of Internet technologies to the
internal corporate network. The TCP/IP Internet Protocols, as well as the standard systems of the
Internet such as FTP, e-mail, protocols and www systems are now increasingly being used with in
networks that are commonly referred to as
“INTRANETS”
Thus, while the Internet is for public consumption, Intranets are for private use, mainly confined to
the users only, within a given/ specific organisation.
Extranet
While the Internet is public and intranet is private, an Extranet is essentially a hybrid of the two:
semi-private.
The contents of the extranet server are specially designed for a very selected group of
users/audience. The users/ audience could be a company’s suppliers, customers or other business
associates.
Internet
Internet is the global connection between computers that allows individuals/users to send e-mail,
make travel bookings, order books etc. between people and companies all around the world.
Internet is the worldwide network of computers holding vast quantities of data that the user can
access directly from a personal computer. Internet has emerged as the single largest,
“INFORMATION SUPERHIGHWAY” in the world.
MIS \ MCS —Page 5
Internet is commonly referred to as “The network of the networks”. The Internet (with capital “I”)
is a public resource. It means that any user or server on the Internet can connect to any other user or
server. No one “owns” the Internet, and this feature gives individual and corporate organizations
tremendous capabilities. Internet has proved to be powerful tool for corporate in particular as it
helps, inter alias, bring in customers, generate revenue and save money.
Internet Benefits:
 Reducing communication costs
 Enhancing
 Accelerating
 Improving
 Facilitating
Internet Problems:
 Security
 Technology Problems
 Lack of standards
 Legal issues.
Internet Capabilities:
Following are the major Internet capabilities and functions, which they support.
Capability
Functions Supported
E-mail
Person-to person messaging, document sharing.
Usenet networking
Discussion groups on electronic bulletin boards.
Chatting
Interactive conversation.
Telnet
Log on to one computer system and do work on another.
Gophers
Locate textual information using a hierarchy of menus.
Archie
Search database of documents, software and data files available
for downloading.
WAIS
(Wide
Area Locate files in databases using keywords.
Information Services)
World Wide Web
Retrieve, format and display information (including text, audio,
graphics, video) using hypertext links.
In short, Internet is a rich source of tools and information and has enormous potential.
MIS \ MCS —Page 6
Question 6. Discuss any two of the following:
 Prototyping
 Case Tools
 Object Oriented Systems
Answer 6. A) PROTOTYPING:
A prototype is basically a scaled-down model or a working version of a product. It
could be the model of a house, one want to build or a Tata Indica or Fiet Sienna undergoing
tests of all aspects of the product’s functionality, before it is converted into the polished,
sleek product. Prototype is now also used in development of information systems to
facilitate rapid system development. The process of preparing prototype is referred to as
PROTOTYPING. It consists of building an experimental system rapidly and inexpensively
for the end-user to evaluate. Prototyping is also viewed as a “strategy of experimental
applications to be achieved by an evolutionary design method.”
Prototyping is fast emerging as the “preferred Approach” among the MIS and user
communities. Infact, prototyping is now becoming Standard Operating Procedure (SOP) for
software development.
STEPS IN PROTOTYPING PROCESS:
It can be illustrated as follows: -
Step 1
Step 2
Identify Basic User
Requirements
Developing Initial
Working Prototype
Make Use of the
Prototype
Step 3
User
Satisfied
Yes
No
Step 4
Revise and Enhance
Prototype
Operational
Prototype
MIS \ MCS —Page 7
APPROACHES TO DEVELOPING PROTOTYPE SYSTEMS:
Prototype Systems could be developed in one of the following ways:
 Non-Functional Prototype Systems
 Partially Functional Prototype Systems
 Fully Functional Prototype Systems
B) CASE TOOLS:
CASE is an acronym foe Computer Aided Software Engineering OR Computer Aided Systems
Engineering. Computer Aided Systems Engineering involves using software packages to
accomplish and automate many of the activities of the Information System Development including
software development or programming. Computer Aided Software Engineering is same as CASE
above, but the emphasis is more on software development.
CASE TOOLS are the software packages available in the area/activities of automating the Systems
Development Activities. Case Tools are also referred to as ‘TOOLSETS’ and as stated by JAMES
O’ BREIN, the toolsets could be: THE PLANNING TOOLSETS: which help begin the development process with
information strategy planning from high level, business vantage
point.
THE ANALYSIS TOOLSET: which focuses on correctly capturing detailed
business requirements early in the development process.
THE DESIGN TOOLSET: which provides detailed specifications of the system
function.
THE INFORMATION INTEGRATOR: which integrates system specifications,
checks them for consistency and correctness and records in local or
central repositories.
THE CODE GENERATION TOOLSET: which produces a higher language
programme code based on system specifications.
THE DATABASE GENERATION TOOLSET: that generates system control
information needed for data storage and access.
THE PUBLIC INTERFACE: which provides for fill transfers and query
reporting.
MIS \ MCS —Page 8
The case tools capabilities:
Case tools can
 Automate
Case tools can not
number
of
manual
tasks

involved in Systems Development.
 Promote standardization based on a single
greater consistency and co-

Easily interface with databases and

Automatic force analysis to use a
prescribed methodology when one doesn’t
 Generate a large portion of documentation
Data Models etc.
a
fourth generation languages.
ordination during a development project.
for a system, such as Data Flow Diagram,
provide
functional, relevant system
methodology.
 Promote
Automatically
exist.

Radically transform the systems
analyses and design process.
MIS \ MCS —Page 9
Question 7. Define EIS and ESS, discuss their characteristics and explain the EIS/ESS
benefits.
Answer 7.
EIS (Executive Information System)
An EIS is a computer-based system that serves the information needs of top executives. It
provides rapid access to timely information and direct access to management reports. It is very
user-friendly and is supported by Graphics providing Exception Reporting and drill down
capabilities. It can also be easily connected with online information services and electronic mail.”
ESS (Executive Support System)
An ESS is “ a comprehensive support system that goes beyond EIS to include
communications, office automation, analysis support and intelligence.”
EIS/ESS Characteristics:
1. Informational Characteristics:
 Flexibility and ease of use.
 Provides timely information with short response time and quick retrieval.
 Produces correct information.
 Produces relevant information.
 Produces validated information.
2. User-Interface/ Orientation Characteristics:
 Contains sophisticated ‘self-help’, user-friendly interfaces including Graphic User
Interface (GUI).
 Facilitates access from many places.
 Provides secure, reliable and confidential access and access procedures.
 It is customized/ tailor made to suit the management style of individual characteristics.
3. Managerial/ Executive Characteristics:
 Provides support for defining overall vision, mission and strategy as it has a strategic /
futuristic orientation.
 Provides support for strategic management.
 Can help with situations that have a high degree of risk/ uncertainty.
MIS \ MCS —Page 10
 Is linked with value-added business/ processes.
 Supports the need/access for/to the external data/databases.
 Have capabilities like ‘Drill-Down’, ‘Exception Reporting’ and ‘Critical Success
Factors’ identification.
 Has a high result/ performance orientation.
EIS / ESS BENEFITS:
 Facilitates the attainment of organizational objectives.
 Facilitates access to information by integrating many sources of data and provides
broad, highly aggregated ‘Perspective’ and ‘Context’.
 Improves the users ‘productivity’ by enabling more effective decision-making.
 Allows the anticipation of problems/ opportunities and facilitates pro-active rather than
a reactive response.
 Increase communication capability and quality.
 Facilitates better strategic planning and control.
 Facilitates finding the cause of a problem in a “Root-Cause Analysis” mode rather than
“Fix-it mode”.
 Meet the needs of the executives in time-effective and time-efficient manner.
 The EIS/ESS provides competitive advantage.
 According to ROCKART AND TREACY: -
EIS/ESS also helps in providing answers to questions like: -



What business the organization should be in?
What are the competitors doing?
What new acquisitions/ activities would protect the organization
from business cycles/ business swings?

Which units should the organization divert/ spin-off to raise cash
for further expansion/ diversification/ acquisition?
 EIS/ESS encourages the development of a more open and active information recourses
that are at the disposal of the organization for working out both strategic and tactical
decisions.
MIS \ MCS —Page 11
Question 8. Discuss the external and Internal Threats in respect of Information Security and
the desired remedial measures.
Answer 8.
The External Security Threats:
The external threats would be those emanating from outside the organization.
REMEDIAL MEASURES:
1) Internet Connections:
Normally in every organization there are relatively few identifiable Internet
connections. It is relatively easy to focus upon them and exercise control. The Internet
connection should be protected by a “ Firewall”. Firewalls are hardware and software
combinations that guard the board between the corporate inter/ intranet (Private Access).
Firewalls can control who, if anyone, can surf the web, download files, etc. firewalls can
also hide the organizational networks identity from the rest of the world on the Internet,
as the corporate internal I.P. address is never used.
2) Remote Dial-in-Capabilities:
While the Internet connections are few and easy to control, the threats from dial-in
are real. There might be hundreds of dial-in threats most of which might be unknown to
the security administrator. Any uses in the organization with a phone line and a modem
attached to his PC can be an exposure for external access.
While controlling remote dial-in-capabilities, the following aspects
need to be given due considerations:
a) Remote Access
b) Remote Access Servers (RAS)
c) Servers I.D
d) The weak points of the system environment.
INTERNET SECURITY THREATS:
The internal threats would be those emanating from inside the organization. It is,
therefore, imperative that formal security policies/ measures are carefully designed and
scrupulously followed to ensure best protection and prevent security breaches.
MIS \ MCS —Page 12
REMEDIAL MEASURES:
1. Passwords:
Passwords should be at least five characters in length. It should be neither the same
as the user’s i.d nor be a common word. It should expire/ change regularly and reuse of the
older password should not be permitted.
2. User Terminations:
When the user ceases to be an employee, intern, temporary associate or consultant/
contactor, the user security administrator must be informed forthwith, so that the user’s i.d
could be terminated.
3. Special Privilege I.D’s:
Certain functionaries like network/ system managers are allotted special I.D’s and
passwords called root, supervisor or administrator i.d/ password providing ‘Carte Blanche’
access to the system. These passwords too should be changed regularly and changed
immediately when someone who knows them leaves the organization.
4. Access Review:
There are generally numbers of users and hundred of thousands, if not million, of
files on computer network. Some type of user administrator review must be undertaken
twice or thrice a year to ensure that unauthorized users is not given access.
5. Authorization Levels:
The requests for authorization permitting access to relative database files are
received and issued in writing, usually via e-mail. The user could be assigned several forms
of authorization for access to parts of database. The authorization could be:
 Read Authorization
 Index Authorization
 Insert Authorization
 Resource Authorization
 Update Authorization
 Activation Authorization
 Delete Authorization
 Drop Authorization
6)
User Information:
The users should be made aware of the security issues.
7)
Routine Maintenance:
It should cover activities like:
a) I.D’s that have not been used in a predefined period of time should be
disabled.
MIS \ MCS —Page 13
b) Logs giving details about unsuccessful log-in-attempts should be
reviewed and investigated.
c) Files that have not been accessed for quite some time should be
purged, to free up space.
8)
Software Updates:
Security administrator should regularly check with the software vendors to obtain
and apply the latest software updates or patches that help close security gaps/ holes.
9)
Virus Checking:
Viruses are any type of programming code that intentionally cause a system
disruption, shut down or loss of data. Some /major viruses are- “ Trojan Horses”, “
Worms”, “ Code Red”, “ Melisa”, “Chernobye”. For protection from virus, installation of
anti-virus software is must and pattern files must be updated regularly. Some of the antivirus software products are “Symantec’s Norton anti –virus”, “ Network Associates, “
Intel’s LANDesk”, etc.
10)
Physical Considerations:
The physical access to the I.T area needs to be controlled. Access to the computers
room or data center should be limited on Need Basis.
MIS \ MCS —Page 14
PART –II: MCS
Question 1: Define ‘Management Control’ and ‘Management Control System’. Discuss the
nature and characteristics of Management Control System.
Ans
MANGEMENT CONTROL
Management control is a continuous process of verifying whether the actions lead to the
result/ performance, which is within allowable and pre-determined limits and ensuring that
the desired objectives are being achieved effectively and efficiently.
It involves following three aspects:
1) It is a process consisting of certain inter-related and sequential steps.
2) It aims at effectiveness and efficiency in the acquisition and utilization of
resources.
3) It is designed to achieve further the objectives of the organization
DEFINITON BY KOONTZ AND O’ DONNEL:
“ Management control implies the measurement of accomplishments against the standard and the
correlation of deviations to assure attainment of objectives according to the plans.”
MANAGEMENT CONTROL SYSTEM
Popularly it is known as M.C.S in short form. M.C.S integrates the managerial activities of
planning, organizing, directing, communicating, leading and controlling in a system where
the focus is on management, the criterion for judging management actions being
achievement of objectives effectively and efficiently.
M.C.S is made effective through two components:
1) MANAGEMENT CONTROL STRUCTURE
2) MANAGEMENT CONTROL PROCESS
NATURE OF M.C.S
M.C.S is by nature restrictive as well as regulative.
THE TRADITIONAL VIEW of M.C.S was to compare targets with the actual
performance and to take corrective measures where deviations occur. This view is
essentially restricted to short range to enable the management to initiate course corrective
action if/when any deviations occur.
THE MODERN VIEW is more comprehensive and realistic. It is designed not only to tell
how near the organizations to its targets but to evaluate the targets themselves in relation to
both the targets themselves in relation to both the constraints in the external environment
and the available resources. It also stresses self-control, wherein at each level people
themselves ensure about their activities. According to this view, management control
system is best aimed at results, not at people as such.
MIS \ MCS —Page 15
CHARACTERISTICS OF M.C.S
1) ONGOING PROCESS
Management control is an ongoing/continuous process. It is constantly responding
to the ever-changing environment. M.C.S is a dynamic process consists of a set of actions
like programming, budgeting, analyzing, monitoring, evaluating, reporting, reviewing, etc.
2) GOAL CONGRUENCE:
Goal congruence implies integrating the personal goals with organizational goals or
at least minimizing the amount of conflict between varying goals. The M.C.S monitors goal
congruence to ensure that the decisions and actions taken by employees are not against the
interest of the organization
3) UNIVERSALITY
Control function is required at every level of management and is every part of the
organization
4) TOTAL SYSTEM
The M.C.S covers all aspects of the organizational operations. Hence, M.C.S has to
understand the inter-relationship and interdependencies of the sub-system elements.
5) COORDINATING AGENCY
M.C.S should be exercised by a control co-coordinating agency. While the line
managers are the focal points, the staff experts translate management judgments into the
format of control system
6) GOAL ORIENTATION
M.C.S is put in place to ensure that the organization accomplishes its
predetermined goals with minimum variance in the more effective and efficient manner.
7) FINANCIAL STRUCTURE
The organizational performance with few exceptions is judged by or expressed in
monetary impact/units. Hence, M.C.S is generally built around the financial structure
8) RYTHMIC
The M.C.S has a definite has a definite schedule and time span. There is a certain
sequence and chronological order. Hence M.C.S should be rhythmic.
9) RECIPROCITY
The reciprocal nature of exchange makes control effective. Hence, M.C.S must
have reciprocity
10) EXPANSILITY (FLEXIBILITY)
M.C.S should be able to adapt to the changes as and when they occur.
MIS \ MCS —Page 16
Question 3: Critically evaluates the roles of the accounting system and information system in
M.C.S
Ans:
ROLE OF ACCOUNNTING SYSTEM
The accounting system plays a very crucial role in the organization when proper financial
information is not available at time. The accounting system alone can provide necessary
inputs for management decision-making and control. The ata as regards cash flows, funds
flow, capital budget, working capital, bills payable, bills receivable, expenses, costs,
performance reports etc. could be available only from the accounting system.
So the accounting system has to be designed in such a manner that:
1. It maintains proper records of the resources mobilize, utilized, deployed and consumed.
2. It gives the details about cost/ expenses incurred.
3. It gives details regarding production, sales so that using these accounting inputs, the
management can measure and analyze the performance vis-à-vis the budgets and take stock
of the situation and ascertain/ ensure optimum utilization/ performance by initiating
appropriate course- corrective actions.
Example:
The bills receivable data giving party wise, bill wise, data wise/ age wise brake up would enable the
management to devise suitable credit policy and limits for each client.
ROLE OF ACCOUNTING SYSTEM IN M.C.S
1. To ensure that the data are collected from all the input centers in time.
2. To see that data are processed speedily/ expeditiously for compiling/ preparing
performance repots.
3. To review reports at successive levels to identify gray areas for initiating course corrective
follow up actions
4. To analyze the reports with a view to identifying trends and highlighting the areas requiring
follow up actions
5. To assist in formulating corrective actions
ROLE OF INFORMATION SYSTEM:
As stated by Kenneth And Jane Loudon, three powerful worldwide changes have altered
the business environment given as follows:
1) GLOBALISATION:




Global work groups
Global delivery systems
Competition in world markets
Management and control in a global market place
MIS \ MCS —Page 17
2) TRANFORMATION OF INDUSTRIAL ECONOMIES:







Knowledge and information based economies
Productivity
New product and services
Leadership
Time based competition
Shorter product life cycle
Limited employee knowledge base
3) TRANSFORMATIOM OF THE ENTERPRISES:







Flattering
Decentralization
Flexibility
Location Independence
Low Transaction and co-ordination costs
Empowerment
Collaboration work and time work
These changes, indeed transformations, are being facilitated by
the information system and information technology. I.T bringing about such changes,
which make the organization more dependent on the knowledge, learning and decision
making of individual employee.
ROLE OF INFORMATION SYSTEM IN M.C.S:
1. Operational level systems help operational managers keep track of the firm’s day- to –day
activities.
2. Knowledge level systems help knowledge and data workers design products, distributive
information and cope with paper work.
3. Management level systems help middle managers monitor and control.
4. Strategic level systems help senior mangers with long term strategic planning.
So, information technology and information systems are now indispensable for any
organization from the management control point of view. Information system using I.T, support
decision- making, co-ordination and control in addition to making available requisite information
given as follows:
MIS \ MCS —Page 18
Question 4 Explain the concept of responsibility centers and discuss in detail, the pros and
cons of ‘Profit Center’ with suitable examples.
Ans:
RESPONSIBILTY CENTRE:
A responsibility center is an organization unit that is headed by the manager who is
responsible for its activities. A decentralization company is a collection of responsibility
centers. The management defines the objective of each of these centers. The managers
leading these centers are expected to deliver the desired output, for which they are held
responsible. For the board of directors, the entire company is a responsibility center.
The objective of a responsibility center is to help in implement the strategies adopted by
organization. If the corporate strategies are sound and if each responsibility center can
meet its objectives, then the organization as a whole can achieve its goals. Thus it can be
seen that responsibility center are the vital units to make the strategy of an organization
successful.
A responsibility center uses inputs, which could be materials, man-hours and other
services to create an output. The centers require working capital to accomplish this task.
The output can be tangible/ physical, when it is a product, or its output could be services,
which is an intangible output.
TYPES OF RESPONSIBILITY CENTER :
1.
2.
3.
4.
Revenue center
Profit center
Expense center
Investment center
PROFIT CENTERS:
Profit centers are independent units within the organization whose performance is
measured in terms of profit targets and the actual profits that are earned by them. This
performance is measured in terms of profit. Profit is not just revenue minus expenses.
Many non-financial aspects also influence a unit’s ability t make profits. In this center,
the optimum relationship between inputs and outputs can be established. Pros and cons of
profit centers are as follows:
ADVANTAGES OF PROFIT CENTERS:
1. The speed of operating decisions can be increased, as many a decisions will now be
made at the level of responsibility centers without referring them to the corporate
office.
2. The quality of many decisions can be improved as the managers that are closest to the
point of decision make them. For example:- Public sectors in India. Board of these
PSU’s doesn’t have complete autonomy regarding decision-making and are dependent
on respective ministries to clear many of the financial outlay proposals.
3. Head quarter’s management may be relieved of day-to-day business decisions and can
therefore concentrate on broader issue. They have no time to control the profit center of
the organization.
MIS \ MCS —Page 19
4. The profit consciousness can be enhanced. As profits are the main criterion of
performance measurement. Mangers will constantly try to improve the profitability.
5. Profitability is a much broader measure of performance. It can measure actions on both
revenues and expenses.
6. This provides an excellent training ground for managers. The profit centers are like
independent companies, the managers get trained in all aspects of management. These
centers are always under pressure to improve their competitive performance.
7. It provides top management the information on the profitability of the components of
company.
8. This allows organization to appoint specialist and experts to manage different types of
businesses.
DIFFICULTIES OF PROFIT CENTERS:
1. The top management has to rely more on reports received from these centers to
effectively control them.
2. At the beginning of decentralization, competent people with requisite experience may
not be available within the organization.
3. It is possible that organization units would start competing amongst themselves
disadvantageously.
4. There can be increased friction in business units especially on the issue of transfer
pricing mechanism.
5. The managers of the profit centers are likely to focus on short-term profitability at the
cost of long-term interest of the company.
6. There is no system that will guarantee that increase in profits of all profits centers will
automatically increase the profits of the organization as a whole.
7. If the profit centers manager for some reason does not have all relevant information, tat
may be available with headquarters, the quality of decision made ma y suffer.
8. Divisionalization leads to addition costs. This is because some work duplication is
inevitable.
9. For realizing the full potential of profit centers, it is imperative that the managers are as
autonomous as the CEO’s of the company. In practice, so much autonomy is not
possible. A company can never be completely divided in independent units and the
powers that a CEO has cannot be given to the business unit managers.
10. Another problem arises when business units have to deal with one another. When the
production, procurement and marketing decisions for a single product line are
distributed among two or more units, separating the contribution of each unit becomes
different.
11. There are also three constraints that are placed by corporate management. These
constraints result from strategic considerations, those resulting from the need for
uniformity and those resulting from the economies of centralization.
MIS \ MCS —Page 20
Question 7. Define ‘Cost Audit’ and discuss its characteristics, scope and objectives. Please
also give a comparative view of the various types of Audit, namely, Internal Audit, Financial
Audit, Cost Audit and Management Audit.
Answer:
The Chartered Institute of Management Accountants (CIMA), London, terminology defines
Cost Audit as “the verification of cost records and accounts and a check on adherence to
the prescribed cost accounting procedures & their continuing relevance.”
According to the Institute of Cost and Works Accountants of India (ICWAI) Cost Audit refers to “
an audit of efficiency of minutes details of expenditure, while the work is in progress and not an
post-mortem examination. Financial Audit is a fait accompli.” Cost Audit is mainly a preventive
measure, a guide for Management Policy and Decision, in addition to being a barometer of
performance.
OBJECTIVES
The Objectives of Cost Audit can be mentioned as follows:
A) GENERAL OBJECTIVES
1. To examine whether proper cost accounting records, as stipulated, under the
Companies Act, 1956, are being maintained or not
2. To ascertain whether the company’s cost accounting records give true and fair view
of cost covered.
3. To verify cost accounts & other relevant data
4. To determine the value of Work-in-progress, Finished Goods/Stocks, as accurately
as possible
5. To compare actual cost and find out reasons, if any, for variances.
6. To ascertain whether cost records have been periodically reconciled with the
financial books as to ensure accuracy.
7. To inculcate the habit of cost consciousness in the minds of those who are
responsible for incurring cost.
B) SOCIAL OBJECTIVES
1. To help improve productivity thereby help proper allocation and utilization of
resources, accelerate development in National Income, Gross Domestic Product
and Economic Development.
2. To help in price fixation and price control mechanism
3. To help improve cost-consciousness
4. To help identify uneconomic product-line and work out appropriate product-mix
for ensuring optimum utilization of resources
5. To help in correct valuation of Work-in-progress and closing stock,leading to
correct profit & loss account
6. To guard against tax evasion efforts through incorrect valuation
7. To benefit consumers by ensuring reliable/competitive pricing
MIS \ MCS —Page 21
SCOPE
1. The Cost Audit in India is conducted in accordance with Section 233-B read with subsection (1) (d) of Section 209 of Companies Act, 1956.Hence, although cost audit of
companies is not compulsory each year, Cost Accounts may be maintained by companies
falling under the purview of Cost Audit as per the legal provisions.
The Scope of Cost Audit may widen when/if the Central Government prescribes cost
accounting records rules to more industries and issues more number of cost audit orders.
2. Cost Audit has to be conducted keeping in view
Provisions of Companies Act, 1956
Cost Accounting Records Rules
Cost Accounting (Reports) Rules
Cost and Works Accountants Act, 1959
3. Cost Audit has to take cognizance of the findings of Internal Audit as well as Financial
Audit
4. Cost Audit should cover Efficiency and Proprietary Audit as well
5. Cost Audit should also cover Systems Audit of all procedures/system in vogue
6. Apart from checking the arithmetical accuracy, Cost Audit must ensure that:
Cost Accounting Principles and Practices are meticulously followed;
The Irregularities & lapses are reported & constructive suggestions for improvement in the
system & method for cost reduction are made.
7. As Cost Audit is going to enable organization to gain competitive edge in terms of Cost, it is
considered most crucial in the complementary Business Environment.
CHARACTERSTICS
1. Cost Audit is Efficiency Audit
2. Cost Audit is Proprietary Audit
3. It is different from Financial Audit
4. It is a specialized service, which can be rendered by a qualified Cost Accountant (with the
exemption of the power to appoint a C.A. to act as Cost Accountant, it sufficient Cost
Accountant are not available.)
MIS \ MCS —Page 22
The comparative view of the Various Audits is as under:
Criteria
Financial Audit
Internal
Audit
Cost Audit
Management
Audit
Time Span
Immediate Past Year
Financial/Accounting
Records & Allied
Documents
Immediate past
Present as well
as Future
Cost
Accounting
Records &
Allied
Documents
Past, Present &
Future
Field of Audit
Current
Financial &
some part
Financial
Records &
Allied
Documents
Principles,
Conventions,
Norms,
Practices
Readily available fully
detailed & well
structured & well
documented procedures
Readily
available fully
detailed & well
structured &
well
documented
Area & Scope
of Audit
Defined/ Determined by
Statute of Law
Defined/
Determined by
the management
Available by &
large.
Reasonably
detailed, well
structured &
well
documented
Defined/
Determined by
Statute of Law
Rights,
Duties,
Obligations &
liabilities of
Auditors
Statutorily determined
(Section 224 to 233 of
the Companies Act,
1956)
Defined/
Determined by
the management
Reporting
To the Shareholders
To the
Management
Statutorily
determined
(Section 224 to
233 of the
Companies Act,
1956)
To the
Company Law
Board (Govt. Of
India)
All types of Records,
pertaining to the
Organizational
Activities. (Data
Internal as well as
External)
Not available in
detailed, structured
or documented
format, as it is still
an evolving concept
Defined/ Determined
with respect to
objective purposes &
included in the terms
of reference.
Defined by the
management
To the Management
or the authority
appointing the
Management
Auditor.
MIS \ MCS —Page 23
Question 6. Explain the Concept of Balance Score Card and its usefulness for M.C.S with
reference to the Organization you are working with OR familiar with.
Answer. The Balance Score Card offers to the companies a framework that can translate a
company's vision and strategy into a coherent set of performance measure. A Balance Score Card
attempts to translate mission and strategy into objectives and measures, organized into four
different perspectives. These perspectives are
1. Financial, 2. Customer, 3. Internal Business processes, 4. Learning and Growth
BALANCE SCORE CARD
Financial Perspective
Economic Value Added
Return on Capital Employed
Cash Flow
Project Profitability
Profit Forecast Reliability
Sales Backlog
CUSTOMER PRESPECTIVE
Pricing Index Tier II
INTERNAL BUSSINESS
PERSPECTIVE
Hours With Customers
Customers
Tender Success Rate
Customer Ranking Survey
Rework
Customer Satisfaction
Safety Incidence Index
Index
Project Performance Index
Market Share
Project Close Out Cycle
INNOVATION & LEARNING
PERSPECTIVE
% Revenue from New Services
Rate of Improvement Index
Staff Attitude Survey
# Employee Suggestions
Revenue per Employee
MIS \ MCS —Page 24
FINANCIAL PERSPECTIVE
These measures indicate whether a company's strategy, implementation and execution are
contributing to the bottom line improvement. The financial objectives that are normally measured
can be growth in sales, increase in profit margins, Return on investments and Earning Per Share
(EPS). One more Important measure that is being used widely now, is Economic Value Addition.
While measuring financial performance following things need to be considered












Sales growth rate by percentage
Percentage revenue form new products, services and customers
Share of targeted customer and accounts
Cross-Selling
Percentage of Unprofitable customers
Revenue/Employee Ratio
Cost Reduction Rates
R&D
Working Capital Ratio
Asset Utilization Ratio
Return on Capital Employed
Payback of Investments
CUSTOMER PERSPECTIVE
In this managers identify the Customer and market segments in which the business unit will
complete. They also have to identify the measures of the business unit's performance in these
targeted segments. The outcome measures include:
Customer Satisfaction
Customer Retention
New Customer acquisition
Customer Profitability
Market Share in targeted Segments.
MIS \ MCS —Page 25
In this perspective, the managers identify the critical internal processes in which the organization
must excel. This will enable the unit to achieve the following:


Deliver the value proposition that will attract and retain customers in targeted market segments
Safety shareholder expectations of excellent financial returns.
The BSC usually identifies entirely new processes at which the Organization must excel to meet
customer and financial objectives. It also incorporates innovation process, which is a departure
from the traditional approach. The innovation process is a powerful driver of future financial
performance. It also helps the organization to identify the infrastructure that they must build to
create long-term growth and improvement.
INTERNAL BUSINESS PROCESS PERSPECTIVE
All Companies have to attempt to improve quality, reduce cycle times, increase yields, maximizes
throughput, and lower costs for their business process. Unless one can outperform competitors on
all the above it may not be possible to be distinctive, with competitive advantages
In the process following steps are crucial:





Identify the market
Create the product/service
Build the product/service
Deliver the product/service
Service the customer
This will include two Questions:


What range of benefits will customers value in tomorrow's products
How might we, through innovation, pre-empt competitors in delivering those benefits to the
market places?
Information on market and customers provides the input for the actual product design and
development. The R&D can then concentrate on following activities:



Perform basic research to develop radically new products and services for delivering value
to customers.
Perform applied research to exploit existing technology for the next generation of products
Make focused developments efforts to bring new products to the market.
In this perspective the companies have to use following measures:
MIS \ MCS —Page 26




Percentage of Sales from new products
Percentage of Sales from Proprietary products
New Product introduction versus competitors
Time to develop next generation of products
LEARNING AND GROWTH PERSPECTIVE
This perspective concentrates on development of objectives and measures, to drive organizational
learning and growth. The Earlier three perspectives identify where the organization must excel to
achieve breakthrough performance. The objectives here are to provide the infrastructure for
achieving the objectives. The infrastructure includes people, systems and procedures. This
perspective requires three categories for learning and growth viz
1. Employee Capabilities
2. Information system capabilities
3. Motivation, empowerment, and alignment
The Core employee measurement group would typically have three features
1. Employee satisfaction
2. Employee Retention
3. Employee Productivity
Employee Satisfaction objective recognizes that employee morale and overall job satisfaction are
now considered highly important by most companies. Employee morale is especially important for
service industries as many a time, employee at the lowest end interact directly with the customers.
The major element in the employee satisfaction survey should include:






Involvement with decisions
Recognition for doing a good job
Access to sufficient information to do the job well
Active encouragement to be creative and use initiatives
Support level from staff function
Overall satisfaction with company
MIS \ MCS —Page 27
The Employee Retention captures an objective to retain those employees in whom the organization
has a long-term interest. Long term, loyal employees carry the values of the organization,
knowledge of organizational processes. Due to these factors company needs to retain such
employees.
In Employee productivity, it can be measured by calculating revenue or profit per Employee.
However there are some problems in this. At times the productivity per employee may increase but
the profit per employee may fall as a result of non-recovery of the incremental costs incurred for
higher revenue generation. When output is increased without adding to the number of employees, it
will result in better productivity ratio.
The importance of communication of the strategy while building a BSC is:



The Scorecard describes the organization's vision for the future to the entire organization.
This helps create shared understanding.
This allows all employees how they contribute to the success of the entire organization.
This is important because otherwise employees and departments will try to optimize their
performance without contributing to the achievement of the strategic objectives
The Scorecard helps in changing the level of efforts in favor of the organizational goals.