Home Assignment for Management Control Systems

1. Case on Racy Jones For Racy Jones, attendance at State University will be possible only with financial help. The university is 160 miles from Racys home, so there will be living expenses as well as other costs. Racys father died one year ago, and the two brothers eat up most of the meagre income that their mother can provide. Fortunately, Uncle Kirby offers to help if Racy is really serious about professional education. Racys S.A.T. scores are quite good much more impressive, in fact, than his high school grades. Racys attention has vacillated between track ( the source of his nickname), hi-fi, love and parental reform with book learning coming in big gulps just before tests. The overall record, however, is good enough to secure admission to State University next fall. My fathers death made me take another look at what I wanted to do, says Racy. Running around the track is fun for me, but its no way to earn a living. So at State University I guess Ill have to major in business administration, with only a minor in physical education. Besides, that fits in with Uncle Kirbys talk of facing lifes responsibilities, and he is going to pay most of the bills the first year. Uncle Kirby, Minister of the Gospel, has a church 200 miles from State University. He has young children of his own and helping Racy will put an unexpected strain on his family finances. Consequently Uncle Kirby is loath to see his money wasted. What little Uncle Kirby knows about Racys behaviour to date does not inspire him with confidence. Instead he wants assurance that his money is well spent. Questions 1. Assume that Uncle Kirby has asked you for advice on the kinds of controls he should establish on Racys activities at State University. What would you recommend to Uncle Kirby? 2. In framing your answer, consider each of the 12 steps for establishing managerial controls discussed during the session on design of mgmt control systems 3. Please respond in not more than 1 to 1.5 pages

Budget data (000s) 1987 budgted profits 1987 budgeted current assets 1987 budgeted fixed assets Actual data ($000s) 1987 profits 1987 current assets 1987 fixed assets

J 90 100 400 J 80 90 400

K 55 200 400 K 60 190 450

L 50 300 500 L 50 350 550

2. The JKL Company uses EVA for measuring divisional performance. The company charges each division 5% return on its average current assets and 10% return on its average fixed assets. Calculate ROI objective and actual ROI for each division in 1987; also calculate EVA objective and actual EVA for each division for 1987 as well Refer to the budgeted profits and assets of the 3 divisions of the JKL company provided above. Listed below are 4 mgmt actions together with the financial impact of these actions For each of these situations calculate impact on budgeted ROI and EVA for each division. Situation 1: An investment in fixed assets is made this action increases the average fixed assets by $100,000 and profits by $10,000 Situation 2: An investment in fixed assets is made. This action increases the average fixed assets by $100,000 and profits by $7000 Situation 3: A program to reduce inventories is institutionalized as a result inventories are reduced by $50,000. Increased costs and reduced sales resulting from the lower inventory levels reduce profits by $5000 Situation 4: A plant is closed down and sold. Fixed assets are reduced by $75,000 and profits (from reduced sales) are decreased by $7,500 What conclusions can you draw from the above situations?