Deck 10: Management Control

Question 1

Give three examples of key variables for an emergency department.

Answer 1

Key Variables : In any organization, it is necessary to identify and closely monitor a set of key factors which may closely impact the functioning of the organization. Such factors are referred as Key Variables.
These Key variables help the Management Control System to control the operations and keep the organization function smoothly. These Key variables provide an indicator to the management of the future problems that might develop.
The key variables for an emergency department of a hospital are enlisted below.
1. Number of patients admitted in the department over a month.
2. Number of hours the ambulance is booked.
3. Ratio of Deaths to number of patients in the department
4. Regulatory changes in the services provided by the department
5. Technological Changes in the health care service.

Question 2

One year ago, Academic Hospital and nearby Western Hospital merged. As part of the merger, Academic Hospital eliminated its small maternity service, and Western Hospital eliminated most of its internal laboratory. The two hospitals are both owned by one parent organization, yet they remain distinct profit centers, with an "each tub on its own bottom" philosophy.
A problem recently arose when Western Hospital demanded a price reduction for the laboratory work associated with an amniocentesis. This procedure is performed at Western on a regular basis, but after the merger, the laboratory work for it has been performed at Academic.
However, Western had recently found that an independent laboratory would do the work for $375, as compared with the $400 Academic was charging. Although the total dollars involved were not substantial (Western only had about 300 amniocenteses per year), all agreed that an important policy issue was involved and that resolution should be sought.
A joint oversight committee of the two hospitals found that the direct incremental costs of performing the amniocenteses were $300 in labor and supplies. In addition, Academic was charging $90 for overhead that would be incurred whether or not the amniocentesis laboratory tests were done at Academic, and $60 for profit. It was also found that Western was currently making a $105 profit on the entire procedure but could raise that profit by $75 if it could get the laboratory work done for $75 less.
How much would the transfer price be under
• full charges,
• variable costs,
• market price, and
• negotiated price?
How much profit does each hospital make under each alternative? How much do the combined hospitals make under each of the above alternatives? What would happen if Western purchased from an outside laboratory for $375?

Answer 2

Management Control system are system which are used by the decision-taking level management to ensure that the organization achieve the desired results in most efficient and effective manner. Management control systems are more than control of costs.
Organizations are spending huge resources to help and identify the outcome of their efforts. The focus of management is to influence as well persuading the action of individual within the organization and for that system to be placed with which employee works towards in achieving organizational goals. The system is responsibility center.
Responsibility center is the smaller group in an organization which has the responsibility of performing certain tasks. Several responsibility center are combined together to form larger responsibility center.
Transfer pricing is one of the difficult management control system who charges amount to one responsibility center for goods and services acquired from another responsibility center in the same organization.
Transfer prices for various scenarios have been computed as below:
a. Full Charge: The transfer price of Academic will charge $450, profit of Academic will be $ 60. Western would invoice at $555 making profit of $ 105. Organization combined profit would be $ 165.
b. Variable cost: Academic will charge $ 300. The loss of Academic will be $ 90. Western would invoice at $555 and making profit of $ 255. Organization combined profit will be $ 165
c. Market price: Academic will charge $ 400, making profit of $ 10. Western would invoice at $ 555 and making profit of $ 155. Organization combined profit will be $ 165.
d. Negotiated Price: Academic will charge $ 375, making loss of $ 15. Western would invoice at $ 555, making profit of 180. Organization combined gain will be $ 165.
e. If Western purchased amniocenteses from outside market then Western would be making profit of $ 180. The combined profit of organization would be $ 90.

Question 3

What are the elements of an internal control system?

Answer 3

Internal control system is a business procedure, practice and policy that is established within an organization in order to ensure integrity of accounting and financial information, reliability of financial reporting, achieving profitable and operational targets and compliance with rules, regulations and laws.
Internal control system is a means by which resources of the organization are measured, directed and examined.
The main aim of internal control system is to detect and prevent errors and fraud and protecting the resources of the organization both tangible (plant and machinery) and intangible (intellectual property such as patents, trademarks).
Internal control system has various elements which provide an organization with a good system of internal control. The elements are as follows.
1.
Audit trail: The first and foremost element of internal control is to develop a clear audit trail. The audit trail is a step by step documentation of the financial transactions from general ledger accounts to the ultimate summary report.
Each record in the accounting system should be traced back to their sources. Example: The total transactions reported in the summary report should be traced back to their individual's records.
The audit trial must be supported by sufficient documents including the documents that come from external sources that affect the specific event or procedure.
Thus, the company maintain an adequate audit trail in order to determine the causes of discrepancies and then corrective actions occurs.
2.
Reliable personnel: The second element in the internal control system is selection and supervision of reliable and qualified employees in order to minimize human errors in recording information.
Organizations hire trustworthy and capable employees in order to get accurate records and a system that protect and prevents misuse of resources.
All employees should be well trained to detect errors in the control system and they were held responsible for compliance of appropriate internal control procedures.
3.
Separation of functions : The next element is to separate the authority in the organization. The first part of separation is that the person who keep records of resources is separated from the person who have physical or custodial control over the resources.
The separation of functions helps in detecting and preventing theft of accounts and resources, embezzlement. The authority that actually disbursed resources should be separated from the authority that actually used those resources.
The second part of separation is that operational activities of the organization should be separated from the accounting of the organization.
4.
Proper authorization: This element indicates proper authorization of functional duties to different individuals for recording transactions, making payments, issuing or receiving assets.
Authorization are of two types:
General authorization is a written and standardized approval of certain actions by different individuals and these have certain limitations and prohibitions.
Special authorization, a specific authority is given to an individual for performing certain actions usually overriding the general authorization.
5.
Adequate documents : Under internal control system, all the necessary documents should be readily available. Objectives and techniques of internal control, total transactions incurred should be clearly and properly documented.
The information should be completely recorded in the documents as soon as an event occurred. The information recorded in the documents should be in consecutive order and free from any manipulation.
6.
Proper procedures : Under internal control system, accounting policies and documents should follow standard procedures. Accounting procedures should be subject to evaluate and updating. When proper procedures are followed, it results into doing things efficiently and effectively.
The goal of the internal control system is to detect and prevent errors, which can be achieved by following proper procedures.
7.
Physical safeguards : these safeguards averts unofficial personnel from accessing valuable assets of the company. Example: blank checks and cash should be kept safe when not in use.
Backup copies of the transactions should be maintained separately and updated regularly. Compliance review of the physical safeguards of the organization should be annually undertaken.
8.
Bonding, rotation, and vacations of duties : employees should be bonded against the fraud and embezzlement in order to protect the organization against huge losses.
Bonding is an administrative control which was designed to take corrective actions in order to detect and avoid losses and errors.
Rotation and vacations of duties in which employee move into another role and handling a different task.
9.
Independent check : control system should also be reviewed and evaluated by outside independent auditors in order to improve the reliability of the system.
Organization should demand substantial comments from the independent auditor on their internal control system.
Independent checks should be used by the organization for understanding the in-depth operations of the organization.
10.
Analysis of cost-benefit : Internal control system is established within an organization in order to achieve operational and profitable targets. Control system should be cost effective that benefits from the system should be more than its costs.
Internal control system should be designed as a cost effective tool that helps in achieving efficient and effective operations.
Thus, the aforementioned are the elements of internal control system.

Question 4

Give an example of a formal and an informal management control.

Question 5

What is the primary focus of management control systems?

Question 6

What are the goals of an internal control system?

Question 7

How are responsibility centers classified? What is the goal of such classification?

Question 8

Is management control a clear-cut area based on generally accepted principles or one that relies to a greater extent on common sense and flexibility?