Sandi Saptalawungan - 1465100

Management Control System Case Analysis Inter 65

Industrial Products
Corporation
Back in 1996, Industrial products Corporation (IPC) produced various industrial
goods in more than 12 divisions. And they make each division as an investment center
with separate balance sheet, therefore have both long term strategic goals and short
term tactical goals of the company, including sales, costs, expenditures and rate of
return on investment. Performance measurement use return of investment. Baker
Division is the producer of industrial pumps based on orders. Marketing activities are
done by sales engineers who work closely with customers. The product line is divided
into five divisions to be studied individually. The following depicts the companys
control of assets, along with the actions that can be taken by Brandt in the following
asset category:
Cash 8% of total assets, when it comes to cash, there is no significant problem.
Baker division has independent cash reserves with an amount that is above average
that improves liquidity and the need for daily operational costs.
Accounts Receivable 21% of total assets, accounts receivable is rather high.
Necessary steps need to be taken in regard to reducing this amount. Some are to
implement shorter-term credits, intensify billing and also implement penalties for
debtors who fail to pay within the designated time limit.
Inventory raw material, 3% of total investment, inventory is well-managed; finished
goods are not stocked for long as they tend to receive orders before production to
accommodate customization. EOQ is not used as a measuring tool here because of no
uncertainty of supplies, delivery and price changes.
Inventory purchased parts and manufactured parts, 10% of total assets, uses EOQ
and Order Review Point which are efficient tools in calculating delivery time and the
next ordering time.
Inventory: floor stocks, 3% of total investment, not much control required to
understand excess components at production area.
Inventory: finished goods, 2% of total investment, a good system to implement as it
reduces warehousing costs as goods are made-to-order with minimum supplies and
conduct delivery as soon as possible.
Fix Assets: Machine, land and Building 53% of total investments

Sandi Saptalawungan - 1465100

Management Control System Case Analysis Inter 65
Because assets of Baker division is in gross, then control over these assets are
important, by using ROA, Margin and Turnover and optimize Volume, Cost and
Asset.

It was observed that when the company employed rate of return on investment (ROI)
as a measure of performance for the Baker Division of IPC, the division manager, Mr.
Brandt, became more focused on short term goals of the company rather than on
meeting the companys long term goals. The division manager, exercised varied levels
of controls for the asset categories under his watch. While his control over the current
assets favored meeting high ROI rates, a lack of expansion plans involving fixed
assets could be noted. Because increasing investments in fixed assets results in a low
ROI rate, long run concerns are not being promoted by having ROI as a performance
measure. This conflict could prove to be injurious to meeting the strategic objectives
of a company.
ROI as a performance measurement tool shows the relationship between profit and
investment, or in other words shows how much the investment is earning in terms of
profit. ROI also shows the income generated from the usage of an asset. ROIs
advantages are that it is a comprehensive tool of measurement whereby everything
that affects the financial reports is mirrored in the formula of ROI. ROI is also easily
understandable and contributes in absolute terms. ROI can be applied to each and
every unit of the organization as an investment center that is responsible for profit.
There is two recommendation for the future of this company;
First, gather comparative companies ROI reports in order to understand how IPC is
performing. When the company acquires a ROI percentage, it is difficult to state
whether company is doing good or otherwise if there is no benchmark of performance
of companies in the same field.
Second, headquarters executives must re-visit the importance of fulfilling both shortterm and long-term goals, because both tactical and strategic decisions are important
for a companys growth and survival, so performance measures should strike a
balance between both concerns to adequately measure a divisions performance.