Management Control System: Responsibility Centers, Competitive Strategies, and Budgetary Slack

This document explores key concepts in management control systems, focusing on responsibility centers, competitive strategies, and budgetary slack. It analyzes the case of Gili Holiday Resort, suggesting appropriate responsibility centers for different departments. The document then examines Porter's generic strategies, particularly differentiation, as a means for Howard Equipment Company to respond to competitive pressures. Finally, it delves into the concept of budgetary slack, outlining its causes and providing practical solutions for Global Horison Inc. to minimize its occurrence.

MANAGEMENT CONTROL SYSTEM
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Table of Contents
QUESTION ONE..........................................................................................................................3
QUESTION TWO.........................................................................................................................5
QUESTION THREE.......................................................................................................................7
1. BUDGETARY SLACK AND THREE REASONS FOR BUDGETARY SLACK..............................7
2. FIVE WAYS TO REDUCE THE PROBLEM OF BUDGETARY SLACK......................................7
REFERENCES...............................................................................................................................9
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QUESTION ONE
MEMO
To: General manager
From: Consultant
Date: March 15, 2018
Subject: Responsibility centre designation
SUGGESTIONS FOR RESPONSIBILITY CENTRE DESIGNATION FOR VARIOUS DEPARTMENT
Sir,
There are different departments in the Gili Holiday which are responsible for the smooth
and efficient operations of different business activities. There are different types of
responsibility designation centre which has its own dedicated staff, goals and objectives,
financial reports and policies and procedures. Key types of responsibility centres are revue
centre, profit centre, cost centre and investment centre. It helps manager of the
department to trace all the different activities and results of business back to specific
employees (Dudin, et al. 2015).
There are different roles and responsibilities of each department which are crucial for the
proper functioning of the company. Key departments of Gili Holiday Resort are hospitality,
food and beverage, sales and logistics and housekeeping.
Food and beverage department of Gili Holiday resort is divided into segments that are
kitchen and restaurant. The kitchen is responsible for making food, side food beverages and
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desserts. The responsibilities of restaurant include waiter service, dining room operation,
clean up service and clean up service (Davis, et al. 2018). The food and beverages
department of Gili Holiday resort is its revenue centre as the manager of this department is
responsible for the revenue only. This department generates the revenue through sales of
the food and beverage.
Sales department plays a crucial role in enhancing the sales and profitability of the
company. Sales department of Gili Holiday resort sells the service and facilities of the
resorts. It adapts different strategies like direct contact and advertisement to sell all its
services like food, room, beverage and other special services to customers. The sales
department is also an important revenue centre of the company as the sales of the service
of a company directly reflect on its profitability.
Hospitality department of Gili Holiday Resort is divided into two major sections that are
front desk and self-service. The front desk office is responsible for different services such as
front desk services, reservation, guest payments, telephone, room assignment and key
control. The key responsibilities of guest service include delivering room-service orders,
assisting guests, local transportation arrangement etc. The responsibility centre which may
be suggested for hospitality department is the profit centre. The manager of this
department is responsible for the revenue as well as the cost. There are different factors
which can influence the cost and profitability of the organization therefore, it is imperative
for the company to focus on all these factors to reduce the cost and to enhance the revenue
(Dopson, et al. 2016).
Logistics and housekeeping department is another important department of Gili Holiday
resort which plays an important role in the smooth operation of the company. Key roles and
responsibilities of this department include purchasing, appliances, tracking for daily purpose
and keeping security. The manager of this department is responsible for the cost only so it
can belong to cost centre (Davis, et al. 2018).
There are different factors which reflect significantly on the cost, profits and revenue of a
company to a significant level, therefore, it is imperative for Gili Holiday resort to develop
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the strategies accordingly. All the department of for Gili Holiday resort should develop
effective strategies in order to achieve all the organizational objectives.
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QUESTION TWO
According to the case study, Howard Equipment Company (HEC) is a company which deals in
manufacturing of heavy construction equipment. Powerful bulldozer (PD 10) is the primary
product of the company. The case study portrays that company is operating its business in a
very price competitive industry.
It is crucial for HEC to adopt the effective strategies in order to respond effectively to
competition. Porter’s generic strategies can be considered by Howard Equipment Company
to gain the competitive advantage over other companies. Porter’s generic strategy includes
cost leadership, differentiation and focus (Rothaermel, 2015).
Differentiation is one of the most effective generic strategies which can be adapted by HEC.
It is an effective technique which involves making products more different and attractive
than its competitors (Salavou, 2015). One of the best ways to beat the competition is to
make the products or services unique and attractive from that of other rival companies.
Effective application of Differentiation strategy can help an HEC in responding to all its major
problems including the pressure of reducing selling price, high customer bargaining power
and demand of the employees regarding wages. Differentiation strategy is an effective way
to stand apart from the competition. HEC can enjoy different benefits such as leading
scientific research, a strong sales force, creative product development and strong reputation
for quality and innovation.
HEC can focus on improvement of its product and facilities to attract the customers. It
should work on the different factors such as price, delivery and quality. The implementation
of the required and important changes can make its product more valuable and can also
reflect positively on the sales of the company (Farhana, et al. 2015).
As per the case study, the bargaining power of customers is very high. Making product more
effective and innovative can add value to the products of the company. In case of PD10, HEC
can focus on making it more advanced and effective so that it can meet the changing needs
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of the customers. It may lead to enhancement in the costing as well as the selling price
(Nielsen, 2015). It would be helpful for the company in meeting the demand of the
customers who need quality products.
In order to make its product different and more effective than the product of its rival
companies, the company need to focus on the effective research, development and
innovation to deliver the products which can meet the expectation of the clients who need
quality products and facilities. One of the main areas in which company have to pay special
attention is marketing and promotion. The company need to make their client understand
the benefits offered by the differentiated offerings.
One of the important factors which is affecting the profitability of the bargaining power of
the employees. Production of PD10 requires the high skilled workers which is enhancing the
bargaining power of the employees. The effective application of differentiation strategy can
lead to enhancement in the profitability of the company (Pehrsson, 2017). The company can
utilize its profits in paying decent wages to employees and can demand better performance.
Although differentiation strategy can be helpful for HEC for in responding effectively to all
the challenges still there are various challenges associated with it which should be
considered by the company to achieve better results. One of the main limitations of this
strategy is copying of business method. The rival companies can copy the business model of
HEC and can steal its customers which can be a great loss for the company. Another
limitation of this strategy is that its implementation may be difficult as well as costly
(Harashima, 2017).
It may be recommended that HEC should consider all the strength and weakness of this
strategy in order to respond effectively to competition as well as other challenges which are
affecting its business.
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QUESTION THREE
1. BUDGETARY SLACK AND THREE REASONS FOR BUDGETARY SLACK
Budgetary slack refers to a practice of underestimating revenue and overestimating
expenses while budget in an effort to make it easier to meet it. In simple words, it is a way
for management of a company to make a budget with built-in flexibility that allows
achieving budgeted objectives easily. It may occur in the case of considerable uncertainty
about the expected result in the future period. Budgetary slack is one of the common when
an organization use participative budgeting as this it involves the participation of the large
volume of works which enhances the chances of introduction of budgetary slack into budget
(Abdel-Rahim, et al. 2017).
Budgetary slack can be used for the different ethical and unethical purposes. There are
various reasons for the introduction of budgetary slack. Key reasons for budgetary slack are
outlined below:
 When senior management reports to the investment community that the company
is routinely beating expectations related to the internal budget.
 Budgetary slack is common when making the budget ofan a new product line whose
historical record of possible outcome is not available.
 It provides the chance of "making their numbers" to managers particularly when
performance appraisal and bonuses are linked to the attainment of the budgetary
numbers (Gallani, et al. 2015).
All the above-mentioned points are the reason for the introduction of budgetary slack in the
budget. Whatever the reason is, the budgetary slack can mislead the top management
which can influence the profitability of the company.
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2. FIVE WAYS TO REDUCE THE PROBLEM OF BUDGETARY SLACK
As mentioned in the provided case study, the managing director of Global Horison Inc. wish
to implement a participatory budget processing plan but he is anxious about the
introduction of budgetary slack by the manager. It is very important for Global Horison Inc
to reduce the problem of budgetary slack for effective planning, control and motivation.
Effective ways which can be adopted by Global Horison Inc. to minimize the problem of
budgetary slack are:
1) Incentives to mangers -Providing incentives to managers for providing accurate
budgetary projections without any budgetary slack as well as for the achievement of
the budgetary projections (Van der Stede, 2016). Global Horison Inc provides
bonuses to it managers for the achievement of the budgetary targets. It should also
focus on rewarding its employees for providing accurate budget estimates
2) Promoting participative strategic planning – It minimizes the budgetary slack as the
managers get emotionally connected to the organization and hence get dedicated
achieve the organizational goals. The devotion of managers can help Global Horison
Inc to receive accurate budgetary projections.
3) Implementation of budgetary control- An effective implementation of budgetary
control can play a significant role in preventing budget slack. Global Horison Inc
should focus on the development of effective budgetary control to avoid budget
slack (De Baerdemaeker, et al. 2012).
4) Avoiding relaying on the budget – Avoiding relaying on the budget as an evaluative
or negative tool. Global Horison Inc should not rely on the budget as a negative or
evaluative tool.
5) Alignment between the strategic business unit and budgeting process- An effective
alignment between the strategic business unit and budgeting process ensures all the
managers have the same opinion about the achievement of the organizational goals.
It helps in minimizing the budgetary slack to a great extent (De Baerdemaeker, et al.
2012). Global Horison Inc can focus on the good aliment between its budgetary
process and strategic business unit to avoid the chance of budget slack.
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All the above-mentioned ways to minimize the budgetary slack can be adopted by Global
Horison Inc. These ways can be helpful for the company to implement the participatory
budgeting process.
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REFERENCES
 Abdel-Rahim, Heba Y., Michael Majerczyk, Douglas E. Stevens, and James C. Wilhelm.
"The Effect of Outcome Uncertainty on Budgetary Slack and Risk Sharing: An
Experimental Examination." (2017)
 Davis, Bernard, Andrew Lockwood, Peter Alcott, and Ioannis S. Pantelidis. Food and
beverage management. Routledge, 2018
 De Baerdemaeker, Jolien, and Werner Bruggeman. "The impact of participation in
strategic planning on managers’ creation of budgetary slack: The mediating role of
autonomous motivation and affective organisational commitment." Management
Accounting Research 29 (2015): 1-12
 Dopson, Lea R., and David K. Hayes. Managerial accounting for the hospitality
industry. Wiley Global Education, 2016.
 Dudin, Mihail, Georgij Kucuri, Irina Fedorova, Svetlana Dzusova, and Anzhela
Namitulina. "The innovative business model canvas in the system of effective
budgeting." (2015)
 Farhana, Mosarrat, and Eric Bimenyimana. "Design driven innovation as a
differentiation strategy: In the context of automotive industry." Journal of
technology management & innovation 10, no. 2 (2015): 24-38
 Gallani, Susanna, Ranjani Krishnan, Eric Jonathan Marinich, and Michael D. Shields.
"Budgeting, Psychological Contracts, and Budgetary Slack." (2015)
 Harashima, Taiji. "The Mechanism behind Product Differentiation: An Economic
Model." (2017)
 Nielsen, L. "Product Positioning & Differentiation Strategy." Hearst Newspapers
(2015)
 Pehrsson, Anders. "Foreign unit's differentiation strategy and performance: The roles
of competition, strategy control, and market experience." In The 43nd Annual
Conference of the European International Business Academy, Milan, Italy,
December, 14-16. 2017
 Rothaermel, Frank T. Strategic management. McGraw-Hill Education, 2015
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 Salavou, Helen E. "Competitive strategies and their shift to the future." European
Business Review 27, no. 1 (2015): 80-99
 Van der Stede, Wim. "Reducing budget slack may lead managers to focus on the
short term." LSE Business Review (2016)
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