1.

(a) State whether the following statements are True or False: 1x4=4

a) Middle-level management includes Board of Directors and Chief Executives.

Ans: False

b) Henri Fayol developed his idea regarding the functions of management.

Ans: True

c) Strategic plans provide the framework and direction for lower-level planning.

Ans: False, Top level plan

d) Tactical plans govern the day-to-day operations of a business.

Ans: True

(b) Choose the correct answer from the given alternatives: 1x4=4

1. Management deals with

a) Interval environment.

b) External environment.

c) Both internal and external environments.

Ans: c) Both internal and external environments.

2. _______ is about grouping of jobs.

a) Organizing.

b) Directing.

c) Planning.

Ans: a) Organizing.

3. Which of the following is not a limitation of planning?

a) Costing process.

b) Rigidity.

c) Top management approach.

Ans: c) Top management approach.

4. The basic role of strategic is to provide

a) Setting procedure.

b) Direction of control.
c) Direction of action.

Ans: c) Direction of action.

2. Write short notes on any three of the following: 4x3=12

a) Formal organization.

Ans: MEANING OF FORMAL ORAGANISATION: The formal organization refers to the structure of jobs
and positions with clearly defined functions and relationships as prescribed by the top management. This type of
organization is built by the management to realize objectives of an enterprise and is bound by rules, systems and
procedures. Everybody is assigned a certain responsibility for the performance of the given task and given the
required amount of authority for carrying it out.

In the words of Chester Barnard, "An organisation is formal when the activities of two or more persons
are consciously coordinated towards a common objective".

Features of Formal Organisation: The main features of formal organisation are:

(a) In a formal organisation, the position, authority, responsibilities, accountability of each level are
clearly defined.
(b) It prescribes the relationships amongst the people working in the organisation.
(c) The formal relations in the organisation arise from the pattern of responsibilities that are created by
the management.
(d) The structure is consciously designed to enable the people of the organisation to work together for
accomplishing the common objectives of the enterprise.
(e) A formal organisation is bound by rules) regulation and procedures.
(f) It is deliberately impersonal.

b) Delegation of authority.

Ans: With the allocation of duties and responsibilities, there must logically be the grant of necessary authority to
the subordinates so as to enable him to perform his duties efficiently. The Principle of delegation of authority
emphasizes that the organisation structure should provide for the delegation of authority to the subordinates.

Since so many individuals work in the same organization, it is the responsibility of management to lay down
structure of relationship in the organization. Authority without responsibility is a dangerous thing and similarly
responsibility without authority is an empty vessel. Everybody should clearly know to whom he is accountable;
corresponding to the responsibility authority is delegated to the subordinates for enabling them to show work
performance. This will help in the smooth working of the enterprise by facilitating delegation of responsibility
and authority.

c) Extrinsic motivation.

Ans: Extrinsic motivation refers to motivation that comes from outside an individual. The motivating factors are
external, or outside, rewards such as money or grades. These rewards provide satisfaction and pleasure that the
task itself may not provide. An extrinsically motivated person will work on a task even when they have little
interest in it because of the anticipated satisfaction they will get from some reward. The rewards can be
something as minor as a smiley face to something major like fame or fortune.

For example, an extrinsically motivated person who dislikes math may work hard on a math equation because he
wants the reward for completing it. In the case of a student, the reward would be a good grade on an assignment
or in the class.
Extrinsic motivation does not mean, however, that a person will not get any pleasure from working on or
completing a task. It just means that the pleasure they anticipate from some external reward will continue to be a
motivator even when the task to be done holds little or no interest.

An extrinsically motivated student, for example, may dislike an assignment, may find it boring, or may have no
interest in the subject, but the possibility of a good grade will be enough to keep the student motivated in order
for him or her to put forth the effort to do well on a task. Extrinsic motivation is likely to involve the concept of
rewarded behaviour.

d) Formal communication.

Ans: Formal Communication: Communication takes place through the formal channels of the organization
structure along the lines of authority established by the management is called Formal Communication. It is that
route of communication which is institutionally determined and is associated with status or position of the
receiver and sender. The formal channels are deliberately related to ensure that accurate information flows
smoothly and timely. Such communications are generally in writing and may take any of the forms; policy;
manuals: procedures and rule books; memoranda; official meetings; reports, etc.

Characteristics: Following are the chief characteristics of the formal communication

(1) Written and Oral: Formal communication can both be written and oral. Daily works are handled
through oral communication, while the policy matters require written communication.

(2) Formal Relations: This communication is adopted among those employees where formal relations
have been established by the organisation. The sender and the receiver have some sort of organisational relations.

(3) Prescribed Path: The communication has to pass through a definite channel while moving from one
person to another. For example, to convey the feelings of a worker to the manager, the foreman’s help has to be
sought.

(4) Organisational Message: This channel is concerned with the authorised organisational messages only
and the personal messages are out of its jurisdiction.

(5) Deliberate Effort: This channel of communication is not established automatically but effort has to be
made for its creation. It is decided keeping in view the objectives of the organisation.

3. (a) Discuss the functions of management. “Coordination is wider than cooperation.” Why? 8+4=12

Ans: Functions/Elements of Management

According to Henry Fayol, in every organisation manager perform certain functions to achieve results.
These functions are broadly classified under five categories:
a) Planning: Planning is a process of making decision about future. It provides direction to enterprise
activities. Its work is to decide in advance what is to be done, when and where it is to be done, how it is to be
done and by whom. The main functions of planning are Set up goals, Forecasting, Search for alternatives source
of action and Budgeting.
b) Organising: It is concerned with the arrangement of an organisation’s resources – people, material,
technology and finances in order to achieve enterprise objective. The main functions of organising are Job
design, Job specification and Authority and responsibility.
c) Staffing: Staffing is the function of employing suitable personas for the enterprise. It may be defined
as an activity where people are recruited, selected, trained, developed, motivated and compensated for manning
various positions.
d) Directing: According to Dale, direction is telling people what to do and seeing that they do it to the
best of their ability. Directing is a function of guiding and supervising the activities of sub ordinates. The four
main elements of directing are:
 1. Leadership: It is a process of influencing the action of a person or a group to attain desired objectives.
The success of an organisation depends upon the quality of leadership shown by its managers.

2. Motivation: It is the process of stimulating people to take desired courses of action. It is to inspire,
encourage and impel people to take required action.

3. Communication: It is a way of reaching other with ideas, facts, and thoughts. Effective communication
is important in organisation because managers Can achieve very little without it.
e) Controlling: It is the management function concerned with monitoring employee’s activities, keeping
the organisation on track towards its goals, and making corrections as required. It includes four things:
Ø setting standard of performance;
Ø measuring actual performance;
Ø comparing actual performance against the standard;
Ø taking corrective actions to ensure goal accomplishment.

Importance of co- ordination (Essence of Management):

Co-ordination is an integral element or ingredient of all the managerial functions as discussed below: -
a) Coordination through Planning: Planning facilitates co-ordination by integrating the various plans
through mutual discussion, exchange of ideas. e.g. - co-ordination between finance budget and purchases budget.
b) Co-ordination through Organizing - Mooney considers co-ordination as the very essence of
organizing. In fact, when a manager groups and assigns various activities to subordinates, and when he creates
department’s co-ordination uppermost in his mind.
c) Co-ordination through Staffing - A manager should bear in mind that the right no. of personnel in
various positions with right type of education and skills are taken which will ensure right men on the right job.
d) Co-ordination through Directing - The purpose of giving orders, instructions & guidance to the
subordinates is served only when there is a harmony between superiors & subordinates.
e) Co-ordination through Controlling - Manager ensures that there should be co-ordination between
actual performance & standard performance to achieve organizational goals.

Now we can conclude that all the functions of management are affected by coordination. Hence
coordination is essential for achieving the objectives of the organisation. It is also required for the survival,
growth and profitability of the organisation. Coordination encourages team spirit, gives right direction, motivates
employees, and makes proper utilisation of resources. Therefore, Coordination is rightly called the "Essence of
Management".

Or

(b) Write a full note on ‘Hawthorne experiment.’ 12

Ans: Available in our mobile application (Member’s only)

4. (a) Discuss the importance of planning functions in management. 12

Ans: Planning is the primary function of management. Planning concentrates on setting and achieving objectives
through optimum use of available resources. Planning is necessary for any organisation for its survival growth
and prosperity under competitive and dynamic environment. Planning is a continuous process to keep
organisation as a successful going concern.

Planning is of vital importance in the managerial process. No enterprise can achieve its objectives without
systematic planning. “Planning is the heart of management” The following points highlight the importance of
planning function of management:
 a. Planning provides directions: By stating i n advance how work is to be done, planning provide
direction for action. If goals are well defined, employees are aware of what the organisation has to do and what
they must do to achieve those goals. Departments and individuals in the organisation are able to work in
coordination. Planning keeps the organisation on the right path. If there was no planning, employees would be
working in different directions and the organisation would not be able to achieve its goals efficiently.
b. Planning reduces the risks of uncertainty: Business enterprises operate in an uncertain
environment and face several types of risks. Planning enables these enterprises to predict future events and
prepare to face the unexpected events. With the help of planning, managers can identify potential dangers and
take steps to overcome them. Thus, planning helps risk and uncertainty.
c. Planning facilitates decision-making: Decision-making involves searching for various alternative
courses of action, evaluating them and selecting the best course of action. Under planning, targets are laid down.
With the help of these targets, managers can better evaluate alternative courses of action and select the best
alternative. Plans lay down in advance what is to be done and how it is to be done. Therefore, decisions can be
taken with greater confidence.
d. Planning reduces overlapping and wasteful activities: Since planning ensures clarity in thought
and action, work is carried on smoothly without interruptions. There is no confusion and misunderstanding.
Useless and redundant activities are minimized or eliminated. It is easier to detect inefficiencies and take
corrective measures to deal with them.
e. Planning promotes innovative ideas: Planning is thinking in advance and, therefore, there is scope
of finding better ideas and better methods and procedures to reach the objectives/goals of the enterprise. This
forces managers to think differently about the future of the organisations from the present. Thus, planning makes
the managers innovative and creative.
f. Planning establishes standards for controlling: Planning provides the goals or standards against
which the actual performance can be measured and evaluated. A comparison of actual performance with the
standards helps to identify the deviations and to take corrective action. Planning makes control meaningful and
effective. ‘Control is blind without planning.” Thus, planning provides the basis of control.

Or

(b) What do you understand by the term ‘planning’? Discuss about the various techniques of planning.
4+8=12

Ans: Introduction of Planning

Planning is the primary function of management. Planning concentrates on setting and achieving
objectives through optimum use of available resources. Planning is necessary for any organisation for its
survival growth and prosperity under competitive and dynamic environment. Planning is a continuous process to
keep organisation as a successful going concern.

In the words of: Koontz and O’Donnel – “Planning is deciding in advance, what to do, how to do it,
when to do it, and who is to do it. It bridges the gap from where we are to where we want to go.”

Allen – “Management planning involves the development of forecasts, objectives, policies programmes,
procedures, schedules and budgets.”

Haynes and Massie - Planning is a decision making process of a special kind. It is an intellectual process
in which creative thinking and imagination is essential.”

Alfred and Beatty - “Planning is the thinking process, the organized foresight, the vision based on fact
and experience that is required for intelligent action.

Various Techniques of Planning (Available in our mobile application - Member’s only)

5. (a) What is informal organization? Discuss the nature of informal organization. 4+8=12
Ans: MEANING OF INFORMAL ORAGANISATION: Man is a social being and wants social
interaction. Formal organisations are joined by people to satisfy their needs but these organisations cannot
satisfy all the needs of people because of their nature. Hence informal organisation emerges in all the formal
organisations.

Informal organisation is natural or spontaneous network of personal and social relationships between
individuals formed on the basis of personal attitudes values emotions, friendships prejudices, interest’s likes and
dislikes, regional affinity, common work place etc. Informal organisation is all pervasive and is found at all
levels of management. It consists of small informal groups with their own behavioral patterns, status systems,
beliefs and goals.

According to Davis informal organisations is” that network of personal and social relations which is not
established or required by formal organisation. It is a shadow organisation”.

Causes of Emergence of informal Groups:

1) To satisfy social needs which are not satisfied by formal organisations.
2) To enjoy sense of belongingness and identification.
3) To get knowledge of approved behaviour determined by the informal organisation.
4) To get outlet of employees’ frustration.
5) To achieve objectives which is not possible in formal organisations.
6) To get opportunities for influence and creativity.
7) To perpetuate cultural values.
8) To promote communication and obtain information.

Features and Nature of Informal Organisation: The chief features of informal organisation are:
1) Informal Organisation is not established by any formal authority. It arises from the personal and
social relations amongst the people working in the organisation.
2) Informal Organisation arises spontaneously, and not by deliberate or conscious efforts.
3) It is influenced by the personal attitudes, emotions, whims, likes and dislikes, etc. of the people in the
organisation.
4) It is based on rules, regulations and procedures.
5) The inter-relations amongst the people in an informal organisation cannot be charted (i.e., cannot be
shown in an organisation chart).

(Full topic covered in our mobile application – Member’s only)

Or

(b) What do you mean by the term ‘authority’? Describe the main characteristics of authority.
Differentiate between authority and responsibility. 2+6+4=12

Ans: Authority: Authority means power to take decision. To carry on the responsibilities every employee need to
have some authority. So, when managers are passing their responsibilities to the subordinates, they also pass
some of the authority to the subordinates. The delegating authority is the second step of organising process.
While sharing the authority managers keep in mind that the authority matching to the responsibility should only
be delegated. They shall not pass all their authority to their subordinates.

Features or characteristics of Authority:

1. Legal Power to take decisions: Authority is a legal power of superior which helps him to take decision
and influence and guide others.
 2. Right to take Decision: Authority ensures the right to make decision in favour of the organization.

3. Right to Command subordinates and lower level management: Authority is a legal power to command
subordinate level employees.

4. Dominance: Authority is dominance by nature because it gives command to the leader over their
subordinates.

5. Right to Control: Authority is a right to control subordinates and other organizational functions in order
to get better result.

6. Accountability: The person possessing authority is also accountable to higher level authority. So, he
should be accountable for his work.

7. Direction of flow: Authority always flows downward from superior to subordinates.

Difference between Authority and Responsibility

Responsibility means the work assigned to an individual. It includes all the physical and mental activities
to be performed by the employees at a particular job position. The process of delegation begins when manager
passes some of his responsibilities to his subordinates which means responsibility can be delegated.

Responsibility is different from authority in the following manner:

Basis Authority Responsibility
Authority is the power or right to take It is the duty or task to be performed by an
Meaning decision. individual.
Authority arises because of a formal Responsibility arises from the superior-
Origin position in the organisation. subordinated relationship.
Direction of Authority always flows downward from Responsibility flows upward as superior assigns
flow superior to subordinated. task or responsibility to subordinates.
Delegation Authority can be delegated. Responsibility can be fully delegated.

6. (a) What is motivation? Discuss the importance of motivation as a tool of

supervision. 4+8=12

Ans: Motivation: The word motivation is derived from ‘motive', which means an active form of a desire,
craving or need that must be satisfied. Motivation is the key to organisational effectiveness. The manager in
general has to get the work done through others. These 'others' are human resources who need to be motivated to
attain organisational objectives.

According to George R. Terry, "Motivation is the desire within an individual that stimulates him or her to
action."

According to Berelson and Steiner “A motive is an inner state that energizes activates, or moves and
directs or channels behavior goals".

According to Lills "It is the stimulation of any emotion or desire operating upon one's will and promoting
or driving it to action".

According to Encyclopedia of Management “Motivation refers to the degree of readiness of an organism

to pursue some designated goals and implies the determination of the nature and locus of force inducing a degree
of readiness."

Importance of Motivation
 a) High Performance: - Motivated employee’s writ put maximum efforts for achieving organisational
goals. The untapped reservoirs of physical and mental abilities are taped to the maximum. Better performance
will also result in higher productivity. The cost of production can also be brought down if productivity is raised.

b) Low employee Turnover and Absenteeism: -When the employees are not satisfied with their job then
they will leave it whenever they get an alternative offer. The dissatisfaction among employees also increases
absenteeism. The employment training of new employee’s costs dearly to the organisation.

c) Better Organisational Images: -Those enterprises which offer better monetary and non-monetary
facilities to their employees have a better image among them. Such concerns are successful in attracting better
qualified and experienced persons. Since there is a better man-power to development programme, the employees
will like to join such organisations. Motivational efforts will simplify personnel functions also.

d) Better Industrial Relations: -A good motivational system will create job satisfaction among
employees. The employment will offer them better service conditions and various other incentives. There will be
an atmosphere of confidence among employers and employees. There will be no reason for conflict and cordial
relations among both sides will create a healthy atmosphere. So motivation among employees will lead to better
industrial relations.

e) Acceptability to Change: -The changing social an industrial situation will require changes and
improvements in the working of enterprises. There will be a need to introduce new and better methods of work
from time to time. Generally, employees resist changes for fear of an adverse effect on their employment.

Or

(b) Define leadership. Are there any traits which seem to be common to all successful
leaders? 2+10=12

Ans: Introduction to Leadership

Leadership is the ability to build up confidence and deal among people and to create an urge in them to
be led. To be a successful leader, a manager must possess the qualities of foresight, drive, initiative, self-
confidence and personal integrity. Different situations may demand different types of leadership.

Leadership means influencing the behaviour of the people at work towards realizing the specified goals.
It is the ability to use non-coercive (no force) influence on the motivation, activities and goals (MAG) of others
in order to achieve the objectives of the organisation.

Koontz and 0' Donnel “Leadership is the ability of a manager to induce subordinates to work with
confidence and zeal”.

George R Terry “Leadership is the activity of influencing people to strive willingly for group objectives”.

Traits and Qualities of a Good Leader

1. Patience: Patience is the capacity to face difficult situations, hardships or inconvenience without
making a single complaint. A good leader must show patience while waiting for expected results, facing difficult
situations and taking important decisions. He must avoid taking hasty decisions and actions.
2. Good Personality: A good personality is a combination of physical, mental and social qualities. Good
personality helps a leader to influence his followers. Attractive physique and good manners add an advantage to
the leader's personality.
3. Self-confidence: A good leader must have self-confidence. This quality is necessary for facing
challenging situations and for solving problems easily and effectively.
4. Human Skills: A good leader must have essential social and human skills. That is, he must
understand people. This quality is necessary for dealing with different types of persons and social groups.
 5. Judgment skills: A good leader should be able to examine problems in right perspective. His
judgment and decision making abilities should be superior to others. He should be able to form opinions and
judge based on facts and not be prejudiced
6. Communication skills: A good leader should be able to communicate the goals and procedures of the
organisation clearly, precisely and effectively to the subordinates. Only then will it be possible for him to
convince, persuade and stimulate subordinates to action.
7. Listening skills: People tend to avoid a leader who does not listen. Hence a good leader in one who
can listen to other people’s problems. He should be able to create a culture whereby people can be frank with him
and give him information and also give him feedback about himself, which can help him to improve himself.
8. Inspiring skills: A good leader should be able to inspire people to deal with the “why” question. He
should not just command and control but be able to lead the people and get them involved to work together as a
team.
9. Administrative Skills: A good leader must have an administrative ability. This means, he must be
able to get the work done through his followers. He must know how to plan, organize and control the work of his
followers.
10. Discipline: A good leader must be a disciplined person. This means he must have respect for the rule
and regulations of the organisation. This is because his followers will follow his example.
11. Initiative: A good leader must always take an initiative. This means he should do the right thing at
the right time without being told by others. He must be able to construct and implement his own plan.
12. Intelligence: A good leader must be smart and intelligent. That is, he should have a good educational
background and sound technical knowledge. He should be more intelligent than his followers. If not, his
followers will not respect him. This will have a bad effect on his performance.
13. Innovative: A good leader must have an art of innovation. That is, he must have a good imagination
and visualization skills. He must develop new ideas and tactics to solve problems. He must combine the new
ideas with the old ideas.

7. (a) (1) “Planning and controlling are two inseparable functions of management.” Discuss. 6

Ans: Relationship between Planning and Controlling

The relationship between planning and controlling can be divided into the following two parts.

(i) Interdependence between Planning and Controlling.

(ii) Difference between Planning and Controlling.

(i) Interdependence between Planning and Controlling. Planning is meaningless without controlling and
controlling is blind without Planning. Both the aspects of the interdependence of planning and control have been
discussed below:

(a) Planning is meaningless without Controlling: if the process of controlling is taken away from
management no person working in the enterprise will take it seriously to work according to the plans and
consequently, the plans will fail.

(b) Controlling is blind without Planning: Under the system of controlling actual work performance is
compared with the standards. Hence, if the standards are not determined there is no justification left for control
and the standards are determined under planning.

(ii) Difference between Planning and Controlling: Yes, planning and controlling are incomplete and
ineffective without each other but it doesn’t mean that both are not independent. Reasons are:

(a) Planning is looking Ahead whereas Controlling is Looking Back: Plans are always formulated for
future and determined the future course of action for the achievement of objectives laid down. On the contrary,
controlling is looking back because under it a manager tries to find out, after the work is completed, whether it
has been done according to the standards or not.

(b) Planning is the first function and Controlling is the last function of Managerial Process: the
managerial process moves in a definite sequence- like planning, organising, staffing, directing and controlling
happens to be the last step.

(2) Write a detailed note on traditional techniques of managerial control. 6

Ans: Techniques of Control or Methods of Establishing Control

A number of techniques or tools are used for the purpose of managerial control. Some of the techniques
are used for the control of the overall performance of the organisation, and some are used for controlling specific
areas or aspects like costs, sales, etc. The various techniques of control can be classified into categories, viz.,

(1) Traditional or Conventional techniques and

(2) Modern or Contemporary techniques.

Traditional Techniques

1. Budgetary Control: A budget is a planning and controlling device. Budgetary control is a technique
of managerial control through budgets. It is the essence of financial control. Budgetary control is done for all
aspects of a business such as income, expenditure, production, capital and revenue. Budgetary control is done by
the budget committee.

According to J.A. Scott, “Budgetary control is the system of management control and accounting in
which all operations are forecasted and so far as possible planned ahead, and the actual results compared with the
forecasted and planned ones”.

2. Standard Costing: Standard Costing is defined by I.C.M.A. Terminology as, “The preparation and
use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points
of incidence”. The technique of standard cost study comprises of:
Ø Pre-determination of standard costs;
Ø Use of standard costs;
Ø Comparison of actual cost with the standard costs;
Ø Find out and analyse reasons for variances;
Ø Reporting to management for proper action to maximize efficiency.

3. Break-even Analysis or Cost-Volume-Profit Analysis: Cost-Volume-Profit Analysis or Break-even

Analysis is the study of the interrelationship between the cost (i.e., cost of production), volume (i.e., the volume
of production and sales), the prices and the sales value, and the profits. In other words, it is the study of the inter-
relationship between the cost (i.e., cost of production), volume (i.e., volume of production and sales), prices (i.e.,
selling prices) and profits.

4. Inventory Control: Inventory is the stock of raw materials, work-in-progress, finished goods,
consumable stores and spare parts and components at any given point to time. So, inventory control means
control over different items of inventory or stock. “It is defined as physical control of stock items and
implementing the principles and policies relating thereto”.

5. Internal Audit: Internal audit is a continuous and systematic review of the accounting, financial and
other operations of a concern by the staff specially appointed by the management for the purpose. In other words,
it is the auditing for the management conducted by the staff specially appointed for the purpose to ensure that the
work of the concern is going on smoothly, efficiently and economically.
 6. Statistical Data Analysis: It is a technique under which statistical data of the past and the present
relating to the important aspects of the business are used for managerial control. The statistical data are collected
from books and registers of the concern and presented to the management in a systematic manner in the form of
tables, charts, graphs, etc.,

7. Direct Supervision and Observation: 'Direct Supervision and Observation' is the oldest technique of
controlling. The supervisor himself observes the employees and their work. This brings him in direct contact with
the workers. So, many problems are solved during supervision. The supervisor gets first-hand information, and
he has better understanding with the workers. Production Planning and Control: According to S. Elon,
“Production planning and control may be defined as the direction and co-ordination of the firm’s material and
physical facilities towards the attainment of pre-specified production goals in the most efficient and valuable
way”.

8. Self-Control: Self-Control means self-directed control. A person is given freedom to set his own
targets, evaluate his own performance and take corrective measures as and when required. Self-control is
especially required for top level managers because they do not like external control. The subordinates must be
encouraged to use self-control because it is not good for the superior to control each and everything. However,
self-control does not mean no control by the superiors. The superiors must control the important activities of the
subordinates.

Or

(b) Explain the following: 6x2=12

1. Zero-base budgeting.

Ans: ZBB is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as
though the activities to which the budget relates were being undertaken for the first time. Without approval, the
budget allowance is zero’.

Zero – base budgeting is so called because it requires each budget to be prepared and justified from zero,
instead of simple using last year’s budget as a base. In Zero Based budgeting no reference is made to previous
level expenditure. Zero based budgeting is completely indifferent to whether total budget is increasing or
decreasing.

‘Zero base budgeting’ was originally developed by Peter A. Pyher at Texas Instruments. Peter A. Pyher
has defined ZBB as “an operating, planning and budgeting process which requires each manager to justify his
entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to
justify why we should spend any money at all”.

CIMA has defined it “as a method of budgeting whereby all activities are revaluated each time a budget
is set."

The major benefits of the use of zero base budgeting can be the following:
a) Zero base budgeting examines all existing and new programmes and activities. It also makes the
managers analyse their functions, establish priorities and rank them. This exercise helps in identifying inefficient
or obsolete functions within the area of responsibility. In this way resources are allocated from low
priority programmes to high priority programmes.
b) This system facilitates identification of duplication of efforts among organisational units. Such
inefficient activities are eliminated and some other activities are merged.
c) All expenditures, under this system are critically reviewed and justified and all operations activities
are evaluated in greater detail in terms of their cost- effectiveness and cost-benefits. This requires managers to
find alternative ways of performing their activities which may result in more efficient procedures.

2. Management audit.
Ans: Management audit is a method of independent and systematic evaluation of the management activities at .all
levels of management to ascertain the functions, efficiency and achievement of' the management (i.e. policies) as
compared to standards set by the company.

According to L. R. Howard, "Management audit is an investigation of business from the highest level
downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective
relationship with outside world and smooth running of internal organization."

As per Taylor and Perry; "Management auditing is a method to evaluate the efficiency of management at all
levels throughout the organization, or more specifically, it comprises the investigation of a business by an independent
body from the highest executive level downwards, in order to ascertain whether sound management prevails through
and to report as to its efficiency or otherwise with recommendations to ensure its effectiveness where such is not the
case."

The scope of management audit is much wider than financial audit because management audit evaluates not
only financial audit but also other aspects of the business. It is the method of evaluating the total efficiency of the
management from the top level to the lowest level. Therefore, the main scope of management audit is:

(i) Evaluate the efficiency of the management: Management· audit evaluates and appraise the efficiency of the
management at all levels.

(ii) Implementation of principles and policies of the management: Management audit review whether
principles and policies formulated by the management have been successfully implemented or not.

(iii) Find variances: It detects the variances in efficiency with the standards set by the management. .

(iv) Analyze the reasons for variances: Management audit analyze the reasons for inefficiencies of the
management for not fulfilling the targets.

(v) Recommend suggestions for improvement: It gives suggestions for improvement in the areas e.g.
production, sales, purchase, finance, human resources, administration etc.