Julie Corporation (Julie) has been well established in Hong Kong for a number of years. It is engaged in manufacturing and retailing of naturally based herbal cosmetic products. Julie conducts extensive research to develop high-quality products. Recently, profitability and market share of Julie have fallen significantly because there are lots of cosmetic products imported from overseas in the past few years. Julies directors have identified two strategic directions for the coming five-year plan. The directors considered that Julie could either invest more in research and development (R&D) to develop innovative products or reduce costs significantly to survive. Julie does not lack experience in R&D, but the directors have always been frustrated by the control and evaluation of the R&D department. The manager of the R&D department has been very protective. Over the previous years, the total expenditure of the R&D department has increased steadily at a rate of 10% per year based on the incremental budgets prepared by the R&D manager. The R&D managers compensation is the highest amongst the senior executives and has incentive pay that linked to R&D expenditure. Personnel costs are the largest expense item of the R&D department and the salaries of the R&D staff are generally above the companys averages. The Board of Directors (BoD) agreed that R&D is important to the companys long term success. However, they are keen to develop and implement an effective system to measure and monitor the performance of the R&D department.

Required:

(a) Identify three characteristics of Research and Development (R&D) which is operated as a strategic responsibility center in Julie Corporation.

(b) Based on the characteristics of the R & D department in Julie, discuss the application of budgetary control and management control in regard to personnel costs and other expenses.

(c) Discuss four factors to be considered when designing a control system for employees.