Chapter 9

MCS IN SERVICE AND NON PROFIT ORGANIZATION

Features of Service Organization Features of Professional Organization MCS in Professional Service Organization Features of Non-Profit Organization MCS in Non-Profit Organization

Features of Service Organization

(1) Absence of inventory buffer

Goods can be held in inventory, which is a buffer that dampens the impact on production activity of fluctuations in sales volume. Services can be stored. The airplane seat, hotel room, hospital operating room, or the hours of lawyers, physicians, scientist, and other professionals that are used today are gone forever. Thus, although, a manufacturing company can earn revenue in the future from products that are hand today, a service company cannot do so. It must try to minimize its unused capacity. Moreover, the cost of many services organizations is essentially fixed in the shorts run. In short, a hotel cannot reduce its costs substantially by closing off its rooms. Accounting firms, law firms, and other professional organizations are reluctant to lay off professional personal in times of low sales volume because of the effect on morale and the costs of rehiring and training. A key variable in most service organization, therefore, is the extent to which current capacity is matched with demand. Service organization attempts this matching in two ways. First they try to stimulate demand in off peak periods by marketing efforts and price concessions. Cruise lines and resort hotels offer low rates off seasons. Second, if feasible, service organization adjusts the size of workforce to anticipated demand, if feasible, by such measures as scheduling training activities in slack periods and compensating for long hours in busy periods with time off later. The loss from unsold services is so important that occupancy rates and similar indications of success in selling available services are normally key variable in service organizations.

(2)

Difficulty in Controlling Quality

A manufacturing company can inspect its products before they are shipped to consumer, and their quality can be measured visually or with instruments(tolerances ,purity, weight, color, and so on).A service company cannot judge product quality until the moment the service is rendered, and then the judgment are often subjective. Restaurants management can examine the food in the kitchen, but customer satisfaction depends to a considerable extent on the way it is served. The quality of education is so difficult to measure that few educational organizations have a formal quality control system.

(3)

Labor Intensive

Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs. Most service companies are labor intensive and cannot do this. Hospitals do add expensive equipment, but mostly to provide better treatment, and this increase costs. A law firm expands by adding partners and new support personnel.

(4) Multi-Unit Organizations

Some services organization operate many units in various locations, each unit relatively small. These organizations are fast-food restaurant chains, auto rental companies, gasoline services stations, and many others. Some of the units are owned; others operate under a franchise. The similarity of the separate units provides a common basis for analyzing budgets and evaluating performance not available to the manufacturing company. The information for each unit can be compared with system wide or regional averages, and high performance and low performers can be identified. However, because units differ in the mix of services they provide, in the resources that they use, and in other ways, care must be taken in making such companies.

(5) Historical Development

Cost accounting started in manufacturing companies because of the need to value work in process and finished goods inventories for financial statement purposes. These systems provided raw data that were easily adapted for use in setting selling prices and for other management purposes. Standard cost systems, separation of fixed and variable costs and analysis of variances were built on the foundation of cost accounting system, separation of fixed and variable costs and analysis of variances were built on the foundation of cost accounting systems. Until a few decades ago, most texts on cost accounting dealt only with practices in manufacturing companies. Many service organizations (with the notable exception of railroads and both cost data. Their use of product costs and other regulated industries) is not having a similar impetus to develop cost data. Their use of product cost and other management accounting data is fairly recent mostly since World War II. Nowadays, their management control systems are rapidly becoming as well as those developed as those in manufacturing companies.

Features of Professional Service Organization

(1) Small in size: Generally, professional; organizations are small in size and are small in size and are located at one place. Accordingly, personal observation is possible on the part of senior management and this forms the basis for motivation of employees. Consequently, the need to have profit centres and formal reports of performance is less felt. This means that the need to have an intricate management control system is lower. While such organizations are small, there is still the need to tie remuneration to actual performance, prepare a budget, regularly compare actual performance against the budget etc. (2) Goals: While earnings a satisfactory return on assets is the main goal of a manufacturing organization, it is not possible to calculate the same for non-profit organization as it possesses only a few tangible assets. The skill of its human resources that is professional staff is its main asset. This being the case, the main financial goal of such organization is to pay adequate remuneration to its professional staff. Another goal of professional organization is to expand. While this leads to scale economics through better utilization of staff at corporate headquater it also reflects the success of the organization as size is an indicator of success. (3) Professionals: While professional organization are not capital intensive like manufacturing organization but labour intensive in nature, professionals working in such organizations possess a number of characteristic. There are: (i) They like to work independently. (ii) The labour is of special kind (iii) Those amongst them who also work in the capacity of managers devote only part time attention to management activities. (iv) Most of them do not possess a formal management education. Senior partner of law firms have client, senior partners of consulting frims play an active role in consultancy assignment, and senior partner of accounting firms take an active part is audit assignments. As a result of the above characteristic, professionals have low regards for managers. By virtue of their background, they are interested in doing the job in the best possible manner without having any regards for the cost. This results in virtually ignoring the financial implications of their decisions. Similarly this affects the attitude of non-professional and other approved staff. (4) Measurement of Output & Input:One of the problems confronting a professional organization is how to measure the outputof its professionals. This is because traditional measures of performance which are used in manufacturing industry such as tons, units etc cannot be used in these organizations. While output is the effectiveness of the professional work, this cannot be measured by: (a) The number of hours a consultant spends with his client or the number of pages in report. (b) The number of hours a lawyer spends in the court room or the number of pages a brief has. (c) The number of patients that is treated by the physician daily. Although some professional organization employs revenue as a measure of output, it must be appreciated that this measures volume of services provided by the organization and not their quality. Whereas, some tasks performed by professional are repetitive in nature, the major portion of the work done by them can be considered as non-repetitive. Instances of repetitive work are physical stocktaking by auditors, drafting simple contracts, wills, deeds by lawyers etc. It is possible to develop standards for such tasks and use them

profitably. However, in respect of non-repetitive tasks, planning the time required, establishing standards considered reasonable for performing tasks, and evaluation of performance become a difficult task. Another problem that arises in performance measurement is the unwillingness of professionals to maintain records relating to time spent. Although this problem can be resolved if senior management takes the initiatives in ensuring accurate reporting of time, the problem arises in connection with the amount to be charged per hour for time spend on a job. (4) Marketing in Professional Service Organization: Whereas there exists a strict demarcation between manufacturing and marketing activities in manufacturing organizations, it is hard to find such dividing line in professional organizations. Professional working in professional firms is like accounting, law and medical are debarred from openly marketing the firms services by virtue of their professional code of ethics. However, most of the organizations need to engage in marketing as its an essential activity. Consequently, professional who work for clients, that is devote most of their time and energy to production make speeches, play golf, establish contacts and similar activities to market the organizational services.

MCS inProfessional Service Organization

The most important aspects of management control systems in professional organizations are: Pricing Strategic planning and budgeting Control of operations Performance measurement and appraisal

(1) Pricing
Most professional firms determine the price of their services in a traditional manner. If the professional service offered is dependent on time, then the fee is fixed on the basis of time spent on the service. Investment banking is an exception to this. In case of investment banking, the service charge is determined on the basis of monetary size of the securities issue. Prices of services offered differ from profession to profession. The prices are high for accountants and physicians compared to research scientists, for instance.

(2) Strategic planning and budgeting

Manufacturing organizations have better strategic planning systems when compared to professional organizations of similar size. One of the main reasons for this could be that professional organizations do not need such a system. Strategic planning is important for manufacturing organizations because any commitment relating to the procurement of plant and equipment does effect its capacity and expenditures for years, and such effects are irreversible. In professional organizations, the main assets are people and changes in the size and composition of the staff are irreversible and easier to make. The strategic plan of a professional organization is not as comprehensive as that of a manufacturing organization. It is mainly a longrange staffing plan and does not cover other functions.

(3) Control of operations

Scheduling the working hours of employees is one of the most important aspects of controlling the operations in professional organizations. The billed time ratio, that is the ratio of hours billed to total professional hours available, should be analyzed thoroughly. Idle time should be minimized and appropriate rates should be used for billing engagements.

(4)Performance measurement and appraisal

In professional organizations, it is easy to analyze the performance of employees at the top most and the lowest hierarchical level, but it is difficult to analyze the performance of employees who are placed somewhere between the two extremes. The main reason for this is the absence of objective criteria for performance appraisal. But there are exceptions to this too. For example, the performance of an investment analyst can be appraised by comparing his recommendations and the market behavior of securities. In many cases, performance appraisal depends on human judgment. An employees performance may be judged by his superiors, peers, subordinates and clients. Professional organizations use formal performance appraisal system numerical ratings of specified performance attributes. These ratings are used as deciding factors for wage hikes and promotions.

Features of Non- Profit Organization

(1) Contributed Capital:
While a business organization receives money from its shareholders by issuing shares, a non profit organization receives contributions. While the contributed capital are of two main type- endowments and plant, endowments are nothing but gifts from donors whose intention is that the principal should remain intact for a specific period or indefinitely and only income arising therefrom should be employed for financing purpose. Work of art, museum objects, contribution of money for acquiring building, equipments and miscellaneous fixed assets are within the category of plant.

(2) Profit motive is non existent:

While most business organization have profit as their main goal which is measured by the net profit shown in the profit and loss account, non profit organization have multifarious goals and owing to the absence of profit motive no such performance measure exists. The income and expenditure account shows the surplus or deficit of the non profit organization. Unlike a business organization, a non profit organization cannot earn a large surplus. The reason underlying this is that a large surplus means that the entity is not providing the services desired by the contributors of capital. Similarly, continous deficit would make the organization bankrupt. Consequently, it is desireable that such organization should earn a modest profit.

(3) Governance:

Trustees who are nominated to govern non profit organization work in honorary capacity and several trustees are not familiar with the management of business. Apart from this, it is difficult to measure the performance of such an organization. Consequently, the control of trustees is less and they are likely to isolate actual and incipient problems compared the directors of a business organization.

(4) Accounting of funds:

An accounting system called fund accounting is used by several non profit organizations under which separate accounts are maintained in respect of many funds. The accounts are self balancing. Generally, the following funds are maintained by organizations: Endowments fund, capital fund, general fund and special purpose funds. The endowments fund accounts for contribution from donor, whereas the capital fund is used for maintaining account for capital contribution in the form of capital assets. In so far the general fund is concerned, it is nothing but the income and expenditure account. The general fund forms the focus for management control.

(5) Financial Accounting:

The non profit organization follows the guidelines laid down by the government for preparing financial accounts for external purpose. However while reporting to the government body as well as management, they follows the above practice. The income anf expenditure accounts and balance sheet also form a part of external reporting.

MCS in Non- Profit Organization

A nonprofit organization was define by law, is an organization that cannot distribute assets or income to, or for the benefit of, its member, its officers, directors. The organization can, of course, compensate its employees, including officers and members, for services rendered and for goods supplied,. This definition does not prohibit an organization from earning a profit, on average, to provide funds for working capital and for possible rainy days. (1) Product Pricing Many nonprofit organizations give inadequate attention to their pricing policies. Pricing of services at their full const is desirable. A full-cost price is the sum of direct costs, indirect cost, and perhaps a small allowance for increasing the organizations equity. This principle applies to services that are directly related to the organizations objectives. Pricing for peripheral activities should be market-based. Thus a nonprofit hospital should price its health care services at full const, but prices in its gift shop should be market based. In general, the smaller and more specific the unit of service that is priced, the better the basis for decisions about the allocation of resources. For example, a comprehensive daily rate for hospital care, which was common practice a few decades ago, masks the

revenues for the mix of services actually provided. Beyond a certain point, of course, the cost of the paper work associated with pricing units of service outweighs the benefits. As a general rule, management control is facilitated when prices are established prior to the performance of the services. If an organization is able to recover it s incurred costs, management is not motivated to worry about cost control. (2) Strategic planning and budget Preparation In nonprofit organizations that must decide how best to allocate limited resources to worth-while activities, strategies planning is a more important and more time-consuming process than in the typical business. Colleges and universities, welfare organizations, and organization in certain other nonprofit industries know before the budget year begins, the approximate amount of their revenues. They do not have the option of increasing revenues during the year by increasing their marketing efforts. They budget expense so that organization will at least break even at the estimated amount of revenue. They require that managers of responsibility centre limit spending close to the budget amounts. The budget is, thereof, the most important management control tool, at least with respect to financial institution. (3) Operation and Evaluation In most nonprofit organizations, there is no way of knowing what the optimum operating costs are. Responsibility centre managers, therefore, tend to spend whatever is allowed in the budget, even though the budgeted amount may be higher than is necessary. Conversely, they may refrain from making expenditures that have an excellent payoff simply because the expenditure was not included in the budget. Although nonprofit organizations have has a reputation for operating inefficiently, this perception has been changing for good reasons. Many organization have had increasing difficulty in raising funds, especially from government resources. This has led to belt-tightening and to increased attention to management control. As mention above, the most dramatic change has been in hospital costs, with the introduction of reimbursement on the basis of standard prices for diagnostic-related groups

Performance Evaluation in Non- Profit Organization

The evaluation of performance is not possible using financial measures, for these entities do not exist to earn profit. The performance is therefore evaluated on the basis of comparisons between budgeted expenditure and actual expenditure. For any organization, the most important reasons to measure performance are to improve effectiveness and to acquire information that will allow the organization to drive its agenda forward. If the motivation for doing evaluation remains outside an organization, the evaluation will have limited impact. To do performance assessment effectively, an organization must commit to adopting a culture of measurement, because acceptance must come from senior management, staff, funders, and board members alike.

(a)

Board self-evaluation

Members of the Board of Directors should regularly evaluate the quality of their activities on a regular basis. Activities might include staffing the Board with new members, developing the members into well-trained and resourced members, discussing and debating topics to make wise decisions, and supervising the CEO. Probably the biggest problem with Board self-evaluation is that it does not occur frequently enough. As a result, Board members have no clear impression of how they are performing as members of a governing Board. Poor Board operations, when undetected, can adversely affect the entire organization.

(b) Staff and volunteer (individual) performance evaluation

Most of us are familiar with employee performance appraisals, which evaluate the quality of an individuals performance in their position in the organization. Ideally, those appraisals reference the individuals written job description and performance goals to assess the quality of the individuals progress toward achieving the desired results described in those documents. Continued problems in individual performance often are the results of poor strategic planning, program planning and staff development. If overall planning is not done effectively, individuals can experience continued frustration, stress and low morale, resulting in their poor overall performance. Experienced leaders have learned that continued problems in performance are not always the result of a poor work ethic the recurring problems may be the result of larger, more systemic problems in the organizations.

(c) Program evaluation

Program evaluations have become much more common, particularly because donors demand them to ensure that their investments are making a difference in their communities. Program evaluations are typically focused on the quality of the programs process, goals or outcomes. An ineffective program evaluation process often is the result of poor program planning programs should be designed so they can be evaluated. It can also be the result of improper training about evaluation. Sometimes, leaders do not realize that they have the responsibility to verify to the public that the nonprofit is indeed making a positive impact in the community. When program evaluations are not performed well, or at all, there is little feedback to the strategic and program planning activities. When strategic and program planning are done poorly, the entire organization is adversely effected.

(d) Evaluation of cross-functional processes

Cross-functional processes are those that span several systems, such as programs, functions and projects. Common examples of major processes include information technology systems and quality management of services. Because these cross-functional processes span so many areas of the organization, problems in these processes can be the result of any type of ineffective planning, development and operating activities.

(e) Organizational evaluation

Ongoing evaluation of the entire organization is a major responsibility of all leaders in the organization. Leaders sometimes do not recognize the ongoing activities of management to actually include organizational evaluations but they do. The activities of organizational evaluation occur every day. However, those evaluations usually are not done systematically. As a result, useful evaluation information is not provided to the strategic and program planning processes. Consequently, both processes can be ineffective because they do not focus on improving the quality of operations in the workplace.