Page 244 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 13: Management Control of Service Organisation

 Discuss the problems in greating and controlling intra-company investment centres such Notes
as branches of a bank

 Explain the non-profit organisations
Introduction

The managers of nonprofit organizations are in charge of designing a proper system of
management control to ensure effective and efficient use of resources. For several reasons,
management control in service industries is somewhat different from management control in
manufacturing companies. These factors apply also to the management control of legal, research
and development, and other service departments in companies generally.

13.1 Service Organisations in General

Characteristics that distinguish from manufacturing organizations:
1. Absence of inventory buffer: Goods in a manufacturing organisation held in inventory are
a buffer that dampens the impact on production activity of fluctuations in sales volume.
Services cannot be stored.

Example: Airplane seat, hotel room, hospital operating room or the hours of lawyers,
physicians, scientists and other professionals.

The cost of many service organizations are essentially fixed in the short run. In the short
run, a hotel cannot reduce its costs substantially by closing off some of its room. Similarly,
professional organizations like accounting firms, law firms are reluctant to layoff
professionals at times of low sales volume because of its effect on morale and costs of
rehiring and training.
A key variable in most service organizations is the extent current capacity is matched with
demand. This can be done in two ways. First, to stimulate demand in off peak period is by
marketing efforts and price concessions. Second, service organisations adjust the size of
the workforce to anticipated demand by such measures as, scheduling training activities
in slack periods and compensating for long hours in busy period with time off later.
2. Difficulties in controlling quality: A manufacturing company can inspect the products
before they are shipped to the customer. A service company cannot judge product quality
until the moment the service is rendered and then the judgements are often subjective.
3. Labour intensive: Most service companies are labour intensive and cannot use equipment
and automate production lines by replacing labour and reducing costs. Hospitals do add
expensive equipment but mostly to provide better treatment and this increases cost.
4. Multi-unit organizations: Some service organizations operate many units in various
locations with relatively small unit e.g. fast food restaurant chains, auto-rented companies,
gasoline service stations, etc. Some of the units are owned, others operate under a franchise.
The similarity of the separate units provides a common base for analyzing budgets and
evaluating performance not available to the manufacturing company.
5. Historical development: Cost accounting started in manufacturing companies to value
work in progress and finished goods inventories for financial statements. These systems
provided raw data for use in setting selling prices and for other management purposes.

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