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Management Control Systems

Notes Many service organizations (with the exception of railroads and other regulated industries)
did not have the need to develop cost data. Their use of product cost and other management
accounting data is fairly recent.

Self Assessment

Fill in the blanks:
1. A key variable in most service organizations is the extent ………………. is matched with
demand.

2. A service company cannot judge ……………….. until the moment the service is rendered
and then the judgements are often subjective.

13.2 Professional Service Organizations

Research and development organizations, law firms, accounting firms, healthcare organizations,
engineering firms, architectural firms, consulting firms, advertising agencies, etc. are examples
of organizations whose products are professional services.
13.2.1 Special Characteristics

1. Goals: A professional organisation has relatively few tangible assets; its principal asset is
the skill of its professional staff which doesn’t appear in its balance sheet. Return on assets
employed, therefore, is not relevant in such organizations. Their financial goals are to
provide adequate compensation to the professionals.
In many organizations, a related goal is to increase their size. It reflects economies of scale
in using the efforts of a central personnel staff and units responsible for keeping the
organizations up-to-date.
2. Professionals: Professional organizations are labour-intensive and the labour is of a special
type. Many professionals prefer to work independently rather than as a part of a team.
Professionals tend to give inadequate weight to the financial implications of their decisions;
they want to do the best job they can, regardless of their costs. This attitude affects the
attitude of supporting staffs and non-professionals in the organisation; it leads to inadequate
cost control.
3. Output and input measurement: The output of professional organizations cannot be
measured in physical terms, such as: units, tons or gallons. We can measure the number of
hours a lawyer spends on a case but this is a measure of input not output. Output is the
effectiveness of the lawyers’ work and this is not measured by the number of pages in a
brief or the number of hours in the courtroom. Revenue earned is one measure of output
in some professional organization, but these monetary amounts relate to the quantity of
services rendered not to their quality (although poor quantity is reflected in reduced
revenues in the long-run). Furthermore, the work done by many professionals is non-
repetitive. This makes difficult to plan the time required to accomplish the task, to set
reasonable standards for task performance and to judge how satisfactory the performance
was.
Some professionals, notably scientists, engineers and professors are reluctant to keep
track of how they spend their time and this complicates the task of measuring performance.
Nevertheless, difficult problems arise in deciding how time should be charged to clients,
how to account for time spent, reading literature, going to meeting and otherwise keeping
up-to-date?

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