Page 251 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes not be measured correctly unless the transfer price is fair to each type. If the transfer price for the
cost of money is set too low, the profitability of the loan-heavy branches will be overstated,
whereas if it is too high, the profitability of deposit heavy branches will be overstated.
Measurement of cost of money is also important in assessing the profitability of loans with
different maturities, loan with different risk characteristics and loans to different markets.

Expense centres: Since transfer price is so controversial that some banks decided not to develop
transfer prices, there they control branches as expense centres. In such a situation, they measure
performance by such indicators as: unit or rupees output per staff member, rupees of revenue
and market share by product type, expenses for rupees of revenue and market share by product
type, expenses for rupees of revenue compared with budget and quality indicators. Some use a
Management By Objectives (MBO) system, in which principal objective is obtaining a specified
numbers of additional customers. They make special analysis of profitability as a basis for
setting prices and for making decisions about opening and closing branches and adding or
discontinuing services.
In comparing performance of several branches, the measurement of volume is a problem. The
totals of each type of transactions can be done but aggregating these individual totals into an
overall measure of volume can be misleading, unless differences in the effort required for the
various types are taken into account.

Self Assessment

Fill in the blanks:
7. The relationship between ……………….. and interest expense is a key variable.
8. If the ………………… for the cost of money is set too low, the profitability of the loan-
heavy branches will be overstated.
13.6 Non-profit Organizations

The term “non-profit” tends to have negative connotations because it tells us what these
organizations do not do, not what they do.

A non-profit organization is one that is chartered to operate in the interests of the society. It
operates free of any obligation to pay income taxes. It is restricted by definition from participation
in equity markets since it has no shareholders. Its sources of funds are derived from contributions,
grants, operating surplus and debts instruments of various types. The principal goal of non-
profits is defined by their mission.

!
Caution Non-profit institutions may be classified into two groups: Government
organizations and private tax-exempt organizations. Private organizations can be further
divided into commercial organisation and charitable groups, the former includes trade
unions, trade associations and clubs and the latter includes hospitals, religious groups,
research, educational and social service organizations.

13.6.1 Management Control Systems in Non-profit Organizations

The issues involved in drafting management control system in a non-profit organisation can be
discussed in the following heads:

246 LOVELY PROFESSIONAL UNIVERSITY