Page 67 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes the manager may be reluctant to interrupt production schedule to produce a rush order for
the customer or the manager may lack the incentive to produce goods that are difficult to
produce.
An overall measure of the manufacturing organization is obtained if the organization is
made into a profit centre. Some authors maintain that manufacturing units should not be
made into profit centres unless they sell a large fraction of their output to outside customers.
Many companies nevertheless create profit centres for such units. They believe that, if
properly designed, the system can create almost the same motivation that exists in sales to
outside customers.

3. Service and support units: Maintenance units, information technology, transportation
units, engineering units, consulting units, customer service units and similar support
units of an organization can be made into profit centres. These may be headquarters units
that service divisions or they may be fulfilling similar functions within business units.
They charge customers for services rendered with the financial objective of generating
enough business so that revenues may equal expenses. Usually, the units receiving the
services have the alternative of procuring them from an outside vendor if a vendor can
offer services of equal quality at a lower price.
Managers of such service units are motivated to control costs, otherwise customers will go
elsewhere. Managers of the receiving units are motivated to make decisions about whether
a request for service is worth the price.

4. Other organizations: A company with branch operations that are responsible for marketing
the company’s products in a particular geographical area is often natural for a profit centre
type of organization. Even though the branch managers have no manufacturing or
procurement responsibilities, profitability is often the best single measure of their
performance. Furthermore, the profit measurement is an excellent motivating device.
Thus, the individual stores of most retail chains, the individual restaurants in fast food
chains and the branches of many commercial banks are profit centers.
4.6.4 Profit Centre Evaluation

There are two types of profitability measurements used in evaluating an organization as a
whole:

1. There is the measure of management performance which focuses on how well the manager
is doing. This measure is used for planning, co-ordinating and controlling the profit
centres day-to-day activities and as a device for providing the proper motivation for its
manager.
2. There is a measure of economic performance which focuses on how well the profit centre
is doing as an economic activity.
The messages conveyed by these two measures may be quite different from each other.

Example: The management performance report for a branch store may show that the
stores manager is doing an excellent job while the economic performance may show that because
of economic and competitive conditions in its area, the store is a losing proposition and should
be closed down.

The necessary information for both purposes cannot be obtained from a single set of data. Since
the management report should be prepared periodically while the economic report is prepared
only on those occasions when economic decision is made, hence, considerations relating to
management performance measurement have first priority in system’s design i.e., the system

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