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KMBS - Intake 11, Group 2 1
P I E D M O N T U N I V E R S I T
Y
Prepared By:
• Wael Abdullah - 1397• Faisal Al-Eidan - 1500• Hassan Ghura - 1512• Qutaibah Al-Khaldei - 1550
KMBS - Intake 11, Group 2 2
Purpose of presentation
To provide insights into
management control systems
for service organization.
KMBS - Intake 11, Group 2 3
Scope of the Presentation
Case Facts Issues/Questions to Address Relevant Theory Conceptual Framework Case Analysis Solutions/Recommendations Lessons Learned Domestic Dimension
KMBS - Intake 11, Group 2 4
When Professor Scott became the president in 1984, the university was facing declining enrollment and increasing cost.
The deficit resulted from using the principal of quasi-endowment funds.
Professor Scott instituted measures to turn the financial situation around:
- Raised tuition. - Froze faculty and staff hiring. - Reduced operating cost.
C a s e Fa c t s
KMBS - Intake 11, Group 2 5
In 1986, Mr. Malcom –Piedmont alumni and partner in local consulting firm, volunteered to examine the situation and offered the following recommendations:
Increased recruiting and fund raising activities.
Recognized the university into a set of profit centers.
Case Facts (Cont.)
KMBS - Intake 11, Group 2 6
At the time the principal means of financial control was an annual expenditures budget submitted by the dean of each school and other support departments’ heads.
Malcom proposed that the deans and other department administrators would be responsible for both revenues and expenditures of their activities.
Case Facts (Cont.)
KMBS - Intake 11, Group 2 7
Central Administrative Costs.
Gifts and Endowment.
Athletics.
Maintenance.
Computer.
Library.
Cross Registration.
C a s e Fa c t s ( C o n t . )I s s u e s o f P r o fi t C e n te r s
KMBS - Intake 11, Group 2 8
1. How should each of the issues described above be resolved?
2. Do you see other problems with the introduction of profit centers? If so, how would you deal with them?
3. What are the alternatives of a profit center approach?
4. Would you recommend that the profit center idea be adopted, rather than alternative?
Issues and Questions to Address
KMBS - Intake 11, Group 2 9
Manufacturing Organizations
Service Organizations
Produce and market tangible goods.
Earn revenue in future from stored products.
Control quality is high Require low labor. Hard to share
information in multi-unit orgs.
Produce and market intangible goods.
Can’t be stored. Costs are fixed in short
run. Hard to match between
current capacity with demand.
Control quality is low Require intensive Labor. Information can be
shared in multi-unit orgs.
Relevant Theories
KMBS - Intake 11, Group 2 10
Organizations that cannot distribute assets or income to owners or shareholders.
It doesn’t prohibit an organization from earning profit, it prohibits only the distribution of profits.
It can compensate its employees for services rendered and for goods supplied.
In many industry groups, there are both nonprofit and profit oriented. (e.g. Hospitals and Schools)
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 11
Special characteristics:
The absence of the profit measure is a serious MCS problem.
It’s necessary goal to have a good financial statement to ensure organization survival.
NPO doesn’t have equity section in balance sheet.
Endowment assets must be kept separate from operating assets. Thus, NPO has two sets of financial statements.
1. Operating statement.2. Contributed capital.
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 12
Special characteristics:
MCS is focus primary on operating fund which includes( operating statement, balance sheet, & cash flows ).
NPO is governed by board of trustees:
1. Not paid2. Less control3. Need for strong governing to detect
the difficulties.
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 13
Management Control Systems considerations:
1. Product pricing.
2. Strategic planning and Budget preparation.
3. Operation and Evaluation.
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 14
1. MCS in Product pricing:
Pricing of services at their full cost (direct and
indirect) is desirable.
It’s directly related to org. objectives.
Peripheral activities should be market-based.
Dysfunctional services: Nonprofit Hospital.
MCS is effective when prices are established
prior to the performance of the service.
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 15
Aid to develop new programs.
Activity Based Costing (ABC): Indirect
cost is now the main concern of cost in many
Firms. Therefore, we must assign overhead in
proportion to the activities that generate it in
the long run to have better cost information.
Analytical Techniques:
KMBS - Intake 11, Group 2 16
2. MCS in Strategic planning and Budget preparation:
Strategic planning is more time consuming process than typical business because they must decide how best to allocate limited resources to worthwhile activities.
Budget is the most important MCS tool where managers of responsibility centers are required to limit spending close to budget amounts.
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 17
3. MCS in Operation and Evaluation:
Responsibility center managers tend
to spend whatever is allowed in the
budget because there is no way of
knowing what optimum operating
costs are.
MCS is becoming more efficient in
response to shrinking sources of
funds.
Relevant TheoriesNonprofit Organization (NPOS) – (Cont.)
KMBS - Intake 11, Group 2 18
Responsibility center is an org. unit that’s headed
by a manager who is responsible for its activities.
Performance in these centers is judged by the
criteria of efficiency and effectiveness.
In profit centers, both revenues and expenses are
measured in monetary terms.
In setting up a profit center a company devolves
decision-making power to those lower levels.
Conceptual Framework
KMBS - Intake 11, Group 2 19
Increase the speed of decision making.
Improve the quality of decisions.
Focus greater attention on profitability.
Provide a broader measure of management
performance.
Advantages of Profit Center
KMBS - Intake 11, Group 2 20
Loss of control for top management.
Quality of management may be
reduced.
Friction may increase over the transfer
price and common costs.
Organizations units competition.
May impose additional cost for
additional management at each profit
center.
Difficulties With Profit Centers
KMBS - Intake 11, Group 2 21
Case Analysis
Central Administration Issues:
Present:
No charge on administrative cost departments.
Proposal:
Cost allocation to each department.
Issues:
Graduate schools’ deans regarded as unfair.
Solution:
Profit centers should contribute to these costs.
Uncontrollable costs should be unallocated to have better data information.
KMBS - Intake 11, Group 2 22
Case Analysis
Gifts And Endowment Issues:
Present:
Endowment used for operating purposes.
Proposal:
University President has the power to control.
Issues:
President has too much authority.
Solution:
President of the university consults board of trustees and deans for decision making.
KMBS - Intake 11, Group 2 23
Case Analysis
Athletics Issues:
Present:
Athletic teams did not generate enough revenue.
Proposal:
Charging fees to students.
Issues:
Students dissatisfaction
New paperwork.
Solution:
Increase the capacity of subscribers from students’ families and communities.
Adopt sponsorship policy.
KMBS - Intake 11, Group 2 24
Case Analysis
Maintenance Issues:
Present:
Each school had a maintenance department.
Proposal:
Allocating actual cost for each department.
Issues:
Deal with outside contractors.
Solution:
One department for all schools.
Outsourcing. Create high quality
standards. Initiate proactive long
contracts with suppliers.
KMBS - Intake 11, Group 2 25
Case Analysis
Computer Issues:
Present:
No control on computer usage and quantity.
Proposal:
Allocating cost on each department based on usage.
Issues:
Discourage use of Research and Development.
Solution:
Create computer department to control.
Increase the capacity of usage from friends and families of the students.
KMBS - Intake 11, Group 2 26
Case Analysis
Library Issues:
Present:
University Library was the main store of books, small library in each department.
Proposal:
Charge a fee based on usage or number of books borrowed.
Issues:
Dissatisfaction and more paperwork.
Solution:
Less paperwork by new software.
Offer services to local community.
Encourage donations.
KMBS - Intake 11, Group 2 27
Case Analysis
Cross Registration Issues:
Present:
Students enrolled in one school could take courses at another school without charges.
Proposal:
School at which a course was taken repay the school in which the student enrolled.
Issues:
Unfair formula.
Solution:
Transfer price standard based on hour fee for each school.
KMBS - Intake 11, Group 2 28
Better reporting system.
Training for schools managers.
Periodic meetings between schools
managers and other departments(culture
issues, reward system, quality improving)
Encouraging goal congruence to overcome
competition and high transfer price.
How to Deal With ProfitCenters Problems?
KMBS - Intake 11, Group 2 29
Balance scorecard, behavioral implications:
Financial strength.
Business process improvement.
Customer satisfaction.
Organizational learning.
Reward structure linked with balance
scorecard.
How to Deal With ProfitCenters Problems? (Cont.)
KMBS - Intake 11, Group 2 30
Unallocated Cost
Central Administration
Athletic Computer Library
Undergraduate liberal arts
school
Graduate liberal arts
school
Engineering School
Law School
Theological School
Expense Centers
Business School
Maint.
Profit Centers
Alternatives of Profit Centers ApproachMix Responsibility Centers
KMBS - Intake 11, Group 2 31
We recommend to mix responsibility
centers:
Improving quality and speed of decisions.
Appropriate cost allocation.
Increase motivation and creative ideas.
Schools managers have better control as
profit centers.
clear rules for transferring price.
RECOMMENDATIONS
KMBS - Intake 11, Group 2 32
There are special considerations in MCS for service organizations.
The absence of the profit measure is a serious MCS problem for nonprofit organizations.
Performance in profit centers is judged by the criteria of efficiency and effectiveness.
Effective MCS should include: Good reporting system. Balance scorecard linked with reward system. Fair transfer price. Goal congruence to meet strategic
objectives.
LESSON LEARNED
KMBS - Intake 11, Group 2 33
Manaber Alnour charity established in
2005 by Awadh Alfadhli.
Manaber Alnour is a nonprofit
organization interested in religious,
education, and social activities.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC)
KMBS - Intake 11, Group 2 34
Vision:Building a generation that understands the
Quran and behaves accordingly.
Mission:Dawaa and educational organization that
takes care of building a balanced Quranic characteristic through creating an environment that makes the Quran loveable and encourages memorizing it and how to behave accordingly.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC) – (CONT.)
KMBS - Intake 11, Group 2 35
In 2008, MAC faced financial crises up to the limitation of enrollment and increasing cost.
Charity units budgets were cost centers (non revenue generation budget).
Charity financial resources are: - Endowment. - Donations. - Tuition fees.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC) – (CONT.)
KMBS - Intake 11, Group 2 36
MAC President asked for help from consultents to encounter the financial crises in order to save the financial situation.
The specialists offered the following recommendations:
- Increase the tuition fees. - Increase the fund raising. - Depend more on volunteers. - Recognize the charity into set of
profit centers.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC) – (CONT.)
KMBS - Intake 11, Group 2 37
MAC profit centers:
Swimming Pool and Entertainments
Training center
Computer lab
General activities.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC) – (CONT.)
KMBS - Intake 11, Group 2 38
Swimming Pool and Entertainments: Started renting the swimming pool for local
communities and other charity organizations.
Training center: Started renting the training center for some
institutions and other charity organizations. organized training course and workshops
for local communities.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC) – (CONT.)MAC PROFIT CENTERS
KMBS - Intake 11, Group 2 39
Computer lab: Organized computer skills training courses for
local communities and other charity organizations. Rented the computer lab for some institutions.
General activities: Organized profitable activities for the public, such
as:( Religious Trips for Hajj and Omra).
organized summer clubs.
DOMESTIC DIMENSIONSMANABER ALNOUR CHARITY (MAC) – (CONT.)MAC PROFIT CENTERS
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