Introduction to Management Control Systems

Various Stages of Management Control Process

1). Programming

Programming is defined as making programs by top/ senior management in terms of organizational goals and strategies
and deciding the funds and resources needed to accomplish the programs. Programs can be made about development
of new products, research and development of activities merger, takeover and other activities that are not related much
with the existing product lines. In service organizations such as hotel chain management may draw programs for each
hotel or each region where hotels are to be set up.
Programming is long range plan, covering period of approximately five future years. The reason is that it programming
is made for shorter period, the results and benefits of programming can not be realized within this period. some
organization like public utilities prepare long range plans for even a period of twenty years .because of the relatively
long time plan, only rough estimates are possible revenues ,expenses and capital expenditure.
Programming is time consuming and expensive. The most significant expense is the time devoted to it by management,
but it also involves a special programming staff and considerable paperwork. A formal programming process is not
worthwhile in some organization. it is desirable in organization that have the following characteristics
Its top management is convinced that programming is important .otherwise programming is likely to be or to become, a
staff exercise that has little impact on actual decision making.
It is relatively large and complex in small, simple organizations, an informal understanding of the organizations future
directions for making decision about resource allocations, which is principal purpose of preparing programs.
If the future is so uncertain that reasonably estimates cannot be made preparation of a formal program is a waste of
time.

2). Budgeting

“Budget is formal financial plan for each year .a budget ,known as shorter angel plans ,is a technique of expressing
revenues ,expenses ,physical targets like production and sales ,profit ,assets and liabilities usually for a period of one
future year” .
Budget has the functions of motivating managers, coordinating activities, communicating to persons within
organization, providing standards for judging actual performance s and acting as control tool.
Budgeting involves operating managers as well as senior manager. Staff personnel have considerable input to the
programming process, but relatively less input to the budgeting process
The program structure consists of program and major project. It includes both capital expenditure and operating items
and it covers a period of several years. The budged is structured by responsibility centre (which may or may not cut
across program) the focus is on operating revenues and expenses and it typically is for a single year.
Budget preparation is done under greater time pressure and is more hectic than programming
A program is abroad brush sketch of the future. A budget has more details both because it is a fairly specific guide to
operating decisions and also because it will be used subsequently to evaluate the performance of individual manager.
Programming decision can have consequences of great magnitude. Budgeting decision are typically much less
significant, because they are made within the context of the current level of operating activities, except as those
activities will be affected by program decision.
Behavioural consideration is much more important in the budget preparation process than in the programming process.
The approved project is a bilateral commitment; the program is not a commitment, because the budget will be used to
evaluate performance.

3. Executing:-

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After the budget preparation, budgeting is used as a tool for coordinating the actions of individual and department
within the organization. In fact within the execution phase task control is done to ensure that actions and performance
match with the planned or desired result. While performing the mangers goal is to achieve budgeted targets. However
compliance to budget is not necessary if the plans given in the budget are found as not the best way of achieving the
objective.
After execution actual performance and result are compared with the budgeted plans and targets and variance reports
are prepared which highlight the variance between the 2 and the causes for such variances. Variance reports should
separate controllable item from non-controllable item, determine the effects of changes in volume on revenues and
cost and if possible, should mention changes in other circumstances affecting the variances

4. Evaluation:-

Management control Process ends with the evaluation phase in which the performances of managers are evaluated.
Since it is an after- event exercise, the evaluation does not affect what has happened. However, evaluation phase acts
like a powerful stimulus as employees know that their performances will be subsequently evaluated. Also on the basis of
performance evaluation, the future budget and plans are revised.

Controlling:
“Controlling is the measurement and correction of the performance of activities in order to ensure that the planned
objectives are accomplished”

Elements of Control:
Press the accelerator, and your car goes faster. Rotate the steering wheel, and it changes direction. Press the brake
pedal, and the car slows or stops. With these devices, you control speed and direction, if any of them is inoperative, the
car does not do what you want it to. In other words it is out of control.

An organization must also be controlled, that is, device must be in place to ensure that its strategies intentions are
achieved, but controlling an organization is much more complicated process than controlling a car

Any control system has four important elements. They are:

(i) Detector or Sensor: The detector analyzes the situation that is being controlled
(ii) Assessor: Helps in comparing the actual results with the standard or expected results.
(iii) Effector: An effector is used to reduce the gap between the actual and the
(IV) Communications network: Transmits information between the detector, the assessor and the effector.

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These elements of control can be better understood with the help of example:

Assume you are driving on a highway where the legal speed is 65 mph. Your control system acts as follows:

(i) Your eyes (Sensor) measures actual speed by observing the speedometer,
(ii) Your Brain (Assessor) compares actual speed with desire speed and, upon directing a deviation from the
standard,
(iii) Directs your foot (Effector) to ease up or press down on the accelerator,
(iv) Your nerves form the communication system that transmit the information from eyes to brain and brain to
foot.

Management Control:
“Management control is the process by which managers influence other members of the organization to implement the
organization’s strategy.”

Elements of Management Control:

(i) Detector or Sensor:- Reports what is happening throughout the organization,

(ii) An assessor:- Compares this information with desired state.
(iii) An effector:- Take corrective action once a difference is observed.
(iv) A communication network:- Tells managers what is happening and how that compares to the desired state.

Simpler Controlling Process V/S. Management Control Process

(i) Much management control is self control, that is, control is maintained not by external devices, but by the
managers who are using their own judgment rather than following instructions from a superior.
(ii) In management control results may not be clear. We cannot know what action a given manager will take
when there is a significant difference between the actual and expected performance, nor what action others
will take in response to the managers signal. By contrast in case of automobile driver, the assessor phase
may involve judgment, but the action itself is mechanical once the decision to act has been made.
(iii) Like controlling an automobile, management control is not automatic. Some detectors in an organization
may be mechanical, but the manager often detects information with his own eyes, ears and other senses.
(iv) Unlike controlling an automobile, a function performed by a single individuals, management control
requires coordination among individuals.

Boundaries of Management Control

1. Strategy Formulation/ Strategic Planning
“Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining
these goals.” The process analyses the changes that take place in the environment and helps to ascertain the
related adjustments needed in the organizational goals. In order to attain goals through optimum resources
utilization it is important to have well define polices and control procedures.
The process of strategic planning relates to formulation of plans dealing with:
 Determination of the goals of the organization
 Evolving managerial policies and procedures
 Identifying markets and distribution channels required to serve the market
 Planning and initiating research and development activities
 Ascertaining the amount and sources of finance
 Acquiring or disposing facilities
 Ascertaining employee capabilities and skills needed to attain the goals

2. Management Control:

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 “Management control is the process by which managers influence other members of the organization to
implement the organization’s strategies”.
It involves variety of activities, including: Planning, coordinating, communicating, evaluating, deciding &
influencing.
Management control is all about ensuring that the necessary resources are mobilized and are deployed
efficiently so that the planned objectives are met without much difficulty. It is all about the organization,
methods and procedures adopted by management to provide reasonable assurance that available resources
and assets are properly deployed and safeguarded against waste and mismanagement and frauds.

Strategy Formulation Management Control

Strategy formulation is the process of deciding Management control is relates with

new strategy implementation of those strategies.

Require information about external Management control follows a system to achieve

environmental development the organizational goals

Irregular and infrequent in nature It is systematic and continuous activity

Responsibility and task of top management In management control other managers also
participate besides the top and senior managers

Focus on specific problem at a time Management control involves total organization

More complex compare to Management control Less complex

Aimed for long term period Short term focus

Number of persons involve are small Large number of persons is involved

Aim and result is to making policies and Aim and result is to take corrective actions to get
programmes the planned or desired results

3. Task Control/ Operational Control:

Task control is the process of assuring that specific tasks are carried out effectively and efficcently. It is a
mechanism that deals with individuals tasks or transactions such as:
 Scheduling and controlling individual jobs
 Procuring specific item for inventory
 Specific personnel actions
Task control is helpful in establishing a relationship between the levels of activity and the cost incurred.

Management Control Task Control

Focuses on the control of the whole organization Directed towards the control of the one unit of the

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 organization

Management control functions and steps within it, Task control functions are based on procedures and
are framed in terms of strategies formulated by top rules which are derived from management control
management and its requirements

Under management control standards set for Under Task control the standard set for evaluation
evaluation are not that much precise are more precise

Under management control the control involves Under task control, control is direct in nature
human dynamics

Financial measures are used for control purpose Most often, non-financial measures are used for
control purpose

Requires summaries of transaction Requires transection based information

Management control use approximations and Task control uses exact and real situation data
estimates

Points Strategy Formulation Management Control Task Control

Level Concentrated at top level Practiced at all level Confined to supervisory level
Focus Focuses on one aspect at a Focuses on the whole Focuses on the efficiency of
time operation that obviously the individual
impacts the organizational

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 effectiveness
Complexity It is complex process Comparatively less complex Simple as the attention is on
as it involves administrative simple activities only
activities
Information Information is collected Data is financial in nature Data is tailor made for
from external sources & and is integrated. specific operation & is often
specific to problem non financial. It is in real
times
People involved Involves top management Involves both top Involves supervisors
management and line
managers
Time Horizon Long drawn Process Involves weeks, months and Involves day-to-day activities
years
Nature of activity Require creative and Requires administrative and Follows directions that are
analytical skills persuasive skills generally listed in rule book

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 RESPONSIBILITY CENTERS
Concept of Responsibility Centers
Responsibility center is unit of organization that is headed by a manager having direct responsibility for its performance.
The responsibility area may be classified on the basis of department, product line, territories or any other type of
identifiable unit.
An organization is composed of a number of financial responsibility centres. These responsibility centres are created by
management based on the needs of the business enterprise.
Responsibilities centres may be define as an organizational unit which is headed by a responsible person namely a
manager. He is responsible for the activities of the unit. The responsibility centres is responsible for performing some
function which is its output. In performing these functions, it uses resources or ‘inputs’. The costs assigned to a
responsibility centre are intended to measure the input that it consumes in a specific period of time, such as a week or a
month.

Types of Responsibility Centers

1. Revenue Centers
2. Expenses Centers/ Cost Centers
 Engineered Expenses Center
 Discretionary Expenses Center
 Administration & Support Center
 Research & development Centers
 Marketing Centers
3. Profit Centers
4. Investment Centers

Revenue Centers
Revenue is a monetary measure of output. Where the output of responsibility centre is measured in terms of money,
we have what is known as revenue centres. According to Anthony, “in a revenue centre, outputs are measured in
monetary terms, but no formal attempt is made to relate inputs (i.e. expense or cost) to outputs”. Examples of revenue
centres are marketing organization where no responsibility for profit exists. Orders booked and sales are compared with
the budget to measures their performance. The primary yard stick for judging the efficency of revenue centres is
revenue earned vis a vis the budget. However, the head of the revenue centre is held responsible for expenses incurred
by his responsibility centre. Generally, revenue centre managers do not have responsibility for estabilishing selling
prices. Thus, in a revenue centre, there is no relationship between inputs and outputs. Following figures shows the
features of revenue
Revenue Centers centres.

Input Not Related to Output

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Inputs Outputs
 PROCESS
Rupees only for cost directly incurred Rupee for revenue

Cost Centers
A cost center is unit of organization in which the manager held responsible for the cost incurred in that segment. This
unit is not responsible for revenues. The plans of this center are in the form of cost estimates, while the performance is
evaluated with the help of cost variance, that is, the difference between budgeted cost and actual cost.
The managers of cost centers have control over some or all costs but not on the revenue. Since all costs are not
controllable, the cost center manager is responsible only for those costs that are controllable by him and his
subordinate.

Engineered Expenses Center

Engineered expense center is a unit where inputs are measured in monetary terms and outputs are measured in
physical terms.
Engineered expenses centers are usually found in manufacturing, warehousing, distribution and trucking.
Engineered expense centers do not just measures the cost but also responsible for the quality and volume of output.
Therefore the type and level of production and quality standards are set so that cost reduction is not achived by
compromising with the quality. Example Manufacturing Unit

Engineered Expense Centers

Optimal relationship can be established

Inputs Outputs

PROCESS
Rupees Physical

Discretionary Expenses Center

Discretionary expenses center includes administration and support services, R&D and most marketing activities. The
operating profit of these centers cannot be measured in monetary terms.
Discretionary expenses reflect the management policies regarding certain expenses. Some examples of management
policies that deals with under discretionary expenses are:
 Marketing efforts initiated to face competition
 Services to be provided to customers
 Expenditure on R&D
 Financial planning and control mechanisms

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 Discretionary Expense Centers

Optimal relationship cannot be established

Inputs Outputs

PROCESS
Rupees Physical

Administration & Support Center

Administrative center includes senior corporate management and business unit management along with the manager of
the supporting staff unit. Support units are units that provides services to other responsibility centers.
It is very difficult to exercise control over these centers because of the following reasons:
 Difficulty in measuring Output: Principal output of Administrative & Support Center is advice or service functions
that are virtually impossible to quantify. Since output cannot be measured, it is not possible to set cost
standards against which to measure financial performance.
 Lack of Goal Congruence: Managers of administrative staff strives for functional excellence. Superficially, this
desire would seem to be congruent with company goals, in fact, much depends how one defines excellence. A
striving for ‘excellence’ can lead to “empire building’ or to ‘safeguarding one’s position’ without regards to the
welfare of the company.

Research & development Centers

Research and Development constitutes a very important function in modern organizations. With the liberalization of the
Indian economy and globalization, a number of opportunities and challenges have been thrown up. This has increased
the importance of research and development.

Problem of Control in Research & Development Centers

1. Lack of goal congruence: The head of research and development centers generally feels inclined to have an
excellent department which may beyond the companies means. It is also found that the personnel engagement
in research and development occasionally do not have interest in the business or adequate knowledge of the
business in order to provide proper direction to research.

2. Difficulty in Relating Results to Inputs: The results of research and development activates are difficult to
measure quantitatively. In contrast to administrative activates, R&D. usually has at least a semi tangible output
in the form of patents, new products, or new processes; but the relationship of output to input is difficult to
appraise on an annual basis because the completed “product” of an R&D group may involve several years of
effort. Thus, inputs as stated in an annual budget may be unrelated to ouputs. Further more even when such a
relationship can be established it may not be possible to reliably estimate the value of the output. And even
when such an evaluation can be made, the technical nature of the value of the output. And even when such an
evaluation can be made, the technical nature of the R&D function may defeat management’s attempt to
measure efficiency. A brilliant effort may against an insuperable obstacle, whereas a mediocre effort may, by
luck, result in a bonanza.

3. Several year for results: As research years take several years to bear fruits, it is difficult to control research and
development in effective manner on an annual basis. It takes sevral years to build up a proper research and
development center. The main element of expenditure is manpower cost and getting highly skilled personnel is
generally difficult.

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 Performance Measurement in R&D Centers
The measurement of performance is done by preparing and presenting financial reports to appropriate levels of
management. These reports are prepared on a monthly or quarterly basis in respect of all responsibility centers and
projects and show actual expenditure incurred against budgeted amount.
Performance report presented to the management may be of two types. In first type actual expenses incurred in each
responsibility center is compared with the budgeted amounts. This enables the executives in the R&D department to
plan their expenses and ensure that commitments made regarding expenses are being met.
The second type involve the comparison of amount approved for each project which is in progress with the current
forecasted figure of total cost. This enable the management to ascertain whether it is worthwhile making changes in
project which have been approved. In this context it should be noted that this report is presented in a periodic manner
to the head of R&D department.
Although these reports are of value to the management, judgment about the effectiveness of research is generally
made based partly on these financial reports and mainly on the basis of discussions.

Profit Centers
“When financial performance in a responsibility center is measured in terms of profit, which is the difference between
the revenue and expenses, the responsibility center is called a profit center”.
A profit center is the unit of organization to which both revenue and costs are assigned so that the profit of the unit can
be measures. A profit center can be established only when the unit costs and revenue can be separately attributed.
A profit center works efficiently when the manager can make decision about the selling price and the level of output to
be sold at those prices.
The performance of profit center is measured in absolute term i.e. Profit

Profit Centers

Input are Related to Output

Inputs Outputs

PROCESS
Rupees Cost Rupee Profit

Investment Centre
An investment centre is a responsibility centre in which the manager is held responsible for the use of assets as well as
for revenue & expenses. It is therefore the ultimate extension of the responsibility idea. The manager is expected to
earn a satisfactory return on capital employed in the responsibility centre.
Measurement of the investment base or capital employed gives rise to many difficult problems and the idea of the
investment centre being new, there is considerable disagreement as to best solution of these problems.

Investment Centers

Input are Related to Capital Employed

Inputs Outputs [Type the company name]

Capital
Rupees Cost Rupee Profit
Employed
 MCS IN SERVICE AND NON PROFIT ORGANIZATION

Features of Service Organization

(1) Absence of inventory buffer

Goods can be held in inventory, which is a buffer that dampens the impact on production activity of fluctuations in sales
volume. Services can be stored. The airplane seat, hotel room, hospital operating room, or the hours of lawyers,
physicians, scientist, and other professionals that are used today are gone forever. Thus, although, a manufacturing
company can earn revenue in the future from products that are hand today, a service company cannot do so. It must try
to minimize its unused capacity.
Moreover, the cost of many services organizations is essentially fixed in the shorts run. In short, a hotel cannot reduce
its costs substantially by closing off its rooms. Accounting firms, law firms, and other professional organizations are
reluctant to lay off professional personal in times of low sales volume because of the effect on morale and the costs of
rehiring and training.
A key variable in most service organization, therefore, is the extent to which current capacity is matched with demand.
Service organization attempts this matching in two ways. First they try to stimulate demand in off –peak periods by
marketing efforts and price concessions. Cruise lines and resort hotels offer low rates off seasons. Second, if feasible,
service organization adjusts the size of workforce to anticipated demand, if feasible, by such measures as scheduling
training activities in slack periods and compensating for long hours in busy periods with time off later. The loss from
unsold services is so important that occupancy rates and similar indications of success in selling available services are
normally key variable in service organizations.

(2) Difficulty in Controlling Quality

A manufacturing company can inspect its products before they are shipped to consumer, and their quality can be
measured visually or with instruments(tolerances ,purity, weight, color, and so on).A service company cannot judge
product quality until the moment the service is rendered, and then the judgment are often subjective. Restaurants
management can examine the food in the kitchen, but customer satisfaction depends to a considerable extent on the
way it is served. The quality of education is so difficult to measure that few educational organizations have a formal
quality control system.

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(3) Labor Intensive
Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs.
Most service companies are labor intensive and cannot do this. Hospitals do add expensive equipment, but mostly to
provide better treatment, and this increase costs. A law firm expands by adding partners and new support personnel.

(4) Multi-Unit Organizations

Some services organization operate many units in various locations, each unit relatively small. These organizations are
fast-food restaurant chains, auto rental companies, gasoline services stations, and many others. Some of the units are
owned; others operate under a franchise. The similarity of the separate units provides a common basis for analyzing
budgets and evaluating performance not available to the manufacturing company. The information for each unit can be
compared with system wide or regional averages, and high performance and low performers can be identified.
However, because units differ in the mix of services they provide, in the resources that they use, and in other ways, care
must be taken in making such companies.

(5) Historical Development

Cost accounting started in manufacturing companies because of the need to value work in process and finished goods
inventories for financial statement purposes. These systems provided raw data that were easily adapted for use in
setting selling prices and for other management purposes. Standard cost systems, separation of fixed and variable costs
and analysis of variances were built on the foundation of cost accounting system, separation of fixed and variable costs
and analysis of variances were built on the foundation of cost accounting systems. Until a few decades ago, most texts
on cost accounting dealt only with practices in manufacturing companies.
Many service organizations (with the notable exception of railroads and both cost data. Their use of product costs and
other regulated industries) is not having a similar impetus to develop cost data. Their use of product cost and other
management accounting data is fairly recent –mostly since World War II. Nowadays, their management control systems
are rapidly becoming as well as those developed as those in manufacturing companies.

Features of Professional Service Organization

(1) Small in size:

Generally, professional; organizations are small in size and are small in size and are located at one place. Accordingly,
personal observation is possible on the part of senior management and this forms the basis for motivation of
employees. Consequently, the need to have profit centres and formal reports of performance is less felt. This means
that the need to have an intricate management control system is lower. While such organizations are small, there is still
the need to tie remuneration to actual performance, prepare a budget, regularly compare actual performance against
the budget etc.

(2) Goals:
While earnings a satisfactory return on assets is the main goal of a manufacturing organization, it is not possible to
calculate the same for non-profit organization as it possesses only a few tangible assets. The skill of its human resources
that is professional staff is its main asset. This being the case, the main financial goal of such organization is to pay
adequate remuneration to its professional staff. Another goal of professional organization is to expand. While this leads
to scale economics through better utilization of staff at corporate headquater it also reflects the success of the
organization as size is an indicator of success.

(3) Professionals:
While professional organization are not capital intensive like manufacturing organization but labour intensive in nature,
professionals working in such organizations possess a number of characteristic. There are:
(i) They like to work independently.
(ii) The labour is of special kind
(iii) Those amongst them who also work in the capacity of managers devote only part time attention to
management activities.
(iv) Most of them do not possess a formal management education.
Senior partner of law firms have client, senior partners of consulting frims play an active role in consultancy assignment,
and senior partner of accounting firms take an active part is audit assignments.
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As a result of the above characteristic, professionals have low regards for managers.
By virtue of their background, they are interested in doing the job in the best possible manner without having any
regards for the cost. This results in virtually ignoring the financial implications of their decisions. Similarly this affects the
attitude of non-professional and other approved staff.

(4) Measurement of Output & Input:-

One of the problems confronting a professional organization is how to measure the outputof its professionals. This is
because traditional measures of performance which are used in manufacturing industry such as tons, units etc cannot
be used in these organizations. While output is the effectiveness of the professional work, this cannot be measured by:
(a) The number of hours a consultant spends with his client or the number of pages in report.
(b) The number of hours a lawyer spends in the court room or the number of pages a brief has.
(c) The number of patients that is treated by the physician daily.
Although some professional organization employs revenue as a measure of output, it must be appreciated that this
measures volume of services provided by the organization and not their quality.
Whereas, some tasks performed by professional are repetitive in nature, the major portion of the work done by them
can be considered as non-repetitive. Instances of repetitive work are physical stocktaking by auditors, drafting simple
contracts, wills, deeds by lawyers etc. It is possible to develop standards for such tasks and use them profitably.
However, in respect of non-repetitive tasks, planning the time required, establishing standards considered reasonable
for performing tasks, and evaluation of performance become a difficult task.
Another problem that arises in performance measurement is the unwillingness of professionals to maintain records
relating to time spent. Although this problem can be resolved if senior management takes the initiatives in ensuring
accurate reporting of time, the problem arises in connection with the amount to be charged per hour for time spend on
a job.

(4) Marketing in Professional Service Organization:

Whereas there exists a strict demarcation between manufacturing and marketing activities in manufacturing
organizations, it is hard to find such dividing line in professional organizations. Professional working in professional firms
is like accounting, law and medical are debarred from openly marketing the firm’s services by virtue of their professional
code of ethics. However, most of the organizations need to engage in marketing as its an essential activity.
Consequently, professional who work for clients, that is devote most of their time and energy to production make
speeches, play golf, establish contacts and similar activities to market the organizational services.

MCS in Professional Service Organization

The most important aspects of management control systems in professional organizations are:
• Pricing
• Strategic planning and budgeting
• Control of operations
• Performance measurement and appraisal

(1) Pricing
Most professional firms determine the price of their services in a traditional manner. If the professional service offered
is dependent on time, then the fee is fixed on the basis of time spent on the service. Investment banking is an exception
to this. In case of investment banking, the service charge is determined on the basis of monetary size of the securities
issue. Prices of services offered differ from profession to profession. The prices are high for accountants and physicians
compared to research scientists, for instance.

(2) Strategic planning and budgeting

Manufacturing organizations have better strategic planning systems when compared to professional organizations of
similar size. One of the main reasons for this could be that professional organizations do not need such a system.
Strategic planning is important for manufacturing organizations because any commitment relating to the procurement
of plant and equipment does effect its capacity and expenditures for years, and such effects are irreversible. In
professional organizations, the main assets are people and changes in the size and composition of the staff are

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irreversible and easier to make. The strategic plan of a professional organization is not as comprehensive as that of a
manufacturing organization. It is mainly a longrange staffing plan and does not cover other functions.

(3) Control of operations

Scheduling the working hours of employees is one of the most important aspects of controlling the operations in
professional organizations. The billed time ratio, that is the ratio of hours billed to total professional hours available,
should be analyzed thoroughly. Idle time should be minimized and appropriate rates should be used for billing
engagements.

(4) Performance measurement and appraisal

In professional organizations, it is easy to analyze the performance of employees at the top most and the lowest
hierarchical level, but it is difficult to analyze the performance of employees who are placed somewhere between
the two extremes. The main reason for this is the absence of objective criteria for performance appraisal. But there are
exceptions to this too. For example, the performance of an investment analyst can be appraised by comparing his
recommendations and the market behavior of securities. In many cases, performance appraisal depends on human
judgment. An employee’s performance may be judged by his superiors, peers, subordinates and clients. Professional
organizations use formal performance appraisal system– numerical ratings of specified performance attributes. These
ratings are used as deciding factors for wage hikes and promotions.
Features of Non- Profit Organization
(1) Contributed Capital:
While a business organization receives money from its shareholders by issuing shares, a non profit organization receives
contributions. While the contributed capital are of two main type- endowments and plant, endowments are nothing but
gifts from donors whose intention is that the principal should remain intact for a specific period or indefinitely and only
income arising therefrom should be employed for financing purpose.
Work of art, museum objects, contribution of money for acquiring building, equipments and miscellaneous fixed assets
are within the category of ‘plant’.
(2) Profit motive is non existent:
While most business organization have profit as their main goal which is measured by the net profit shown in the profit
and loss account, non profit organization have multifarious goals and owing to the absence of profit motive no such
performance measure exists.
The income and expenditure account shows the surplus or deficit of the non profit organization. Unlike a business
organization, a non profit organization cannot earn a large surplus. The reason underlying this is that a large surplus
means that the entity is not providing the services desired by the contributors of capital. Similarly, continous deficit
would make the organization bankrupt. Consequently, it is desireable that such organization should earn a modest
profit.
(3) Governance:
Trustees who are nominated to govern non profit organization work in honorary capacity and several trustees are not
familiar with the management of business. Apart from this, it is difficult to measure the performance of such an
organization. Consequently, the control of trustees is less and they are likely to isolate actual and incipient problems
compared the directors of a business organization.

(4) Accounting of funds:

An accounting system called ‘fund accounting’ is used by several non profit organizations under which separate
accounts are maintained in respect of many funds. The accounts are self balancing. Generally, the following funds are
maintained by organizations: Endowments fund, capital fund, general fund and special purpose funds.
The endowments fund accounts for contribution from donor, whereas the capital fund is used for maintaining account
for capital contribution in the form of capital assets. In so far the general fund is concerned, it is nothing but the income
and expenditure account. The general fund forms the focus for management control.

(5) Financial Accounting:

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The non profit organization follows the guidelines laid down by the government for preparing financial accounts for
external purpose. However while reporting to the government body as well as management, they follows the above
practice. The income anf expenditure accounts and balance sheet also form a part of external reporting.

MCS in Non- Profit Organization

A nonprofit organization was define by law, is an organization that cannot distribute assets or income to, or for the
benefit of, its member, its officers, directors. The organization can, of course, compensate its employees, including
officers and members, for services rendered and for goods supplied,. This definition does not prohibit an organization
from earning a profit, on average, to provide funds for working capital and for possible “rainy days”.

(1) Product Pricing

Many nonprofit organizations give inadequate attention to their pricing policies. Pricing of services at their full const is
desirable. A “full-cost” price is the sum of direct costs, indirect cost, and perhaps a small allowance for increasing the
organization’s equity. This principle applies to services that are directly related to the organization’s objectives. Pricing
for peripheral activities should be market-based. Thus a nonprofit hospital should price its health care services at full
const, but prices in its gift shop should be market based. In general, the smaller and more specific the unit of service
that is priced, the better the basis for decisions about the allocation of resources. For example, a comprehensive daily
rate for hospital care, which was common practice a few decades ago, masks the revenues for the mix of services
actually provided. Beyond a certain point, of course, the cost of the paper work associated with pricing units of service
outweighs the benefits. As a general rule, management control is facilitated when prices are established prior to the
performance of the services. If an organization is able to recover it’s incurred costs, management is not motivated to
worry about cost control.

(2) Strategic planning and budget Preparation

In nonprofit organizations that must decide how best to allocate limited resources to worth-while activities, strategies
planning is a more important and more time-consuming process than in the typical business. Colleges and universities,
welfare organizations, and organization in certain other nonprofit industries know before the budget year begins, the
approximate amount of their revenues. They do not have the option of increasing revenues during the year by
increasing their marketing efforts. They budget expense so that organization will at least break even at the estimated
amount of revenue. They require that managers of responsibility centre limit spending close to the budget amounts.
The budget is, thereof, the most important management control tool, at least with respect to financial institution.

(3) Operation and Evaluation

In most nonprofit organizations, there is no way of knowing what the optimum operating costs are. Responsibility
centre managers, therefore, tend to spend whatever is allowed in the budget, even though the budgeted amount may
be higher than is necessary. Conversely, they may refrain from making expenditures that have an excellent payoff simply
because the expenditure was not included in the budget. Although nonprofit organizations have has a reputation for
operating inefficiently, this perception has been changing for good reasons. Many organization have had increasing
difficulty in raising funds, especially from government resources. This has led to belt-tightening and to increased

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attention to management control. As mention above, the most dramatic change has been in hospital costs, with the
introduction of reimbursement on the basis of standard prices for diagnostic-related groups

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