NAME / NIM : Ni Luh Putu Amara Prabasari / 119211078

Ni Luh Putu Mas Ashita Trisnayanti / 119211323

CLASS : Accounting IC, 5th Semester
SUBJECT : Management Control System

MANAGEMENT CONTROL SYSTEM IN SERVICE ORGANIZATION

What is a Service organization?

 Service organizations are specialized units carrying out business activities or
assisting the business organizations.
 These units do not have tangible products
 They make value addition to the other unit’s products.

Manufacturing organization V/S service organizations:

 Inventory Building:
 Unlike manufacturing organization’s, product of the service organizations /
business unit is “SERVICE”, it is intangible in nature one can not store it
e.g. Lawyer’s hours, Doctor’s time, Hotel room etc
 Unlike physical products, it can not keep buffer stock of services.
 Revenue of manufacturing organization can be earned from the product
manufactured in the past, but if not sold today, the resources are lost
forever.
 The key performance issue in the service organization is how to minimize
the unused capacity
 Resource Characteristic :
 Service industry is normally labour intensive. It is not easy to adjust the
capacity of production and control the performance if the production
factors due to the behavioural factors of labour
 Service industry heavily relies on special class of labour. They need special
class of skilled personnel and high calibre of professionals, who seeks more
autonomy in working. This makes MCS more difficult
 Quality of services:
 Quality of services is always dependent on actual service provider
 Service quality of a professional is depends on varied factors such as
resource availability, time, behavioural factors etc
 Service quality of a professional can not be precisely controlled
 Pricing of service
 A usual manufactured product provides a standard base for its costing and
thereby it’s pricing. But the costing of the service is influenced by many
factors and which is quite complex to arrive at.
 Cost of services is a flexible nature and it depends on various factors such as
quality, time, efforts etc
 Multi-unit organization setup
 Service organizations provide feasibility when implemented at many places
simultaneously such as a renowned surgeon practicing at many places or a
chain of hotels,
 Such set up leads to generating similar kind of units but unlike
manufacturing unit, the output is largely depend on quality, time, efforts of
the professional involved and the setup facilities
 Very few tangible assets
 Professional organization’s primary assets / investment is in qualified and
experienced professionals.
 Rarely these organizations need heavy investment in tangible assets,
therefore tools such as ROI proves meaningless.
 The utilization of assets takes back seat in service organizations
 Input and Output measurement is difficult
 The input as well as output are non-quantifiable in nature e.g. a surgeon
rendering his service to a hospital
 It is difficult to assess the effectiveness and efficiency of a
professional/service organization
 Marketing of the services is usually informal
 Like a manufacturing organization one can not differentiate the production
efforts from marketing efforts in service organization
 Marketing is through word of mouth and can not segregate the sale effort
leading to particular sale.
 The sale efforts in service organization is intangible in nature
 This factor may lead to problem in arriving at marketing and sales cost
separately
General considerations of MCS in service organization
1. Pricing
Usually pricing of services are made on full cost basis. Its is generally
related with the time spent by an expert on a client. It’s a subjective assessment of
the input / cost
2. Profit centres and Transfer pricing
Support units such as data processing, printing, maintenance, tele-
communication to its siblings as well as outsiders. They charge for their services on
opportunity cost. Defining such service units as profit centres solves the problem of
pricing. A well establish transfer pricing policy takes care of opportunity cost of the
service being rendered.
3. Strategic planning & budgeting
Normally service organizations do not follow a systematic strategic
planning except for the long term staffing plan. As the resource requirement is low,
risk involved is low, uncertainties are less hence the units follow informal
measures of control rather than formal measures of control
4. Performance Measurement and Appraisal tool
 Any of the following or mix of the following tools can be used
 Recommendations of investment bankers v/s Market conditions
 Accuracy of Diagnosis – Actual findings
 Judgments made by seniors
 Use of numerical ratings
 Appraisal by peer professionals / self appraisal
 Client report
 Internal audit to control quality and quantity
  Different Service Sectors and Management Control Approach

5. Financial service organization and MCS:

This sector includes the firms like banks, financial institutes, insurance
firms and investment firms. They engaged in money management. The primary
asset of these institutions is money. Time period for the transaction may range from
hours (stock market), days (credit notes), years (FDs, long term securities).
Therefore the performance assessment is quite complex in these organizations
Risk & reward – Risk in pure financial transaction are more evident than a
manufacturing organization. The actual risk assessment may be very complex in
financial transactions. Information Technology has changed the face of this sector.
It has paved great improvement in the financial services sector however the threats
are also increasing e.g. credit card business, online trading etc
6. Health services and MCS
This includes hospitals, clinics, polyclinics, scanning centres, MRI, Lab etc.
The major assets here are medical professionals, sophisticated equipment and
infrastructure. The cost structure of treatment, availability of technology health
consciousness, shifting focus from charitable services to commercial services etc
has made the control process more involved and complex.
The health services are available today in many shapes and sizes. You
demand it and it is available. What was yesterday available to few is now available
to may, in house as well as outdoor. Health services have been paid by third party
such as government agencies, insurance companies, charitable organizations, trusts
etc. This influence the control process. Quality control can be exercised through
peer review or through outside review agency
In health services, the professional loyalty exists more than the
organizational loyalty. The autonomy of the professionals working plays important
role in the efficient working of the health organization.