cost analysis profit planning and control n.
Skip this Video
Loading SlideShow in 5 Seconds..
Cost Analysis, Profit Planning, and Control PowerPoint Presentation
Download Presentation
Cost Analysis, Profit Planning, and Control

Cost Analysis, Profit Planning, and Control

131 Views Download Presentation
Download Presentation

Cost Analysis, Profit Planning, and Control

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. Cost Analysis, Profit Planning, and Control MBA 603 Chapter 14 - Service Organizations

  2. Overview • 2003 finds that the service sector is roughly 80% of GDP for the United States. • Service Organizations have many different facets than manufacturing operations in terms of : • Measuring costs • Measuring Productivity • Measuring Returns on Assets

  3. Characteristics • Absence of Inventory Buffer in service organizations does not provide protection from sales fluctuations. • They must minimize unused operating capacity. • Costs are very fixed in the short run. • Key variable is matching current capacity.

  4. Characteristics - Continued • Service organizations attempt this matching process in two ways: • They try to stimulate demand in non-peak periods by lowering prices and increased marketing programs (Cruise Lines). • They adjust their workforce to demand levels by scheduling training in slack periods and giving time off when people work more during peak business seasons (CPA Firms).

  5. Characteristics - Continued • Difficulty in Controlling Quality - manufacturing companies can inspect products and measure quality while, service companies cannot until the service is rendered. • Labor Intensive - manufacturing companies can add equipment and automation to reduce headcount, while service companies are labor intensive and depend on staffs to be effective.

  6. Characteristics - Continued • Multi-Unit Organizations - Service organizations that operate many units in various locations, each unit is small. • Multi-Unit Organizations - similarity of units provide common basis for analyzing budgets and performance. • Multi-Unit Organizations - Units differ in the mix of services , resources used, and need to be analyzed carefully.

  7. Professional Service Organizations • Service Organizations such as law firms, accounting firms, advertising agencies, etc., have Special Characteristics. • Goals of a Professional Organization are: • Maximize skill of professional staff by providing adequate compensation for the staff. • Increase the size of the organization and equate it with success and potential higher compensation.

  8. Professional Service Organizations - Continued • Professionals prefer to work independently, rather than as part of a team. • They are usually not good managers because they focus on their professional skills through training. • They usually do not focus on financial implications of their decisions or work habits.

  9. Professional Service Organizations _ Continued • Output and Input Measurement is difficult for professional organizations. • Revenues earned is one measurement tool. • Work done by staff members are usually non-repetitive - no 2 consulting jobs are alike. • Professional do not like to keep track of their time - tradition or concealment? • How to effectively charge clients is a problem.

  10. Professional Service Organizations - Continued • Small Size is a normal profile for a service organization , usually in one location. • Because of the small size there is less of a need for profit centers and formal reporting systems. • Budgets are utilized in most professional organizations to control costs and maximize revenues, etc.

  11. Professional Service Organizations - Continued • Marketing and production are clearly defined in manufacturing and only senior management cares. • Marketing is key also in professional organizations but harder to conduct because of ethical codes, laws, and industry standards. • It is hard to assign credit for sales contracts etc., with rewards being subjective.

  12. Management Control Systems • Pricing in professional organizations is traditionally established in many firms. • Fees are related to time spent by level of management expertise with a loading for overhead costs. • The profit component is affected by producing a satisfactory product, including the risk of not doing it well and those staff members not generating revenue.

  13. Management Control Systems - Continued • Strategic Planning and Budgeting in professional organizations usually are not as sophisticated as manufacturing firms. • Since most service firms are people orientated they develop their long range plans around staffing needs. • Capital Asset purchases are analyzed in a similar fashion as most manufacturing firms, but with an emphasis on productivity gains.

  14. Management Control Systems - Continued • Control Of Operations is focused on scheduling the time of professionals. • Billed time ratio - ratio of hours billed to total professional hours available is a key monitoring metric. • Work being performed by project teams has control focused on on projects. • A written plans for each project are designed and timely reports prepared to measure overall performance.

  15. Management Control Systems - Continued • Performance Measurement and Appraisal for the majority of professionals is very difficult. • Judgements by superiors are common with more organization utilizing formal collection processes as a basis for personnel decisions. • Appraisals by ones professional peers or subordinates is employed. • Budgets are used to measure cost performance and control of discretionary expenses. • Some firms use internal audit procedures to control quality.

  16. Financial Service Organizations • These organizations include commercial banks, thrift institutions, insurance companies, and securities firms. • They primarily manage money. • Some act as: • Intermediaries • Risk Shifters • Traders

  17. Financial Service Organizations - Continued • Several observations about the financial services sector: • 2002 saw financial service organizations produce $400 billion or 5% of GDP • Deregulation has blurred the industry and geographical boundaries. • Information technology has revolutionized the industry creating new products and trading methods. • Controls for the sector have become critical. • New forms of financial instruments (derivatives) have created huge losses.

  18. Financial Service Organizations - Continued • Corporate scandals of 2002 created push for investment banking firms to spin off their research departments. • Pros of Spin Off: • It will insure objective research data. • Cost is being subsidized by investment banks but, if people have to pay for it quality will rise. • Investor confidence will rise if people believe it is unbiased data.

  19. Financial Service Organizations - Continued • Cons of Spin Off: • Costs will rise upon separation. • Best researchers will join investment banks that pay well which will leave independent firms with lower caliber employees. • To keep costs low, research firms will issue shorter less detailed reports than now.

  20. Financial Service Organizations - Continued • Special Charateristics are present in control systems in financial service industry. • Monetary Assets re the backbone of all these entities. • Quality here refers to the quality of services rendered because money has the same value for all firms. • Firms invest extra controls to safeguard financial assets, especially money.

  21. Financial Service Organizations - Continued • Time Period for Transactions is a crucial control factor in the industry. • Some loans and bonds take many years to be completed as transactions which means a system has to be devised to monitor their safety. • In buying and selling securities, the volume and speed of the transaction need to be monitored for improprieties from traders and groups of investors.

  22. Financial Service Organizations - Continued • Risk and Reward are part of financial services daily business operations, greater risk-greater $’s. • Interest rates and insurance premiums may be bad.

  23. Health Care Organizations • These organizations are hospitals, clinics, retirement and nursing homes, medical laboratories, etc. • They account for 14% of GDP and about the size of all manufacturing in the U.S.. • Many are profit oriented organizations.

  24. Non-profit Organizations • Absence of Profit Measures: This factor makes evaluation of operating performance difficult. • Contributed Capital: It replaces the owner’s equity section of a normal balance sheet presentation. • Fund Accounting: A unique set of accounting methods that are self-balancing and represent committed funds or budgets.

  25. Non-profit Organizations - Continued • Governance: A board of trustees oversee operations at monthly meetings and must be stronger than normal for profit organizations. • Product Pricing: This area is weak in non-profits because of the lack of profit drive and a full cost approach must be used. • Strategic Planning and Budget Preparation:These processes are more important and difficult than normal business enterprise operations.

  26. Non-profit Organizations - Continued • Operation and Evaluation: Managers tend to spend whatever is in their budgets, so it is imperative that the trustees monitor operations visa the budget very tightly.