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MANAGEMENT CONTROL SYSTEM

Service Organizations and Financial Institutions

FOREWORD

Praise our thanks to the presence of God Almighty, for His grace so that we can finish
writing a paper on Performance Report Analysis.
The author has tried to compose this paper well, but the author recognizes that we have
the limitation of us as human beings. The author realizes that in the preparation of this paper
there are still many shortcomings. Therefore, if found there are errors both in terms of writing
techniques, or from the content, the authors apologize and expect criticism and suggestions that
are constructive.
CHAPTER I

PRELIMINARY

Management control system is not only about manufacturing aspect only. Management
control systems also work in the service sector. In the process of control, the service sector has
relatively different characteristics than the manufacturing sector. The management control
system to be discussed is devoted to professional service organizations (legal consultants,
lawyers, accounting and similar professions), hospitals, nonprofits (foundations), government
and trade organizations (agents, distributors, retailers).
In addition to discussing the management control system in the service sector, this paper also
discusses the management control system in the financial services company. Financial services
company is a company whose main area is managing money. Basically this company acts as a
mediator that he gets money from the depositors or savers and lend it to individuals or
companies. Another action is risk shifters, which is to earn money in the form of premiums,
invest the premium and accept the risk of occurrence of certain events such as death or damage.
Another action is as a trader that is buying and selling securities either for themselves or their
customers. Looking at the business field run, the financial services company has a few masalh
against management control that is different from other service companies.
CHAPTER II

DISCUSSION

2.1 Service Organization General

In 2003, service sector employment has grown more than double the growth of the
manufacturing sector that requires more insight into management control systems for
service organizations.

2.1.1 Characteristics of Service Organization Generally

Management controls in the service industry are somewhat different from


management controls in manufacturing firms. These characteristics are:

1. Absence of Buffer Stock


Goods can be stored in inventory form a buffer to minimize the impact of
fluctuations in sales volume on production processes, services can not be
stored. Service companies can not do what a manufacturing company does,
so service companies should try to minimize their unused capacity.
Moreover, costs and many service organizations are essentially fixed in the
short run. In the short term, a hotel can not reduce its costs substantially by
closing some of its rooms. Accountants, law firms, and other professional
organizations are reluctant to lay off professional employees when sales
volumes are low due to the moral impact and cost of hiring and retraining
new employees.
2. Difficulty in Controlling Quality
The service company can not judge the quality of the product until its service
is delivered, and often the assessment is subjective. For example the quality
of education, the quality of education is difficult to measure so that only some
educational organizations have a formal quality control system.
3. Labor intensive
Manufacturing companies can add equipment and automating the
production line so that the company replaces the labor and reduces costs.
Almost all service companies are labor intensive and can not do such a thing.
Hospitals can indeed add expensive equipment, but most are intended to
provide better service, and this adds to the cost. Attorney's office expands its
business by adding new colleagues and support staff.
4. Multi-Unit Organizations
Some service organizations operate many units in different locations, where
each unit is relatively small. The similarity of separate units provides a
common basis for analyzing budgets and evaluating performance, which is
absent in manufacturing firms. Information and each unit can be compared
with the system or regional averages, and high- and low-performance
employees can be identified.

2.2 Professional Service Organization

Research and development organizations, lawyers' offices, accounting firms, health


organizations, engineering firms, companies, architecture, consultant offices, symphonic
organizations and other arts organizations, and sports organizations are examples of
organizations whose products are professional services.

2.2.1 Special Characteristics of Professional Services Organizations

1. Target
Professional organizations have relatively few tangible assets; its main assets
are the skills and professional staff, which do not appear on the company's balance
sheet. The return on assets used is essentially meaningless in the organization.
Financial goals to provide adequate compensation to professionals. The
associated goal is to increase the size of the organization. This reflects a natural
tendency to link success to a large size; economies of scale in the use of business
and staff employees and central units responsible for keeping the organization up-
to-date.
2. Professional
Professional organizations are labor-intensive organizations, and their
employees are special people. Many professionals prefer to work independently
rather than as part and team. Professionals who also are managers tend to work
only part-time in management activities. Education for most professions does not
include education in management but generally emphasizes professional skills in
appeal to management skills. Professionals tend to underestimate the financial
implications of their decisions; they want to do the best job they can do, regardless
of the cost. This attitude affects the attitudes of support staff and nonprofessional
employees in the organization; this leads to inadequate cost control.

3. Input and Output Measurements


The output of a professional organization can not be measured by physical size,
such as units, tonnes, or gallons. One can measure the number of patients served
by a physician in one day, and may even classify such patients by the type of
complaint; but can not be equated with the amount or quality of services
provided by the physician. The best that can be measured is the physician's
efficiency in dealing with his patients, which can be used to identify casual and
hardworking workers. Revenue earned is one measure of output in some
professional organizations, but this monetary figure is, at best, only related to the
quantity of services provided, but not the quality (although poor quality is
reflected in reduced revenue over the long term).

4. Small company
With some exceptions, such as some law firms and accounting firms,
professional organizations are usually relatively small and operate in one location
only. Senior management in such organizations can personally observe what is
going on and directly motivate its employees. Thus, there is less need for
sophisticated management control systems, with profit centers and formal
performance reports. Nonetheless, even small organizations still need budgets, a
general comparison between performance against budgets, and a way to associate
compensation with performance.

5. Marketing
In a manufacturing company there is a clear dividing line between marketing
activities and production activities; only senior management is paying attention
to both. Such a clear separation is not present in the pro- fessional organization.
In some professional organizations, professional codes of ethics limit the number
and character and marketing efforts that are too obvious to professionals. But
marketing is an important activity in almost all organizations. In these situations,
it is very difficult to give appropriate rewards to the person responsible for
"selling" to a new customer.

2.2.2 Management Control Systems exist in Professional Service Organizations

1. Pricing
The selling price and job are set in the traditional way in many professional
companies. If the profession is one of the professions in which its members are
accustomed to keeping track of their timelines, the determination of professional
fees to be paid is usually attributed to the professional time spent in the
assignment. The hourly billing rate is usually based on compensation from the
professional level (and not the compensation of a particular person), plus the
burden of overhead and profit.
2. Center for Earnings and Transfer Pricing
Supporting units, such as maintenance, processing of transport information,
printing, and procurement of goods and services, charge the services they provide
to units that consume such services.
3. Strategic Planning and Budgeting
In general, formal strategic planning systems in professional organizations do
not develop as well as in manufacturing firms of the same size. Part of the
explanation for this is that professional organizations do not have a great need for
such a system. In manufacturing companies, many program decisions involve a
commitment to buy factories and equipment. These decisions have a predictable
impact on both capacity and cost over the next few years, and once made, the
decisions are essentially irreversible. In a professional organization, its main
assets are human. Although the organization avoids short-run fluctuations in the
number of employees, changes in employee size and composition are easier to
perform and easier to reverse than changes in the physical capacity of the plant
4. Operation Control
Much attention is, or should be, devoted to professional timing scheduling. The
billed time ratio, which is the ratio of the billable hours to the number of hours
available, is closely monitored. If the reverse time usage is idle time or for
marketing or public service reasons, some assignments are charged at a lower rate
than the normal rate, then the resulting price variance must be closely monitored.
The inability to set standards for task performance, the desire to carry out work
in teams, problems arising from managing matrix organizations, and the
behavioral characteristics of professionals all complicate planning and control
over day-to-day operations within professional organizations. When the work is
carried out by the project team, the control is focused on the project. A written
plan for each project is required, and a timely report must be made, comparing
actual performance with planned performance in terms of cost, schedule, and
quality.
5. Measurement and Performance Assessment
An assessment made by a superior is the most common assessment. To that end,
more and more professional organizations are using the formal system to collect
performance appraisals as a basis for personnel decisions and for discussions with
such professionals. Some systems require a numerical rating of certain attributes
of performance and provide a weighted average for these ratings. Compensation
may be attributed, in part, to this numerical rating. Assessment by co-workers, or
by subordinates, is sometimes part and formal control system. In some
organizations, individuals may be asked to make judgments about themselves.
Expression of satisfaction or dissatisfaction with the kiien is also an important
basis for assessing performance, although such expression may not always be
available.
Budgets can be used as a basis for measuring cost performance, and actual times
used can be compared against planned time. Budget and control over
discretionary loads in professional firms is as important as in manufacturing
companies. However, such financial measures are relatively insignificant in
assessing the contribution of a professional to a firm's profitability. The main
contribution of these professionals relates to quantity and is above all the quality
of work, so its judgment must be more subjective. Furthermore, the assessment
should be done on the spot.

2.3 The Financial Services Organization(Commercial Banks and Financing Institutions )

2.3.1 General Characteristics of Commercial Banks and Financing Institutions


1. Regulated Capital
The ability of a bank to lend or invest money is governed by a government where
capital should at least be balanced by a certain percentage of its assets

2. New product
Until now commercial bank activities generally relate to the activities of saving
and lending money, with relatively small amount of revenue generated from fees
charged to manage trust funds and secure consumer assets. The Bank furnishes
several services for its customers without any burden or indirect expenses
resulting from the acquisition of a company in maintaining a certain minimum
balance.
3. Risk
Banks are faced with 3 forms of risk:
a. Credit risk, ie the risk that a loan can not return.
b. The interest rate risk, ie the selisijh between interest paid on deposits
and tariffs obtained on loans and investments, will change in an invisible
way.
c. Transaction risk, ie the risk of error in the transaction process.
4. Automation
In all banks the function of saving and withdrawal is usually automatic. For large
amounts of transactions made through Automatic Teller Machine (ATM). Many
lending decisions are also automated. Even such functionality is automated where
experts believe that in the near future only the function of employees at branch
offices still serve customer satisfaction.

2.3.2 Management Control Implications

If branches are treated as profit centers the following issues need to be addressed:

1. The relationship of tariff and term of time deposit to tariff and loan period
2. Volume of deposit
3. Loan losses
4. Cost
5. Shared revenue
6. Transfer price
2.4 Securities Company

The characteristics of securities firms relevant to management control are quite different
from some of the previous organizations. The differences are:

1. The interests of customer relationships


The products of securities firms are invisible, and their quality is difficult to measure.
The quality contents of the principle is the company's professional capability. The
attitude of the subscriptions to the company is mainly influenced by their assessment of
the professionals who are used to connecting with them
2. Stars and teamwork
Star perpetrators of securities companies' organizational structures are relatively small,
and relationships between superiors and subordinates are more informal and
unstructured. The stars that trade in securities are usually helped by other professionals,
some of whom are stars too. For an important task, leading professionals may adopt a
team that works on a project, sometimes full time but more often part time.
3. The need for rapid information flow
Many securities and commodities are listed on the world's bourses where each region
has a different time zone. Therefore, the securities company runs a 24 hour trading
business per day. Each trader has a book showing the position of change in each of the
securities in which he is responsible. Every trader also has a computer layer that shows
information about developments around the world that may affect the price.
Development and maintenance of information systems in securities firms is a very
important function.
4. Focus on short-term performance
Securities firms tend to focus on short-term performance, and the short term they mean
is quarterly. Evidence is the largest class of investors and they have little advantage in
the class, because their goal is to provide funds for payments to be made over the time
of the retirees. Short-term Focus exists because no one knows what will happen in the
future and especially because this short-term proof has become a tradition.
5. Financial Performance Measurement
The financial performance of securities firms and managers or other professionals is
primarily measured on the basis of income and second on the basis of gross profit. Little
effort is required to measure net income from various activities or individuals.
2.5 Insurance Companies

There are two forms of insurance companies namely life insurance and accident
insurance. Life insurance companies collect premiums from policyholders, invest this
premium, and pay a certain amount if the policyholder dies. All life insurance contracts
usually include an investment view that is part of the premium that brings the development
of the policy's cash value. Accident insurance companies collect premiums, invest, and
pay to the policyholders a certain loss.

The problem of management control in insurance companies, especially life insurance,


is that they do not know the profit from current policy sales until the next few years. They
make premiums based on the best estimates of incoming and outgoings of the policy.
Although earnings are not immediately known, management can not wait too long to
produce control decisions so that current information is required.

The actuary counts a tentative premium, and the final premium shows the marketing
person's assessment of the goodness of the policy and the premium charged by the
competitor. The actuarial calculation takes into consideration the following factors :

a. Acquisition costs
b. The cost of providing services
c. Profit
d. Possible loss
e. Investment income
f. Possible payouts
g. income tax
h. Profit rate desired

Measurement of sales performance is more focused on sales volume and not just profit
level. The Commission is based on the first year premium or the beginning of the year, or
on the amount of the written policy.
CHAPTER III

CONCLUSION

Management controls in service organizations are different when compared to


manufacturing organizations. This is due to the lack of a buffer supply to the service
organization, the difficulty of measuring quality, and in general service firms tend to be labor-
intensive. Management control systems in service organizations are generally the same as
management control systems in trade organizations.

The financial services organization differs in two ways over the other. First, the raw
material is money. Second, the profit rate of many transactions can not be measured for many
years after commitments are made. The main one, the company will make a profit if future
income is derived from current loans, investments, and insurance premiums that exceed the
cost of funds associated with this income. Management control issues are more complex in
banking investments, securities trading, and some other organizations due to the fact that profit
or loss can result from a single transaction.

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