Piedmont university

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


Purpose of presentation

To provide insights into

management control systems

for service organization.


Scope of the Presentation

Case Facts Issues/Questions to Address Relevant Theory Conceptual Framework Case Analysis Solutions/Recommendations Lessons Learned Domestic Dimension


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


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.)


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.)


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


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


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


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.)


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.



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.



Management Control Systems considerations:

1. Product pricing.

2. Strategic planning and Budget preparation.

3. Operation and Evaluation.



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.



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:


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.



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.



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


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


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


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.


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.


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.


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.


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.


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.


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.


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?


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.)


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


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


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


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)


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.)


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.



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.



MAC profit centers:

Swimming Pool and Entertainments

Training center

Computer lab

General activities.



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


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

Piedmont university

Business

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