'Japanese companies that have used just-in-time (JIT) for five or more years are reporting close to a 30% increase in labour productivity, a 60% reduction in inventories, a 90% reduction in quality rejection rates, and a 15% reduction in necessary plant space. However, implementing a just-in-time system does not occur overnight. It took Toyota over twenty years to develop its system and realise significant benefits from it.' --- Sumer C Aggrawal, Harvard Business Review
Explain how the benefits claimed for JIT in the above quotation are achieved and why it takes so long to achieve those benefits.
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Just-in-time (JIT) has emerged from criticisms of traditional responses to the problems of improving manufacturing capacity and reducing unit costs of production.
The JIT approach involves a continuous commitment to the pursuit of excellence in all phases of manufacturing systems and design. The aims of JIT are to produce the required items, at the required quality and in the required quantities, at the precise time they are required. In particular, JIT aims to achieve the following:
The elimination of non-value-added activities
Zero inventory
Zero defects
Batch sizes of one
Zero breakdowns
A 100% on-time delivery service
There are two aspects to JIT systems, JIT purchasing and JIT production, both of which assist in the benefits highlighted by Aggrawal.
(i) Reduction in inventories
JIT purchasing seeks to match the usage of materials with the delivery of materials from external suppliers. This means that material inventories can be kept at near-zero levels. For JIT purchasing to be successful this requires the organisation to have confidence that the supplier will deliver on time and that the supplier will deliver materials of 100% quality, that there will be no rejects, returns and hence no consequent production delays. The reliability of suppliers is of utmost importance and hence the company must build up close relationships with their suppliers. This can be achieved by doing more business with fewer suppliers and placing long-term orders so that the supplier is assured of sales and can produce to meet the required demand. Such factors will enable inventory levels to be kept as near
to zero as possible and help to produce Aggrawal's claimed benefit.
(ii) Increase in labour productivity
In a JIT production environment, production processes must be shortened and simplified. Each product family is made in a work cell based on flowline principles. The variety and complexity of work carried out in these work cells is increased (compared with more traditional processes), necessitating a group of dissimilar machines working within each work cell. Workers must therefore be more flexible and adaptable, the cellular approach enabling each operative to operate several machines. Operatives are trained to operate all machines on the line and undertake routine preventative maintenance. It is factors such as these that result in an increase in labour productivity in a JIT environment.
(iii) Reduction of necessary plant space
With JIT production, factory layouts must change to reduce movement of workers and products. Traditionally machines were grouped by function. All the drilling machines were together, all the grinding machines were together and so on. A part therefore had to travel long distances, moving from one part of the factory to the other, often stopping along the way in a storage area. All these are non-value-added activities which have to be reduced or eliminated. Material movements between operations are therefore minimised by eliminating space between work stations and grouping dissimilar machines into manufacturing cells on the basis of product groups. Storage space is reduced due to the reasons set out in (i) above. Plant space is therefore kept to a minimum.
(iv) Reduction in quality rejection rate
Production management within a JIT environment seeks to both eliminate scrap and defective units during production and avoid the need for reworking of units. Defects stop the production line, thus creating rework and possibly resulting in a failure to meet delivery dates. Quality, on the other hand, reduces costs. This level of quality is assured by designing products and processes, introducing quality awareness programmes and statistical checks on output quality, providing continual worker training and implementing vendor quality assurance programmes to ensure that the correct product is made to the appropriate quality level on the first pass through production.
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Explanation of time needed
Some of the changes necessary to produce such benefits are quite radical and cannot be implemented overnight. The co-operation of workers is vital and they must be trained and will need many hours of practice. Close relationships with suppliers cannot be established straight away. They must be built up over time as trust between the two parties develops. It is therefore obvious that the benefits cannot be expected to appear within 24 hours but must be developed gradually to allow the full benefits of JIT to materialise.
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Sunday, June 26, 2011
Financial Performance Measurement weakens Performance Management System
How reliance solely on Financial Performance Measurement can weaken the effectiveness of Performance Management System
When managers concentrate on financial performance measures (FPM) they ignore other important variables that cannot be stated in monetary terms.
- For instance, quality of service is a vital competitive activity in business but it can’t be stated in monetary terms.
In knowledge industries intangible factors such as innovation and learning need to be measured.
- Innovation and know-how are intangible. The balance scorecard measures innovation and learning as one of its four perspectives.
Some financial performance measures can lead to short-termism where managers focus on achieving annual returns at the expense of long-term investment.
- The use of ROCE is an example of this. By keeping old assets which have been written down, the measure of ROCE is improved but the business may be retaining assets past their most productive period.
Concentrating on cutting costs is an example of looking solely at financial measure of performance.
- When staff are laid off this may see a short-term cost reduction but motivation may suffer and good, experienced staff may be lost forever..
Financial measures look backward at what happened rather than trying to plan for the future.
- Managers cannot rely on past performance solely to guide them going forward.
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When managers concentrate on financial performance measures (FPM) they ignore other important variables that cannot be stated in monetary terms.
- For instance, quality of service is a vital competitive activity in business but it can’t be stated in monetary terms.
In knowledge industries intangible factors such as innovation and learning need to be measured.
- Innovation and know-how are intangible. The balance scorecard measures innovation and learning as one of its four perspectives.
Some financial performance measures can lead to short-termism where managers focus on achieving annual returns at the expense of long-term investment.
- The use of ROCE is an example of this. By keeping old assets which have been written down, the measure of ROCE is improved but the business may be retaining assets past their most productive period.
Concentrating on cutting costs is an example of looking solely at financial measure of performance.
- When staff are laid off this may see a short-term cost reduction but motivation may suffer and good, experienced staff may be lost forever..
Financial measures look backward at what happened rather than trying to plan for the future.
- Managers cannot rely on past performance solely to guide them going forward.
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Explain "Target Costing" and how it may be applied
Target Costing (TC) is technique that focuses on managing costs during a product’s planning and design phase. TC is a customer-oriented approach.
Target costing (TC) is an approach aimed at reducing the life cycle costs of new products while ensuring quality, reliability and other customer requirements, by examining all possible ideas for cost reduction at the product planning, research and development and the prototyping phases of production. It is not just a cost reduction technique but is part of a comprehensive strategic profit management system.
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Target Cost-Setting Process
Develop a product concept and then determine the price that customers are willing to pay for it to achieve the desired market share.
A target or desired profit margin is deducted to get a target cost for the product. The target profit margin can be based on a required return on the new investment or profit as a percentage of sales.
If the estimated actual cost of the product exceeds the target cost, value engineering and value analysis and continuous improvement will be used to close the cost gap.
It is important that target costing is supported by an accurate costing system using appropriate cause-and-effect cost drivers for cost assignment.
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Target costing (TC) is an approach aimed at reducing the life cycle costs of new products while ensuring quality, reliability and other customer requirements, by examining all possible ideas for cost reduction at the product planning, research and development and the prototyping phases of production. It is not just a cost reduction technique but is part of a comprehensive strategic profit management system.
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Target Cost-Setting Process
Develop a product concept and then determine the price that customers are willing to pay for it to achieve the desired market share.
A target or desired profit margin is deducted to get a target cost for the product. The target profit margin can be based on a required return on the new investment or profit as a percentage of sales.
If the estimated actual cost of the product exceeds the target cost, value engineering and value analysis and continuous improvement will be used to close the cost gap.
It is important that target costing is supported by an accurate costing system using appropriate cause-and-effect cost drivers for cost assignment.
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Thursday, June 23, 2011
The Benefits that may accrue to the organizations which adopt Environmental Management Accounting
1. Environmental management accounting (EMA) involves the generation and analysis of bothfinancial and non-financial information in order to support internal environmental management processes.
2. It is complementary to the conventional management accounting approach, with the aim to develop appropriate mechanisms that assist the management of organisations in the identification and allocation of environmentally related costs.
Benefits
1. Organisations that alter their management accounting practices to incorporate environmental concerns will have greater awareness of the impact of environment-related activities on their profit and loss accounts and balance sheets. This is because conventional management accounting systems tend to attribute many environmental costs to general overhead accounts with the result that they are ‘hidden’ from management. It follows that organisations which adopt EMA are more likely to identify and take advantage of cost reduction and other improvement opportunities.
2. A concern with environmental costs will also reduce the chances of employing incorrect pricing of products and services and taking the wrong options in terms of mix and development decisions. This in turn may lead to enhanced customer value whilst reducing the risk profile attaching to investments and other decisions which have long term consequences.
3. Reputational risk will also be reduced as a consequence of adopting (EMA) since management will be seen to be acting in an environmentally responsible manner. Organisations can learn from the Shell Oil Company whose experience in the much publicised Brent Spar incident cost the firm millions in terms of lost revenues as a result of a consumer boycott.
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2. It is complementary to the conventional management accounting approach, with the aim to develop appropriate mechanisms that assist the management of organisations in the identification and allocation of environmentally related costs.
Benefits
1. Organisations that alter their management accounting practices to incorporate environmental concerns will have greater awareness of the impact of environment-related activities on their profit and loss accounts and balance sheets. This is because conventional management accounting systems tend to attribute many environmental costs to general overhead accounts with the result that they are ‘hidden’ from management. It follows that organisations which adopt EMA are more likely to identify and take advantage of cost reduction and other improvement opportunities.
2. A concern with environmental costs will also reduce the chances of employing incorrect pricing of products and services and taking the wrong options in terms of mix and development decisions. This in turn may lead to enhanced customer value whilst reducing the risk profile attaching to investments and other decisions which have long term consequences.
3. Reputational risk will also be reduced as a consequence of adopting (EMA) since management will be seen to be acting in an environmentally responsible manner. Organisations can learn from the Shell Oil Company whose experience in the much publicised Brent Spar incident cost the firm millions in terms of lost revenues as a result of a consumer boycott.
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Wednesday, June 22, 2011
Divisionalisation
Identify the possible factors that may have prompted the senior management to introduce a divisional structure and suggest some potential problems that may arise.
Reasons :
1. Decision makers at divisional level have more awareness of their markets and services and of local problems. They are closer to, and so have a better understanding of, day-to-day operational problems.
2. There is greater speed of decision making and responses to changing events since there is no need to refer decisions upwards. This is valued by customers and is particularly important in a modern rapidly-changing environment.
3. Divisionalisation allows senior management to concentrate on strategic problems affecting the organization as a whole They need not be burdened by large amounts of information that is not relevant to their role.
4. Divisionalisation helps junior mangers to develop in roles of responsibility.
5. Divisional managers can be more adventurous and are better motivated.
6. The authority to act to improve performance should motivate divisional managers.
7. A divisional structure can reduce the complexity and cost of the communications system.
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Potential problems that may arise:
1. Duplication of functions and facilities. It is perhaps wasteful for each division to have, say, its own accounts department.
2. There will be some loss of the information needed by senior managers to take strategic decisions. At the extreme, for example, a divisional manager may be able to hide the truth about a division’s poor performance from senior management, who would close down the division or change its manager if they were aware of the full story.
3. Competition between divisions may cause the divisions to take decisions that are not in the interests of the organization as a whole.
4. Senior management may spend too much time resolving disputes between the divisions, say in the level of cross charges, rather than concentrating on strategic issues.
5. Top management, by delegating decision making to divisional mangers, may loss control since they are not aware of what is going on in the organization as a whole.
6. On the other hand, senior management might have difficulty in fully delegating decision making.
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Reasons :
1. Decision makers at divisional level have more awareness of their markets and services and of local problems. They are closer to, and so have a better understanding of, day-to-day operational problems.
2. There is greater speed of decision making and responses to changing events since there is no need to refer decisions upwards. This is valued by customers and is particularly important in a modern rapidly-changing environment.
3. Divisionalisation allows senior management to concentrate on strategic problems affecting the organization as a whole They need not be burdened by large amounts of information that is not relevant to their role.
4. Divisionalisation helps junior mangers to develop in roles of responsibility.
5. Divisional managers can be more adventurous and are better motivated.
6. The authority to act to improve performance should motivate divisional managers.
7. A divisional structure can reduce the complexity and cost of the communications system.
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Potential problems that may arise:
1. Duplication of functions and facilities. It is perhaps wasteful for each division to have, say, its own accounts department.
2. There will be some loss of the information needed by senior managers to take strategic decisions. At the extreme, for example, a divisional manager may be able to hide the truth about a division’s poor performance from senior management, who would close down the division or change its manager if they were aware of the full story.
3. Competition between divisions may cause the divisions to take decisions that are not in the interests of the organization as a whole.
4. Senior management may spend too much time resolving disputes between the divisions, say in the level of cross charges, rather than concentrating on strategic issues.
5. Top management, by delegating decision making to divisional mangers, may loss control since they are not aware of what is going on in the organization as a whole.
6. On the other hand, senior management might have difficulty in fully delegating decision making.
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Sources of Information for evaluation of financial stress faced by companies
There are a number of ways in which an assessment can be made of how likely a company may fail, some using qualitative and some quantitative information.
Identify FIVE (5) sources of information for evaluating the financial stress faced by companies.
(1) Analysis of the company accounts to identify problem relating to key ratios such as liquidity, debt cover and profitability.
(2) Other information in the published accounts, such as:
**very large increases in intangible fixed assets
**a worsening cash and cash equivalents position shown by the cash flow statement
**very large continent liabilities
**important post-balance sheet events
(3) Information in the chairman’s report and the directors’ report (including warnings, evasions. Changes in the composition of the board since last year)
(4) Information in the press (about the industry and the company or its competitors)
(5) Information about environmental or external matters such as changes in the market for the company’s products or services.
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Identify FIVE (5) sources of information for evaluating the financial stress faced by companies.
(1) Analysis of the company accounts to identify problem relating to key ratios such as liquidity, debt cover and profitability.
(2) Other information in the published accounts, such as:
**very large increases in intangible fixed assets
**a worsening cash and cash equivalents position shown by the cash flow statement
**very large continent liabilities
**important post-balance sheet events
(3) Information in the chairman’s report and the directors’ report (including warnings, evasions. Changes in the composition of the board since last year)
(4) Information in the press (about the industry and the company or its competitors)
(5) Information about environmental or external matters such as changes in the market for the company’s products or services.
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Impact of Corporate Failure
Discuss the impact of corporate failure on different stakeholders
As financial crisis hits businesses in the wider economy, there is a significant increase in the number of companies filing for insolvency. Corporate failure which leads to the collapse and closure of companies can have serious consequences for a number of different groups, such as:
Owners of companies which fail may lose their livelihood and even their homes and assets where these have been used as security for money invested in setting up business,
Investors in companies may lose substantial sums of money.
Creditors may not be paid for products and services. This can lead to difficulties for those companies as well.
Employees lose their jobs.
Entire communities can be adversely affected by the closure of important employers in the area.
The potential consequences of failure mean that concerned parties want to improve their success in identifying failing companies, in order to take steps to prevent the failure or to liquidate their investment before losing substantial sums of money. This has led to attempts to develop models which would enable the identification of companies likely to fail.
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As financial crisis hits businesses in the wider economy, there is a significant increase in the number of companies filing for insolvency. Corporate failure which leads to the collapse and closure of companies can have serious consequences for a number of different groups, such as:
Owners of companies which fail may lose their livelihood and even their homes and assets where these have been used as security for money invested in setting up business,
Investors in companies may lose substantial sums of money.
Creditors may not be paid for products and services. This can lead to difficulties for those companies as well.
Employees lose their jobs.
Entire communities can be adversely affected by the closure of important employers in the area.
The potential consequences of failure mean that concerned parties want to improve their success in identifying failing companies, in order to take steps to prevent the failure or to liquidate their investment before losing substantial sums of money. This has led to attempts to develop models which would enable the identification of companies likely to fail.
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Definition: Operational ABM and Strategic ABM
Operational ABM
Operational ABM is about ‘doing things right’. Those activities which add value to products can be identified and improved.
Activities that do not add value should be reduced in order to cut costs without reducing product value. Where for example a product or service has been estimated to require a longer activity time than other products or services then every effort should be made to find ways of reducing the number of hours required.
Strategic ABM
Strategic ABM is about ‘doing the right things’ using the ABC information to decide which products to develop and which activities to use. It can focus on profitability analysis, identifying which products/customers are the most profitable and for which sales volume should be developed.
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Operational ABM is about ‘doing things right’. Those activities which add value to products can be identified and improved.
Activities that do not add value should be reduced in order to cut costs without reducing product value. Where for example a product or service has been estimated to require a longer activity time than other products or services then every effort should be made to find ways of reducing the number of hours required.
Strategic ABM
Strategic ABM is about ‘doing the right things’ using the ABC information to decide which products to develop and which activities to use. It can focus on profitability analysis, identifying which products/customers are the most profitable and for which sales volume should be developed.
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Evaluate the adoption of ABM in companies
ABM (activity-based management) is the application of ABC to improve profitability. It includes:
**performing activities more efficiently,
**eliminating the need to perform non-value added activities,
**improving the design of products and
**developing better relationships with customers and suppliers.
The goal of ABM is to enable customer needs to be satisfied while making fewer demand on organizational resources.
Benefits
It is intended to help deliver improved quality, lower costs and increase profitability. The cost drivers identified under ABC costing help management make decisions as they are aware of what actually drives activity and thus cost in the organization.
It allows better control of resources: the activities driving costs are identified and the costs associated with activities can be controlled once they have been identified.
Drawbacks
The process of identifying cost drivers can take time and is sometimes subjective as cost drivers may not be easily identified, for instance external audit.
ABM also relies on information being available and so IT resources need to be capable of storing and processing the data on activities effectively.
It take time and money to collect the data and it may not be useful in smaller or more stable organizations with a low level of overhead costs.
The risks attaching to the use of ABM
1. An activity may have implicit value not necessarily reflected in the financial value added to any service or product. The company might decide to cut back on the level of expenditure involved in servicing customers. This may lead to a poorer perceived value by customers of the service provided with a consequent fall in demand.
2. There are risks attaching to the use of ABM insofar as ABM can give the wrong signals. For example a particularly pleasant work environment can help attract and retain the best staff, but may not be identified as adding value in operational ABM.
3. By the same token, a customer that represents a loss based on committed activities, but that opens up leads in a new market, may be identified as a low value customer by a strategic ABM process.
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**performing activities more efficiently,
**eliminating the need to perform non-value added activities,
**improving the design of products and
**developing better relationships with customers and suppliers.
The goal of ABM is to enable customer needs to be satisfied while making fewer demand on organizational resources.
Benefits
It is intended to help deliver improved quality, lower costs and increase profitability. The cost drivers identified under ABC costing help management make decisions as they are aware of what actually drives activity and thus cost in the organization.
It allows better control of resources: the activities driving costs are identified and the costs associated with activities can be controlled once they have been identified.
Drawbacks
The process of identifying cost drivers can take time and is sometimes subjective as cost drivers may not be easily identified, for instance external audit.
ABM also relies on information being available and so IT resources need to be capable of storing and processing the data on activities effectively.
It take time and money to collect the data and it may not be useful in smaller or more stable organizations with a low level of overhead costs.
The risks attaching to the use of ABM
1. An activity may have implicit value not necessarily reflected in the financial value added to any service or product. The company might decide to cut back on the level of expenditure involved in servicing customers. This may lead to a poorer perceived value by customers of the service provided with a consequent fall in demand.
2. There are risks attaching to the use of ABM insofar as ABM can give the wrong signals. For example a particularly pleasant work environment can help attract and retain the best staff, but may not be identified as adding value in operational ABM.
3. By the same token, a customer that represents a loss based on committed activities, but that opens up leads in a new market, may be identified as a low value customer by a strategic ABM process.
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Tuesday, June 21, 2011
"Beyond Budgeting" - Adaptation Issues in Public Sector
The legal framework of public sector organistions would prevent such a system being introduced. For example, UK local authorities are prevented by law from borrowing funds for revenue purposes or budgeting for a deficit.
If the beyond budgeting model is to allow greater freedom for managers then it will take a considerable change of mindset in the public sector to achieve the flexible agenda envisaged, especially where such flexibility would involve considerable and increased delegation to managers.
Need for organisational, managerial and cultural changes.
Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years. In addition, individual managers might become overwhelmed by the complexity of decision-making in such an unregulated decision-making environment.
In the public sector, the budget process inevitably has considerable influence on organisational processes, and represents the financial expression of policies resulting from politically motivated goals and objectives.
Whether the public sector can adapt to the concept of greater flexibility - which lies at the heart of beyond budgeting - remains a matter of ongoing debate.
Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years.
The desire to generate improved performance - essentially considered the driver for the beyond budgeting model - is present in the public sector evidenced in initiatives such as key performance indicators and 'best value' plans. But this is not matched by a desire for the flexibility inherent in the model.
In terms of beyond budgeting, managers in such organisations are likely to remain constrained by the inability of their organisation to change.
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If the beyond budgeting model is to allow greater freedom for managers then it will take a considerable change of mindset in the public sector to achieve the flexible agenda envisaged, especially where such flexibility would involve considerable and increased delegation to managers.
Need for organisational, managerial and cultural changes.
Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years. In addition, individual managers might become overwhelmed by the complexity of decision-making in such an unregulated decision-making environment.
In the public sector, the budget process inevitably has considerable influence on organisational processes, and represents the financial expression of policies resulting from politically motivated goals and objectives.
Whether the public sector can adapt to the concept of greater flexibility - which lies at the heart of beyond budgeting - remains a matter of ongoing debate.
Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years.
The desire to generate improved performance - essentially considered the driver for the beyond budgeting model - is present in the public sector evidenced in initiatives such as key performance indicators and 'best value' plans. But this is not matched by a desire for the flexibility inherent in the model.
In terms of beyond budgeting, managers in such organisations are likely to remain constrained by the inability of their organisation to change.
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Assessment of the ‘overall performance’ in respect of public services
‘Overall performance’ refers to a comprehensive coverage of the major issues that are generally regarded as important in assessing a public service. They could be broken down into three categories:
1. Financial indicators (assessing efficiency).
2. Non-financial quantitative indicators (assessing effectiveness).
3. Qualitative indicators that are difficult to quantify (assessing effectiveness).
1. Financial
Cost per unit of activity/unit cost measurement e.g. per hospital bed per annum, annual cost per pupil, per arrest, per each call to attend a fire.
A comparison between actual and budgeted or standard cost (variance analysis) – flexible budget approach may be adopted to relate costs to activity levels.
Benchmarking costs against other regions and/or ‘best practice’.
An indicator that measures cost recovery against service delivered – e.g. fees received from dental patients who are required to contribute towards the cost of a service – may be set at a ratio to total costs incurred.
The ratio of one cost component to the total cost of the service e.g. staff costs as a percentage of the total costs. This could be supplemented by benchmarking ratios.
2. Non-financial (quantitative)
Units of activity delivered within a period e.g. operations undertaken, number of children attending school, criminals arrested, fires attended.
Flexibility and speed of response e.g. time taken for ambulances to arrive, hospital waiting lists and time elapsed between diagnosis and treatment.
Quality of Service/output measures – pupils’ test marks, crime rates, life expectancy, the number of hospital deaths arising from infections, numbers of people rescued from fires.
Utilisation of resources e.g. – bed occupancy ratios, average class size, ratio of police vehicles currently operational.
Number of complaints received.
Accessibility – e.g. distance to nearest hospital or school.
3. Qualitative
Public confidence in the service – the strength of the expectation that –
a criminal will be arrested.
a pupil will receive a ‘good’ education.
a patient will be ‘well looked after’ in hospital.
the fire service will respond rapidly when required.
The morale of the workforce.
The ‘attitude’ of the staff – do they appear concerned, helpful and confident when dealing with the public?
How effective are they at meeting the information needs of their 'customers’?
Cleanliness, comfort, security – do people feel ‘comfortable’ within the premise owned by the public service (school and hospital)? It is part of ‘quality’, but it is difficult to quantify.
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1. Financial indicators (assessing efficiency).
2. Non-financial quantitative indicators (assessing effectiveness).
3. Qualitative indicators that are difficult to quantify (assessing effectiveness).
1. Financial
Cost per unit of activity/unit cost measurement e.g. per hospital bed per annum, annual cost per pupil, per arrest, per each call to attend a fire.
A comparison between actual and budgeted or standard cost (variance analysis) – flexible budget approach may be adopted to relate costs to activity levels.
Benchmarking costs against other regions and/or ‘best practice’.
An indicator that measures cost recovery against service delivered – e.g. fees received from dental patients who are required to contribute towards the cost of a service – may be set at a ratio to total costs incurred.
The ratio of one cost component to the total cost of the service e.g. staff costs as a percentage of the total costs. This could be supplemented by benchmarking ratios.
2. Non-financial (quantitative)
Units of activity delivered within a period e.g. operations undertaken, number of children attending school, criminals arrested, fires attended.
Flexibility and speed of response e.g. time taken for ambulances to arrive, hospital waiting lists and time elapsed between diagnosis and treatment.
Quality of Service/output measures – pupils’ test marks, crime rates, life expectancy, the number of hospital deaths arising from infections, numbers of people rescued from fires.
Utilisation of resources e.g. – bed occupancy ratios, average class size, ratio of police vehicles currently operational.
Number of complaints received.
Accessibility – e.g. distance to nearest hospital or school.
3. Qualitative
Public confidence in the service – the strength of the expectation that –
a criminal will be arrested.
a pupil will receive a ‘good’ education.
a patient will be ‘well looked after’ in hospital.
the fire service will respond rapidly when required.
The morale of the workforce.
The ‘attitude’ of the staff – do they appear concerned, helpful and confident when dealing with the public?
How effective are they at meeting the information needs of their 'customers’?
Cleanliness, comfort, security – do people feel ‘comfortable’ within the premise owned by the public service (school and hospital)? It is part of ‘quality’, but it is difficult to quantify.
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ABC and Public Sector
Activity based costing (ABC) was developed for manufacturing companies to address the problem of overhead absorption.
ABC regards labour costs as fixed in the short run, in capital-intensive industries, where the bulk of costs are fixed costs. It is inappropriate to allocate overhead costs by labour hours, which are of decreasing significance.
Cost profile of Public Sector
**High levels of overhead are experienced in public sector organizations.
**Labour is often fixed in the short run,
**There are few raw materials and
**Some items of capital equipment are very expensive.
It may not be easy, for example, to allocate a ward sister’s time over the patients in her care. ABC would therefore appear to be appropriate.
Role of ABC
ABC tries to identify those activities on which costs are spent, referring to them as cost drivers. The cost of the service’s individual operations can be determined.
The advantage of this approach is that it take a critical financial view of work practices.
1. High cost activities can be identified.
2. Design. An examination of the cost drivers may result in those activities being better designed.
3. Management. Additional and better information leads to better planning and control.
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ABC regards labour costs as fixed in the short run, in capital-intensive industries, where the bulk of costs are fixed costs. It is inappropriate to allocate overhead costs by labour hours, which are of decreasing significance.
Cost profile of Public Sector
**High levels of overhead are experienced in public sector organizations.
**Labour is often fixed in the short run,
**There are few raw materials and
**Some items of capital equipment are very expensive.
It may not be easy, for example, to allocate a ward sister’s time over the patients in her care. ABC would therefore appear to be appropriate.
Role of ABC
ABC tries to identify those activities on which costs are spent, referring to them as cost drivers. The cost of the service’s individual operations can be determined.
The advantage of this approach is that it take a critical financial view of work practices.
1. High cost activities can be identified.
2. Design. An examination of the cost drivers may result in those activities being better designed.
3. Management. Additional and better information leads to better planning and control.
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