Magazine article CMA - the Management Accounting Magazine

Measuring Service Performance

Magazine article CMA - the Management Accounting Magazine

Measuring Service Performance

Article excerpt

Measuring Service Performance

Much of an organization's effort is often devoted to meeting internal service requirements. Clearly, the overhead costs associated with these services need to be controlled.

First, we must determine if the services are reasonable in cost and provide good value. This is frequently difficult because a service department is likely to provide a variety of services. Individual service costs are often hidden in an umbrella cost figure for the entire department. Therefore, we need to determine the total cost for each type of service. Individual service costs will provide a clue to the reasonableness. For example, the cost of telephone switchboard services might be very high. This might trigger a review to see if a change in telephone systems would result in a net cost reduction.

Often, however, we need to determine the cost per transaction in order to make decisions on the reasonableness of costs. To do this, we need to know the cost of a standard unit of production. To process and prepare one purchase order might be a reasonable unit of production in some organizations. In others, the cost would have to be broken down by the type of purchase order.

Transaction costs give managers information useful for decision-making. One should be concerned if each purchase order cost $10 and 90% of purchase orders are under $50. We would need to establish different procedures for different order sizes.

Ideally, we measure service performance against standards. To do so, we need both a cost and a service level standard. In the case of purchase orders, such a standard would determine the speed to process a requisition and the effort to check prices or to obtain competitive bids. It is often useful to document these standards in an internal contract between the service department and the user. Such an agreement reduces uncertainty and establishes level below which complaints about inadequate service are valid. It also protects the service department from complaints, when restricted services are agreed to at a lower cost (e.g., the telephone switchboard will not be staffed after 4:30 p.m.). It should also protect the service department from the impact of significant volume fluctuations.

The presence of service contracts makes budgeting easier, and provides an objective assessment of requirements to meet the needs of the organization.

The establishment of valid cost standards is difficult and, in the case of internal services, the cost of developing "exact" standards might not be justified. …

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