Friday, September 26, 2008 Applying accounting concepts on the CCMC dilemma (part 2) By Ricardo Y. Danlag Jr., CPA Vice Dean, Chair Accountancy Department, University of Southern Philippines Foundation
(Last week, Mr. Danlag proposed the use of some concepts and tools employed by managerial accountants in evaluating whether it is right for Cebu City Hall to sell the Cebu City Medical Center. Mr. Danlag mentioned responsibility accounting.)
There are four common types of responsibility centers: cost center, revenue center, profit center and investment center.
In a nutshell, a cost center is an organizational unit (like department or division), whose manager is held accountable for the costs incurred in the sub-unit. On the other hand, the manager of the revenue center is held accountable for the revenue attributed to this particular sub-unit just as the manager of the profit center is responsible for profits earned by the organizational sub-unit he/she heads. However, since profit is equal to revenue minus expense, profit center managers are held accountable for both the revenue and expense attributed to these two sub-units (profit and revenue centers).
Meanwhile, the manager of an investment center is held accountable for the sub-unit’s profit and the invested capital used by the sub-unit to generate its profit.
How did City Hall consider the Cebu City Medical Center (CCMC) as a responsibility center? As cost, revenue, profit or investment? What was the basis for the comment on incompetence? Was there a performance report?
I believe that CCMC should be considered as a mere cost center. It has to be evaluated for its performance as a cost center, based on how its managers or administrators are able to control costs at the minimum without exceeding the budget and, if it goes beyond allocation, that such is amply justified.
As a cost center, it can be evaluated on the basis of the number of patients treated annually at the facility. Even free service can be quantified. Thus, it is important that the hospital be cleared on the Key Result Areas (KRAs) prescribed by the funding agency and the performance indicators on which it will be evaluated. A general denunciation of its incompetence is unfair, to say the least. Benchmarks have to be established in order for the managers to be aware of their performance as gauged through agreed parameters.
But I believe that the most effective tool to evaluate CCMC is the balanced scorecard. The balanced scorecard integrates performance measures in four key areas: financial, internal operations, customer and innovation and learning. (Ronald W. Hilton, Managerial Accounting, 4th ed. McGraw-Hill International Editions.)
Managers of most successful organizations do not rely on either financial or non-financial performance measures alone.
They recognize that financial performance measures summarize the results of past actions. These measures are important to a firm’s owners, creditors, employees and so forth. Thus, they must be watched carefully by management as well.
Non-financial performance measures concentrate on current activities, which will be the drivers of future financial performance. Thus, effective management requires a balanced perspective on performance measurement, a viewpoint that some call as the balanced scorecard perspective.
The balanced scorecard translates an organization’s mission and strategy into operational objectives and performance measures for four different perspectives: the financial perspective, customer perspective, internal business process perspective and the learning and growth (infrastructure) perspective.
The financial perspective describes the economic consequences of actions taken in the other three perspectives. The customer perspective defines the customer and market segments in which the business unit will compete. The internal business process perspective describes the internal processes needed to provide value for customers and owners.
The learning and growth (infrastructure) perspective, on the other hand, defines the capabilities that an organization needs to create long-term growth and improvement. This last perspective is concerned with three major enabling factors: employee capabilities, information systems capabilities, and employee attitudes (motivation, empowerment and alignment).
Through these accounting concepts, the CCMC has to be evaluated based on four perspectives: If it is a cost center, is it successful in preserving the finances of the hospital, looking for ways to save without sacrificing quality?
Are the customers satisfied? Were patients treated and saved? Is the perception of the clientele positive towards them? Are internal business processes continually improved and streamlined to effect the desired efficiency? And finally, are the employees empowered and part of a learning organization?
Did City Hall consider the above tools before it came up with the plan to sell CCMC? Did it provide enough resources for it to be able to achieve its mandate as viewed through the four perspectives?
