Advantages and disadvantages of the four traditional organization designs

Four traditional organization designs are functional, geographic, product, and network.


Functional design involves the creation of positions, teams, and departments on the basis of specialized activities. Advantages include clear identification and assignment of responsibilities, and ease of understanding. People doing similar tasks and facing similar problems work together in a functional design. This increases the opportunity for communication and mutual support. A disadvantage is that it fosters a limited point of view that focuses on a narrow set of tasks. Employees tend to lose sight of the organization as a whole. Coordination across functional departments often becomes difficult as the organization increases the number of geographic areas served and the range of goods or services provided.

Geographic design involves establishing an organization's primary units geographically while retaining significant aspects of functional design. Advantages include direct contact with customers and ability to adapt to their needs. It also can reduce costs by locating unique resources (e.g., manufacturing, distribution) closer to customers. However, it increases control and coordination problems because of duplication of functions.

Product design involves the establishment of self-contained units, each capable of developing, producing, marketing, and distributing its own goods or services. The main advantage is that it reduces the information overload that managers face in a purely functional organization design. However, product designs usually incorporate features of functional and place designs into the organization of each product division.

The network design is organized by division on the basis of the product or geographic market in which the goods or services are sold. This design eases problems of coordination by focusing expertise and knowledge on specific goods or services. A disadvantage of the M-form is that a firm must have a large number of managerial personnel to oversee all the product lines. Another disadvantage is the higher cost that results from the duplication of various functions by the divisions.

What is a activity center ?

After being recorded in the general ledger and subledger accounts, costs are accumulated in activity center cost pools. An activity center is a segment of the production or service process for which management wants a separate report of the costs of activities performed. In defining these centers, management should consider the following issues: geographical proximity of equipment, defined centers of managerial responsibility, magnitude of product costs, and a need to keep the number of activity centers manageable. Costs having the same driver are accumulated in pools reflecting the appropriate level of cost incurrence (unit, batch, or product/process). The fact that a relationship exists between a cost pool and a cost driver indicates that, if the cost driver can be reduced or eliminated, the related cost should also be reduced or eliminated.

Gathering costs in pools reflecting the same cost drivers allows managers to recognize cross-functional activities in an organization. In the past, some companies may have accumulated overhead in smaller-than-plantwide pools, but this accumulation was typically performed on a department-by-department basis. Thus, the process reflected a vertical-function approach to cost accumulation. But production and service activities are horizontal by nature. A product or service flows through an organization, affecting numerous departments as it goes. Using a cost driver approach to develop cost pools allows managers to more clearly focus on the various cost impacts created in making a product or performing a service than
was possible traditionally.

How manipulation in accounting may happen?

Sometimes the totals of a wage bill are inflated by over totalling the column in which the wages payable are entered. Such a fraud can be detected only if the totals of the wage bill are  checked.  Similarly,  a  cashier  may  misappropriate  receipts  from  customers  by  under-totalling the receipts column of the cash book. At times, shortages in cash have been also covered  up  by  over  totalling.  Such  frauds  can  be  detected  only  if  the  totals  of  the  cash book  and  the  general  ledger  are  checked.  

On  these  considerations,  where  totals  of  the cash book or the ledger are found to have been made in pencil, the book keeper should be  asked  to  ink  the  totals  before  their  verification  is  commenced.  This  would  deter  him from altering the totals on the totaling mistakes being discovered. 

Sometimes a fraud is committed in the following manner :
(a)  under-casting the receipt side of the cash book;
(b)  overcasting the payment side of the cash;
(c)  fictitious  entries  being  made  in  the  cash  column  to  show  that  amounts  have  been deposited in the account when, in fact, no deposit has been made;
(d)  posting an amount of cash sale to the credit of a party and subsequently withdrawing the amount; and
(e)  wrong totals or balances being carried forward in the cash book or in the ledger. Students, it is expected, will be able to think several other devices where amounts can be misappropriated  either  by  making  wrong  entries  or  by  failing  to  make  an  entry  in  the accounts.

Types of Errors in Accounts

Concealed  and  Unconcealed  Errors: As a general rule, mistakes are unconcealed but frauds are deliberately concealed. This proposition does not need any elaboration; but exceptions are in both cases. Mistakes become concealed if compensated by another or more mistakes in the opposite direction; or it may even be greatly minimized by that chance happening. For example, by mistake one or more accounts were short debited by an aggregate figure of Rs. 30,000 and this short debit is compensated by chance error or

say short casting or one or more credit accounts to the tune of say Rs. 30,200 the dimension of the error would apparently be Rs. 200 by which the trial balance would be thrown out of agreement and there may be a temptation to think, “the error is small, let us ignore it”. This attitude towards apparently small errors is dangerous because its true dimensions remain concealed and that may render the statements of account totally unacceptable. Mistakes may as well be concealed for wrong arithmetical calculations or for a faulty process of verification. Depreciation and stocks are examples which immediately come to one’s mind. Wrong calculation of depreciation or omission to include certain stocks in the inventory or wrong valuation of stocks are not apparent. Petty cash defalcation is often unconcealed because petty cash is an item which on many occasions is left out of checking.

Procedural  Errors: Sometimes we become so obsessed with the general ledger and its supporting records that we neglect other important features of the accounting system. An accounting system includes both records and procedure. Errors can appear in either or both. Whatever errors occur in the implementation of the procedures may be termed as procedural errors (which include frauds also). For example, the sales procedure of a company may include the following steps:

(a) Receipt of an order through salesman.

(b) Review of order by the credit department to determine whether the customer should be given credit as requested.

(c) Clearance with inventory department to be sure that the order can be executed.

(d) Preparation of forwarding note with copies to obtain the customer’s acknowledgement of the receipt of goods.

(e) Preparation of invoice and dispatch of the same to the customer.

If the procedure requires that these steps should be taken in the order indicated and if, for any reason, the second step is omitted, or is not completed before subsequent steps have been taken an error in procedure has been made and this may lead the company into financial loss caused by non-recovery of the money. Procedures are established to maintain control over resources and over transactions; any failure to follow the

established procedures lessens the control and may permit errors which do affect ledger accounts. Any breakdown in established procedures thus suggests not only the presence of a procedure type error but also of other consequences.

Other errors of this type include the approving of transactions of documents by some one other than the person authorized to do so, failure to ensure that all preceding steps have been taken before approving a document and substitution of one person by another in a procedural function without proper authority. It is the normal procedure that goods, when received should be inspected for quality by the inspection department staff. If the storekeeper carried out this function it is indeed risky. Similarly, if the procedure requires that the timber go-down should have been given periodical insecticide treatment and management has ignored that, a great loss may be caused to the timber by white ants.

What is needed to be emphasized here is this that a procedural error, which is neither a defalcation nor misappropriation, may involve the company in a sizable loss. This type of error or fraud cannot be located by any rigorous examination of the books of account. All these errors discussed above may be grouped in the following categories in terms of their accounting incidence :

(i) Errors of omission - where a transaction has been omitted either wholly or partially.

(ii) Errors of commission - where a transaction has been mis-recorded either wholly or partially.

(iii) Compensating errors - where there are two or more errors which exactly counter balance each other, so that the trial balance agrees in spite of them.

(iv) Errors of principle - these are errors arising as a result of transactions having been recorded in a fundamentally incorrect manner; for example, a distinction not being made between capital and revenue income or expenditure.

(v) Procedural errors.

Why Manipulation of Accounts might occur?

Manipulation  of  Accounts: Detection of manipulation of accounts with a view to presenting a false state of affairs is a task requiring great tact and intelligence because generally management personnel in higher management cadre are associated with this type of fraud and this is perpetrated in methodical way. This type of fraud is generally committed :

(a) to avoid incidence of income-tax or other taxes;

(b) for declaring a dividend when there are insufficient profits;

(c) to withhold declaration of dividend even when there is adequate profit (this is often done to manipulate the value of shares in stock market to make it possible for selected persons to acquire shares at a lower cost); and

(d) for receiving higher remuneration where managerial remuneration is payable by

reference to profits.

There are numerous ways of committing this type of fraud. Some of the methods are given below:

(i) inflating or suppressing purchases and expenses;

(ii) inflating or suppressing sales and other items of income,

(iii) inflating or deflating the value of closing stock;

(iv) failing to adjust outstanding liabilities or prepaid expenses; and

(v) charging items of capital expenditure to revenue or by capitalizing revenue expenses.