Managing Fixed AssetsIn

The Public Sector

Managing For Service Excellence

By

William D. Brady, Jr., MA, CPPO

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Managing Fixed Assets In The Public Sector

Copyright @ 2001 by William D. Brady, Jr All right reserved

Universal Publishers / uPUBLISH.comUSA ∙ 2001

ISBN: 1-58112-684-0

www.upublish.com/books/brady.htm

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Introduction

The purpose of this text is to define and encourageconversation among public fixed assets managementfunctions. No two-fixed assets management functions arealike. However, all share the same approaches in managingassets in their charge. I will attempt to define some keysettings in managing fixed assets from defining fixed assetsto accountability for those assets. This text was written tohelp better operate the day-to-day affairs of the public sectorfixed assets management function. The informationpresented here is not new; however, the information is notcontained in one concise location.

Additionally, it is my intention to stimulateconversation and communication on the subject of personalproperty management. In so doing, the expectation is thatthese conversations and communications will increase theeffectiveness and efficiency of personal propertymanagement. The public sector is an area that relies onsound management practices and the management on thoseassets entrusted to us is no exception.

William D. Brady, Jr., MA, CPPO

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Dedication

To my wife, Yolanda, who has inspired and supportedme in all of my endeavors. Without her support Icould not have accomplished this book or any of myother many endeavors.

Appreciation

I extend my sincere thanks to Mr. Richard Hamilton,Property Manger, The Citadel, Charleston, SC forhis assistance. His assistance and counsel wereinvaluable in the preparation of this book.

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The Author

William D. Brady, Jr., has served as the Director ofProcurement Services at The Citadel, the Military College ofSouth Carolina, in Charleston, South Carolina since 1987.He began has public purchasing career in 1983 after servingfor 23 years with the United States Air Force. His dutiesinclude responsibilities for purchasing, supply management,fixed asset management and copier services. In 1987, hebegan service as a member of the Financial Records System(FRS) Team; a team designated to implement an automatedfinancial system including a purchasing system. Since itsformulation in 1987 the team has been responsible forimplementation of the FRS Purchasing Module in 1990 andthe Fixed Assets Module in 1991. He has attended ten of thepast twelve annual International FRS conferences where heintroduced presenters, served as a panelist for FRSpurchasing and FOCUS topics and presented or hostedsessions on purchasing and fixed assets related topics. Mr.Brady has served as the President, Vice President, ProgramCommittee Chairperson, and the Professional DevelopmentChairperson of the South Carolina Association ofGovernmental Purchasing Officials (SCAGPO). TheNational Institute of Governmental Purchasing, Inc. (NIGP)selected him to be one of fourteen Procurement ManagementAuditors in 1996. Since then he has participated as aconsultant in three audits, two for the District of Columbia andone for the University of the District of Columbia.Additionally, in 1998, he served as a member of the NIGPEthics Committee, Education and Professional DevelopmentCommittee, and the Procurement Procedures and ResearchCommittee. In 1999, he served as the Vice-Chairperson of theNIGP Education and Professional Development Committee.The NIGP Technical Bulletin has published two of his articlesrelated to public purchasing. He is a NIGP Master Instructorand an Associate Professor for Embry-Riddle Aeronautical

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University. For NIGP, he teaches General Public Purchasing,Intermediate Public Purchasing, Electronic Purchasing,Contracting Out for Services, Specification Writing andInventory and Warehouse Management. With Embry-RiddleAeronautical University, he teaches graduate courses inbusiness and management. A graduate of Washburn Universitywith a Bachelor of Business Administration degree, he has aMaster of Arts degree in management and supervision fromCentral Michigan University. His professional certification isas a Certified Public Purchasing Officer (CPPO).

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Table of Contents

Chapter 1 Introduction ..................................................... 1

Purpose ......................................................................... 1Objectives ..................................................................... 1Introduction ................................................................. 1What Is The Public Sector ......................................... 3What Are Fixed Assets................................................ 4Types Of Fixed Assets ................................................. 8Why Manage Fixed Assets.......................................... 9Fixed Assets Management Organization................. 12Fixed Assets Management Principles ...................... 16Fixed Assets Cost Determination ............................. 17Grants ......................................................................... 20Summary .................................................................... 23Questions .................................................................... 25Notes............................................................................ 25

Chapter 2 Control and Accountability .......................... 28

Purpose ....................................................................... 28Objectives ................................................................... 28Introduction ............................................................... 28Authority .................................................................... 29Control........................................................................ 32Accountability ............................................................ 36Centralized Versus Decentralized........................... 38Assigning Responsibility ........................................... 39Capitalization Policy ................................................. 43Identification and Tagging ....................................... 46Summary .................................................................... 48Questions .................................................................... 50Notes............................................................................ 51

Chapter 3 Inventorying and Reporting......................... 52

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Purpose ....................................................................... 52Objectives ................................................................... 52Introduction ............................................................... 52Management Inventory Program ............................ 54Fixed Assets Management Cycle.............................. 55Physical Inventories................................................... 56Fixed Asset Transfers................................................ 61Lost, Missing Or Stolen Fixed Assets ...................... 62Trade-In Of Fixed Assets.......................................... 63Management Inventory System................................ 64Forms.......................................................................... 70Reports........................................................................ 74Summary .................................................................... 76Questions .................................................................... 78Notes............................................................................ 79

Chapter 4 Disposition Of Fixed Assets .......................... 80

Purpose ....................................................................... 80Objectives ................................................................... 80Introduction ............................................................... 80Surplus Property ManagementPrinciples .................................................................... 83Surplus Property Classifications.............................. 84Disposal Methods....................................................... 86Sales To Employees ................................................... 98Distribution Of Proceeds .......................................... 98Hazardous Materials Handling.............................. 101Summary .................................................................. 107Questions .................................................................. 110Notes.......................................................................... 110

Chapter 5 Performance Measurements....................... 111

Purpose ..................................................................... 111Objectives ................................................................. 111Introduction ............................................................. 111

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What Is Performance Measurement...................... 114Performance Measurements................................... 115Performance Measurement Tools .......................... 120Summary .................................................................. 124Questions .................................................................. 127Notes.......................................................................... 127

List of Figures

Figure 1-1 Examples of Public SectorAssets ............................................................................ 6Figure 1-2 Fixed Assets ManagementOrganizational Placement ........................................ 13Figure 2-1 Metal Identification Tags ....................... 47Figure 2-2 Bar Coded IdentificationTag .............................................................................. 47Figure 3-1 Fixed Assets ManagementCycle............................................................................ 56Figure 4-1 Disposal Methods .................................... 89Figure 5-1 Written Report...................................... 121Figure 5-2 Table Report.......................................... 122Figure 5-3 Graph Report ........................................ 123

List of Tables

Table 2-1 Responsibility Assignments ..................... 42Table 2-2 Fair Market ValueDetermination ............................................................ 46Table 4-1 Sale Price Ranges...................................... 92Table 4-2 Household Hazardous Waste ................ 107

Index ......................................................................... 129

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Chapter 1 Introduction

Purpose

The primary purpose of this chapter is to introduce thefield of fixed assets management. It describes the nature andscope of fixed assets management and how it relates to theother segments of the public agency.

Objectives

Upon completing this chapter, you should be able to:

• Describe the public sector.

• Define fixed assets.

• Identify the types of fixed assets.

• Describe the reasons that the public sector managesfixed assets.

• Provide a general description of the fixed assetsmanagement principles.

• Briefly describe the fixed assets cost determinants.

• Identify the Federal grants management programsavailable.

Introduction

Fixed assets management activities are a meaningful partof the public sector functions. Good fixed assetsmanagement establishes and maintains a current inventory ofpersonal property used within the organization. In so doing,responsibility and accountability for personal property isestablished to ensure effective and efficient usage of theproperty. Additionally, a good fixed assets managementprogram will facilitate the physical inventory of fixed assets,

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advance the establishment of insurance conditions, andcomply with federal, state, or local policy.

Fixed assets management is not the only name for thissegment of the materials management area. It has had anumber of titles through the years. Property management is acommon title used in the public sector. Other names usedare equipment management, and, to a lesser degree,inventory control, although that name is normally reservedfor the management of expendable supplies for use withinthe organization. The National Institute of GovernmentalPurchasing, Inc. uses the title fixed assets management in itsInventory and Warehouse Management Seminar.1 Fixedassets management appears to be in common usage withsoftware manufacturers who develop inventory and trackingsoftware for personal property. In this book the title fixedassets management is used throughout to describe theprocess of managing personal property. This title appears tomore adequately describe this function in the public sector.However, property, equipment, and fixed assets are usedinterchangeably to describe fixed assets.

The fixed assets manager, individual responsible for fixedassets management, is continuously encountering a diversityof challenges involving technology, administration,personnel, and management functions. In order to direct thefixed asset management effort of their organization, themanager must understand the organization’s operatingpolicies and procedures. The complexity and value ofpersonal property has dramatically increased in recent years,as a result, the new fixed assets manager is finding it moreand more difficult to learn the skills of managing the fixedassets program. This effort necessitates more planning andexpertise on the part of the manager. The fixed assetsprogram must be dynamic rather than static, proactive ratherthan reactive, and accommodating to changes inorganizational needs rather than unaccommodating.

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Fixed assets managers play a key role in today’s materialsmanagement structure, whether they are at the federal, state,or local level. In today’s materials managementenvironment, the fixed assets manager is confronted withrecognizing the need for education and information in arapidly changing environment and organization. The fixedassets manager must be a dynamic supervisor, an organizer,a self-starter, and a generalist who is willing to get out andtake charge.

What Is The Public Sector

The Code of Federal Regulations, Title 41, Volume 2,Chapter 101, Section 101-43.001-26 defines public agencyas: “any State; political subdivision thereof, including anyunit of local government or economic development district;any department, agency, or instrumentality thereof, includinginstrumentalities created by compact or other agreementbetween States or political subdivisions; multijurisdictionalsubstate districts established by or pursuant to State law; orany Indian tribe, band, group, pueblo, or community locatedon a State reservation.”

In broad terms, the public sector encompasses all of thegovernmental agencies that provide the common goods andservices that the taxpaying public needs. This segmentincludes federal, state, county, city, and municipalities thatcarry out the missions of government. The public sector canbe viewed as all governmental agencies including highereducation, hospitals, and the other non-profit organizationsin federal, state, county, and city government. Thedistinction between private organizations and the publicsector is that of the profit motive. Private organizations arein business to compete and return a profit for theirstockholders. Whereas, the public sector is often classifiedas non-profit organizations and are chartered to provideservices to their constituents. The public sector is itself

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governed by the laws passed by the legislature or governingboards and commissions. Elected officials often are the topmanagers of public sector agencies and lend a challengingelement to the equation. Public agencies often have thespecial attention of the elected officials, the public, and thepress, which have a stake in assuring the accountability ofgovernment to the people.

Accountability is a key feature of the public sector andone of the principal arguments taken into account in thisbook. The public sector is answerable to the taxpayers suchthat it must aspire to policies that are compatible with publicdesires. The people are the pivotal element in a democracyand those in the public sector are accountable to all of thepeople in a democracy. There is, however, an underlyingdistrust of the public sector by the people. Therefore, mostprograms and policies in government contain numerouscontrol programs and a high degree of accountability. Fixedassets management is no exception. The primary purpose forfixed assets management is to ensure accountability of thesignificant investment in assets entrusted to the public sectoradministrators.

What Are Fixed Assets

Fixed assets are many things to the many public sectorentities and are, in all probability, as variously defined. Itcan be any item costing over a certain dollar amount, large orsmall, to an item that has a certain useful life. A publicsector organization’s assets represent a substantial financialinvestment. The costs of acquiring, maintaining, insuring,and replacing these assets have a considerable impact on theoperations of the entity. Fixed assets are not always found inone place and, in fact, are more commonly thought of asmovable assets, property, or equipment. As movable assets,they get transferred from place to place creating amanagement challenge. Assets also tends to be used up or

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expended over time and their value declines to the pointwhere they are no longer thought of as assets and can bethought of as an albatross or burden on the organization. Atthe end of their useful life, most assets are apt to have somescrap or salvage value depending on the asset and, therefore,become an interesting challenge for the fixed assets manager.

To define fixed assets one must look at a number ofdefinitions and combine the definitions to form onemeaningful definition that will apply to the particularcircumstances of the public sector. The Merriam-WebsterDictionary defines property as “something owned orpossessed, a piece of real estate; the exclusive right topossess, enjoy, and dispose of a thing; something to which aperson or business has a legal title.” Personal property isdefined as “property other than real property consisting ofthings temporary or movable.” The dictionary furtherdefines equipment as “ the implements used in the operationor activity; all the fixed assets other than land and buildingsof a business enterprise.” 2

The Concise Columbia Electronic Encyclopedia definesproperty as “in law, the right of ownership, i.e., the exclusiveright to possess, enjoy, and dispose of an object of value;also, the object of value possessed, enjoyed, and disposed ofby right of ownership. Modern Anglo-American propertylaw provides for ownership of nearly all things of economicvalue; there are exceptions, such as the high seas or outerspace, which are not subject to ownership. The law dividesproperty into realty (real property) and personalty (personalproperty). Realty is chiefly land improvements built thereon;personalty is chiefly movable objects whose distribution theowner can determine by sale, will, or gift. Realty, inmedieval times, was the basis of wealth and the keystone ofthe social structure; its ownership was controlled to protectsociety. The ownership of personalty, being of minorimportance, was almost unfettered. With the rise ofcommerce and a large landless middle class, personalty

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became the dominant form of property, and the law of realtygradually became assimilated in most respects into that ofpersonality.”3

Figure 1-1: Examples of Public Sector Assets

Fixed assets, from the definitions above, can be thought of assomething owned or possessed, something to which thepublic organization has legal title, is other than real propertyconsisting of things temporary or movable, and all theproperty other than land and buildings of a publicorganization. Normally, the property managed is defined aspersonal property as opposed to real property. Therefore,real property and those items attached to the real property areusually not included in the definition of fixed assets. It isthose assets that are movable or used temporarily that lendthemselves to being managed. Examples of fixed assetsinclude computers, furniture, printers, vehicles, boats,motors, analyzers, microscopes, medical equipment,education equipment, athletic equipment, and roadwayequipment. Expendable supplies that are expended upon use,such as, pens, pencils, nuts, bolts, pipe, oil, gas, and valvesare not fixed assets.

The definitions gleaned from the dictionary andencyclopedia are good, rough definitions that describe fixedassets in general terms. We must delve further into thesubject to obtain a suitable definition that will serve theneeds of public sector fixed asset management to its fullest.

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The Federal Government’s Office of Management andBudget (OMB) publishes the OMB Circular A-21 toestablish principles for determining costs applicable togrants, contracts, and other agreements with educationalinstitutions. The principles deal with the subject of costdetermination and make no attempt to identify thecircumstances or dictate the extent of agency andinstitutional participation in the financing of a particularproject. The principles are designed to ensure that theFederal Government bear its fair share of total costs,determined in accordance with generally acceptedaccounting principles, except where restricted or prohibitedby law. Agencies are not expected to place additionalrestrictions on individual items of cost. OMB Circular A-21defines equipment as: “Equipment” means an article ofnonexpendable, tangible personal property having a usefullife of more than one year and an acquisition cost whichequals or exceeds the lesser of the capitalization levelestablished by the organization for financial statementpurposes, or $5,000.4

Additionally, the Office of Management and Budgetpublishes OMB Circular A-110 that sets forth standards forobtaining consistency and uniformity among Federalagencies in the administration of grants and agreements withinstitutions of higher education, hospitals, and other non-profit organizations. OMB Circular A-110 definesequipment as: Equipment means tangible nonexpendablepersonal property including exempt property chargeddirectly to the award having a useful life of more than oneyear and an acquisition cost of $5,000 or more per unit.However, consistent with recipient policy, lower limits maybe established.5

Both of the above definitions introduced two additionalterms to the dictionary and encyclopedia definitions. This isthe first that “useful life” and “acquisition cost” have beenmentioned. These two terms furnish more depth to our

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rudimental dictionary definition. Fixed assets, according tothe OMB, must now have some minimum useful life andcost before they may b classified as truly being fixed assets.The Office of Management and Budget, to consider an itemas fixed assets, calls for a useful life of one year. TheOMB’s conditions apply to institutions of higher education,hospitals, and other non-profit organizations. That wouldseem to include all organizations in the public sector.Therefore, if a public sector organization intends to obtain agrant or agreement with the Federal Government, itsdefinition of fixed assets must include a useful life of at leastone-year. Using the same reasoning, the fixed asset musthave a minimum acquisition cost of $5,000 to be classifiedas fixed assets. The public organization may set lowercapitalization limits; however, if applying for a grant, theminimum limit will be $5,000 or additional approval will beneeded.

Armed with this further information, we can now definefixed assets for the public sector. Fixed asset means“personal property that is not permanently attached to realproperty, buildings or grounds; that is movable; has a usefullife of at least one year and a minimum acquisition costestablished by the organization.” The minimum acquisitioncost, as we know from above, must be $5,000 to be qualifiedby the Federal Government as a fixed asset; however, wewill leave the establishment of a minimum acquisition costopen for the organization to determine. The organizationmay wish to establish a lower minimum acquisition cost fortracking and accountability purposes. The above definitionprovides the organization the flexibility to adequatelyidentify and manage its fixed assets.

Types Of Fixed Assets

Fixed assets encompass a wide variety of assets, Figure 1-1. They may be standard off-the-shelf items, such as,

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forklifts, automobiles, computers, printing presses, andlaboratory equipment. Other assets may be significantlymodified or custom made for a particular purpose. Robots,specialized medical equipment are examples of suchspecialized assets. The list could grow much largerdepending on the dollar limit established by the agency to beconsidered an asset. If the dollar limit is set low, below$500, for example, the list of assets will grow astronomicallyand the task of accounting for the assets will also increase.As the dollar limit is increased, the list of the types of fixedassets will decrease proportionally.

There are three major characteristics of fixed assets.These characteristics are:

They are acquired for use in operations and not for resale.Only assets used in normal business operations should beclassified as fixed assets.

They are long-term in nature. Fixed assets yield servicesover a number of years.

They possess physical substance. Fixed assets arecharacterized by physical existence or substance and thusare differentiated from intangible assets, such as patentsand goodwill.6

Why Manage Fixed Assets

As stated earlier, fixed assets represents a significantdollar investment for any public sector organization. Inpublic utility companies, for example, net plant assets (plantassets less accumulated depreciation) often represent morethan 75% of total assets. Recently, net plant assets were79% of Consolidated Edison’s total assets and 92% ofPennsylvania Power & Light Company’s.7 It is importantthat the fixed assets be accounted for as they are being usedwithin the organization. According to the Code of FederalRegulations, Title 41, Volume 2, Chapter 101, Section 101-

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43.001-18 management means the safeguarding of thegovernment’s interest in property in an efficient andeconomical manner consistent with the best businesspractices. Fixed asset management fits very well within thisdefinition. A fixed asset management program is importantfor a number of reasons. Most evident is its importance inthe control of losses due to pilferage, theft, and neglect.Losses are controllable and can be prevented or minimized.Reliable fixed asset management programs have anadditional fundamental value in the maximization of the useof assets by facilitating sharing between and withindepartments and subdivisions. Scarce resources in the publicsector are a reality and it’s highly likely that only one of aparticular asset may be affordable to the organization for usein a number of departments or subdivisions.

Another point of view that commands serious attention isthe importance of an accurate fixed asset managementprogram to meet the growing demands from federal andstate-funding sources for improved control andaccountability over fixed assets. It is important that theworth of the accountability over assets does not become thebasis for the rejection of government grants, contracts, andappropriations. In addition, OMB Circular A-110 and othergovernment regulations covering administration ofagreements with federal government agencies require thatpublic agencies avoid purchasing “unnecessary orduplicative items.”8 Federal agencies have the authority todisallow reimbursement for new assets when suitable assetsare already available. A reliable and accurate fixed assetmanagement program will ensure that such requests will notbe rejected.

Public sector managers, administrators and employeeshave a duty and responsibility to provide protection for theassets under their control. This protection is for losses fromnatural disasters, theft, fire, and an abundance of other illsthat can befall a public sector organization. Protection is

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provided in the way of insurance on the fixed assets toprovide for replacement if damaged or destroyed. Accuratefixed asset records are necessary to prove the severity of thelosses once they have occurred. The fixed asset managementprogram ensures accurate documentation for such aneventuality.

A major purpose of a fixed asset management program isto establish and assign responsibility for the assets. Thispurpose aligns with the accountability philosophy previouslydiscussed. From a functional perspective, accountability hasbeen presented in the form of a ladder comprising fivedistinct levels. The levels move from more objectivelymeasured aspects (legal compliance) to aspects requiringmore subjective measures (policies pursued and rejected).The ladder is generally consistent with the analysis of theAmerican Accounting Association’s (AAA) Committee ofConcepts of Accounting Applicable to the Public Sector.

Level 1: Policy accountability-selection of policiespursued and rejected (value)

Level 2: Program accountability-establishment andachievement of goals (outcomes and effectiveness)

Level 3: Performance accountability-efficient operation(efficiency and economy)

Level 4: Process accountability-using adequate processes,procedures, or measures in performing the actions calledfor (planning, allocating, and managing)

Level 5: Probity and legality accountability-spendingfunds in accordance with the approved budget or being incompliance with laws and regulations (compliance)9

The public sector has not been saddled with the task ofcomputing depreciation on its assets. Generally acceptedaccounting practices have not compelled that non-profitgovernmental organizations compute and track depreciation.However, this rule has recently changed and all not-for-profit

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organizations will be required to recognize the cost of usingup long-lived tangible assets-depreciation-in general-purposeexternal financial statements. With the obligation for thepublic sector to account for depreciation, the burden ofproviding positive inventory and tracking of fixed assets willfall on the fixed asset management function.

Fixed Asset Management Organization

Is there a standard organizational placement for the fixedasset management function in the public sector? Thisquestion could be researched for years without adequatelyanswering the question because of the wide diversity inpublic sector organizations. To understand the enormity ofthe task one must gain insight to the organizing function.Increasing specialization of activities, projects, and skillsdemand that managers look to elements within their controlfor gaining coordination by designing, mapping out, anddeliberately planning the duties and relationships of peoplein the organization. In summary, the organizing functionseeks:

To establish efficient and logical patterns ofinterrelationships among members of the organization.

To secure advantages of specialization whereby theoptimum utilization of talents can be realized.

To coordinate activities of the component parts in order tofacilitate the realization of the goals of the organization. 10

In some organizations, the fixed assets manager is in thecontroller’s office and is responsible for the inventory andtracking of assets, as well as, the fixed assets accountingfunctions. There are other organizations where the functionreports directly to a chief executive officer such as a vicepresident. Still other public agencies have the fixed assetmanagement function reporting to the chief procurementofficer; Figure 1-2 shows a typical organization structure of

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that nature. This type of organizational placement ranksfixed asset management on the same level and status as theother functions within the procurement department. Thedirector of procurement reports to a vice president who hasequal status as the other vice presidents providing the powerto operate within the organization with a high level of statusand power. This type of organization seems to fulfill theorganizing functional requirements listed above.

Figure 1-2: Fixed Asset Management Organizational Placement

Regardless of the organizational placement of the fixedasset management function, there should be an organizationchart that accurately shows the lines of authority,responsibility, and accountability for the function. Theprimary purposes to chart the organization structure are toshow the hierarchical way functions and individuals havebeen grouped together, including the authority andresponsibility lines that connect them. Organizational charts,to be useful, must show “what is” as opposed to “whatshould be.” There are six principles proposed by classicalwriters of organization design. Although these principles areno longer interpreted to be universally applicable for allorganizations, they continue to offer a foundation uponwhich managers can build a workable structure.11

One of the traditional principles generally referred to asunity of command, states that no member of an

Typical Organizational Placement

Purchasing Supply Management Fixed Asset Management

Director of Procurement

VP Finance

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organization should report to more than one supervisor onany single function. The application of this principle iseasy in a pure line organization, in which each superiorhas general authority; however, it becomes a complexproblem in actual cases in which some form of staffand/or functional organization is used. In practice,instructions may be received from several sources withoutthe loss of productivity. The central problem is to avoidconflict in orders from different people relating to thesame subject. You should recognize immediately thatmany people who are not recognized in the formalhierarchy of authority might influence the actions of asubordinate. The unity-of-command principle simplymeans that subordinates need to know from whom theyreceive the authority to make decisions and take action.

The exception principle states that lower-level managersshould handle recurring decisions in a routine manner,whereas problems involving unusual matters should bereferred to higher levels. This principle emphasizes thatexecutives at the top levels of an organization havelimited time and capacity and should refrain frombecoming bogged down in routine details that can behandled as well by subordinates.

A third principle involves the span of control of amanger: there is a limit to the number of subordinates thatone superior should supervise. The determination of theoptimum number depends on many factors in a givenorganization and should always be tied directly to thequestion of the number of levels in the hierarchy. If itappears that a small span of control for each manager isdesirable, then the number of necessary levels will belarger than would be the case with a larger span ofcontrol. The organization with more levels is considered“tall,” whereas the organization with a larger span ofcontrol is “flat.” A tall structure with small spans ofcontrol assumes that coordination can be attained only by

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direct supervision. A flat structure with large spans ofcontrol assumes that mutual adjustment amongsubordinates can handle much of the coordination ofmembers.

A fourth principle, the scalar principle, states thatauthority and responsibility should flow in a clear,unbroken line, or chain of command, from the highest tothe lowest manager. The principle simply states that anorganization is a hierarchy. The importance andusefulness of the principle is evident whenever the line issevered. The splintering of one organization into two ormore results from a permanent breach of this principle.Temporary breaches, however, are not uncommon,although they are frequently subtle and unrecognized.The tendency of an aggressive executive to fight thecontrol of superiors can create an environment forforming an “empire” that is uncoordinated with the largerorganization.

The manner in which activities should be divided andformed into specialized groups is referred to asdepartmentation. The purpose of departmentation is tospecialize activities, simplify the tasks of managers, andretain control. Several types of departmentation arepossible: geographical, by customer, by process orequipment, by product, or by professional skills. Often,different types are used at different levels of theorganization structure.

In the organizational sense, decentralization is theprocess of diversifying and delegating authority to lower-level managers. Centralization and decentralization arematters of degree; they should be treated as two ends of acontinuum. Two important considerations determine thedegree of decentralization desirable in a given situation.First, the amount of skills and competence possessed bysubordinate managers influences the success of any