22421:%Management%Decisions%and% Control'(MDC)'Notes! Lecture'1:'Introduction' History'of'management'accounting' ' Critical!point!in!management!accounting!history!=!Industrial!revolution!–!new! organisational!form!!!there!was!a!gap!between!management!and!operating! activities!!!development!of!management!control!systems! !
! Main!themes!in!management!accounting:! • Move!from!cost!system!!!holistic!management!approach! • Recognition!of!the!social!context!of!management!accounting! • Contingency!based!approach!!!one!size!does!not!fit!all! • Management!accounting!development!!!linked!to!development!of! management!styles! ' Management'Control'Systems' Control!–!exert!influence/control!over!employee!behaviour! Decision'making!–!provide!info!to!make!decisions! Management!control!systems!enable!the!owner!to!control!behaviour!of!low!level! employees!(CONTROL)!and!to!also!provide!information!back!to!the!owner! (DECISIONS).!! • The$control$problem$assumes$that$organisations$and$individual$are$ purposeful,$goal$seeking$entities,$who’s$goals$may$not$be$congruent,$i.e.$ conflict$in$goals$may$be$an$inherent$characteristic$of$a$social$organisation$ (Flamholtz,$Das,$Tsui,$1985)$ o These!control!systems!influence!behaviour!of!employees!to!achieve! common!goal!of!the!organisation.!! ! Planning'–'influences'behaviour' and'sets'expectations' ! Performance!measures!as! control!system!(e.g.!KPI’s)!!! being!rewarded!
Management'Decisions' Business!decisions! Organisations!make!a!range!of!long!and!short!run!decisions!that!tradePoff!the!various! interests!of!stakeholder!groups! • Control!systems!provide!info!that!enable!mgmt!to!make!decisions!! ! Decision!Facilitating!systems!! Accounting!system!is!the!principal!“quantitative”!information!system!in!business! organisations.!The!system!should!provide!info!for!5!broad!purposes:! 1. Formulating!overall!strategies!and!long!range!planning! 2. Resource!allocation!decisions! 3. Cost!planning!and!cost!control!of!operations!and!activities! 4. Performance!measurement!and!evaluation!of!people! 5. Meeting!external!regulatory!and!legal!reporting!requirements.! ! Theory'in'management'accounting'' Economics' • Economics!is!based!around!the!problem!of!scarce!resources.!Firm!based! economics!addresses!this!issue.!! • Finance!issues!of!investment!and!financing!influence!the!information!that!is! relevant!for!those!types!of!decisions.! Management'and'science'and'operations'research' • Provide!analytic!and!optimisation!models!for!management!accounting.!! Sociology' • Help!us!understand!how!the!structures!that!exist!within!society!impact!upon! management!and!the!information!they!use!to!make!decisions!and!control! activities!and!people!in!organisations.! Behavioral'science' • Business!outcomes!are!the!result!of!decisions!and!actions!of!individuals.! Therefore!issues!such!as!motivation!and!performance!evaluation!take!on!a! human!behavior!perspective.!In!addition,!the!firm’s!performance!is!a!function! of!individual!performances.! ! 5!categories!of!control!systems:! 1. Planning!–!setting!standard!of!expected!behaviour!by!all!individuals!across! the!organisation!' 2. Cybernetic!–!quantifiable!numbers!(e.g.!budgets,!variance!analysis,!financial,! non!financial,!hybrids)!for!creating!standard,!measuring!performance!and! generating!feedback.!' 3. Rewards'and'compensation!–!motivate!staff!and!improve!performance!!! both!monetary!and!nonPmonetary!rewards' 4. Administrative'–!organisational!structure!to!control!employee!behaviour!and! make!them!accountable' 5. Cultural'–!values,!beliefs,!social!norms!established!to!influence!employee! behaviour!!!cant!specifically!quantify!it!'
Lecture'2:'Management'control'and'decision'systems' MCS'='mechanisms'put'in'place'by'organisation'to'affect'employee'behaviour'and' align'their'goals'with'goals'of'organisation'in'order'to'achieve'an'outcome' Organisational!context!of!MCS!!!to!control!and!provide!info!to!management!to! make!decisions!(i.e.!used!for!both!decision!support!and!control)! ! Defining!the!organisational!unit:! • Different!size!–!small,!corporation,!multiPnational! • Different!scope!–!control!system!for!entire!organisation!or!for! subunit/division! o Project!team,!subPunit/division/department,!entire!organisation,! interPorganisational!network!! Organisational'objectives!–!what!is!the!organisation!unit!trying!to!achieve!and!what! are!its!reasons!for!existing!!!aims!and!goals.!Traditional!economic!perspectives!of! organisation!goals:! • To!maximise!wealth!of!shareholders! • To!facilitate!the!efficient!allocation!of!resources! ! Organisational'stakeholder!–!any!group!or!individual!who!can!affect!or!is!affected!by! the!achievement!of!the!organisation’s!objectives!(e.g.!shareholders,!customers,! government,!suppliers!etc…)! ! 2!different!ways!of!considering!multiple!stakeholder!interests:! 1. Intrinsic!–!stakeholder!commitment!rests!on!assumption! that!firms!have!a!normative!(moral)!commitment!to! advance!stakeholder!interest!and!that!this!commitment! shapes!firm!strategy' o Moral!stakeholder!management!!!each'shareholder'is'equal' 2. Strategic!–!stakeholder!mgmt!suggests!that!concern!for!stakeholders!is! motivated!by!the!perception!that!is!can!improve!financial!performance' o Priorities!!!employees!happy!=!customers/suppliers!happy!=! shareholders!happy! ! External!Environment! • Nature!of!industry/market! • Key!stakeholder!and!their!interests! • Competitive!environment! • How!organisation!conducts!activities! MANY!FACTORS!TO!CONSIDER:! • Current!constraints/challenges! • Elements!that!are!crucial'to'organisational'survival!(e.g.!protecting!brand! name!with!a!patent,!or!reliance!on!suppliers)! • Changes/turbulence!–!e.g.!shifts!or!new!laws!etc…! ! STRATEGY!is!the!key!interface!between!the!organisation,!its!environment!and!its! activities.!3!interconnected!levels!of!strategy!(Porter$and$LangfieldGSmith):!
1. Corporate'strategy!–!what!does!the!organisation!do!and!how!is!it!structured! !!overall!aims!and!ambitions!of!organisation!as!a!whole' o Allocation!of!resources' o Financing!structure' o Organisational!structure' o Chosen!markets!of!operation' o Single!biz!unit' o OR!MultiPbiz!unit:' " Portfolio!–!small!business!units!in!different!regions!and! markets!that!are!unrelated/separate!(e.g.!Virgin!!!gym,! mobile,!bank!etc…).!Focus!on!diversifying!to!expand!to!new! markets!and!reduce!losses' " Leverage!–!synergy/sharing/connectedness!of!R&D,! knowledge!in!a!related!market!(e.g.!Pharmaceutical!drugs)! 2. Competitive'strategy!–!how!the!organisation!is!going!to!position!itself!in!the! market!in!order!to!generate!economic!returns.!How!does!it!compete!relative! to!other!organisations!in!the!same!market.' o Cost'Leader!–!standard!product!at!lower!price!to!max!sales!volume' o Differentiator'–!uniqueness.!Maximise!profit!at!higher!price!for!a! different!market.!E.g.!premium,!quality,!brand.!' o Niche'–!take!complete!market!share!(i.e.!a!mini!monopoly)' 3. Operational'strategy!–!activities!that!the!value!chain!of!an!organisation!go! through!in!order!to!achieve!its!competitive!strategy' o How!does!the!business!function!on!a!daily!basis!!!the!core!activities! &!processes!!!enabling!organisation!to!deliver!competitive!strategy' o E.g.!maintaining!r/ships!with!suppliers,!economies!of!scale'
' Organisational'performance!–!successful!achievement!of!objectives.!Performance! indicators!measure!success.! OBJECTIVE' Maximise!shareholder!wealth! Organise!the!worlds!information!and!make!it!universally!accessible!and!useful! Develop!and!prepare!elite!athletes!for!participation!in!Olympic!games!
PERFORMANCE' Magnitude!of!financial!returns! Amount!of!web!data!indexed!and!accessed! #!of!participants!and!medals!
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“There$is$no!universally!appropriate!accounting$system$which$applies$equally$in$all$ situations.$Rather,$particular$features$of$an$appropriate$accounting$system$will$depend!upon! the!specific!circumstances!in$which$an$organisation$finds$itself”$(Oatley$1980)!
o i.e.!depends!on!organisation!context!!!‘contingency'theory’'' ! The!Need!for!MCS! Control'problems!–!frame!and!describe!the!need!for!MCS!in!organisations.!Framing! (done!by!the!researcher,!student,!consultant):! • Can!be!general!or!specific!!!the!more!specific!the!more!detailed!the! guidance!for!MCS!design!and!use! • Based!on!important!organisational!factors!(nature!of!employees,!activities,! structure,!strategy)! • Typically!arise!form!the!combination!of!factors!
4. Performance!measurement!and!evaluation!of!people! 5. Meeting!external!regulatory!and!legal!reporting!requirements!!
Lecture'3:'Administrative'controls:'organisation'structure,'governance' and'policies'and'procedures' Administrative!controls!(AC)!is!at!the!heart!of!an!organisation!! • AC!is!the!most!pervasive!and!static!which!focuses!most!on!influencing!employee! behaviour! • “AC!systems!direct!employee!behaviour!through!the!organizing!of!individuals!and! groups,!the!monitoring!of!behaviour!and!who!you!make!employees!accountable!to! for!their!behaviour,!and!the!process!of!specifying!how!tasks!or!behaviours!are!to!be! performed!or!not!performed”!Malmi$&$Brown$2008! ! ACS!has!many!names:! • Boundary'control'systems! o Delineate!the!acceptable!domain!of!activity!for!organizational! participants…(Simons!1995,!p.39)! • Action'controls! o Ensure!that!employees!performance!(or!do!not!perform)!certain!actions! known!to!be!beneficial!(or!harmful)!to!the!organization!(Merchant!&!Van! der!Stede!2003,!p.67)! • Behaviour'controls! o Procedure!guides,!operating!manuals,!job!codification!and!rigid!lines!of! reporting!and!accountability!for!controlling!employee!behaviour!(Abernethy! &!Brownell!1997,!p.235)! • Bureaucratic'controls'! o Explicit!routines!of!monitoring!and!directing,!involving!close!personal! surveillance!and!direction!of!subordinates!by!supervisors,!rules!which! specify!standards!of!output!(Ouchi,!1979,!p.835)! ! Common!to!all!definitions!is!a!concern!with!task,'actions'and'behaviour' ' 3!types!of!Administrative!control!systems! 1. Organisational'structure' 2. Governance'structure' 3. Policies'and'procedures'' ' Organisational'structure!is!the!formal!arrangement! of!jobs!within!an!organisation:! • Divides!work!to!be!done!into!specific!jobs! and!departments! • Assigns!tasks!and!responsibilities!associated! with!individual!jobs! • Coordinates!diverse!organisation!tasks! • Clusters!jobs!into!units! • Establishes!relationships!among!individuals,! groups!and!departments!!!e.g.!designates! how!groups!will!work!together! !