Introduction

Management Accounting Provide informationo Financialo Non financial

Tailored to specific needs of each decision maker

Classes of organization decision making Planning – forward looking and predictiveo Product planning

Revenues Costs

o Production planning Resource availability

o Strategy development External environment Requirements of target customers

Organizingo Developing organization systems and the required

infrastructure required to support primary production systems

Controllingo Measuring and evaluationg the performance of existing

organization systems

Financial VS Managerial Accounting

Financial ManagerialAudience External InternalPurpose Past performance

Provide contracting basis for owners and lenders

Inform internal decisionsFeedback and control on operating performance

Timeliness DelayedHistorical

CurrentFuture oriented

Restrictions Regulated No regulationsType of Info Financial Financial

OperationalPhysical

Nature of Info ObjectiveAuditableReliableConsistentPrecise

SubjectiveJudgementalValidRelevantAccurate

Scope Highly aggregateEntire organization

DisaggregateLocal decisions and actions

Financial information summarizes the financial effect ofunderlying activities but to explain financial results, managers must dig deeper and inevitable focus on the nonfinacial/operating data that explain the performance of the activities that are driving the financial results

Value proposition What the organization tries to deliver to customer Priceo Relative price given product features and competitors’

Qualityo Degree of conformance between what the customer is

promised and what the customer receives Functionality and features

o Performance of the product Serviceo All other lements of the product relevant to the customer

Role of effective management accounting system is to caputre, track, and report these value proposition measures, which are the leading indicatiors of financial performance.

To deliver the value propositions, organizations use processes that they design and manage

Cost information Identify opportunities for process improvement Provides information for planning

Service Organizations, Government and Not-for-Profit Organizations

Used management accounting less than manufacturing organizationso Benign, noncompetitive markets

Evaluate how well and how efficently these organizations used their funds to provede services to their customers

Behavioral Implications Alter behavior when they know they are being studied and

their performance being measured Focus on the variables and behavior being measured and pay

less attention to those not being measured Resistance to change

Ethics and Management Accounting Moral system or set of values that individuals use to regulate

their behavior Ethical lapses can have profound implications for

organizations and their employees Laws of societyo Define certain decisions as illegal

Societal standardso Rule out certain types of decisions as unacceptable

although not illegal Corporate valeso Boundary systems

Prescriptive Define behavior that is unacceptable and has direct

consequenceso Belief systems

Descriptive Idenitify broad goals for organization behavior

Professional codes of conducto Protect client’s rights to privacyo Accountants will prepare reports that reflect their

informed and unbiased beliefs Personal system of valueso Familyo Cultureo Religion

Corporate governance Concerned with how to promote the achievement of the

organization’s stated objectives Senior management should provide systems of internal

controls

Cost Management Concepts and Cost Behavior

Cost Monetary value of goods and services expended to obtain

current or future benefits “Different costs for different purposes”o The way that a cost will be used defines the way it should

be computed

External users: historical costs Asset is sold or used: expense Exchange of asset or liability for an asset: expenditure

Product Costs Manufacturing costso Direct materials

Cost of purchased raw materialso Durect labor

Wages of people who work directly on making the product

o Manufacturing overhead Costs of assets that an organization uses to convert

purchased raw materials into finished goods Financialo Only manufacturing costs

Conservatism Report assets whoce ability to produce future

benefits can be estimated in a systematic wayo Total inventory cost

Evaluate how well management has used the resources Managerialo Manufacturing costs + other product-related costs

To estimate total costs of developing, introducing, making and supporting a product

To evaluate product profitabilityo Cost of individual unit of inventory

To make informed decisions

Cost object Something for which management accountant computes a

cost

Flexible resources Costs are proportional to the amount of the resource used Variable costs Direct costso Cost of a resource or activity that is acquired for or used

by a single cost objecto Costs that can be associated unequivocally and

specifically with a single cost object

Capacity related resources Acquired and paid for in advance of when work is done Fixed costs Indirect costso Cost of a resource that is used by more than one cost

object Vary with the amount of capacity acquired

Assuming that all costs are variable will underestimate cost because it does not account for the costs of idle capacity

Assuming all costs are fixed will overestimate cost because it will not reflect that the organization will need to pay only for the flexible resources that it uses

Cost classification can vary if the cost object changes

CVP Cost volume profit analysis Assumptiono Costs are either variable or fixedo Units made = units soldo Revenue per unit does not change as volume changes

For multiproduct, use weighted values

CVP Chart Provides graphic picture of organization’s profit behavior as

sales level vary

Incorporating fixed costs

o Increase computed cost of a product as demand goes down

o Charge out capacity to products based on the amount of capacity that each product uses

o Underassigns costs since few organizations operate at capacity

Opportunity Cost Implicit cost Sacrifice one makes when using a resource

Zero if there is excess capacity of that resource Opportunity cost = contribution per unit of resource

An allocation that is volume based has the potential to distort costs particularly when the direct costs are a tiny fraction of the fixed costs

Types of production activities Unit relatedo Volume or level are proportional to the number of units

produced or to other measures Batch relatedo Triggered by the number of batches produced

Product sustainingo Support the production and sale of individual productso Provide the infrastructure that enables the production,

distribution and sale of the product but are not involved directly in the production

o Quantity of resources used is independent of the production and sales volumes and the quantity of production batches and customer orders

Customer sustainingo Enable the company to sell to an individual customer but

are independent of the volume and mix of the products sold and delivered

o Quantity of resources used is independent of the production and sales volumes and the quantity of production batches and customer orders

Channel-sustainingo Required to maintain and sustain product distribution

channels Business sustainingo Rquired for the basic functioning of the businesso Independent of the size of the organization or the volume

and mix of products and customers Other support activitieso Vary in proportion to the size or complexity of the

organizationo Allocated to cost objects in a way that reflects their cause

Abandonment costs Costs incurred when it stops using a resource or stops

making a product

Nonmanufacturing costs Research and development Marketing Selling Logistical activities

Customer accounting To determine the profitability of dealing with different

customers

Traditional Cost Management Systems

Job order costing system Estimates the cost of manufacturing products for many

different jobs required for specific customer orders Applicable in organizations that treat each individual job as

a single unit of output Costs are accumulated and unit costs calculated for each job Trackso Raw materials inventoryo Work-in-process inventory

Costs of the resources for each job not yet completedo Finished goods inventory

Process costing systems Applicable when all units produced during a specified

timeframe are treated as one type of output Assign unit cost Costs are accumulated by specific department department production reports are the key documents that

keep track of costs

Products differ in their materials content and hours of labor and machine time

Products differ in demand they place on support activity resources

Job costs sheet For estimating job costs

Markup rate Depends on

o amount of support costs excluded from the cost driver rate

o target rate of return

o competitive intensityo past bidding strategies adopted by key

competitorso demand conditionso overall product-market strategies

all costs associated with a cost driver are accumulated separately

Cost pool subset of total support costs that can be associated with a

distinct cost driver

Cost driver rate

Remains stable over time and does not fluctuate as activity levels change in the short run

If based on planned or actual short-term usage, results in higher rates in periods of lower demand

Normal cost of support activity Cost of the resources committed to the particular activity Excludes fluctuations in costs caused by short-term

adjustments Caused by the level of capacity of each activity that is made

available rather than by the level of actual usage of the committed resources

Practical capacity Long-term average usable capacity made available by the

amount of resources committed to a support activity Excludes short-term variations in demand as reflected in

overtime or idle time Estimated as a percentage of theoretical capacity

Combined conversion cost driver is used more in service organizations

Separating labor from support costs is common in manufacturing and trading establishments

Use different cost pools if the cost or productivity of resources is different and if the pattern of demand varies across resources

Record actual costs to determine unexpected variations

Multistage process costing systems Determine costs for each stage of the process and then

assign their costs to individual products allows mesurement of the costs of converting the raw

materials during a time period to be made separately for each process stage

common in process-oriented industries

Conversion costs

Not necessary anymore to maintain separate cost records for individual jobs

Activity-Based Cost Systems

Exclusive use of unit-level drivers to allocate overhead costs leads to product cost distortion

Traditional cost systems systematically and grossly underestimate te cost of resources required for specialty, low-volume products and overestimate the resources cost of producing high-volume standard products

Activity-Based Cost Systems Use activities for accumulating costs Ask what activities are being performed by a department’s

resources Assigns the resource expenses to activities on the basis of

how much of the resources each activity uses Activities should describe what resources were doing Assumption is that all resources are working at full capacity Concernso Time consuming and costly (interviews and surveys)o Updated infrequently so cost driver rates are out-of-dateo Cost assignments are based on individuals’ subjective

estimateso Difficult to add new activities or add more detail to an

existing activityo As the activity dictionary expands, the demands on the

computer model used to store and process the data escalate dramatically

o Few individuals report that a significant percentage of thier time is idle or unused

Activity cost drivers Represent the quantity of activities used to produce

individual products

Activity-based management Actions managers take, on the basis of an ABC study, to

improve the efficiency of activities and the profitability of products

Reflects cost of unused capacity

Unused capacity should not be treated as general cost; it should be assigned

How committed costs become variable costs Demands for capacity resources changeo Changes in quantity of activities performedo Changes in the efficiency of performing activities

Managers make decisions to change the supply of committed resources to mee the new level of demand for the activities performed by these resources

Activity volumes > capacity of resources = bottleneck Indirect costs increase because they increase supply of resources

to relieve the bottleneck Demands for indirect and support resources can decline through

ABM or competitive or economy-wide forces

After unused capacity has been created, committed costs will vary downward if managers actively reduce the supply of unused resources

Time-driven activity-based costing To estimateo Unit cost of supplying capacity for each department or

process Cost of resources that supply capacity Practical capacity of the resources supplied

o Consumption capacity by each transaction or product Estimate of the time used on a resource when an

activity is performed Advantageo Data are easier to obtain and far easier to validateo Ease of updating

Triggered by events that require the estimates in the model to be modified

o Easily update cost driver rates Changes in the prices of resources supplied Shift in the efficiency of the activity

o Relax the assumption that all orders of a particular type are the same, requiring the same amount of time to process

Time equations Enables the model to reflect how particular order and

activity characteristics cause processing times to vary

Customers differ in their use of marketing, selling, distribution and administrative resources

How to turn unprofitable customers to profitable customers Process improvements Activity-based pricingo Establishes a base price for producing and delivering a

standard quantity for each standard product Managing customer relationshipso Persuading customers to use a greater scope of the

company’s products and services

Why service companies are ideal for ABC All costs appear to be fixed Variable cost is close to zero Do not have direct, traceable costs to serve as convenient

allocation bases No material costs

Manufacturing costs are customer independent Measuring revenues and costs at customer level provides far

more relevant information

Implementation issues Lack of clear business purpose Lack of senior management commitment Delegating the project to consultatntso Do not have the needed familiarity with the company’s

operations and business problems Poor ABC model designo Gets lost in the detailso Too complicated to build and maintain

Individual and organizational resistance to change People feel threatenedo Unprofitable products

o Unprofitable customerso Inefficent activities and processeso Substantial unused capacity

Management Accounting Information for Activity and Process Decisions

Relevant costs costs and revenues that differ across the decision alternatives

Sunk costs costs of resources that already have been committed and

cannot be influenced by any current action of decision

Concentrate only on the relevant costs Sunk costs are not relevant Not all fixed costs are sunk costs and not all sunk costs are fixed

costs

Assuming responsibility for decisions Managers are concerned about their reputations within their

own organizations Behavior may be viewed as suboptimial Might garner more respect from colleagues for accepting

responsibility Difficult time distinguishing sunk cost business decisions

from sunk cost personal decisions Critical: identifying what is relevant and disentangling

personal responses

Make or buy decisions Avoidable costso Eliminated when a part, product, product line, or busines

segment is discontinued Qualitative factorso Reputation of the selected outside suppliero Reliability of the supplier in meeting the required quality

standards and in making deliveries on timeo Technological innovations is an important determination

of competitive advantage

Theory of Constraints TOC Operating income can be increased by carefully managing

bottlenecks in a process Three measureso Throughput contribution

Revenue – direct materials (for the quantity of product sold)

o Investments Material costs of raw materials + Material costs of

work-in-process + Material costs of finished goodso Operating costs

All other costs except direct material costs Emphasizes short-run optimization of througput contribution

Bottleneck Any condition that impedes or constrains the efficient flow

of a process Identified by determining points at which excessive amounts

of work-in-process inventories are accumulating

Facility Layout Systems Process layouts

o All similar equipment or functions are grouped togethero Where production is done in small batches of unique

productso Long production pathso High inventory levels

Store work in process in each area while it awaits the next operation

Use of batches reduce setting up, moving and handling costs

Rate at which each processing area handles work is unbalanced

Supervisors evaluate many processing area managers on their ability to meet production quotas

Product layoutso Equipment is organized to accomodate the production of a

specific producto High volume productiono Placement of equipment or processing units is made to

reduce the distance that products must travel Cellular manufacturingo Organization of a plant into a number of cells so that

within each cell all machines required to manufacture a group of similar products are arranged in close proximity

o Machines are flexible and can be adjusted easilyo U shapre provides better visual control of the work flow

Batch production creates inventory costs and delays associated with storing and moving inventory which increase cycle times, thereby reducing service to customers

Inventory related costs Moving, handling and storing work-in-process costs Costs due to obsolescence or damage Costs of rework Financing

PCE Processing cycle efficiency

Streamlining manufacturing processes reduces the demand placed on many support-activity resources

CONC Cost of nonconformance to quality standards

Quality factors Satisfying customer expectations regarding attributes and

performance Ensuring that the technical aspects of the product conform to

the manufacturere’s standard

Costs of quality control Prevention costso To ensure that companies produce products according to

quality standards Appraisal costso Relate to inspecting products to make sure they meet both

internal and extenral customer’s requirements Internal failure costso Results when the manufacturing process detects a

defective component or product before it is shipped to an external customer

External failure costso When customer discover defects

It is much less expensive to prevent defects than to detect and repair them

COQ Cost of quality report Illustrates the financial mangnitude of quality factors Helps managers set priorities for the quality issues and

problems they should address Allows managers to see the big picture of quality issues and

allows them to try to find the root causes

JIT Just-in-time manufacturing Requires making a product or service only when the

customer, internal or external, requires it No work-in-process inventoryo A problem anywhere in the system can stop all production

Needs a highly-trained workforce whose task is to carry out activities using the highest standards of quality

Measureso Defect rateso Cycle timeso Percent of time that deliveries are on timeo Order accuracyo Actual production as a percent of planned productiono Actual machine time available compared with planned

machine time available Implications for management accountingo Management accounting must support the move to JIT

manufacturing by monitoring, identifying, and communicating the sources of delay, error and waste in the system

o Clerical process of management accounting is simplified by JIT manufacturing because there are fewer inventories to monitor and report

Cost Information for Pricing and Product Planning

Incremental cost per unit Amount by which the total costs of production and sales

increase when one additional unit of that product is produced and sold

Why study product cost and pricing When to offer discounts Decide the best mix of products to manufacture and sell How best to deploy marketing and promotion resources and

how much commission to provide

Short-term and long-term pricing considerations Whether surplus capacity is available for additional

production Whether shortages of available capacity limit additional

production alternatives How long a firm must commit its production capacityo Opportunity costso Additional expensive new capacity to handle future sales

increase Use of subcontractors Introduce new products or eliminate existing products

Price taker

Chooses its product mix given the prices set in the marketplace for its products

Price setters Relatively little competition that enjoy large marketshare

and exercise leadership

Short-term product mix decision: price takers The contribution margin per unit of the constrained resource

is the criterion used to decide which products are most profitable to produce and sell at the prevailing price

Managers must decide which costs are relevant to the short-term product mix decision

Managers have little flexibility to alter the capacities of some resources

Relevant costso opportunity costso short-run variable costs

Short-term pricing decisions: price setters available surplus capacityo minimum available acceptable price must at least cover

the incremental costs that the company will incur to produce and deliver the order

no available surplus capacityo minimum acceptable price must cover all incremental

costs but when the firm must acquire additional capacity to satisfy the order, more incremental costs are involved

Long-term pricing decisions: price setters use full costs wheno contracts for customized productso regulated industrieso long-term contractual relationships

most activities will depend on the production decisions because it has great flexibility in adjusting the level of commitment

o serves as a benchmark or target price from which the firm can adjust prices up or down depending on demand conditions long-term average tends to equal the price based on the

full costs that will be recovered in a long-term contract markups o increase with the strength of demando depend on elasticity of demand

elastic customers are very sensitive to the price markups are smaller quantities sold will decrease sharply when prices

increase inelastic

profits increase when prices increaseo fluctuate with the intensity of competitiono lower for strategic reasons

penetration pricing new product to penetrate the market

skimming pricing higher price is charged to customers who are willing

to pay more for the privelege of possessing the latest technological innovations

Long-term product mix decisions: price takers relevanto product sustaining costs

o batch related costs Managers cannot easily change the amount of commited cost

in the short run Managers can adjust the supply of most resources for long

run Comparing product costs with market prices reveals which

products are not profitable in the long termo Full product line for customers to enjoy one-stop

shoppingo Reengineer/redesign unprofitable products to eliminate or

reduce costly activitieso Phase out a product to help improve profitabitlity

if managers eleminate the activity resources no longer required to support the discontinued product

if managers redeploy the resources from the eliminated products

capacity constraints are likely to be less of a concern comparison of the price of a product with its acitvity-based

costs provides a valuable evaluation of the long-run profitability

Management Accounting and Control Systems: Assessing Performance over the Value Chain

Management accounting and control systems MACS One of the central performance measurement systems at the

core Technical characteristicso Scope of the system

Measure and assess only actual production process Pre and postproduction costs are ignored Disadvantage when trying to understand the total

life cycle costs Must be comprehensive and include all activities across

the entire value chaino Relevance of the information generated

Accurate Most accurate information possible subject to cost-

benefit trade-off Timely

Results of performance musst be fed back to the appropriate units in the most expedient way possible

Consistent Language used and technical methods do not

conflict within various parts of an organization Flexible

Customize application for local decisions If not possible, an employee’s motivation to make

the best decision may be lessened

Control Set of procedures, tools, performance measures and systems

that organizations use to guide and motivate employees Stageso Planning

Developing an organization’s objectives choosing activities to accomplish the objectives selecting measures

o Execution Implementing the plan

o Monitoring Meausring the system’s current level of performance

o Evaluation

Feedback about the system’s current level of performance is compared to the planned level

o Correcting Taking the appropriate actions to return the system to

an in-control state

Management must have the ability to correct situations One key difference in the control process lies in determining the

most appropriate types of performance measures

Behavioral considerations Embedding the organization’s ethical code of conduct Using a mix of short- and long-term qualitative and

quantitative performance measures Empowering employees to be involved in decision making

and MACS design Developing an appropriate incentive system to reward

performance

Value chain Sequence of activities that should contribute more to the

ultimate value of the product than to its cost

Total-Life-Cycle Costing Process of managing all costs along the value chain Provides information for managers to understand and

manage costs through a product’so Designo Developmento Manufacturingo Marketingo Distributiono Maintenanceo Serviceo Disposal

Opportunity costs play a heightened role

Research Development and Engineering Cycle Market researcho Emerging customer needs are assesedo Ideas are generated

Product designo Develop the technical aspects of products

Product developmento Creates features critical to consumer satisfaction and

design prototypes, production processes and any special tooling

80% to 85% are comitted to decisions made in the RD&E cycle

Decisions made here are critical because an additional dollar spent on activities that occur during this cycle can save at least $8 to $10 on manufacturing and postmanufacturing activities

Manufacturing Cycle Costs are incurred in the production of the proudct Not as much room for engineering flexibility Much higher cost than RD&E

Postsale Service and Disposal Cycle Costs here are committed in the RD&E stage Overlaps with the manufacturing cycle Stages

o Rapid growth from the first time the product is shipped through the growth stage of its sales

o Transition from the peak of sales to the peak of service cycle

o Maturity from the peak in the service cycle to the time of the last shipment made, disposal occurs at the end of a product’s life and lasts until the customer retires the final unit of the product

Disposal costs include elimination of any harmful effects of the product

Breakdown of costs for each functional life cycles will differ depending on the industry and specific product produced

Understanding of total-life-cycle costs can lead to cost-effective product designs that are easier to service and easier and less costly to dispose

Target Costing Cost reduction focus on design stage but also considers all

aspects of the value chain and explicitly recognizes total-life-cycle costs

Market researcho Customer driven

Customer input obtained continually throughout the process

Concurrent design and engineering Uses total-life-cycle conceptso Key goal is to minimize cost of ownership of a product

Price-led costingo Target selling price and target product volume are

chosen on the baisis of the company’s perceived value of the product

o Target profit margin results from long-run profit analysis

o Determine target cost

o Determine target costs for each component through value

engineering Examination of each component of a product to

determine whether it is possible to reduce costs while maintaining functionality, reliability, mantainability, quality, safety, recyclability, usability and performance

Analyzes both product and manufacturing process design

Subactivities Identifying components for cost reduction

Compute value index Ratio of the value to the customer and the

percentage of total cost devoted to each component

If < 1 candidates for value engineering If high value candidates for enhancements

Optimal value zone Based on experience and opinions Wider at the bottom of the value index chart

low cost and low importance Narrower at the top features are important

and cost variations are larger Above the zone candidates for cost

reduction Below the zone candidates for

enhancements Generating cost reduction ideas

Reduced

Eliminated Combined Substituted Rearranged Enhanced

Use cross-functional product teams throughout the entire process to guide the process

Suppliers play a critical role o Companies may offer incentive plans to suppliers who

come up with the largest cost reduction ideaso Some use supply chain management

Develops cooperative, mutually beneficial, long-term relationships

Concernso Lack of understanding of the target costing concepto Poor implementation of the teamwork concepto Employee burnouto Overly-long development time

Cost Analysis Developing a list of product components and functions Doing a functional cost breakdown Determining relative ranking of customer requirements Relating features to functionso Quality function deployment matrix

Systematically arraying information about Features Functions Competitive evaluation

Highlights relationships among competitive offerings, customer requirements and design parameters

Developing relative functional rankingso Through QFD

Convert feature rankigs into functional or component rankings Need information about percentage contribution of

each component to a customer features

Kaizen Costing Reducing costs during the manufacturing stage Making improvements to a process in small, incremental

amounts Tied into the profit-planning system Target reduction rateo Ratio of the target reduction amount to the cost baseo Applied over time to all variable costs

Variance analysiso Comparisons between actual reduction amounts to the

preestablished targeted reduction amountso Goal: actual production costs < cost base

Workers are assumed to have superior knowledge about how to improve processes

Gives workers the responsibility and control to improve processes and reduce costs

Concernso Enormous pressure on employees to reduce every

conceivable cost Use a cost-sustained period to address this problem

Provides opportunity to learn any new procedures before the company imposes Kaizen and target costs on them

o Leads to incremental rather than radical process improvements

Can cause myopia as management tends to focus on details

Environmental Costing Involves selecting suppliers whose philosophy and practice

in dealing with the environment match those of buyers Use activity-based costing method to control and reduce

environmental costso Identify activities that cause environmental costso Costs of these activities must be determinedo Costs must be assigned to the most appropriate products,

distribution channels and customers Explicit costso Direct costs of modifying technology and processeso Cost of cleanup and disposalo Costs of permits to operate a facilityo Fines levied by government agencieso Litigation fees

Implicit costso Costs tied to infrastructure required to monitor

environmental issueso Administration and legal counsel costso Employee education and awarenesso Loss of goodwill

Three ways to learn about and adopt a method Bring in outside consultants to implement a particular

methodo Effective but costly

Develop their own systems internallyo Satisfying, highly costly and time consuming

Benchmarkingo Understand their current operation and approacheso Then look to the best practices of other organizations for

guidance on improvingo Highly cost effectiveo Selecting appropriate benchmarking partners is criticalo Process

Internal study and preliminary competitive analyses Decide which key areas to be benchmark for study Determine how it currently performs on these

dimensions Preliminary internal competitive analyses Preliminary external competitive analyses These will determine the scope and significance

of the study Developing long-term commitment to the

benchmarking project and coalescing the benchmarking team Obtaining the support of senior management to give

the benchmarking team the authority to spearhead changes

Developing a clear set of objectives for guidance Empowering employees to make change Team should include individuals from all functional

organizations Lack of training of benchmarking methods will lead

to failure of implementation Identifying benchmarking partners

Critical factors Size of the partners

Depend on specific activity/method Number of partners

As the number of partners increases, so do the issues of coordination, timeliness and concern over proprietary information disclosure

Relative position of the partners within and across industries Newcomers or declining performance seek a

wide variety of benchmarking partners Industry leaders benchmark because of

commitment to continuous improvement Degree of trust among partners

Obtaining truthful and timely information Information gathering and sharing methods

Type of information Product benchmarking

Examining other organizations’ products Functional benchmarking

Other organizations’ practices and costs with respect to functions or processes

Strategic benchmarking Other organizations’ strategies and strategic

decisions Methods of information collection

Unilateral benchmarking Independently gather information about one or

several other companies that excel in the area of interest

Relies on data that can be obtained from industry trade associations or clearinghouses of information

Cooperative benchmarking Voluntary sharing of information Database

Large amount of information in one place Insights what the data mean and how to use

it are not available Indirect/third party

Outside consultant to act as a liason among firms engagned in benchmarking

Members remain anonymous Group

Meet openly Abide by a code of conduct Opportunity for better understanding of the

other parties involved Most effective method and most costly

Determine benchmarking gap Taking action to meet or exceed the benchmark

Simply judging the effects of a benchmarking effort in the short term on the basis of financial indicators may lead to premature abandonment of what has been learned during the benchmarking project

Motivating Behavior in Management Accounting and Control Systems

Major role for control systems is to motivate behavior congruent with the desires of the organization

Scientific management school Most people found work objectionable Individuals cared little for making decisions or exercising

creativity on the job Money was the driving foce behind performance

Management believes that employees should follow highly-detailed, prescribed procedures

Behavior should be monitored and controlled

Human relations movement People had needs that went beyond performing simple

repetitive task at work Financial compensation was only one aspect of what

workers desired Employees wanted respect, discretion over their jobs and a

feeling that they contributed something valuable Improve morale and job satisfaction and the overall quality

of working life

Human resources model of motivation High level of employee responsibility for and participation

in decisions in the work environment Assumptiono Organization operate under a system of beliefs about the

values, purpose and direction of their organizationo People find work enjoyableo People desire to participate in developing objectives,

making decisions and attaining goalso Employees have a great deal of knowledge and

information about their jobso Individuals are highly creative, ethical and responsibleo Individuals desire opportunities to effect change

Individuals are motivated by both financial and nonfinancial means of compensation

A well-designed MACS should incorporate the principles of the organization’s code of ethical conduct

Ethical framework embedded in the system design will influence the behavior of all users

Pressures from job circumstances Requests to tailor information to favor particular individuals

or groups Pleas to falsify reports or test results Solicitations for confidential information Pressures to ignore a questionable or unethical practice

System designers might ensure the following to incorporate ethical principles

That the organization has formulated, implemented and communicated to all employees a comprehensive code of ehtics

That all employees understand the organization’s code of ethics and the boundary systems

That a system in which employees have confidence exists to detect and report violations

Five categories that capture the broad array of ethical considerations

Legal rules Societal norms Professional memberships Organizational or group norms Personal norms

Ethical hierarchy provides a set of constraints on a decision Ethical conflicts occur when one systems of values diverges

from a more fundamental system

Dealing with ethical conflicts

Maintain a hierarchical ordering of authorityo Avoiding ambiguity or misunderstanding

Way that the chief executive and other senior managers behave and conduct business

If the organization’s code of ethics is more stringent than an individuals’s code, conflicts may arise

Employees faced with ethical conflicts must make sure to document the events and discussions and list the parties involved so that a case can be made

Conflicts between the organization’s stated and practiced values Individual should ensure that the facts are correct and that a

conflict does exist Individual should determine whether this conflict is

institutional or whether it reflects the decisions and actions of only a small minority of employees

Choiceso Point out the discrepancy to a superior and refuse to act

unethicallyo Point out the discrepancy to a superior and act unethicallyo Take the discrepancy to a mediatoro Work with respected leaders to change the discrepancyo Go outside to publicly resolve the issueo Go outside anonymously to publicly resolve the issueo Resign and go publico Resign and remain silento Do nothing

If the organization is serious about its stated code of ethics, it should have an effective ethics control system to ensure and provide evidence that the organization’s stated and practiced ethics are the same

Elements of an effective ethical control system Statement of the organization’s values and code of ethics

written in practical terms Clear statement of the employee’s ethical responsibilities for

every job description and a specific review of the employee’s ethical performance

Adequate training Evidence that senior management expects members to

adhere to its code of ethicso Provide a statement of the consequences of violating the

code of ethicso Establish a means of dealing with violationso Provide visible support of ethical decision makingo Provide a private line of communication

Evidence that employees can make ethical decisions or report violations

An ongoing internal auditThree dimensions of motivation

Direction Intensity Persistence

Careful attention to motivation is a key step for the organization and its employees to align their respective goals

Employee self control Employees monitor and regulate their own behavior and

perform to their highest levels

Diagnostic control systems

Feedback systems that monitor organizational outcomes and correct any deviations from predetermined performance standards

Interactive control systems Force a dialogue among all organizational participants about

the data coming out of the system and what action to take

Task control Process of finding ways to control human behavior so that a

job is completed in a prespecified manner Preventive controlo Much of the discretion is taken out of performing a task

because of the precision required or the nature of the materials involved

o As the accomplishment of a task requires increasingly greater judgement, the building of preventive control systems becomes more difficult

Monitoringo Inspecting the work or behavior of employees while they

are performing a tasko Negative consequence

Unnecessary stress Undermines the level of trust

Most appropriateo When there are legal requirements to follow specific rules

or procedures to protect public safetyo When employees handle liquid assets to reduce

opportunity for temptation and fraudo When the organization can control its environment and

eliminate uncertainty and the need for judgement

Results control Focus on measuring employee performance against stated

objectives To be effectiveo must have clearly defined objectiveso communicated the objectives to appropriate organization

memberso designed performance measures consistent with the

objectives most effectiveo when organization members understand the

organization’s objectives and their contribution to those objectives

o when organization members have the knowledge and skill to respond to changing situations

o when the performance measurement system is designed to assess individual contributions

central to the design is the development of a performance measurement system that fully reflects the multiple objectives and goals of an organization

Non-Goal Congruent Employees are so motivated to achieve a single goal that

they engage in non-goal congruent or dysfunctional behavior Gaming the performance indicatoro Employee might alter his or her actions specifically in an

attempt to manipulate a performance indicator through job-related acts

Data falsification Smoothing

o Form of earnings management that occurs when individuals accelerate or delay the preplanned flow of data without altering the organization’s activities

o Same bottom-line financial outcomeso But organization does not have a clear picture of

performance for a defined time period

Multiple performance measures Cause employees to recognize the various dimensions of

their work and to be less intent on trying to maximize the performance on a single target

Tall organizations Traditional hiearchical organizations

Flat organizations Fewer layers

Business process reengineering Designers begin with a vision of what organizational

participants would like their process or product to look like or how they would like it to function and then radically redesign it

Led to the need for new information requirements and measures

New measures must take into account group-level performance measures and cross-functional business process measures

Essential elements in empowering employees in MACS design Allowing employees to participate in decision makingo Employees who participate in decision making evince

greater feelings of morale and job satisfaction Translate to increase productivity

o People still perform the major portion of work and have superior information and understanding in regard to how work is best accomplished and how to improve products and processes

Ensuring that employees understand the information they are using and generatingo To be able to take actions that lead to superior

performanceo Employees have to be constantly reeducated as the system

and its performance measures change

Intrinsic rewards Those that come from within an individual and reflect

satisfaction from doing the job and from the opportunities for growth that the job provides

Reflect the nature of the organization and type of work one is performing

Extrinsic rewards Any rewards that one person provides to another to

recognize a job well done Reinforce the notion that employees have distinguished

themselves Reinforce the common perception that the wage

compensates the employee for a minimally acceptable effort and organization must use additional rewards to motivate the employee to provide additional effort

Incentive compensationo Pay-for-performance systemso Provide monetary rewards based on measure results

o Base rewards on achieving or exceeding some measured performance

o Work best in organizations in which employees have the skill and authority to react to conditions and make decisions

o Must focus primarily on outcomes that the employee controls or influences

o Should reflect the nature of their responsibilitieso Categories

Those that rely on internal measures Those that rely on performance of the organization’s

share price in the stock marketo Types

Cash bonuses Lump-sum reward Pay for performance Merit pay Pays cash on the basis of some measured

performance One-time award Can be fixed and triggered when measured

performance exceeds the target Can be proportional to the level of performance

relative to the target Profit sharing

Calculated as a percentage of an organization unit’s reported profit

Group incentive compensation plan focused on short-term performance

Based on residual income/economic value added Procedures

Must prepare a means to calculate profits Monitored and attested to by an external

auditor When a deduction is to be made from the pool

that is based on the owner’s inverstment, the management accounting system must provide a measure of invested capital

If based on some level of performance, management accounting system must provide the underlying measures of performance and the overall performance score

Gain sharing System for distributing cash bonuses from a pool

when the total amount available is a function of performance relative to some target

Group incentive Uses a formula to specify the amount and

distribution of the rewards and a base period of performance as the benchmark for comparing subsequent performance

Promotes teamwork and participation in decision making

Improshare Improved productivity sharing

Specifies how the difference will be shared between the shareholders and the employees and how to calculate the amount distributed to each employee

Scanlon plan

If < baseRatio labor savings are added to a bonus pool

If > baseRatio labor costs deducted from bonus pool

Rucker plan

Idea is to define a baseline relationship between payroll costs and the value of production and then to reward workers who improve efficiency

Must reflect performance levels that are reasonable Belief that montly or weekly performance awards

are best because they provide rapid feedback, additional motivation

Short-cycle feedback can put strains on the organization’s management accounting system when the need for recording and accruing labor costs increases both the cost and potential for error in the management accounting system

Culture must promote cohesive relationships within the group and between the group and management

Stock options Right to purchase a unit of the organizations stock at

a specified price (option price) Set the option price at 105% of the stock’s market

price at the time the organization issues the stock option

Restricted to senior executives Argument: stock price increases often reflect

general market trends that have nothing to do with the performance Stock option price should be keyed to the

performance of the organization’s shares relative to the performance of the prices of comparable prices

Valuable only if the organization’s share price increases more rapidly than the share prices of comparable organizations

Performance shares stock Stock appreciation rights Participation units Employee stock ownership plans

Measures of absolute performanceo Number of acceptable quality units producedo Oragnization’s esultso Organization’s share price performanceo Ability to exceed a performance target levelo Amount of a bonus poolo Degree to which performance exceeds the average

performance level of a comparable group

Compensation policy can be affected by government regulations

Six attributes of a measurement system

Employees must understand their jobs and reward system and believe that it measures what they control and contribute to the organizationo Ensures that the employee perceives the reward system as

fair and predictableo Critical management role

specifying and developing a clear relationship among effort, performance, and result

ensuring that all employees understand this relationship designers of the performance measurement system must

make a careful choice about whether it measures employees’ inputs or outputso outputs often reflect circumstances and conditions that are

beyond the employee’s control perceived link between individual’s efforts and

measured results is reduced elements of performance that the performance measurement

system monitors and rewards should reflect the organization’s critical success factorso ensures that the performance system is relevant and

motivates intended performance that matters to the organization’s success

reward system must set clear standards for performance that employees accepto determines employees’ beliefs about whether the

performance system is fair measurement system must be calibrated so that it can

accurately assess performanceo ensures that a clear relationship between performance and

outcome is established when it is critical that employees coordinate decision

making, the reward system should reward group rather than individual performance

Instances when rewards are based on inputs when it is possible to measure outcomes consistently when outcomes are affected by factors beyond the

employee’s control when outcomes are expensive to measure

input-based compensation measures the time, knowledge and skill level that the

employee brings with the expectation that the unmeasured outcome is correlated with these inputs

some believe it is particularly inappropriate for companies to continue operating compensation systems in which executive rewards bear no relation to corporate performance

the idea behind stock related incentive plans is to motivate employees to act in the long –term interests of the organization by engaging in activities that increase the organization’s market value

Using Budget to Achieve Organizational Objectives

A long-term planning process drives the capital spending planUse the projected balance sheeet as an overall evaluation of the net effect of operating and financing decisions during the budget period Use the income statement as an overall test of the profitability of the planners’ proposed activitiesCash flow forecast help organization plan the appropriate mix of external financing to minimize the long-run cost of capital

Capacity Levels flexible resources that the organization can acquire in the

short termo provides the ability to use existing capacity

capacity resources that the organization must acquire for the intermediate termo general purpose capacity that is transferrable among

organizations given time capacity resources that the organization must acquire for the

long termo impose financial risk on the organizationo chosen level of this capacity reflects the organization’s

assessment of its long-term growth trendo special purpose capacity that is customized for the

organization’s use

planners classify activities by type because they plan, budget and control short-, intermediate-, and long-term expenditures differently

analysts evaluate short-term activities by considering efficiency

analysts evaluate intermediate- and long-term activities by using efficiency and effectiveness considerations

choosing the capacity plan commits the firm to its intermediate- and long-term expenditures

choosing the production plan fixes the short-term expenditures

Financing section of cash flow statement summarizes the effects on cash transactions that are not a part of the normal operating activities

Sources and uses of cash Operations Investments or withdrawals Long-term financing activities related to issuing or retiring

stock or debt Short-term financing activitieso Obtain a line of credit

Allows and organization to borrow up to a specified amount at any time

Secured Organization has pledged an asset that the financial

institution can seize if borrower defaults unsecured

use of budget information identify broad resource requirementso help develop plans to put needed resources in place

identify potential problemso help avoid problems or to deal with them systematically

compare projected operating and financial resultso serve as a measure for comparison with operating and

financial results of competitorso use to test the efficiency of the organization’s operating

processes

What-if analysis

explore the effects of alternative marketing, production, and selling strategies

only as good as the model used to represent what is being evaluated

model o must be completeo must reflect relationships accuratelyo use accurate estimates

Sensitivity analysis proess of selectively varying a plan’s or a budget’s key

estimates for the purpose of identifying over what range a decision option is preferred

if small forecasting errors of an estimate used in the production plan change the plan, model is sensitive to that estimate

if performance consequences from a bad estimate are sever, invest time and resources to improve the accuracy of their estimates