Management Accounting 2
ASSIGNMENT 1
BY
RAY, Ka Sing HO
CONTENTS
Page
Terms of Reference 3
Introduction 4
Main Body 5-9
References and bibliography 9-11
Terms of Reference
Explain the possible effects of placing employees in positions of 'failure' and 'success' on individuals and their aspiration levels.
Identify four situations from the literature or from my own experience where control systems may lead to distortion and circumvention, and discuss the behavioural implications of each.
Examine the behavioural consequences of implementing budgetary control systems in practice, and examine the ways in which they might be taken into account in terms of the alternatives that are open to management when designing such systems.
Introduction
The management accounting helps to measures and reports financial information and other information that helps them to fulfil the objectives of the organisation. It helps the managers to set goals and monitor the progresses of the policies they are have implemented. Further, it helps to determine the feasibility of policies that they are implementing. Another function is to get feedback for current policies.
Some of the management accounting systems are budgeting system, costing system, process costing system and management control system.
In the past, managers have dismissed the view that behavioural issues are a major consideration in management accounting systems. They have focused on the financial performance and not on such qualitative factors. However, as time pass, the behavioural context has become more important as it gains the notice of researchers. National and corporate cultures are also becoming an issue in designing the management accounting system.
In the discussion that follows, an attempt will made to shed some light as to the effects and impact of the behavioural context. The specific management accounting systems that will be discussed are budgeting system and activity-based costing system.
Main Body
Placing employees in positions of success are very important to an organisation. Imagine the perfect business: all employees are in the right position, they self-motivated, delivering top-level performances, and working efficiently and smoothly with office mates and executives alike. Far from being an impossible dream, this type of harmonious and high performing environment is not only achievable; it is becoming essential to a company's bottom line. Happy, successful employees are not only more productive but also, more likely to remain loyal and present on the job, maximizing efficiency and saving the company hundreds of thousands of money in continuous rehiring and retraining costs.
One of the purposes of a management accounting system is to provide information that helps the management to make decisions and create activities that help the organisation to achieve its goal and to encourage their employees to work in the best interest of the organisation. Therefore, the behavioural issue of employees is a vital aspect in management accounting.
However many accountants do not see the behaviour of employees as an important part of an organisation. This is due to the following reasons:
. It is only recently that behavioural implications have been noticed. Thus, time would be needed to change the mentality that it is only a minor or even non-existence part of management accounting.
2. Very little research has been done on this aspect. Hence, accountants find that they cannot find a reliable source to follow.
3. Many managers are not concerned with this issue. Instead, they are more interested in the actual performance without knowing that behaviour is actually one of the motivators to perform.
Unfortunately, behavioural considerations are current and relevant in today's business world. Even though in many situations accountants perceive that there is no problem and everything is under control, the truth is that they cannot afford to ignore such issues. The following conditions ...
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2. Very little research has been done on this aspect. Hence, accountants find that they cannot find a reliable source to follow.
3. Many managers are not concerned with this issue. Instead, they are more interested in the actual performance without knowing that behaviour is actually one of the motivators to perform.
Unfortunately, behavioural considerations are current and relevant in today's business world. Even though in many situations accountants perceive that there is no problem and everything is under control, the truth is that they cannot afford to ignore such issues. The following conditions are the onus to effective management decision making:
* Clear and unambiguous goals have to be set so that employees know their duties and responsibilities.
* Relevant information must flow in order to make the best decisions.
* Goal congruence must exist between the objectives of the employees and the goals of the organisation. This is to ensure that the employees can make the best decision without any conflict.
* Good communication channels must exist so that other employees can gain knowledge of the decisions at the fastest time.
* Feedback must be provided to alter the decisions quickly to make the best decisions for the organisation.
However, placing employees in positions of 'failure' could cause following possible effects:
. Projection Essentially, this is blame-shifting. Rather than attempting to address any problems which may be revealed, managers will 'pass the buck', blaming other managers, 'the system', 'the computer' and so on.
2. Short-termism Undue pressure on managers to meet financial targets may result in short-term action which improves a particular measure, but which is detrimental to the organisation in strategic terms.
3. Aggression This could manifest itself in the form of acrimonious disputes between managers about the allocation of budget resources, in the manipulation of accounting figures, or even in outright sabotage of the information system. It can also often be seen in conflict between the accounting and other organisational functions, stemming from the misconception that the purpose of accounting and accountants is to investigate errors and.
4. Budgetary slack as difference between minimum necessary expenditure and actual/budgeted expenditure, observing at that point that it may arise as a consequence of using incremental budgets.
Budgets need to be formulated along the lines of executive responsibility. The organisation requires to be sub-divided into its major constituent parts as represented by the senior management functions, or example - Production - Marketing - Distribution - Personnel - Finance and Administration. These major areas need to be further sub-divided into their constituent parts, again along the lines of management responsibility, and this sub-dividing will continue through each descending tier of management. Care needs to be taken to ensure that the fulfilment of every part of the budget is the direct responsibility of a designated manager, and that dual or overlapping responsibility for an operation is avoided.
Then control is applied in two stages:
By the preparation of budgets along the lines of executive responsibility. This ensures that every area of the budget is the responsibility of some designated executive who will oversee its operation, and will be accountable for the achievement of the budgeted levels of performance.
By the constant monitoring of actual performance against the budget, and the determination of variance from budget. The results of these comparisons are reported to the executives responsible for each area of the budget. This is known as responsibility reporting. All significant variances, whether they are favourable or adverse, need to be investigated. [A significant favourable variance indicates a departure from the original plan]. What is significant is a matter of subjective judgement, but will probably take into account such factors as:
i. The absolute size of the variance - is it large enough to worry about? There is little point in spending valuable time investigating a small variance.
ii. The proportionate size of the variance - a variance which shows [say] a 20% under/overspending may require further inquiries.
iii. It is part of a trend over time that shows a continuing deterioration?
The use of variances enables a manager to adopt the technique of management by exception, concentrating his efforts on the parts of the plan that are going wrong and thus using valuable time efficiently.
Levels of Attainment
The levels of expected performance which are set influence the motivation of managers responsible for target achievement.
Example, If levels are set too high, then there is a strong disincentive to management involvement in the budgetary process, and a low level of motivation.
Example, If levels are set too low, then managers can achieve targets easily despite inefficiencies. This is known as budgetary slack
Setting appropriate levels of attainment in budgets is a complex and difficult Activity with an important behavioural dimension.
Conflicting Purposes of Budgeting
Budgeting may serve a number of different purposes. There is a danger, therefore, that using the same budget for the various purposes may be unsatisfactory.
For example, a budget may be used for planning [as a forecast], for motivating [as a target] and for evaluating performance [as a yardstick].
A forecast needs to be realistic but a target needs to be demanding. A target should be challenging but a yardstick must be fair. A forecast, while it should be plausible, will be prepared in advance of the period, but a yardstick should be based on the most up to date information as to what is achievable.
Thus it has been suggested there should be two budgets:
A budget for planning and decision-making based on reasonable expectations.
A budget for motivation with more difficult targets.
The basis of control is the circulation of management information. The problem is, accountants can produce the information but they cannot make managers use it. Therefore, a very relevant question is, what factors can encourage managers to use the information supplied?
There are several factors, besides the relevance of the information that determines whether or not management information is used by managers.
The information needs to be presented with clarity. It needs to be readily understandable, it needs to point to the need for action, and it should highlight significant changes. It should be in sufficient detail to enable managers to make use of it, but excessive detail needs to be avoided.
Managers are more likely to use management information if it is presented with timeliness. Information, to be of value, needs to be presented as soon after the event as practicable. This has the double effect of relating to events which are still fresh in the manager's mind, and giving an opportunity to take corrective action on adverse trends as soon as possible.
Budgeting is a form of planning and control system found in most organisations of any size, in both the public and the private sectors. There are benefits to be gained from the process, but they do not come automatically. It is important, therefore, to be aware of the problems which may be encountered and to re-appraise the system constantly.
Limitations of Budgeting
These include:
The budget system may cause antagonism and poor motivation [due to undue pressure, poor human relations etc].
. Variances are frequently due to changed circumstances, poor forecasting etc., rather than management performance.
2. Budgets reflect the current organisation structure which may not be optimal, especially during rapid change.
3. There is a danger of inertia and inflexibility because of an unwillingness to change well established plans.
4. There are considerable difficulties in setting appropriate levels of attainment.
5. There is the problem of time lag in the system [e.g. June's results are not available until late July, are reported in August and are compared to forecast made months earlier].
6. The technique should not be relied upon as a substitute for good management.
Examples of failure budgeting : Trading Budget [say] 1 year.
a. Capital Expenditure Budget [say] 5 years.
b. Research and Development Budget [say] 5 years minimum.
It should be borne in mind, that if a Budget is for more than one year, that the chances of it being modified are extremely high.
Although the overall Budget may be for a year or more, it is always broken down into shorter periods. Budget periods in excess of one year would be broken down into annual amounts, and the annual amounts would be further sub-divided into monthly accounting periods. Budgets which are compiled for the duration of one year, would similarly be broken down into accounting periods.
Having arrived at the amounts for each period, the actual expenditure incurred during a period can be compared with the appropriate Budget and Variances extracted.
Benefits of Budgeting
These include:-
. The organisation's objectives are identified and turned into specific plans, Activities and objectives, related to specific manager's responsibilities.
2. The communication of the organisation's plans and objectives, and of the progress towards meeting these.
3. The detailed examination of the organisation's structure and cost behaviour necessary for budgeting, highlights strengths and weaknesses and indicates potential areas for cost reduction.
4. Co-ordination between the department and functions of an organisation will be improved by a good budgeting system.
5. The development of routine management in setting budgets and accepting targets should lead to increased motivation.
6. Performance is reported and monitored thus aiding control.
7. Variance analysis reveals the nature of any weaknesses. It indicates areas for further investigation and points to the corrective action to be taken.
Conditions for Successful Budgeting
The involvement and support of top management.
A clear definition of long term objectives and their communication. Short term plans must be linked to long term objectives.
A realistic organisation structure with clearly defined responsibilities.
Genuine involvement of managers in all aspects of the budgeting process.
An appropriate accounting information system. This requires:
ii. The recording of performances in relation to responsibilities.
iii. Prompt and accurate reporting of results.
iv. The ability to provide more detailed information and advice on request.
Budgets should be administered in a flexible manner. Significant changes in circumstances should lead to changes in plan. Rigid adherence to budgets which are inappropriate for current conditions leads to loss of credibility and effectiveness.
Conclusions.
These initial empirical observations give some support to the theoretical and practical observations noted earlier. This paper sets out some of those theoretical problems and the questions which follow from them. It is a contention that there is a considerable challenge for management accounting from the development of forms of organisational collaboration which explicitly works away from the concept of market or hierearchy and beyond the injunction for hierarchies to behave more like markets and for inter firm markets to behave more like hierarchies. Clearly there is much to examine in these complex inter firm chains.
References and bibliography
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Ray, Ka Sing HO
