TOPIC 1

INTRODUCTION TO MANAGEMENT ACCOUNTING :ORGANISATIONS & CONTROL

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What is management accounting?

…is concerned with the provision of information to people within the organisation to help them make better decisions and improve efficiency and effectiveness of existing operations.

Management Accounting System

An information system that produces the information required by managers to better manage resources

Includes

- estimates of product cost

- information for planning and controlling

- information for measuring performance

- information for short & long-term decision making

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Differences between MA & FA

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Management Accounting process

Management accounting can support the organisation's formulation and

implementation of strategy helping managers improve the organisation’s

competitive advantage in terms of quality, delivery time, flexibility, innovation and cost, through modern process improvement and cost management techniques.

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Key influences on management accounting system structure

Organisational structure Availability of information technology Organisational strategies Organisation view of management accounting Types of decisions confronting managers External influences

Classifying costs according to their behaviour

Variable costs– Change in total in direct proportion to a change in

the level of activity or work performed

Fixed costs– Remain unchanged in total despite changes in

the level of activity

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Costs terms

Cost object– is any item (product, services, activity or a business

unit) that cost can be traced to

Direct cost– is a cost that can directly trace to a particular cost object

in an economic manner eg direct material, direct labour

Indirect cost (also known as overhead)– is a cost that cannot directly traced to a particular cost

object in an economic manner eg. machine lubricant, indirect material

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Product costs consist of:

Direct material is usually identified as variable cost o Eg: Wood to produce furniture, steel to produce car

Direct labour is usually classified as variable cost o Eg: Workers’ wages directly making furniture,

installing car Manufacturing (or production) overhead includes all

indirect cost o Eg: machine lubricant (as indirect material);

supervisor’s salary (as indirect labour); depreciation, building insurance

Corporate Scandals

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Corporate Scandals

Enron – 2001, US, shareholders lost US$74b WorldCom – 2001, US, investors lost US$180b AIG – 2005, US, US$3.9b accounts fraud Olympus – 2001, Japan, had used US$1b in

payment to cover losses on investment Silver Bird – 2012, Malaysia, estimated

RM111.5m loss

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Importance of Organisational Control system

the absence or malfunctioning of organisational control systems can lead to huge losses, and even to corporate bankruptcy.

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What is Organisational Control system?

A control system is a set of formal and informal systems to assist the management to steer the organisation towards its goals

Controls help in guiding employees effectively towards the accomplishment of the organisation’s goals

Eg: Corporation’s policies and objectives are high level control whereby it is serve as a communication mode between different levels in an organisation, which defined the control action that each employees should take. If the objective is not achieved, it will serve as an alarm for manager to take further action (Ouchi, 1978, p.173)

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Issues of Organisational Control

What are the systems and processes of control that make up the operating mechanism?

How do they achieve their intended results? What are the factors that influence their

effectiveness? How do different types of controls interact with each

other?

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The answers to these questions depend upon whether one believes in a deterministic or voluntaristic approach.

Organisational Control Approaches

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A deterministic approach to predicting and explaining human behaviour in organisations treats humans as if they were unthinking, inanimate entities at the mercy of external stimuli.

Organisational Control Approaches

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The voluntaristic approach suggests that human action is meaningful because it arises from the meanings people attach to what is going on around them.

Organisational Control Approaches

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The control process in any organisation can be undertaken at three levels:

1. Strategic control

2. Management control

3. Operational control

Organisational Control Process

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Strategic control deals primarily with the broad questions of domain definition, direction setting, expression of the organisation’s purpose, and other issues that impact the organisation's long-term survival.

1. Strategic Control

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Management control deals with effective resource utilisation, the state of competitiveness of the unit, and the translation of corporate goals into business unit objectives.

2. Management Control

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Operational controls are primarily concerned with efficiency issues.

Occur at very specific functional or sub-departmental levels of the organisational hierarchy.

The time horizon of operational control is very short, the benchmarks are known and well defined, and the outcomes are tangible and easily measurable.

3. Operational Control

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The role of the management is to organise, plan, integrate and interrelate organisational activities to achieve organisational objectives.

The achievement of these activities is facilitated by MCS.

MCS is the means by which senior managers ensure that subordinate managers efficiently and effectively strive to attain the company's objectives.

Management Control Systems (MCS)

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Management control systems involve a number of activities in an organisation, including: Planning the future course of action Coordinating and communicating the various

activities of the organisation to different departments Evaluating information and deciding the various

activities; and finally, Influencing people to work in accordance with the

goals of the organisation. Eg: the budget is regarded more as a tool for planning

and communication

Management Control Systems (cont.)

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Nature of decisions - management control decisions are based on the framework established by the organisation's strategies.

Decisions are systematic and rhythmic - decisions in management control process are systematic and rhythmic i.e. they are in accordance with the strategies and procedures laid down by the top management.

Important aspects of MCS

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Strategy implementation tool - management control helps an organisation to move towards its strategic objectives. It is an important vehicle for the execution of strategy.

Behavioral considerations – people (employees) are important assets for an organisation & without their cooperation, managers cannot implement their decisions effectively. Eg: in order to manage people effectively, the system requires to consider three main factors among employee ie. where there is lack of direction, motivational problems and personal limitations

Important aspects of MCS (cont.)

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1. A Total System - A properly-designed MCS embraces all aspects of an organisation’s operations. – An important part of management’s function is to

assure that all parts of the operation are in balance with one another. Therefore management must have information about all parts of the organisation’s operations.

Characteristics of a Good MCS

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2. Goal Congruence - people act according to their perceived best interests. A good management control system encourages managers to act in accordance with both their own best interests and the best interests of the organisation as a whole. – At a minimum, the MCS should not include evaluation

and reward criteria that make the individual’s interests inconsistent with those of the organisation.

Characteristics of a Good MCS (cont.)

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3. Future-oriented - planning is always oriented to the future. The organisation should be focused on the future. Employees should be encouraged to be flexible so as to respond effectively to change.

Feasibility of control cost - control devices are costly and not always economically feasible. So, control devices should be put in place only when the economic benefits exceed the costs.

Characteristics of a Good MCS (cont.)

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Management control needs to be distinguished clearly from strategy formulation and from task control.

While strategy formulation takes place at the highest level in an organisation, task control takes place at the individual level.

Management control lies at the middle level between strategy formulation and task control

Distinction between Strategy formulation, Management control & Task control

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General Relationship among Planning and Control Functions

Source: Robert N.Anthony, Govindarajan, Management Control Systems, (USA: Irwin,

1995)

Distinction between Strategy formulation, Management control & Task control

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Formal control systems are written, management-initiated mechanisms that influence the behaviour of employees in achieving the organisation’s goals.

Informal control systems are unwritten, typically worker-initiated mechanisms that influence the behaviour of individuals or groups in business units.

Types of Management Control Systems (MCS)

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Formal controls can be classified into three types, based on the nature of management intervention. They are:

i.Input controls - these are the actions taken by the company before a planned activity is implemented,

– includes selection criteria, recruitment and training programs, manpower allotments, strategic plans and resource allocations.

Formal Control Systems

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ii. Process controls involve tracking certain variables and taking corrective action whenever there is any deviation from specified parameters in the variables. The control is applied to the behaviour or activities rather than the end results.

– Eg: the factors that affect inventory levels of finished goods, such as the rate of sales or dispatch delays

Formal Control System (cont.)

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iii. Output control is exercised when performance standards are set and monitored, and the results are evaluated.

– Output control takes place when the control activity is based on the comparison of actual and planned outcomes.

– Such controls are applicable when it is easy and inexpensive to measure the output and when there are few elements of uncertainty.

Formal Control System (cont.)

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Informal controls can be classified into three types. They are:i.Self-control - It deals with the establishment of the personal objectives by the individual, monitoring their attainment and adjusting the behaviour in the organisation to attain the goals.

– Self-control can be beneficial to an organisation if the organisation’s goals are in congruence with the individual’s goals, but if it does not match then the performance of the employee can suffer.

Informal Control System

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ii. Social control refers to the prevailing social perspectives and patterns of interpersonal interactions within subgroups in the firm. Social control arises out of the internalisation of values and mutual commitment towards some common goals.

Informal Control System (cont.)

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iii. Cultural controls - According to William G Ouchi, culture is “the broader values and normative patterns that guide worker behaviour within the entire organisation.”

– Cultural control can be realised by norms of social interaction, and stories, rituals and legends relating to the organisation.

Informal Control System (cont.)

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Control Influences in Organisations

The ultimate criteria by which any accounting control system should be assessed is behavioural – that is, how does it affect what managers and their subordinates actually do and how do such activities fit into overall plans, etc. (Emmanual and Otley, 1985, p. 82).

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Factors influences Control Systems

Control systems do not function in isolation. They can be influenced by: organisational culturepowerorganisational structurebounded rationality

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