ACCT 102 Management Accounting Lecture 18

1. ACCT 102Management AccountingLecture 18

2. Behavioral Accounting

3. Control Means: Getting people to do what organization wants (goal congruence) Or Getting people to always act to maintain or improve company value. Or Getting people to always act according to established rules or procedures. Control implies objectives Problem of objectives � whose?Control implies objectives Problem of objectives � whose?

4. Motivational analysis involves 1. understanding the causes of behavior in organizations and the ways to correct negative behavior and to promote positive behaviour 2. predicting the effects of any managerial action 3. directing behavior so that organizational and individual goals can be achieved. Stimulus of behavior Direction � fulfillment of needs � self esteem? Strength - effort Duration Why do you go for tertiary education? Brothers, earning a higher salary Why Singapore Management University � holistic SAT Interview (form of control) Essay Teambuilding Study for Exams Duration: See the usefulness of the course in relation to your personal objectives Praise by ProfStimulus of behavior Direction � fulfillment of needs � self esteem? Strength - effort Duration Why do you go for tertiary education? Brothers, earning a higher salary Why Singapore Management University � holistic SAT Interview (form of control) Essay Teambuilding Study for Exams Duration: See the usefulness of the course in relation to your personal objectives Praise by Prof

5. Ultimately it is the people who achieve goals �Remember, its still the people who are going to get you results. Don't burn them out.� BT � 24 July 2000 People - most important asset of an organization Mgt Control System � accounting is part of the system Understand the needs of employees � and how they are motivate � not everybody goes for promotion Change pay structure � commission or change performance measures � include non-financial Mgt Control System � accounting is part of the system Understand the needs of employees � and how they are motivate � not everybody goes for promotion Change pay structure � commission or change performance measures � include non-financial

6. Mgt Control System � accounting is part of the system Understand the needs of employees � and how they are motivate � not everybody goes for promotion Change pay structure � commission or change performance measures � include non-financial Mgt Control System � accounting is part of the system Understand the needs of employees � and how they are motivate � not everybody goes for promotion Change pay structure � commission or change performance measures � include non-financial

7. The Motivational Cycle Exhibit 8-2, p. 264. � Conflict between personal and organizational objectives To motivate � offer acceptable rewards for employees Measure performance which relate to the objectives of the organization so that organization knows that organizational fulfill Assigned responsibility to meet objectives Motivation may break down � inappropriate or inadequate rewards Measure � wrong attributes May measure correct attributes but subject to manipulation � padding the budgetExhibit 8-2, p. 264. � Conflict between personal and organizational objectives To motivate � offer acceptable rewards for employees Measure performance which relate to the objectives of the organization so that organization knows that organizational fulfill Assigned responsibility to meet objectives Motivation may break down � inappropriate or inadequate rewards Measure � wrong attributes May measure correct attributes but subject to manipulation � padding the budget

8. Linking Individual and Organizational Objectives From ABKY � p 652 1st � organization to identify its objectives Establish reward system based on performance measures that organization wants to achieveFrom ABKY � p 652 1st � organization to identify its objectives Establish reward system based on performance measures that organization wants to achieve

9. Performance Assessment

10. Performance Assessment

11. Performance Assessment

12. 12 Accounting-Based Performance Measures

13. 13 Step 1: Choosing among Different Performance Measures

14. 14 Return on Investment (ROI)

15. 15 ROI

16. 16 ROI

17. 17 Residual Income

18. 18 Economic Value Added (EVA�)

19. 19 Return on Sales (ROS)

20. 20 Step 2: Choosing the Time Horizon of the Performance Measures

21. 21 Step 3: Choosing Alternative Definitions for Performance Measures

22. 22 Step 4: Choosing Measurement Alternatives for Performance Measures

23. 23 Step 5: Choosing Target Levels of Performance

24. 24 Step 6: Choosing the Timing of the Feedback

25. Effectiveness Degree to which a goal, objective, or target is met. Determined by process design Efficiency Degree to which inputs are used in relation to a given level of outputs. Determined by process design and how the process operates Performance may be effective, efficient, both, or neither.

26. What You Measure Is What You Get �You simply can�t manage anything you can�t measure � Richard Quinn - Vice-President Sears Merchandising Group �Measures provide clear, visible targets throughout the organization� - Thomas Rosetta - Gilbarco�s Manager Performance Measures

27. What Gets Measured Gets Done, But If We Measure the Wrong things The Wrong Things Will be Done And The Wrong things May be Done Very Well Performance Measures

28. Performance measures should be tailored towards making the organization more competitive. In today�s globally competitive environment, factors important to competing effectively include: Improve quality Improve on-time deliveries Reduce processing time / costs Improve customer satisfaction Performance Measures Quality Service CostsQuality Service Costs

29. Responsibility Accounting

30. Responsibility Accounting

31. Responsibility Accounting

33. Types of Responsibility Centers

34. Profitability Analysis of Strategic Business Segments

35. Strategic Business Segment

36. Decentralization

37. Compatible performance measurements Suboptimization Duplication Lack of competent personnel Decentralization

38. Centralization

40. Segment Reports

44. Income statements for each retail store, district, or division. Income statements for each product line or service. Income statements for each sales territory or customer category. Cost reports for cost centers.

45. Identification of the segment. Assignment of direct costs to the segment. Allocation of indirect costs to the segment.

46. Direct Versus CommonSegment Costs

48. 48 Additional Difficulties faced by Multinational Companies: The economic, legal, political, social, and cultural environments differ significantly across countries Governments in some countries may impose controls and limit selling prices of a company�s products Availability of materials and skilled labor, as well as costs of materials, labor, and infrastructure may differ across countries Divisions operating in different countries account for their performance in different currencies

49. 49 An inherent trade-off exists between creating incentives and imposing risk An incentive should be some reward for performance An incentive may create an environment in which suboptimal behavior may occur: the goals of the firm are sacrificed in order to meet a manager�s personal goals

50. 50 Moral Hazard describes situations in which an employee prefers to exert less effort (or report distorted information) compared with the effort (or accurate information) desired by the owner because the employee�s effort (or the validity of the reported information) cannot be accurately monitored and enforced

51. 51 Intensity of Incentives � how large the incentive component of a manager�s compensation is relative to their salary component

52. 52 Compensation for Multiple Tasks If the employer wants an employee to focus on multiple tasks of a job, then the employer must measure and compensate performance on each of those tasks

53. 53 Companies use teams extensively for problem solving Teams achieve better results than individual employees acting alone Companies must reward individuals on a team based on team performance

54. 54 Based on both financial and nonfinancial performance measures, and include a mix of: Base Salary Annual Incentives, such as cash bonuses Long-Run Incentives, such as stock options Well-designed plans use a compensation mix that balances risk (the effect of uncontrollable factors on the performance measure, and hence compensation) with short-run and long-run incentives to achieve the firm�s goals

55. What is the Balanced Scorecard?

56. Financial measures alone are NOT sufficient to measure long-term value. Financial measures alone do NOT always direct management to make value-adding decisions. Link strategic objectives to a set of financial and operational measures in order to clarify and communicate them and to use them for evaluating performance Act as a guide to implement strategy Why a Balanced Scorecard? Traditional emphasis on financial alone cannot motivate, predict, or create future performance No single measure or set of measures can adequately guide and motivate the current actions that will drive future performance Financial results report past performance but are not adequate predictors or drivers of future performance. Even current financial performance may be distorted by omitting the effects of current actions that have created or destroyed future value. Balance short-term financial performance with long-term growth opportunities Link strategic objectives to a set of financial and operational measures in order to clarify and communicate the and use them for evaluating performance Traditional emphasis on financial alone cannot motivate, predict, or create future performance No single measure or set of measures can adequately guide and motivate the current actions that will drive future performance Financial results report past performance but are not adequate predictors or drivers of future performance. Even current financial performance may be distorted by omitting the effects of current actions that have created or destroyed future value. Balance short-term financial performance with long-term growth opportunities Link strategic objectives to a set of financial and operational measures in order to clarify and communicate the and use them for evaluating performance

57. 57 Balanced Scorecard

58. The Balanced Scorecard translates an organization�s mission and strategy into operational objectives and performance measures for four different perspectives: the financial perspective, the customer perspective, the internal business process perspective, and the learning and growth (infrastructure) perspective. The financial perspective establishes the long- and short-term financial performance objectives. The financial perspective is concerned with the global financial consequences of the other three perspectives. Thus, the objectives and measures of the other perspectives must be linked to the financial objectives. The financial perspective has three strategic themes: revenue growth, cost reduction, and asset utilization. In the customer focus, the characteristics of our products that create value for our customers. The customer perspective is the source of the revenue component for the financial objectives. This perspective defines and selects the customer and market segments in which the company chooses to compete. In the internal process focus, examine the operations of the processes creating our goods and services to evaluate our improvement in operating efficiency. Internal�Processes are the means for creating customer and shareholder value. Thus, the process perspective entails the identification of the processes needed to achieve the customer and financial objectives. To provide the framework needed for this perspective, a process value chain is defined. The Innovation and�Learning Perspective is the source of the capabilities that enable the accomplishment of the other three perspectives� objectives. This perspective has three major objectives: increase employee capabilities; increase motivation, empowerment, and alignment; and increase information systems capabilities. The Balanced Scorecard translates an organization�s mission and strategy into operational objectives and performance measures for four different perspectives: the financial perspective, the customer perspective, the internal business process perspective, and the learning and growth (infrastructure) perspective. The financial perspective establishes the long- and short-term financial performance objectives. The financial perspective is concerned with the global financial consequences of the other three perspectives. Thus, the objectives and measures of the other perspectives must be linked to the financial objectives. The financial perspective has three strategic themes: revenue growth, cost reduction, and asset utilization. In the customer focus, the characteristics of our products that create value for our customers. The customer perspective is the source of the revenue component for the financial objectives. This perspective defines and selects the customer and market segments in which the company chooses to compete. In the internal process focus, examine the operations of the processes creating our goods and services to evaluate our improvement in operating efficiency. Internal�Processes are the means for creating customer and shareholder value. Thus, the process perspective entails the identification of the processes needed to achieve the customer and financial objectives. To provide the framework needed for this perspective, a process value chain is defined. The Innovation and�Learning Perspective is the source of the capabilities that enable the accomplishment of the other three perspectives� objectives. This perspective has three major objectives: increase employee capabilities; increase motivation, empowerment, and alignment; and increase information systems capabilities.

64. Developing employee productivity Performance evaluation. Retention rates. Employee satisfaction. Strengthening information systems Increasing the quality of the systems. Making the systems accessible. Producing relevant, accurate, and timely information.

65. Conducting a well-run organization Effective communication. Alignment of goals. Integration of team efforts across departments. Clearly defined planning, controlling, and evaluating processes.

71. Control implies planningControl implies planning

72. Different strategies call for different scorecards. Therefore, Balanced Scorecard must be organization specific

73. It tells the story of a company�s strategy by articulating a sequence of cause-and-effect relationships. It assists in communicating the strategy to all members of the organization by translating the strategy into a coherent and linked set of measurable operational targets.

74. In for-profit companies, the balanced scorecard places strong emphasis on financial objectives and measures. The scorecard limits the number of measures used by identifying only the most critical ones. The scorecard highlights sub-optimal tradeoffs that managers may make.

75. Don�t assume the cause-and-effect linkages to be precise. Don�t seek improvements across all measures all the time. Don�t use only objective measures on the scorecard.

76. Don�t fail to consider both costs and benefits of initiatives such as spending on information technology and research and development. Don�t ignore non-financial measures when evaluating managers and employees.