MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

Management Accounting Managing organizations (Strategy and control) Chapter 6

Objectives • Balance the assignment of responsibilities, the choice of performance measures and compensation based on performance • Link responsibilities with individuals who have the specific knowledge to make the decision • Recognize self-interest in motivating individuals within organizations • Identify the costs and benefits of monitoring members of the organization • Choose performance measures that reveal actions of members of an organization • Create a balanced scorecard to articulate the strategy of the organization • Design compensation contracts based on performance measures and responsibilities assigned • Design internal control systems by separating the planning process from the control process • Identify control issues within an organization

Framework for OrganizationalChange Revisited Control systems within an organization: 1. Assign responsibilities 2. Measure performance and 3. Provide compensation for performance

Planning Decisions Product/Service Design Production and Delivery Customer Services Control Decisions Responsibilities Performance Measures Compensation Framework for Organizational Change Technological Change Customer Preferences Globalization Strategy for Customer Value Product/Service Innovation Quality, Low Cost Customer Value Organizational Value

Control Within an Organization Control is the process of getting members of the organization to work toward the goals of the organization An organization is economically viable only if the benefits of having the organization are greater than the costs of control within the organization Management Accounting plays an important role in control

Knowledge and Decision Making Within an Organization The distribution of knowledge throughout the organization is an important issue in the assignment of responsibilities. Knowledge is costly to acquire, store, and process Transfer of knowledge (through use of accounting numbers and documents Knowledgeable individual Manager The manager retains responsibility

Knowledge and Decision Making Within an Organization Delegation of responsibility Knowledgeable individual Manager Control (including accounting performance measures) The manager transfers responsibility but creates a control system

Motivating Individuals to Support Organizational Goals Concepts that underlie organizational-control self-interested behaviour of individuals The monitoring costs to reduce self-interested behaviour through Measurement ofindividualperformance Rewardingindividualperformance

Self-Interested Behaviour/Monitoring Costs In accepting a new member, an organization must recognize that the individual is influenced by self-interest and devise a mechanism that motivates them to act in the best interest of the organization When an individual joins an organization, the individual perceives that the benefits of joining the organization are greater than the cost. The individual is motivated by self-interest Monitoring costs are a drain on the organization, but are necessary to encourage appropriate behaviour

Performance Measurement Performance measures describe how well an individual has performed a task A good performance measure reveals the actions of the individual being evaluated Motivates individuals to act in the organization’s best interest and Cultural differences influence performance measurement

Performance Measurement Certain aspects of financial accounting systems exist today because of the demand for performance measures Multiple performance measures generally will reveal an individual’s actions more accurately than a single measure

The Balanced Scorecard Financial Perspectivecreating organizational valuefor owners/shareholders Customer perspective processadding value for customers Internal business processensuring efficiency andquality in the value chain Strategy Learning and growthinvesting in organizationalinfrastructure

The Balanced Scorecard Each organizational objective has driver performance measures and outcome performance measures Driver performance measuresmeasures of input activities to achieve the objective Outcome performance measuresmeasures to determine whether the objective has been realized e.g. the number of employee training sessions is a driver performance measure for the objective of increasing employee skills to serve customers e.g. the number different services that an employee can offer a customer

Example Balanced Scorecard

Limitations of theBalanced Scorecard It is difficult to optimize performance across the 4 perspectives while making the appropriate trade-offs necessary to do so The addition of too many measures leads to a unwieldy scorecard where managers are left to determine the relative importance of measures subjectively Over reliance on the financial perspective leads to an unbalanced scorecard which focuses on the short term

Rewarding Performance Through Compensation Contracts An organization can be viewed as a set of contracts that identify the assignment of responsibilities, the performance measures to evaluate the members, and how the benefits generated by the organization are shared Compensation is often used as a motivational tool

Separating Steps of Decision Process Decision planning process Decision control process 1. Initiation 2. Ratification 3. Implementation 4. Monitoring

Management Accounting Managing organizations (Strategy and control) End of Chapter 6

MANAGEMENT ACCOUNTING