MANAGEMENT ACCOUNTING Pearson Education Limited 2008 Cheryl S

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MANAGEMENT ACCOUNTING © Pearson Education Limited 2008 Cheryl S. Mc. Watters, Jerold L. Zimmerman,

MANAGEMENT ACCOUNTING © Pearson Education Limited 2008 Cheryl S. Mc. Watters, Jerold L. Zimmerman, Dale C. Morse

6 -2 Management Accounting Managing organizations (Strategy and control) Chapter 6 Management Accounting Mc.

6 -2 Management Accounting Managing organizations (Strategy and control) Chapter 6 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -3 Objectives • Balance the assignment of responsibilities, the choice of performance measures

6 -3 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 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -4 Framework for Organizational Change Revisited Control systems within an organization: 1. Assign

6 -4 Framework for Organizational Change Revisited Control systems within an organization: 1. Assign responsibilities 2. Measure performance and 3. Provide compensation for performance Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -5 Framework for Organizational Change Technological Change Customer Preferences Globalization Strategy for Customer

6 -5 Framework for Organizational Change Technological Change Customer Preferences Globalization Strategy for Customer Value Product/Service Innovation Quality, Low Cost Planning Decisions Control Decisions Product/Service Design Production and Delivery Customer Services Responsibilities Performance Measures Compensation Customer Value Organizational Value Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -6 Control Within an Organization Control is the process of getting members of

6 -6 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 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -7 Knowledge and Decision Making Within an Organization The distribution of knowledge throughout

6 -7 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 Manager Transfer of knowledge (through use of accounting numbers and documents Knowledgeable individual The manager retains responsibility Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -8 Knowledge and Decision Making Within an Organization Delegation of responsibility Knowledgeable individual

6 -8 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 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -9 Motivating Individuals to Support Organizational Goals Concepts that underlie organizational-control self-interested behaviour

6 -9 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 of individual performance Management Accounting Mc. Watters, Zimmerman, Morse Rewarding individual performance © Pearson Education Limited 2008

Self-Interested Behaviour/Monitoring Costs When an individual joins an organization, the individual perceives that the

Self-Interested Behaviour/Monitoring Costs 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 selfinterest Management Accounting Mc. Watters, Zimmerman, Morse 6 -10 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 Monitoring costs are a drain on the organization, but are necessary to encourage appropriate behaviour © Pearson Education Limited 2008

6 -11 Performance Measurement Performance measures describe how well an individual has performed a

6 -11 Performance Measurement Performance measures describe how well an individual has performed a task A good performance measure reveals the actions and of the individual being evaluated Motivates individuals to act in the organization’s best interest Cultural differences influence performance measurement Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -12 Performance Measurement Certain aspects of financial accounting systems exist today because of

6 -12 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 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -13 The Balanced Scorecard Financial Perspective creating organizational value for owners/shareholders Customer perspective

6 -13 The Balanced Scorecard Financial Perspective creating organizational value for owners/shareholders Customer perspective process Strategy adding value for customers Internal business process ensuring efficiency and quality in the value chain Learning and growth investing in organizational infrastructure Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -14 The Balanced Scorecard Each organizational objective has driver performance measures and outcome

6 -14 The Balanced Scorecard Each organizational objective has driver performance measures and outcome performance measures Driver performance measures Outcome performance measures of input activities to achieve the objective measures 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 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -15 Example Balanced Scorecard Objectives Initiatives Performance measure Target Financial Perspective Increase shareholder

6 -15 Example Balanced Scorecard Objectives Initiatives Performance measure Target Financial Perspective Increase shareholder wealth Develop new products Return on assets 25% Growth Increase online sales % growth in sales 30% Increase market share Increased advertising % market share 10% Customer satisfaction Increase post-sales service % satisfied through survey 99% Reduce throughput time Reduce non-value-added activities Average throughput time On-time delivery Streamline delivery process % pm-time delivery Reduce defects Quality teams % defects Multi-skilled workforce Employee training % of employees with multiple skills Improve information systems Hire new employees in computing Number of employees in computing Reduce employee turnover Pay higher salaries % annual turnover Customer Perspective Internal business perspective 4 hours 90% 0. 01% Learning and growth perspective Management Accounting Mc. Watters, Zimmerman, Morse 80% 20 10% © Pearson Education Limited 2008

6 -16 Limitations of the Balanced Scorecard It is difficult to optimize performance across

6 -16 Limitations of the Balanced 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 Management Accounting Mc. Watters, Zimmerman, Morse Over reliance on the financial perspective leads to an unbalanced scorecard which focuses on the short term © Pearson Education Limited 2008

6 -17 Rewarding Performance Through Compensation Contracts An organization can be viewed as a

6 -17 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 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -18 Separating Steps of Decision Process Decision planning process Decision control process 1.

6 -18 Separating Steps of Decision Process Decision planning process Decision control process 1. Initiation 2. Ratification 3. Implementation 4. Monitoring Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008

6 -19 Management Accounting Managing organizations (Strategy and control) End of Chapter 6 Management

6 -19 Management Accounting Managing organizations (Strategy and control) End of Chapter 6 Management Accounting Mc. Watters, Zimmerman, Morse © Pearson Education Limited 2008