Transcript Management Control - Middle East Technical University

Management Control
EMBA 5403
Fall 2010
Mugan
Accounting?
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Financial
Managerial
Cost
Auditing
Tax
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AUDITING
COST
FINANCIAL
TAX
MANAGERIAL
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The Role of Accounting
Role
Managerial
Users
Internal Managers
Decisions
Planning
Directing
Controlling
Preferred Characteristics
Measure Inputs and Outputs
Timeliness
Identify Responsibility
Forward-Looking
Financial
Shareholders
Creditors
Other External
Users
Investment
Credit
Verifiable
Measure Organizational Value
Measure Risk of Organization
Consistent with IFRS
Tax
Taxing Authorities
Tax Liability
Verifiable
Measure Past Income
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Application of Managerial
Accounting
 Applies to all types of business  Service, Merchandising, and Manufacturing
 Applies to all forms of business
organizations –
 Proprietorships, Partnerships, and Corporations
 Applies to not-for-profit as well as
profit-oriented companies
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Accounting and Accountability
 Process of identifying, measuring, and
communicating economic information to
permit informed judgements and decisions
by the users of the information (American
Accounting Association, 1966)
 Stewardship function:usually owners and
managers are separate
 Increase shareholders’ wealth
 Financial Accounting
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Differences and Similarities
 Both deal with the same accounting data
 Both managerial and financial accounting
deal with economic events of a business
 Both require that economic events be
quantified and communicated to interested
parties
 Financial – external
 Managerial- internal
 Determining unit cost - managerial accounting,
 Reporting Cost of Goods Sold -financial accounting
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Managerial or Management
Accounting
 Industrial Revolution – more complex production
process
 Cost became important
 Cost accounting (forerunner of managerial
accounting)
 Cost of an object – product, segment, division
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First book 1897 – Garcke and Fell – Factory Accounting
 20th century – multinationals, and large companies
 Performance evaluation
 Budgeting
 Management accounting term used after Second
World War
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Management or Managerial
Accounting
 Assist managerial decisions
 Provide timely and accurate information
to control costs and to measure and
improve productivity; and devise
improved production process
 Accurate costs important for
 Pricing decisions
 New product
 Response to rival products
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Main activities
 Planning- strategic and operational
 budgeting
 Implementing/Directing
 Generate, analyze and report relevant
information
 Controlling
 Actual vs budget comparison
 Analysis and interpretation
 Feedback
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Managerial Accounting
 Process of
Identifying
Measuring
Analyzing
Interpreting
Communicating
information in pursuit of a company’s goals
 Managerial accountants – business
partners/consultants in companies
 Provides information to managers
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Technology and Managerial
Accounting
 New techniques created new roles for
management accountants
 New technologies demanded new
control techniques
 Emerging service organizations
 Teams with people from production,
marketing, engineering, etc.
 More flexible approaches to effective
cost controls
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Managerial Accounting
Objectives
 Provide information for planning and
decision making – be a part of it
 Assist managers in daily control of
operations
 Motivate the managers and other
employees towards the company goals-goal
congruence
 Performance measurement of managers
 Strategic planning – determine competitive
position and long-run success of the
company
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Characteristics
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Internal – manager oriented
Future looking – planning
Involves estimates
More timely and relevant data necessary
Adaptive to changing business environment
Cross-functional – brings together
production, marketing, managerial
accountants and other key personnel
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Planning
 Objectives should be inline with the
overall objective of increasing
shareholders’ wealth
 E.g. increase sales by 10% in Central
Anatolia – objective
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Planning
Identify
alternatives.
Select alternative that does
the best job of furthering
organization’s objectives.
Develop budgets to guide
progress toward the
selected alternative.
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Directing
 Coordinate diverse activities and human
resources
 Implement planned objectives
 Provide incentives to motivate employees
 Hire and train employees including
executives, managers, and supervisors
 Produce smooth-running operation
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Controlling
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Process of keeping activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or formal system of evaluations
Employee job assignments
Routine problem solving
Conflict resolution
Effective communications
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Decision making is not a separate management function,
but the outcome of the exercise of good judgment in
planning, directing, and controlling.
Feedback in the form of performance reports
that compare actual results with the budget
are an essential part of the control function
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Management Control
 Assure that resources are obtained
and used effectively and efficiently in
the accomplishment of the
organization’s objective
 Has financial and non financial
performance measurement
 Concerned with the implementation
of strategies and
 Task control
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Exh.
1-1
Planning and Control Cycle
Formulating longand short-term plans
(Planning)
Comparing actual
to planned
performance
(Controlling)
Decision
Making
Begin
Implementing
plans (Directing
and Motivating)
Measuring
performance
(Controlling)
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Management accounting
system
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To control costs
To measure and improve productivity
To devise improved production process
To decide on new products
To decide on obsolete products
To decide on prices
To respond to rival products (Johnson and
Kaplan, 1987)
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Cost Management Perspective
 Provide highest quality service/goods with
lowest possible cost
 Objectives:
 Determine cost of resources consumed in
company’s activities
 Eliminate non-value added activities as much as
possible
 Determine efficiency and effectiveness of all
major activities
 Identify and evaluate new activities that can
improve the performance of the company
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Comparison
Financial Accounting
Managerial Accounting
External persons who
make financial decisions
Managers who plan for
and control an organization
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
Primary focus is on
the whole organization
Focuses on segments
of an organization
Must follow IFRS or
and prescribed formats
Need not follow IFRS
or any prescribed format
Mandatory for
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external reports
Not
Mandatory
1. Users
2. Time focus
5. Subject
6. Accounting
Standards
7. Requirement
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Strategic Cost Management
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Value chain
 Get raw materials and other resources
 Research and development – including quality
assessment
 Product design
 Production
 Marketing
 Distribution
 Customer service
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Should understand the value chain
Cost drivers in activities
Managing the cost relationships to a company’s advantage –
strategic cost management
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Making Planning Decisions
How should we
finance our
operations?
What customers
should we target?
What price should
we charge?
What products or
services should we
provide?
Which projects
should we choose?
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Cost – Benefit Analysis
 Cost- using resources to achieve a
benefit
 Benefits- aspects of a decision that
help the organization
 Analysis: the process of analyzing
alternative decisions to determine
which decision has the greatest
benefit relative to its cost
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Discussion Question
 A finance professor and a marketing
professor were recently comparing notes on
their perceptions of corporations. The
finance professor claimed that the goal of
a corporation should be to maximize the
value to the shareholders. The marketing
professor claimed that the goal of a
corporation should be to satisfy customers.
 What are the similarities and differences in
these goals? Zimmerman, 2003; p.24
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The Changing Business
Environment
 Just-in-time production
 Total quality
management
 Process reengineering
 Theory of constraints
 International
competition
 E-commerce
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Business environment
changes in the past
twenty years
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Just-in-Time (JIT) Systems
Receive
customer
orders.
Complete products
just in time to
ship customers.
Schedule
production.
Complete parts
just in time for
assembly into products.
Receive materials
just in time for
production.
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JIT Consequences
Improved
plant layout
Reduced
setup time
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Zero production
defects
Flexible
workforce
JIT purchasing
Fewer, but more ultrareliable suppliers.
Frequent JIT deliveries in small lots.
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Benefits of a JIT System
Reduced
inventory
costs
Freed-up funds
Greater
customer
satisfaction
Higher quality
products
Increased
throughput
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More rapid
response to
customer orders
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CHOPPING INVENTORIES AT PORSCHE
Industry insiders were writing off Porsche as an independent carmaker in the
earlier 1990s. Sales in 1992 were down to less than 15,000 cars, onefourth their 1986 peak, and losses had mounted to $133 million. That’s
when Wendelin Wiedeking became the top manager at the revered, but
ailing, company.
Wiedeking hired two Japanese efficiency experts to help overcome Porsche’s
stubborn traditionalism. “They immediately tackled a wasteful inventory
of parts stacked on shelves all over the three-story Stuttgart factory.
One of the experts handed Wiedeking a circular saw. While astounded
assembly workers watched, he moved down an aisle and chopped the
top half off a row of shelves.”
They proceeded to overhaul the assembly process, slashing the time required
to build the new 911 Carrera model from 120 hours down to just 60
hours. They cut the time required to develop a new model from seven
years to just three years. And a quality-control program has helped
reduce the number of defective parts by a factor of 10. As a
consequence of these, and other actions, the company’s sales have
more than doubled to about 34,000 cars, and earnings were about $55
million in the latest fiscal year.
Source: David Woodruff, “Porsche Is Back—And Then Some,” Business Week,
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September 15, 1997, p. 57. Mugan
Disadvantage:
Just-In-Time (JIT) systems have many advantages, but they
are vulnerable to unexpected disruptions in supply. A
production line can quickly come to a halt if essential parts are
unavailable. Toyota, the developer of JIT, found this out the
hard way. One Saturday, a fire at Aisin Seiki Company’s plant
in Aichi Prefecture stopped the delivery of all brake parts to
Toyota. By Tuesday, Toyota had to close down all of its
Japanese assembly lines. By the time the supply of brake parts
had been restored, Toyota had lost an estimated $15 billion in
sales.
Source: “Toyota to Recalibrate ‘Just-in-Time,’” International
Herald Tribune, February 8, 1997, p. 9.
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Total Quality Management
(TQM)
TQM improves productivity by encouraging the use of fact
and analysis for decision making and if properly implemented,
avoids counter-productive organizational infighting.
Continuous
Improvement
Systematic
problem solving
using tools such
as benchmarking
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Process Reengineering
Anticipated results:
Process is simplified.
Process is completed
in less time.
Costs are reduced.
Opportunities for
errors are reduced.
A business process
is diagrammed
in detail.
Every step in
the business
process must
be justified.
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The process is redesigned
to eliminate all
non-value-added activities
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Process Reengineering versus
TQM
Process Reengineering
Total Quality Management
 Radically overhauls
existing processes.
 Tweaks existing
processes to realize
gradual improvements.
 Likely to be
imposed from
above and to use
outside
consultants.
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 Uses a team approach
involving people who
work directly in the
process.
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Theory of Constraints
A constraint (also called a bottleneck) is
anything that prevents you from getting
more of what you want.
The constraint in a system is determined
by the step that has the smallest capacity.
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Theory of Constraints
Only actions
that
strengthen the
weakest link in
the “chain”
improve the
process.
2. Allow the
weakest link to
set the tempo.
3. Focus on
improving
the weakest
link.
1. Identify the
weakest link.
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4. Recognize that
the weakest link
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THE CONSTRAINT IS THE KEY
The Lessines plant of Baxter International makes medical products such as
sterile bags. Management of the plant is acutely aware of the necessity to
actively manage its constraints. For example, when materials are a constraint,
management may go to a secondary vendor and purchase materials at a
higher cost than normal. When a machine is the constraint, a weekend shift is
often added on the machine. If a particular machine is chronically the
constraint and management has exhausted the possibilities of using it more
effectively, then additional capacity is purchased. For example, when the
constraint was the plastic extruding machines, a new extruding machine was
ordered. However, even before the machine arrived, management had
determined that the constraint would shift to the blenders once the new
extruding capacity was added. Therefore, a new blender was already being
planned. By thinking ahead and focusing on the constraints, management is
able to increase the plant’s real capacity at the lowest possible cost.
Source: Eric Noreen, Debra Smith, and James Mackey, The Theory of
Constraints and Its Implications for Management Accounting (Montvale, NJ:
The IMA Foundation for Applied Research, Inc.), p. 67.
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International Competition
Increasing sophistication
in international markets.
Fewer tariffs,
quotas, and
other barriers
to free trade.
Competition has
become worldwide
in most industries.
Improvements
in global
transportation
systems.
An excellent management accounting system is needed
to succeed in today’s competitive
global marketplace.
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GLOBAL FORCES
Traditionally, management accounting practices have differed significantly from one country to
another. For example, Spain, Italy, and Greece have relied on less formal management
accounting systems than other European countries. According to Professor Norman B.
Macintosh, “In Greece and Italy the predominance of close-knit, private, family firms motivated
by secrecy, tax avoidance, and largesse for family members along with lack of market
competition (price fixing?) mitigated the development of management accounting and control
systems. Spain also followed this pattern and relied more on personal relationships and oral
inquisitions than on hard data for control.” At the same time, other Western European countries
such as Germany, France, and the Netherlands developed relatively sophisticated formal
management accounting systems emphasizing efficient operations. In the case of France, these
were codified in law. In England, management accounting practice was influenced by
economists, who emphasized the use of accounting data in decision making. The Nordic
countries tended to import management accounting ideas from both Germany and England.
A number of factors have been acting in recent years to make management accounting
practices more similar within Europe and around the world. These forces include: intensified
global competition, which makes it more difficult to continue sloppy practices; standardized
information system software sold throughout the world by vendors such as SAP, PeopleSoft,
Oracle, and Baan; the increasing significance and authority of multinational corporations; the
global consultancy industry; the diffusion of information throughout academia; and the global
use of market-leading textbooks.
Sources: Markus Granlund and Kari Lukka, “It’s a Small World of Management Accounting
Practices,” Journal of Management Accounting Research 10, 1998, pp. 153–171; and Norman
B. Macintosh, “Management Accounting in Europe: A View from Canada,” Management
Accounting Research 9, 1998, pp. 495–500.
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E-Commerce
In recent years, many dot.com businesses
failed that might have benefited from
the application of managerial
accounting tools:
 Cost concepts
 Cost estimation
 Cost-volume-profit
 Activity-based costing
 Budgeting
 Decision-making
 Capital budgeting
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Code of Conduct for
Management Accountants
The Institute of Management Accountant’s
(IMA) Standards of Ethical Conduct for
Practitioners
of Management Accounting and Financial
Management have two major parts offering
guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.
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Codes of Conduct on
the International Level
The Guidelines on Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), govern the
activities of professional accountants worldwide.
In addition to competence, objectivity, independence,
and confidentiality, the IFAC’s code deals with
the accountant’s ethical responsibilities in:
Taxes
Fees and commissions
Advertising and solicitation
Handling of monies
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Cross-border
 Accounting for Managers: Interpreting Accounting
Information for Decision-Making
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