Transcript MANAGEMENT ACCOUNTING © Pearson Education Limited 2008 Cheryl S. McWatters, Jerold L.

MANAGEMENT ACCOUNTING
© Pearson Education Limited 2008
Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse
6-2
Management Accounting
Managing organizations
(Strategy and control)
Chapter 6
Management Accounting McWatters, Zimmerman, Morse
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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 McWatters, Zimmerman, Morse
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6-4
Framework for Organizational
Change Revisited
Control systems within an organization:
1. Assign responsibilities
2. Measure performance
and
3. Provide compensation for performance
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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
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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
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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
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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 McWatters, Zimmerman, Morse
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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 McWatters, Zimmerman, Morse
Rewarding
individual
performance
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6-10
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 McWatters, Zimmerman, Morse
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
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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
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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
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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
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The Balanced Scorecard
Each organizational objective has driver performance
measures and outcome performance measures
Driver
performance measures
Outcome
performance measures
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
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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 McWatters, Zimmerman, Morse
80%
20
10%
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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 McWatters, Zimmerman, Morse
Over reliance on the
financial perspective
leads to an unbalanced
scorecard which focuses
on the short term
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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 McWatters, Zimmerman, Morse
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Separating Steps of Decision Process
Decision planning
process
Decision control
process
1. Initiation
2. Ratification
3. Implementation
4. Monitoring
Management Accounting McWatters, Zimmerman, Morse
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Management Accounting
Managing organizations
(Strategy and control)
End of Chapter 6
Management Accounting McWatters, Zimmerman, Morse
© Pearson Education Limited 2008