Management Accounting and Control - Coursework Example

? Management Accounting and Control Question One From an accounting and financial perspective, a budgetary process is no more than a mere plan for income and spending, usually for a specific period of time. However, this might not be the case since actual spending and revenues of entities tend to deviate from the budget. This variance from an organisation’s budget is what directs attention to important aspect of budgetary process, the control process. There is need for accountants to explore all variances as a practice of “management by exception” (Bunce et al 1995).In the management of public resources, it is important to adopt a control model that aids the process of good governance. In this control model, there are several actions that ought to be subjected to control as argued by Otley and Berry (1980). In their argument, the authors point out four conditions of control. i. Existence of clear organisation’s objectives ii. The outputs of the budgetary process should be measurable iii. The effect of the control actions must be predictable iv. The organisation should be able to implement a corrective action throughout the budgetary process. Existence of clear organisation’s objectives Management of public and large private organisations is sometime hard to attain the desired ends. Activities and various operations should be monitored closely and action should be taken in order to achieve the intended objectives. Objectives drive an organisation in pursuing any activity. It dictates what ought to be done at specific period of time. An organisation has objectives and subsidiary objectives that influence its course of actions. Setting clear objectives is one of the functions of modern management both in private and public sector. Measurement of goal attainment both financially and in terms of meeting demands of stakeholders is paramount. The issue of goal attainment cannot be achieved without confronting the issue of organisation’s effectiveness and efficiency, which means have direct effect on organisation’s budget (Bunce et al., 1995). The extent to which clear objectives apply in the context of budgeting As suggested by Otley and Berry (1980), objectives for budgetary process under control must exist; otherwise without them the control process is meaningless to the organisation. Well defined objectives compel an organisation to work without certain resource and time constraints. Most organisations around the world defined their objectives which ought to be achieved within budgeted resources. The objectives act a guide to the utilization of the existing resources as reflected in the budget. The authors further suggest that the budgeting control process is influenced directly by the objectives to be attained during a specified period of time. It is demeaning for organisation to spend its resources on unbudgeted things since it will undermine the attainment of well defined objectives. Without objectives, the budgeting process will be aimless hence the entire concept of budgetary control becomes inappropriate. As the business operations progresses, an organisation continually monitors the world around and compares its current state with its objectives. Is the organisation in the correct route in respect to its budgeting process? Is its spending within the appropriate budget limit? Is the organisation avoiding resource strain? The objectives helps an organisation makes a budgetary observations by the use of measurable aspects of budget. The outputs of the budgetary process should be measurable Most literature advocate for adoption of performance based budgeting (PBP) as a primary way of attaining efficiency in the management of public resources. The sole aim of this concept is to link performance information with effective management and allocation of public or organisational resources. It emphasizes the significance of singling out measurable outcomes and effectively allocating resources to facilitate the realization of these outcomes. According to Otley and Berry (1980), the outputs that ought to be realized as an end product of the budgetary process ought to be measurable so as to enable an organisation to relate them with the cost of the activities. Budget control process is a continuum that entails the availability and use of resources at each of the vast range of stages of the budget process. This helps an organisation ascertaining cost at budget preparation, approval, implementation, audit and evaluation hence facilitates proper adjustment of the budget (Bunce et al. 1995). The extent at which measurable outputs apply to the context of budgeting With measurable outputs of the budgetary process, an organisation is capable of realizing improved accountability since it will compel the organisation to base its budget on projected outputs as well as inputs. This ensures that all operations that would lead to attainment of intended objectives are planned and budgeted for. The condition also influences the quality of decision making process, since organisation’s spending decisions are aligned to desired outcomes and objectives. This also leads to enhanced service delivery owing to the fact that the measurable outputs that managers must strive to achieve should be factored in the budget (Carlin & Guthrie, 2003). The effect of the control actions must be predictable As discussed in the preceding paragraphs, there is a possibility that deviations occur between actual output and planned output thus suggesting that the budget itself has also been affected. In budgeting, organisations must understand feedback control process as an important aspect it allows them to determine the actual cause of variance at any stage of business operations. In turn, this enables them to formulate course of actions that could correct the problem. The information provided by feedback control process is useful in implementing change in the available inputs in order to attain desired results at each stage of business operations. The extent to which this condition applies to budgeting Note mentioning, the process of feedback control can only be fruitful if the effects of control actions to be pursued are predictable or tangible. The desired outcomes of a given change in the inputs of an activity should be predictable. For example, in the management of a public resources, managers or authorities concerned with the budgeting process should make comparison of actual spending and desired spending so as to enable them discover incidence of gross overspending, thereafter pursue real action that would alter aspect of inputs so as cub overspending. The predictive model is implemented based on past experience and measurement. This condition enables budgeting committee to adjust the inputs components in terms of financial resources. The organisation should be able to implement a corrective action throughout the budgetary process. It is widely acknowledge that variations tend to occur during execution of activities in various business entities and public organisations. Therefore, organisations should be ready at anytime to pursue actions that would change these variations in order to realize anticipated results. Organisations must have the necessary capabilities to evaluate alternative course of action so to realize achievements in line with organisation’s expectations in the event of mismatch between expected and attained results at a given stage of budgetary process. Unless corrective actions are implemented in the event of these deviations, the expected outcomes of any engagement will not be realized (Otley and Berry 1980). The extent to which this condition applies to budgeting The corrective action pursued changes the input thus causing the whole process to alter. This means that the budgeting committee must go to drawing board to ascertain the existing resources have been utilized up to this point in time. It provides the entire organisation an opportunity to determine how resources allocated to each activity have been effectively utilized. In case a problem related to spending of the resources has been realized, possible solutions are provided. The committee appointed to oversee the budgeting process is compelled to formulate new ways of ensuring that spending of the resources is done within the budget limit. Therefore, it is beyond reasonable doubt that this condition influences the budgeting process of any entity (Otley and Berry 1980). Question Two Definition of Contrallability Principle For effective management of organisational resources, managers at various levels must be held accountable for business undertakings which they have direct influence through their actions. The question that has sparked a great deal of debates in accounting and financial management is “should managers be held accountable for items which they do not have power over them?”The convention wisdom of accounting as reflected in most literature and text books, advocates utilization of the “controllability principle” as proposed by Merchant and Van der Stede (2007). The principle has been useful in management accounting, psychology and administrative science. Note mentioning, the principle was coined from literature works on divisionalization of the US organisations and companies. This principle holds that evaluation of performances of individual accounting managers should be based on factors that under their direct or indirect control. This is necessitated by the need to differentiate between performance of managers and economic performance of each department or division. Divisional accounting managers’ performance measures entail application of controllability principle, which excludes costs that the managers do not have direct control or influence. On the other hand, the principle holds that the measurement of economic performance of each department or division controlled by individual managers should include the allocation of costs which managers do not have direct control or influence. This occurs particularly in independent companies (Fischer, 2010). In applying this principle, an organisation must differentiate between controllable and non-controllable factors. In reference to responsible accounting, uncontrollable factors are classified into the following classes: Economic and competitive forces, which responsible personnel have to react. Natural occurrences, which are often beyond control of organisation’s management. Expenses and costs incurred by the organisation which cannot be controlled by managers, and this include corporate costs, interests, taxes and group head office costs among others (Fischer, 2010). Responsibility Accounting This is a concept that has been utilized in measurement of accounting performances by both public and private organisations. This concept has become paramount particularly when pursuing accounting performances of large diversified business firms and organisations, where management cannot be undertaken as single segment. This means that decentralization or separation of various organisations’ activities into manageable parts. In accounting, these parts are commonly referred to as responsibility centers and they include: Cost centers Profit centers Revenue centers Investment centers This idea allows organisation’s responsibilities to be assigned to managers who manage segments that have huge impact over organisation elements or components to be managed. According to Fischer (2010), these elements include costs for a cost center, revenue for a revenue center, a measure of organisation’s profitability for a profit center and return on investment (ROI) realized by an organisation for an investment center. Contrallability concept is the cornerstone of responsibility accounting, where a manager for every responsibility center is held responsible for all aspects of performance that are under his/her control. This would lead to realization of responsibility reports where every layer of organisation management is held accountable for all subordinate management areas or layer (Fischer, 2010). Responsibility accounting has been widely accepted as part of traditional and modern accounting control systems owing to its numerous advantages. It has been argued by many management scholars that the concept provides a primary way through responsible managers can undertake their activities that are otherwise unmanageable. This concept allows managers of an organisation occupying high level of management to assign responsibilities to lower level managers. This concept boosts the morale of lower level managers. Despite the numerous advantages, there are certain constrains associated with this concept. The concept has received sharp criticism on the grounds that it creates what managers often called “stovepipe entity.”In addition, emphasis on individual segments tends to make managers to ignore the interdependencies within an entity (McNair and Carr, 1994). Can the Principle of Contrallability be Practically Applied? Attempts by business firms and organisations to apply the principle of cotrallability in responsibility accounting have proved futile. In it important to point out the fact there exist variations in accounting systems of organisations. Controllability principle requires that an organisation is divided into various segments and functional areas. In effect, this ignores the existence of interdependence between various segments within the organisation. As such, this undermines attempts of responsibility accounting to observe controllability principle (Drury and El-shishini, 2011). The application of controllability principle is rarely, if ever, applied successfully by firms and organisations in the modern days. This trend is associated with fact that managers of established functional areas or segments within an organisation compete purposely to optimize their own performance measurements as opposed to working together to ensure success of the accounting system in order to realize expected outcomes. According to Van de Ven et al. (1975), personnel in various functional areas are dependent upon one another in their pursuit of completing individual tasks. Modern firms and organisations are characterized by high degree of interdependence than the traditional organisations. This interdependence of segments within an organisation or between organisations is expected to increase in the near future. The new trends of organisations have detrimental effect on organisation’s efforts to observe controllability principle in responsibility accounting. Organisational interdependency irrespective of whether an organisation has adopted horizontal or vertical structure is a great barrier to controllability principle. This is because it makes it hard for an organisation to assess contribution of individual managers to overall results Fischer (2010), Horizontal interdependencies of organisations has rendered application of controllability principle hard an impractical. This is due to the fact that it requires parameters that are critical to the success of managerial works are under control of other individuals in the organisation. Horizontal interdependency is uncontrollable factor that managers of organisation often encounter. Based the empirical results, Fischer (2010), argued that the notion of truly independent responsibility center is rare if not absent in firms around the world. Each center has a physical custody of certain resources used by other centers. In addition, a responsibility center must use resources located in other center thus making them dependent on one another (Fischer, 2010). Throughout the application of controllability principle, organisations make implicit assumption that accounting system can be optimize by separating entire company into various responsibility centers, thereafter, assuming top down approach in controlling them. However, the division of entire organisation into center inevitably fails to factor in the aspect of interdependencies. In reality, ignoring interdependencies between organisations hinders teamwork and necessitates incorporation of buffers which include workers, managers and additional inventory (Drury and El-shishini, 2011). The system which undermines teamwork is inconsistent with lean management concepts that are commonly advocated by modern organisations. For this reason, proponents of modern accounting control systems agitate management of accounting system as a whole in a bid to eliminate the need to bring in buffers. In order to be always effective, business firms, organisations and companies must embrace process oriented learning support systems as opposed to financial result system used by traditional companies. The information system should reflect problems and constraints faced by an organisation in a timely manner to allow identification of ways of correcting them and improving the entire accounting process. Controllability principle undermines management’s efforts to reveal control information in a timely and aggregated manner. This suggests that controllability principle is unqualified good in responsibility accounting (Drury and El-shishini, 2011). Question Three Management control entails managers taking the necessary steps to ensure that employees undertake their duties as expected in a bid to attain organisational objectives. This is an important role since it is employees in an entity who make things happens. It is important to pursue management control in guard against possibilities that employees will do things opposite to the expectation of the organisation. As suggested by Merchant and Van de Stede (2007), organisations experience a great deal of problems in their pursuit of management control process. This occurs in three distinct dimensions namely motivational problems, lack of direction and personal limitations. Motivational Problems Even in organisations where employees know what they are expected to do, some may decide to do things opposite due to motivational problems. These problems are common in many organisations around the world due to fact there are variations in organisational and individual objectives. In most cases, individuals are self-centered hence they may pursue activities for their own benefit at the expense of the entity’s interests or objectives. It rare to find a competent employee who devotes considerable amount of time to duties delegated to them by an organisation. Self-centered behaviors are still a problem to many organisations today. According to Merchant and Van der Stede (2007), workforce misconduct such as time wasting, falsifying, stealing, abuse of organisational resources and mismanagement are prevalent in most firms and organisations. This have high costs to the organisation. Other misdirected behaviors of employees have detrimental effects such as demoralizing other employees, impaired business relations, legal fees and litigation costs and loss of revenues (Merchant and Van der Stede, 2007). Employees at higher level of management i.e. managers, executives and supervisors are also prone to make unsound decisions that can enable them attain their interests. Some tend to overspend on items that could fulfill the pleasures of their lives. These behaviors and misconduct are attributed to lack incentives that can be used to motivate positive behaviors. Some organisations do not have programs or incentives that motivate employees or workforce to perform their duties in consistent with organisational objectives. Personal Limitations In some organisations, employees understand what is expected of to do and they are highly motivated to perform their duties. However, they might not in a position to perform an exemplary job due to certain personal limitations that ought to be addressed by management control section. As indicated by Merchant and Van der Stede (2007), most of these limitations are person-specific and are caused by lack of requisite intelligence, poor training, experience and stamina among others. A perfect example is when an organisation promotes certain employees above their level of competence and ability. It is a common knowledge that problems are inevitable when employees occupy positions that “over their heads.”Lack of knowledge is another example of personal limitation. Key personnel should have the right information necessary for performance of quality work. However, this is not always the case. Some of these individuals may lack the knowledge required when performing certain duties. In some organisations, jobs are not properly designed thus causing stress to employees thus giving rise to occurrence of on-the-job incidents and decision challenges (Merchant and Van der Stede, 2007). Lack of Direction The success of an organisation particularly in the modern business environment depends entirely on the effectiveness of the workforce. In some organisations, employees perform their duties poorly since they do understand what the entity expects from them. In the event of this, undesired behaviors will obviously occur. It is the duty of the management control to educate or train employees on how they can perform their duties in a bid to realize desired objectives. The organisation should be very keen on what and how employees perform at any period of time. The extent to which budgets and budgetary information may be utilized to address the problems of management control Motivational Problems Budgets provide information on how an organisation spends its resources with the objective of realizing certain objectives. Any variations between planned spending and actual spending portrays that the resources have been mismanaged or directed to other activities other than those expected to by the organisation. Budgetary information provides a clue of what is going on within organisational management. As discussed earlier, motivational problems tend to compel employees of managers to direct organisational resources other activities for personal gain. Therefore, budgets and any deviation in budgetary information provide a platform within which an organisation can address motivational problems (Merchant and Van der Stede, 2007). Personal Limitations Personal limitations mean that individual employees especially those involved in the management of organisation resources will not be able to utilize resources allocated to various activities. Lack of right information or knowledge on management of budgeted resources gives rise to budgetary constraints which alert the management control department about existence of these problems. It is at this point that the management control can trace and address problems of personal limitations (Van der Stede, 2001). Lack of Direction Budget provides direction of an organisation as it provides targets that influence actions of employees. Budget helps an organisation create a focus for the direction of employees. It gives an organisation opportunity to stand back and review performance of employees and the problems affecting their performances. Budget and budgetary information improved clarity and focus of entire workforce. Budget documents organisational goals and objectives in financial terms. As such, it serves a controlling system. Management observes performance reports in order to control operations thus enabling them to address this management control problem (Van der Stede, 2001). Question Four Brief Description of Balance Scorecard (BSC) It is apparent that organisations must manage their future growth, business plans and objectives. Strategic planning and control in business firms have direct impact on organisational performances. In the recent years, strategic managers have appreciated the balance scorecard (BSC) as tool for strategic control. This methodology has been placed alongside other new approaches which include Enterprise Resource Planning (ERP) and Total Quality Management (TQM). By definition, BSC is a methodological tool that helps organisations to align their activities behind stated vision, mission and objectives. It is commonly used as a management system used to get people working in an effective manner and focusing on the desired outcomes. The tool is far much more than a way of keeping score; it is a system that consists of workers, business strategy, business processes and procedures and technology. Balance scorecard has different meaning under different context. At one end, BSC is a measurement framework used to classify various measures of management. The classes are then displayed graphically as a dashboard. At the other end, BSC is a robust tool for strategic planning and management. Critique of BSC merits as means of addressing the “problem” of management control According to Kaplan and Norton (1996), BSC provides organisational managers with the necessary instrumentation that is useful in navigating to competitive success in future. The authors further claim that the tool addresses a vast range of deficiency in management systems of organisations. BSC has been used as ‘bible’ for reference. In effect, many business firms and organisations have changed their management systems in a bid to conform to ethos of BSC. Even though this trend is growing, BSC as a merit of addressing the problems of management control has been sharply criticized. According to Simons (1990), BSC does not conform to stakeholder approach used in measuring performance of an organisation. BSC focuses largely on a specific output of organisational strategic planning i.e. the nature of scope of business transactions and contracts based on management choices (Simons, 1990). Balanced scorecard fails to analyze contribution of employee and suppliers and does not take into account the extended value chain, which is crucial for the success of network entities. This implies that the dimensions of problem of management control particularly motivational problems cannot be addressed in any way. It is important to recognize efforts of employees as it enables an organisation address various concerns that influence their actions within the organisation (Kaplan and Norton, 1996). BSC does not recognize performance measurement as a two-way approach since it focuses only on top-down performance approach. This means that the undertakings of each employee without cannot be monitored. Employees tend to lack or loose direction when performing their duties. Since BSC does care about performance of employees at all times, it is hard for the management to trace and address lack of direction problem among employees (Mooraj et al. 1999). Issues that must be addressed before developing and implementing BSC Developing and implementing a balanced scorecard system that will enable an organisation pursue strategic management better should be a priority of managers. If properly developed and implemented, BSC can enhance quality and productivity of various units and subunits of an organisation. Before pursuing this duty, organisation s must address certain key parameters that influence the success of BSC. One of these issues is that the managers or executives must have clear set of strategies that aids in attainment of a common corporate or organisation language. This is paramount because success can only be attained if an organisation is united in pursuing this strategy. Having different interpretations of the system lead to problems in the planning process and this may lead to a serious organisation schism (Kaplan and Norton, 1996). Another critical issue that must address is correct evaluation of organisation’s past performance. Therefore, the organisation must generate past data of their performance. Previous records must be assessed in a bid to get a clear picture of what should be dealt with by the BSC. Finally, the organisation must concretely evaluate individual capabilities, knowledge and skills so as to enable managers create relevant performance metrics based on the ability of the workforce. This also helps the management delegate tasks to the right people hence ensuring that set goals and objectives are successfully accomplished (Kaplan and Norton, 1996). References Bunce, P., Fraser, R. and Woodcock, L., 1995. Advanced Budgeting: a journey to advanced management systems, Management Accounting Research, 253]265. Carlin, T. and Guthrie, J. 2003. Accrual Output Based Budgeting Systems in Australia, Public Management Review, 5(2), 145-162. Drury, C. and El-shishini, H. 2011. Applying the Controllability Principle and Measuring Divisional Performance in UK Companies. Viewed 7 May 2013 Fischer, M. 2010. The application of the Contrallability Principle and Managers ’ Responses: a Role Theory Perspective. New York: Springer. Kaplan, R.S. and Norton, D.P. 1996. The Balanced Scorecard Translating Strategy into Action. Harvard Business School Press, Boston, MA. Merchant, A. and Van der Stede, W. 2007. Management control systems: performance measurement, evaluation and incentives. Prentice Hall, Harlow, UK. McNair, C. and Carr, L.1994. Responsibility redefined: Changing concepts of accounting-based control. Advances in Management Accounting: 85-117.  Mooraj, S., Oyon, D. and Hostettler, D. 1999. The Balance Scorecard: A Necessary Good or an Unnecessary Evil. European Management Journal 17(5), pp. 481-491. Viewed May 7, 2013 .Otley, D. and Berry, A. 1980. Control, Organisations and Accounting Accounting. Organisations and Society, 5(2): 231-244. Simons, R. 1990. Rethinking the role of systems in controlling strategy. Harvard Business School, note 9-191-091. Van der Stede, W. 2001. Measuring 'tight budgetary control’. Management Accounting Research, 12 (1). pp. 119-137. Read More