Management Accounting and Decision Making - Assignment Example

1. “Strategic management accounting came to prominence in the late 1980s as one of the range of new techniques and approaches designed to restore the lost relevance of management accounting” (Roslender and Hart,2003:256) Critically evaluate the extent to which the differing strategic management accounting methods, such as value chain analysis, life-cycle costing, attribute costing, benchmarking and others, have succeeded in restoring the lost relevance of management accounting. Strategic management accounting is one innovation which has been advanced in response to the pressures for change in management accounting practices in the private sector. It is now proven that strategic management accounting -- as presently defined -- has a distinct contribution to make to management accounting. The theoretical framework behind strategic management accounting is also applicable to organizations from all sectors. More advances could be made by additional development, especially extending its role to that of scanning internal policies for sustaining successful changes in organizations and providing a boundary between such intra-organizational changes and extra-organizational controls. Strategic management accounting is being deployed by organizations as a mechanism for the management of its confines with the society within which it operates. Hence, strategic management accounting methods, such as value chain analysis, life-cycle costing, attribute costing, benchmarking and others, have restored the lost relevance of management accounting to a great degree. The theoretical framework for strategic management accounting - the theory of contestable markets is regarded as one of the key economic ideas, affecting most of public policy in the last few decades. The essence of contestable market theory is that the effectiveness of a given business is best achieved by the threat of potential new comers into that market. In these circumstances, there is clearly a potential role for the strategic management accounting approach in monitoring and detecting market changes, linked to careful analysis of cost structures to enable organizations to compete successfully in these near market places. From this we can conclude that strategic management accounting is relevant to all kinds of organizations as they address the agenda for change which confronts them. The theory of strategic management accounting has relevance for the ideas on change in organizations too. In particular, this expansion of strategic management accounting would facilitate a move away from static, functional approaches to management accounting practices. 2. “A positive additive mark-up over variable cost is always desirable, despite such mark-ups producing suboptimal resource allocation. A positive mark-up is desirable because it motivates the seller to reduce costs by undertaking specific investments. The value to the firm from such investments more than offsets the “cost” of the mark-uo in the form of reduced levels of internal transfers.”(Sahay,2003) Critically examine the statement by Sahay, regarding the implications of transfer price rules for organisations. There is strong evidence to support Sahay’s claim that by using additive markup on top of the unit production cost definitely improves the performance of actual cost-based transfer pricing. In addition to that, the principle of additive markup governs the whole range of alternative markup policies, which are characterized by setting the transfer price at the actual cost plus a percentage markup. In decentralized firms, the transfer price is generally assessed for internal transactions in which one division provides an intermediate product or service to another division. This would show as profits in the income statement of the selling division and as expenditure in the income statement of the buying division. This technique of setting transfer prices influences the way decisions are delegated to various divisions, which makes the transfer pricing policy all the more indispensable for the senior management for integrating the operations of its various divisions. Let us see how this works in a setting with incomplete contracts. Here, the manager of the selling division can make certain investments that may improve the value of the intra-organizational trade. This is obviously the case when it comes to R&D spending by the selling division, which would enhance the quality and dependability of the produce before it is sent to the buying division. On the other hand, the selling division can decide to investments in procurements that will ensure supplies of alternatives of the produce. This would however depend on the position of the buying division. Due to such asymmetries in available information, the actual cost of investment cannot be directly compensated to the selling division. Thus, the practice of marking up the transfer price above the production cost is quite reasonable. 3. According to a number of different theories; agency, expectancy, goal-setting and social cognitive, monetary incentives to individuals help firms improve their levels of performance. Critically assess the extent to which these different theories help organisations design compensation packages for their managers. After years of research it is now possible to offer a coherent, data-based theory of work motivation, personal fulfillment and compensation for managers. Evidence from research suggests that the best model would incorporate all of the following theories: goal setting, expectancy, social-cognitive, attribution, job characteristics, equity, and turnover-commitment. The resulting model based on these theories would lead to high performance cycles. It begins with managers being faced with high challenge or difficult goals. If high challenge is accompanied by high expectancy of success or self-efficacy, high performance results, given that there is: commitment to the goals, adequate ability, feedback, and low situational constraints. High performance is achieved through four mechanisms, direction of attention and action, effort, persistence, and the development of task strategies and plans. Hence for managers, a combination of high performance and rewards, lead to job satisfaction, which in turn facilitate commitment to the organization and its goals. The model has implications for not only leadership, but also for self-management and education. An empirical test of this new framework suggests that goal theory can provide a strong theoretical foundation for understanding the independent contributions of task, mission and performance on employee work motivation. The importance of the organization’s mission and the degree of manager motivation levels has a proportional effect on employee work motivation. This also makes the job more important. In addition, after controlling for the effect of these intrinsic rewards provided by the job and organization, performance of managers related to extrinsic rewards were not found to contribute to their work motivation. Even if some managers value monetary rewards less than others, such financial incentives still are highly valued. Evidence also has been found to suggest that managers do not value opportunities to benefit society or helping ahead of their own self-interests. Not only is the type and amount of reward important, but such extrinsic rewards must contingent on performance if they are to act as performance incentives. 4. “Environmental responsibility requires taking a long- term view ” (Cole & Sterner, 2000: 368). Critically examine the extent to which life-cycle costing may be an appropriate framework for organisations to employ to help them make informed and effective decisions in areas that have environmental implications, such as comparing new building designs.   Life Cycle Costing (LCC) is an assessment of the costs in each stage of the life-cycle of a product/process/service. It takes into account various factors as capital, labor, material, energy, and disposal based on the present and future costs. Environmental Life-Cycle Costs, in addition to the above set, also takes into consideration, the costs caused by the environmental impact of the product/process/service. For a complete economic evaluation, we have to address all the costs and benefits for which actors and participants in a product’s life-cycle have to account for. It is here that Life Cycle Costing proves invaluable. The life-cycle cost accounting methods take into consideration the environmental effects of buildings and their construction materials. Performing a comparative analysis highlights the various environmental costs associated with the product, process or activity. What makes life-cycle cost accounting even more relevant is that such analysis is conducted at each stage of the product/process life cycle. The method also allows for a comprehensive assessment of cumulative environmental impacts. Some of the parameters being assessed include material usage, embodied energy, CO2 emissions, solid waste generation, air and water pollution, environmental costs, etc. Additional parameters may be included as particular cases warrant. For instance, some building development may impact reductions in biodiversity and where nuclear power is used for electricity production, the radioactive residue would be an appropriate assessment parameter. Further, monetized externalities can be included in the analysis so that the performance of buildings is represented in fiscal value. This framework is also suitable for formulating regulations and institutional projects, where the owner retainer ship of the building can span a few decades. One proven application of this framework is in the area of determining optimal thermal insulation levels in building codes. With increasing usage of solar and wind power generated energy, the cumulative life cycle costs will eventually fall below the original construction costs, which is another sound reason to incorporate LCC in the decision making framework. 5. Critically evaluate the implications to management accounting control of increasing the level of decentralisation in an organisation. – Big corporations with advanced technologies that are decentralized have been associated with a strong emphasis on Management Control Systems; and large, diverse, decentralized firms use more administrative controls, including sophisticated budgets, formal patterns of communications and participation in budgets. Decentralized organizations also regard aggregated and integrated data quite useful. Managerial performance is also related to the interaction between decentralization and each of the characteristics of wide ranging scope, integrated, aggregated and timely information obtained/gathered from management control systems. Structural mechanisms involve differentiation and integration as their key components. Concerning differentiation, conventional thinking in management accounting proposes that decentralization is usually combined with profit centre liability accounting systems. To achieve integration, on the other hand, simpler mechanisms such as operating procedures and formal budgets are normally employed. Closer inspection of empirical findings suggests that complete and formal mechanistic controls might be only one of many aspects of coordinating efforts in differentiated organizations. Given that decentralized firms employ sophisticated controls and utilize high levels of participation and human relations approaches to coordinate activities, participation in budgeting is interlinked with the decentralization. Structural contingencies linked to effective participative budgeting have included functional differentiation, especially with research and development in marketing; leadership style employing high compared to low budget emphasis; a consideration rather than initiating style of leadership; all related to decentralization. Then there are studies that have considered the fit between organic structures and Management Control Systems. Organizational theory also recommends changes incorporating a flexible, open information systems rather than tight budgetary systems, as organic structures are best served by broad scope and future oriented information. 6. Critically evaluate the view that the balanced scorecard is a superior performance measurement system than the traditional financial system. The Balanced Scorecard, being a management system that incorporates both fiscal and non-fiscal measures in key aspects of an organization, is a better system than the traditional financial systems. Also, it allows for aligning these measures with organization strategy, which gives an edge over other systems. Thus, it helps top management to consolidate their strategies, communicate those to the stakeholders and assess the organization’s progress and subsequent achievement of its objectives. The Balanced Scorecard addresses the commonly encountered inadequacies of managing an organization by utilizing traditional financial measures alone, such as return on investment and earnings per share. On top of that it is understood that financial measures may have worked well in an earlier era, but are anachronistic with the skills and competencies that business entities are attempting to master in this extremely competitive economic environment of today. The following are some additional advantages of the Balanced Scorecard System: 1. It enables the organization to communicate its strategy top-down throughout the organization by means of the objectives and measures implemented. This reduces ambiguity among lower level managers and workers, and possibly eliminates actions inconsistent with the companys strategy. 2. The Balanced Scorecard solidifies all of the various critical components of the organization into a single management report. This gives managers a concise but a complete view of the business. 3. Finally, the Balanced Scorecard enables executives to evaluate the casual relations between the organization’s strategy, objectives, and financial and functional measures. This process results in frequent reformulation of the organization’s objectives, measures, and even the strategy itself. References: Barnett, F. William, Jr., and Terrance P. Berland., "Strategic thinking on the front lines.(corporate decentralization)." The McKinsey Quarterly 2 (Spring 1999): 118(7). Latshaw, Craig A., and Yeong Choi., "The balanced scorecard and the accountant as a valued "strategic partner"." Review of Business 23.1 (Wntr 2002): 27(3). Albright, Tom, and Marco Lam. "Managerial accounting and continuous improvement initiatives: a retrospective and framework.",  Journal of Managerial Issues 18.2 (Summer 2006): 157(19). Horngren, Charles T.,  "Management accounting: some comments." Journal of Management Accounting Research, 16 (Annual 2004): 207(5). Ghosh, Dipankar, and Margaret N. Boldt.,  "The outcome saliency effect on negotiated transfer prices." Journal of Managerial Issues 16.3 (Fall 2004): 305(19). Read More