Management Accounting - Performance Evaluation - Essay Example

Management Accounting: Performance Evaluation Inserts His/Her Inserts Grade Inserts (23, February, 2012) Introduction The role of internal accounting is increasing everyday in the business world as companies attempt to achieve long term success. Management accounting today has a great role to play in organisations because they act as a bridge between upper and lower level management. On one hand they play a vital role in setting the strategic direction of the company while on the other hand they also have to implement cost control measures for the lower level employees. The basic job of management accountant is to provide sales forecasts, customer profitability analysis, budget analysis, and cost control measures. All these play a vital role in the functioning of the organisation. In this case study analysis we will be providing a brief background of the case study organisations. The major issues that the organisation is currently facing will be discussed and then recommendations will be made based on theory related to management accounting. Background of the Case The case in question is explaining the problems that an organisation is facing in its daily business affairs. The role of the management accountant is to evaluate the internal accounting measures that have been implemented and help refine them so as to suit the business strategy of the company. The firm is facing problems like low productivity, lack of job security, lack of direction, and effective control measures. All these problems are discussed in the case study. Also employees at all level are not very happy about the way organisation is functioning. All in all employees are disgruntled and managers are not able to solve the problems. The organisation discussed in the case study is also lacking commitment. Employees are not feeling that they are a part of this company. This is driving the general productivity levels down which is resulting in late shipping to customers. There seems to be no connection between the upper and lower level management as both seems to go in different directions. Key Issues in the Organisation The key issues the organisation is facing are lack of communication between upper and lower management, lack of appropriate control measures, inconsistent strategic vision, and performance management issues. All these issues are hindering the performance of the whole company and are making employees dissatisfied. Communication is pathetic between the upper and lower management. The company is going nowhere because middle level managers do not know what they should be doing. There seems to be a ‘disconnect’ between the two tiers of management. This is causing all the major problems in the organisation as no one knows what his or her role is. It is extremely important for the lower level managers to inform employees about their roles but in this case lower level managers and supervisors are themselves not aware of their role. This is causing confusion within the organisation all this is due to the lack of communication between the senior executives and lower level employees. Lack of communication is also causing employees to become unsure about their future. This is in turn becoming their reason for not taking interests in their daily work. Employees are discussing about the future prospects of the company as they remain unsure about their own future. No employee can work without having some degree of job security. Jobs are important especially for the lower level employees and due to job insecurity their performance is decreasing. Employees are also not motivated to work hard in the absence of their supervisor due to lack of communication between them and the senior managers. Control measures serve many useful purposes for any organisation. They play a pivotal role in reducing costs and at the same time avoid wastage of valuable resources. An important issue the company in the case study is facing is lack of appropriate control measures. The company have implemented control measures and managers are called for discussions when targets are not achieved but those measures are not proving to solve the problem. Rather these control measures have become counterproductive as employees continue to work slowly in the absence of managers and supervisors. Sales targets and forecasting has to play a major role here because targets should be competitive but they should not be very audacious. Extraordinarily optimistic targets can reduce the motivation of employees and can decrease satisfaction. This is why control measures are important for any firm. The resources of the company are also wasted by employees. For example the photocopier machine is being used for personal purposes and time is being wasted on internet surfing. Employees are also wasting their time by not doing anything in the factory. All this is again due to lack of appropriate control measures. Employees are not made accountable of their use of time and resources, and this adds to the misery of the company. No organisation can ever achieve efficiency if valuable resources are squandered. The company is also lacking a strategic direction because managers keep on changing their direction. In the case a middle level manager is complaining about the strategic incoherence of the company executives. They are just pushing whatever they think is appropriate for the company down in the throats of lower level employees without thinking for a second whether employees will be able to digest those changes or not. This is a serious problem for the company as it shows that the company is lacking s strategic long term vision. Management accountant is responsible for taking informed decisions with the information available to him but in this case decision making is being done in a haphazard way. In the absence of long term goal no organisation can excel and therefore the firm is suffering greatly. Because there is no focused strategic vision the company makes employees work on a particular task and before they are able to finish those tasks, assigns them a new task. This is a big problem for the company because employees are becoming dissatisfied every single day. Middle level managers are not achieving their targets and therefore are losing confidence. Because of this employees under middle and lower level managers are not performing in the desired manner. Performance management system is also a major issue in the company. There are many part time employees and they are not maintaining productivity but still no effort is made to tighten them nor is anyone laid off. This shows that the company does not have an apt performance appraisal system that can evaluate the performance of employees. Monitoring performance is an integral part of management accountancy and this is lacking in the organisation. All kinds of employees are working in the company and no fines are being charged against employees. Performance evaluation is not being done in the organisation which is fuelling the problems for the company. It is important to use performance evaluations as a way to control employees from wasting their time. Inefficient employees should be told to leave the organisation immediately but this is not being done because performance evaluation is lacking within the organisation. Because there is no direct threats from the managers and any performance measurement, employees know that they cannot get caught using the resources of the company. This is also why they are not performing at optimal productivity level. All the above discussed issues are hindering the performance of employees and making the organisation inefficient. Employees are not working towards a joint goal because of lack of performance evaluation and appropriate control. Lack of communication and strategic vision is also creating problems for the company. Recommendations The most important thing for the company right now is to upgrade its performance evaluation system which seems to have failed miserably. Performance evaluation has an important role in management accounting because targets are set by managerial accountant and evaluation has to be done according to the set targets. Currently the company has to develop an effective system for evaluation of performance. The current system is not equipped as middle managers are not being taken on board when targets are set. Also unreasonable targets are being set which are lowering the productivity of employees. In such a situation it is important to implement appropriate measures of performance. It is suggested that performance measures, if appropriate, can encourage goal congruence (Dury, 2007). This is what is required in the organisation as employees seem to be detached from organisational goals. This is mainly because they are part time workers and also because their performance is not measured in an efficient manner. When the factory manager took a tour of the office she found people using internet for non work related purposes. But when they saw her walking towards them, all of them reverted back to work. This is an example of how performance measures can improve performance. Because employees thought that their work was being monitored closely they went back to their work. Management accounting tells us to do the same on a wider level so that performance of employees can be improved. The example given above also tells us that workers are not defiant and they are willing to work. Only proper performance measures are required to motivate employees. Managers often complain that they are being evaluated on things over which they have little or sometimes no control (Merchant & Van der Stede, 2007). The same is happening in the organisation in question and performance evaluation system is required to deal with the situation. Managers should be given targets and should be evaluated against those targets that they can influence. Currently managers cannot influence productivity because of structural problems and lack of consistency. This is why productivity related measures might not work for the company immediately. The relationship between mission, strategic vision, and budget is also strong therefore budget should be set keeping in mind the broad mission of the company (Atrill & McLaney, 2004). The organisation should use budget to achieve its overall mission and strategic vision should be reflected in the budgets. Currently budgets are being given to managers on general office costs which is not correct. Budgets should be assigned depending on the work load and output that is desired from a manager. Also the manager should be taken on board if the firm wants to do well in near future. The factory managers are experienced and because of their hard work the organisation has survived for such a long time. It is therefore important to learn from their experience and make them a part of the budget setting process as they are perfectly aware of the board mission of the company. Through communication all employees working in the organisation can be informed about what the organisation wants from them (Garrison, 1985). This is what should the company do immediately. Employees are not aware of what is required from them and here the role of managerial accountant is to act as a bridge between the top and lower management. Management accountant should translate the strategic vision of the top management in a quantifiable target for the lower management. This is how management accountant can play a role in the overall communication process for the company. Employees should be made aware of what is expected from them because this will help get rid of the uncertainty that exists in the organisation. The effect of communication and organic decision process, and management accounting system is positive on the performance of the firm (Chenhall & Morris, 2000). The firm needs to learn a lesson or two from this finding, and should implement organic decision process through management accounting system in the organisation. Employees should be heard and their insight should be used to set forecasts, targets, and profitability reports for future periods. If this is done then problems of the factory will be mostly solved because it is important to make the employees part of the decision making process. When decision making is delegated to employees they become more responsible because they think they are themselves setting their targets. This feeling of empowerment can do wonders for the productivity of the employees and also for the profitability of the organisation in the long run. Interactive style of budgets can play a role in improving performance in the process of strategic change (Abernethy & Brownell, 1999). The firm will need to go through a process of change in future as a complete overhaul is required. While doing so interactive style of budgeting should be implemented so that employee performance can be improved and managers feel that they have considerable power over their work. The firm also needs to establish appropriate control measures so that organisational resources are not wasted by employees. Non accounting controls especially personnel forms of control can improve organisational effectiveness. This is also something what organisation is question has to learn. Personnel controls that are subjective in nature should be used so that employees are always on their toes and resources are not wasted. The role of accounting is always limited as it cannot always take into account different situations which a human being can and therefore it is important to establish non accounting measures in the firm. Conclusion The firm is going through many problems right now. The main problems include lack of communication between employees, lack of direction, inappropriate control measures, and ineffective performance. The role of management accountant is critical in the solution of these problems. The firm should first of all take all the middle and lower managers in board and inform them about the vision of the company so that all employees are aware of what is expected of them. Then appropriate performance measures are established so that employees can be motivated to work. Personnel forms of control measures should be applied in the firm in order to save organisational resources. Bibliography Abernethy, M. & Brownell, P. 1997. Management control systems in research and development organizations: The role of accounting, behavior and personnel controls. Accounting, Organizations, and Society, 22(3): 233-248 Abernethy, M. & Brownell, P. 1999. The role of budgets in organizations facing strategic change: an exploratory study. Accounting, Organizations, and Society, 24(3): 189-204 Atrill, P, & McLaney, E. 2009. Management Accounting for Decision Makers. Florida: Prentice Hall Chenhall, R. & Morris, D. 2000. Organic decision and communication processes and management accounting systems in entrepreneurial and conservative business organizations. Omega, 23(5): 485-497 Dury, Colin. 2007. Management and Cost Accounting. New York: Cengage Learning EMEA Garrison, R. 1985. Managerial accounting: concepts for planning, control, decision making. London: Business Publication Merchant, K. & Van der Stede, W. 2007. Management Control Systems: Performance Measurement, Evaluation and Incentives. Florida: Prentice Hall Read More