Management Accounting - Benefits and Problems Associated with Financial Performance Indicators - Coursework Example

Management Accounting s Submitted by s: Benefits and problems associated with financial performance indicators Benefits Financial performance measurement is an important part of business management, which help the managers to advance the objectives of the business, which in turn improves the competitiveness of the firm, and the market share associated with it (Neely, 2007, p. 11). The key performance indicator on the other hand is employed to measure the progress of businesses in terms of meeting their goals. There are several benefits that are linked with applying financial performance indicators and these include the identification of problems where the manager is able to discover any issues in the business by applying them. These issues might be dangers to the safety of the employees, issues that deal with labour productivity as well as failing to satisfy the needs of the customer. The identification of these inconveniences allows the manager to react in the appropriate way and make corrections to the elements that are the source of the inconviniences. These indicators also enable the manager to recognize any chances that may exist for cost saving in the business and develop the ways reducing any wasteful spending in the days to come. This technique will entail following the costs that are not committed and increasing the cost that are committed accordingly. This also assists the business to consider elements like contingency costs as well as increase in prices that may restrict financial exposure. The financial performance indicators can be a vital tool in attracting and retaining potential customers since the customers regularly refer to them when making evaluations of the sustainability of potential businesses. Most of than not, they will request for information on the performance of the company and coming up with this type of information without financial performance indicators is not easy. The financial performance indicators are also advantageous to the business since they play a big role in revealing the possible strengths that the business has in order to allow the business to take advantage of the opportunities that are in the market. When a review reveals a score that is high, the strengths are easily identified which means that the business is doing well. Problems Several problems are connected with the selective use of financial performance indicators that are applied to monitor performance (Beckford, 2002, p. 7). One of the problems is that these indicators are short term since relating rewards to financial performance may give the managers the temptation to settle on decisions that will only improve short-term financial performance. This may have an effect that is negative when profitability is considered in the long run. For instance, managers may make the decision to delay investment, which will in turn generate an improvement in the profits realized in a short term in their divisions. The financial performance measures are also likely to exhibit a focus that is internal and in order to be competitive in a successful manner, it is vital that the factors that are external, which include satisfaction of the customer and the actions that are taken by the competitors, which are addressed. Managers may also get the temptation to manipulate the results in order to acquire financial performance. For instance, the costs that are recorded in a particular year may be manipulated and inaccurately recorded in the accounts of another year in a quest to improve the performance of the year. Employing financial performance indicators does not afford a lot of advantages to the company because they are not able to express the all the information that is concerned with elements that encourage the long-term success and maximizing of the wealth of the shareholders such as customer satisfaction, the capability to come up with innovation as well as quality. From a different point of view, financial performance is more or less an outcome of the evolution in the factors that are not financial and in particular, many important success factors deal with non-financial factors. The financial performance measures have a characteristic that makes them consider the past and this is not appropriate for the business environment that exists today since it exhibits dynamic characteristics. The way out of this is employing both financial and non-financial indicators and the most favourable approach for performance measurement as well as control will include financial performance indicators since it is important to monitor financial performance. It will also include the non-financial performance indicators whose measurements will be required to portray the long-term feasibility as well as the health of the organization. How management accounting practices are changing Management accounting mainly encompasses the provision of information to the managers who are part of an organization and are responsible for directing and controlling the operations of the company. Management accounting contrasts with financial accounting, which mainly focuses on making information available to stakeholders and creditors among others who are not inside the firm. Information that is included in management accounting may include the information that is linked to the cost of the products or services that the organization deals with and a budget, which is considered a quantitative expression of a plan. It also includes reports on performance, which are constituted by comparisons of budgets that have real results (Horngren and Foster, p 3), and a lot of other information that is designed to help the managers in their activities that involve making plans and controlling them. The conventional management accounting methods were developed to gauge hoe efficient the internal processes can be. In the 80s, the practitioners that were in the conventional management accounting field were the subject of a lot of criticism since it was perceived that they had not changed their practices in any way for more than fifty years even though other areas in the business environment were taking place. Over the decade that has passed, new management accounting practices that include costing based on activities, the balanced scorecard as well has bottleneck accounting have been created. Contrary to the conventional management accounting, the costing that is based on activities removes emphasis from direct labour or raw materials as the elements that drive costs and focuses on activities that affect the cost. This assists in providing a clear picture for the organization of the elements that drive the costs and the chances that they might have or reducing these costs (Kaplan and Norton, 2001, p. 378). In the traditional setting, the management accountant was tasked with creating a principal report that addressed variance analysis, which was a systematic method of comparing actual, and budgeted costs as the production went on. There is still use of the variance analysis to some degree by the firms that are in the manufacturing industry but it is employed together with other performance reports that include the balanced scorecard. The balanced scorecard is comprised of a set of operational and financial measure that are founded on customer satisfaction, internal processes and the innovation as well as enhancement activities that are linked to the organization. It can also be utilized as a strategic management system in the identification of the elements that motivate value in the strategies that an organization uses as well as a management system to make the organization conform to the strategy. The extent to which the Balanced Scorecard adds value for organizations Kaplan and Norton were of the idea that the balanced scorecard had the capability to be used as a strategic management system that was able to support four processes (Kaplan and Norton, 1996) which included translating the visions that the organizations have. Statements that are condescending such as “best in class” pose a difficulty in translation to measures that are operational which the people at the local level can be able to understand easily. A balanced scorecard enables the management to make further clarification of their vision up to the point where they will be able to translate their vision to become a set of goals and operational measures on the balanced scorecard. These are supposed to be meaningful to the people that are supposed to realize the vision and the objectives as well as measures are supposed to be able to map out the long term motivators of success. An execution of any strategy normally begins with the communication of that strategy throughout the organization and making those that are supposed to execute it knowledgeable. There should be a translation of the strategy into objectives as well as performance measures on the balanced scorecards, which relate to the operating units as well as the individuals and rewards must be connected to these measures. The managers regularly set targets that they wish to achieve for objectives that are long term in the scorecard perspectives and so that they can be able to accomplish the goals, they have to point out the initiatives that are required for the allocation of the necessary resources to the initiatives. The managers come up with short-term objectives for the measures that exhibit progress that is directed at the achievement of long-term progress (De Geuser, Mooraj & Oyon, 2009, p. 109). The managers are supposed to come up with approaches that are founded on particular hypothesis that are dependent on cause and effect relationships, which include: when that customer is satisfied highly, the satisfaction is associated with rapid payments of invoices whose outcome is a higher return in capital and this can be used as a measure of financial perspective. An information system that is improved yields a return in sales that is higher and therefore when a company decides to execute the approach it might realize that particular cause and effect relationships do not come up over time. In a case like this, the company is supposed to review the theory that is behind the unit’s approach, which might end up needing a change in the approach. The whole process that involves the collecting of feedback, putting hypotheses to test and implementing the required adjustments is collectively referred to as strategic learning and companies use the balanced scorecard as the main element of the management process (Kaplan and Norton, 2001 pp. 22-26). Core arguments made about traditional budgeting Budgets are quantitative statements that cover a particular period of time and may encompass the revenues that are planned for, liabilities, the flow of cash as well as assets with the aim of giving the organization direction and assistance in coordinating activities and facilities (Cole, 2004, p. 224). The traditional budget has several limitations, which show that it has become an outdated discipline and at the same time rigid. The budgets have a tendency to direct their focus on the targets in respect of increasing changes from previous periods, which generates a target that is internally permissible, but in actual sense is difficult since no focus is directed at the maximization of the customer or value of the shareholder. In the industries that are project based and those that deal with services, financial decision-making can depend on budgets since they are not in a position to exhibit correctly the complete cost of each of the projects as well as services. Instead of encouraging and motivating the strategies, budgets are perceived to be hurdles to change and innovation and entrepreneurial managers are always blamed for incurring costs in the project that do not reflect in the budget. The traditional budgets are generally time consuming and they also use up energy making it an expensive affair regardless of the development of software and computer networks that are supposed to handle them. The cause of the wastage of time is mainly the activities that the process is involved in where different managers want inclusions of various things into the budget since they know they will have to cut back on some areas in the future. Theorists in the area of management have put in a lot of effort and energy in trying to define the role that budgets should play in strategic management and it can be seen that planning, forecasting and budgeting are mutually dependent, but there is no particular approach that can control how they are supposed to be sequenced and connected. Generally, there is a difference between planning and budgeting as well as forecasting in their intentions since the budgets is used to control, the forecast is employed in making predictions. On the other hand, the plans are used to develop the outcomes that are desired and the expectations that they organization has over a long period of time making plans have an effect on change. When planning is implemented in the correct way, it can be used to develop a strategic view of the organization and the creation of goals that only outwardly connected to the processes and constraints that take place internally. Budgets generally occur annually and they are used to develop a reference for control in the daily running of the organization. This means that it sets the basis and the limits that the organization needs to observe to make sure that it has a way of meeting its goals. They can be equated to internal political control, which is mostly based upon costs, and they operate unanimously without any interference from planning. Forecasts on the other hand, provide a view of profitability that is short term with a basis on internal and external restrictions since they bring reality to the assumptions that are made by the planning and budgeting activities. In the event that the actual performance does not meet the desired targets, budgets should not be adjusted, rather, the organization should develop forecasts that will be able to follow the performance that is expected in reference to the budget. Simon’s levers of control A control in the strategy of a business can be arrived at by incorporating the four levers that include beliefs, boundary, diagnostic control and interactive control systems whose power in implementation strategy is not dependent on the use of each specifically but in the manner in which they complement each other when applied collectively (Simons, 1995, p. 15). The interaction of negative and positive forces generates a tension that is dynamic which exists between opportunistic innovation and the achievement of predictable objectives, which is required to motivate and regulate growth that is profitable. Diagnostic control system The diagnostic control system is mainly dependent on data that is of a quantitative nature, statistical analyses as well as variance analyses where the managers employ these and other comparisons that are numerical to regularly look for any occurrence of unusual phenomenon that might be a sigh of a future problem. These systems are important in discovering particular types of problems and they motivate the employees and the managers to adopt behavior that is ethical so that they can be able to meet prescribed objectives. Regardless of the means that is used to meet the goal, the achievement makes sure that the numbers will not rise and fall in a way that would elicit attention to a specific department or person. The bonuses that employees earn are habitually founded on the degree to which the performance goals have been achieved in quantitative terms and in the case that the goals are practical and reachable, the diagnostic system works successfully. It allows the managers to distribute tasks and concentrate on other issues and the employees who have attained empowerment are able to finish their tasks without worrying about deadlines, the level of productivity or other goals. Belief systems The belief systems are mainly used to facilitate communication of the doctrines of corporate culture to all the workers in the organization and they are typically broad and intended to address various types of people that work in different departments. For them to be effective, the employees must be in a position to identify the main values as well as morals that are being upheld by the managers. The managers must make sure that they do not adopt a specific belief because it is trending at that moment, rather because it demonstrates the actual nature and ethics system of the whole company. The employees easily understand issues that are associated with ethics and the mission of the organization when they are presented in an informal and natural setting. The progressive complexity of organizations makes it necessary to come up with formal and written mission statements as well as codes that guide ethics to make sure that there are no mistakes in the organization’s mission and path. Boundary systems Boundary systems are founded on the notion that in an era where the workers are empowered, it is relatively simpler and more efficient to establish rules that identify what is wrong instead of what is right. This is meant to enable the employees to come up with new solutions and strategies in definite constraints, which are created by the management with the aim of guiding the employees from particular clients and businesses. They also direct the effort of the employees in the sections that have been identified as the best for the company when profitability and the productivity of the workers are considered. Interactive control systems So that this control system can be able to function, it is important the workers as well as the management continue to have regular contact in person. The management should be in a position to collect all the vital aspects of the operation of the organization to be able to develop and uphold their general strategic plan for the organization on a daily basis. Organizations utilize various instruments to achieve this kind of regular communication and they include the evaluation data that is in the reports that are released frequently, the production reports that are generated internally as well as professional journals. Key factors necessary for ABC to be successfully implemented Many projects do not achieve success since they lack planning that is supposed to cover the front end which actually bore the risk that is involved in consideration and activity based management not reaching expectations is not related in any way with the methodology that is employed or the technology that it uses (Gido and Clements, 2012, p. 239). In essence, it is the variables associated with behavior and the organization as a whole in the process of execution of the action based management that brings about the failures. One can arrive at the conclusion that variable that are associated with behavior and the organization have an effect in the successful execution of activity based costing but they can be overcome at each of the stages in the execution of the action based costing and eventually lead to its successful execution. If the activity based costing is appropriately executed, it would generate a different perspective of actual cost of a product or service which may have more accurate characteristics that the conventional accounting methods. The steps that are required to make sure that the execution of the activity based costing becomes successful mainly focus on generating interest in the activity based costing through all the levels of the organization and to get rid of the hurdles while obtaining the commitment of the management to support it (Hoque, 2005, p. 115). Devotion from all the managers to change has a significant impact on the successful execution of the activity based costing and this implementation has the likelihood to fail without the commitment and sponsorship of the users and the management. This means that the management is the most important motivator of the success of the activity based costing. Consequently, for the activity based costing to have success and generate significant outcomes, the employees must adopt it and be liable to it which means that the efficient sponsorship and the manner in which the rationale for activity based costing execution is conveyed to the employees is important. In the event that this is not done, then execution will most probably not be successful. Strategic investment decisions require additional tools to be used in the decision-making processes Senior managers are mandated with the task of making the decisions that are tough and many things depend on the outcome of these decisions since the managers are judged based on the success of the decisions that they made (Chang, 2010, p. 447). Therefore, risk cannot be neglected when strategic decision-making is being considered but there is a possibility that the management can considerably improve their probabilities of success by making changes that are direct. This involves expanding their pool of tools that support them in the making of decisions and understanding the specific tools that are best suited for particular situations. Majority of the organizations develop an over-dependence on the basic tools such as the discounted cash flow analysis even in the event that they are being faced with intricate and uncertain situations. The traditional tools work perfectly if the environment that is prevailing is stable and a business model that is understandable with an ample source of information. In other environments that are characterized by an industry that evolves quickly, they tend to fail terribly. This is as a result of the assumption of the conventional tools that the makers can be able to access full and reliable information but the decisions in this era must be made even when the information is incomplete and uncertain. The issues that mangers come across is not the lack of suitable instruments that can be depended on to arrive at decisions under high levels of uncertainty, rather the variety is overwhelming when it does not have direct guidance about when to employ particular tools. With the lack of this guidance, the people that are supposed to make decisions will carry on relying on the tools they are familiar with in an erroneous effort to introduce logic to decisions. Bibliography Beckford, J. (2002). Quality. 1st ed. Routledge. London: Chang, C. (2010). Service systems management and engineering. 1st ed. John Wiley & Sons. Hoboken, N.J.: Cole, G. (2004). Management theory and practice. 1st ed. Thomson Learning. London: De Geuser F., Mooraj S. & Oyon D. (2009). Does the Balanced Scorecard add value? Empirical evidence on its effect on performance. European Accounting Review, 18(1), 93-122. Gido, J. and Clements, J. (2012). Successful project management. 1st ed. South-Western Cengage Learning. 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