Management Accounting Systems - Essay Example

I. Introduction This paper aims to look at management accounting systems and how to ensure that these systems will provide quality information to managers which will not be a source of contention and disagreement. Different academic literatures are consulted. Information quality is an important determinant of a good management accounting system. This is explored further in the paper, as well as the role of management accounting in strategic management. Lastly, key performance measures are determined for a mid-sized bank according to a strategic management accounting framework, the balanced scorecard. II. If you were the Chief Executive of a mid-size national bank, how would you ensure that management accounting systems were in place to ensure that senior management meetings were provided with management accounting data (numbers !) that are not a source of contention and disagreement? A. Management accounting system and strategic management A management accounting system is set up in order to serve some strategic purpose. The goal of management accounting system is to come up with information that will aid managers in making decisions with regard to meeting some goals or ensuring that the company performs well (Naranjo-Gil & Hartman 2006). However, because management accounting does not follow some stringent rules such as the GAAP for the financial accounting, contentions on the information that management accounting system provides arise among managers. In order to address this conflict, the management accounting system should be assessed according to the quality of the information that it provides, according to certain dimensions. A good management accounting system will not only provide managers certain information for operational decision-making, but one which can be used as a strategic tool for the company. Strategic frameworks such as the balanced scorecard aims to integrate the companys management accounting system into the companys strategy. Balanced scorecard aims to break down the objectives in line with the companys mission and vision into certain perspectives—from the shareholders perspective, to customers perspective, to internal processes, and to innovation (Kaplan & Norton 2007). Because objectives are translated into measures and targets, a good management accounting system is set up in order to assess the companys performance in line with these targets (2002). These targets, from the four different perspective in the balanced scorecard, will serve as key performance measures to an organisation (Kaplan & Norton 2007). B. Information quality dimensions When there are conflicts that arise from issues of product profitability, individual product managers become defensive in line with the assessment of their performance. A good management accounting system aims to be objective as much as possible, with the quality of information that it provides as one of the criteria to judge how a management accounting system works well in aiding managers to come up with decisions. According to Nelson et al., information quality has four dimensions--scope, timeliness, format and accuracy (2005). Scope “measures the degree to which all possible states relevant to the user population are represented in the information (Nelson et al. 2005).” A good management accounting system is not only internally but also externally focused; assesses the both the financial and non-financial aspects of the companys operations; as well as with orientation to the future, being a strategic tool to the company (Heidmann, Schaffer & Strahringer 2008). A good management accounting system should also provide information that is timely, which is defined by Nelson et al as “the degree to which information is up-to-date (2005).” Because managers need to respond to changes in the environment, the frequency of reporting about certain recent events and feedback on recent previous decisions is crucial. One of the major sources of contentions in terms of management accounting data is the difference in format in which it is represented. According to Nelson et al., format “measures the degree to which information is represented in a manner that is understandable and interpretable to the user and thus aids in the completion of a task (2005).” Management accounting information can come in graphical formats in representing complex data which are accompanied by explanations (Heidmann, Schaffer & Strahringer 2008). This way, vagueness and large room for subjective bias in terms of interpretation will be minimised; the focus will be on the meaning of the graphical representation in relation to the targets. Accuracy “measures the degree the information is correct, unambiguous, meaningful, believable and consistent (Nelson et al. 2005).” When there is no standard measure of accuracy in terms of the information that the management accounting system provides, this becomes the major source of differences in the accounting data that managers provide, and becomes the basis for disagreement and contention. Good management accounting information is needed in order for managers to come up with sound decisions. However, assessing the quality of this information is important to see how it can help managers come up with decisions in ensuring that an organisation performs well. These quality dimensions of information should be addressed and included when designing a management accounting system. C. Key performance measures for a mid-sized bank In order to come up with key performance measures for a mid-sized bank, the strategic management accounting tool, the balanced scorecard should be used for a more integrative approach. The bank should start with how it appears to its shareholders. From a banks mission and vision, strategic initiatives and objectives can be crafted. For this dimension, the objectives may include the companys profitability as well as efficiency of operations. Certain financial measures such as ROE, or the companys return on equity, ROCE, or return on capital employed, average cost per customer and revenue growth can be utilised as performance measures. Good management accounting system should also include non-financial assessment of the companys operations. In order to achieve the banks financial targets, it has to include objectives and strategic initiatives from the customers perspective. These measures include customer satisfaction with the companys products, customer retention and turnover, as well as the customers average lifetime value to the bank. Only by satisfying customers will the bank be able to retain them, and profit from offering them quality products and services. In order to support the banks targets for its shareholders and customers, the bank should excel at certain internal processes. These processes focus on profitability; internal processes in line with satisfying customers are aimed to provide the company a stream of revenues. Internal processes that ensure efficiency of operations aim to manage costs are needed in order to ensure the companys profitability. For a mid-sized bank, these internal processes can include measures such as percentage of increase in current customer base, percentage of complaints and reports by customers that are addressed and resolved, the ratio of spending for administration and back-door supports to the level of the companys revenues, average collection turnover, percentage of defaults, etc. These are some examples of key measures from the internal processes perspective. Lastly, from the innovation and development perspective, the bank can include measures of employee satisfaction and employee turnover, as well as the period for new product development and introduction. These measures can be used by a mid-sized bank in order to assess its performance, in a more integrative approach by using the balanced scorecard. III. Conclusion A good management accounting system should provide information that will not be a source of contention and disagreement to its recipients. In order to ensure this, the quality of information that such system provides should be assessed according to its dimensions. A good management accounting system should provide a timely and accurate information which is drawn from a broader scope, and is represented in a simple way in order to minimise confusion and room for subjective bias in terms of interpretation. A good management accounting system should also serve as a strategic tool for the company, that is, to help the organisation in performing well by providing a frameworks to match its strategic initiatives, objectives and actual performance. As key performance measures are laid out, the company can come up with targets from which its actual performance to be gauged for constant improvement. References 2002. "Taking Measure to Grow: Performance View." Journal of Accountancy 193, no. 6: 56-57. Business Source Premier, EBSCOhost (accessed November 12, 2009). Heidmann, Marcus, Utz Schaffer, and Susanne Strahringer. 2008. "Exploring the Role of Management Accounting Systems in Strategic Sensemaking." Information Systems Management 25, no. 3: 244-257. Business Source Premier, EBSCOhost (accessed November 12, 2009). Kaplan, Robert & David Norton. 2007 July-August. "Using the Balanced Scorecard as a Strategic Management System." Harvard Business Review p. 150-161. Business Source Premier, EBSCOhost (accessed November 12, 2009). Naranjo-Gil, David & Frank Hartmann. 2006. "How Top Management Teams Use Management Accounting Systems to Implement Strategy." Journal of Management Accounting Research 18, 21-53. Business Source Premier, EBSCOhost (accessed November 12, 2009). Nelson, R. Ryan, Peter A. Todd, and Barbara H. Wixom. 2005. "Antecedents of Information and System Quality: An Empirical Examination Within the Context of Data Warehousing." Journal of Management Information Systems 21, no. 4: 199-235. Business Source Premier, EBSCOhost (accessed November 12, 2009). Read More