Framework For Management Control Systems Research - Case Study - Management Accounting Assignment

Internal Code: TV612

Management Accounting Assignment: Case Study

Case Study 1:  Management control systems provide information that is intended to be useful to managers in performing their jobs and to assist organizations in developing and maintaining viable patterns of behaviour. Any assessment of the role of such information, therefore, requires consideration of how managers make use of the information being provided to them. The traditional framework for considering these issues was developed by Anthony 1965 at the Harvard Business School under the title of Ž ‘management planning and control systems’. This distinguished ‘management control’ from ‘strategic planning’ and ‘operational control’. His approach was intended to achieve two aims. First, it was intended to broaden the scope of information being considered beyond just accounting information. Paradoxically, it was largely unsuccessful in achieving this, mainly because of its deliberate neglect of ‘operational control’. Operational control was neglected because it was apparent that different organizations used very different practices at the operating level, so Anthony concentrated on the commonalities that existed between them. Focusing on commonalties allowed the use of a common language capable of including all organizational activities. Accounting provided such a language and management control became largely synonymous with management accounting at a time when this discipline of management accounting was in almost terminal decline.  Second, it brought issues of managerial motivation and behaviour into view. Here it was much more influential in its effects, influencing much of the behavioural management accounting work which was to dominate the 1970s and 1980s. At the same time, a similar approach was being developed in Europe by Hofstede 1967 Ž . and publicized in his now famous book, ‘The Game of Budget Control’, which still represents one of the most comprehensive studies of its kind. A further weak link in the management control systems framework was also intentional. Its deliberate neglect of the process of ‘strategic planning’, which at best it took as given and, at worst, ignored completely, was intended to simplify the research questions asked. However, such deliberate neglect inevitably led to the specification of control systems and measures that were common to all strategies. Again, accounting measurement was stressed and non-financial performance measures were neglected.3 Although it may well have been sensible to concentrate initially on the core area of ‘management control’, it is now necessary to pay more attention to the neglected elements of strategy and operations. This is particularly important as contemporary organizations are themselves changing, illustrated by such developments as business process re-engineering and de-layering, where the same manager may well be responsible for some elements of strategy, management control and operational control.4 This paper represents a first step towards the aim of developing A complete framework for analysis. Questions: 1. What are the key objectives that are central to the organization’s overall future success, and how does it go about evaluating its achievement for each of these objectives? 2. What strategies and plans have the organization adopted and what are the processes and activities that it has decided will be required for it to successfully implement these? How does it assess and measure the performance of these activities? 3. What level of performance does the organization need to achieve in each of the areas defined in the above two questions, and how does it go about setting appropriate performance targets for them? 4. What rewards will managers and other employees gain by achieving these Ž . performance targets or, conversely, what penalties will they suffer by failing to Ž achieve them ?. 4. What are the information flows feedback and feed-forward loops that are Ž . necessary to enable the organization to learn from its experience, and to adapt its current behaviour in the light of that experience? Case Study 2: Budgeting has traditionally been a central plank of most organizations’ control mechanisms, as it is one of the few techniques capable of integrating the whole gamut of organizational activity into a single coherent summary. Performance is defined essentially as profitability; in a profit centre, the overall measure of performance combines an output measure revenue with an input measure cost and the Ž. Ž. budgeting process seeks to keep the two elements in balance. Cost centres are more problematic as results can no longer be measured in financial terms, and thus cannot be directly compared with costs. The budgeting process tends to assume a given level of output or sales and attempts to determine an appropriate level of spending.13 In order to develop a budget, there is a need for an underlying plan by which the organization’s objectives are expected to be achieved and which serves as the basis for the cost structure underlying the budget.14 Target setting has long been seen as an important part of budgeting, with both the process e.g. participation and the outcome e.g. target difficulty being the subject Ž. Ž . of behavioural accounting research. Although reward structures and incentive schemes have received some attention particularly in the agency literature, the topic has been Ž . more implicit than explicit in the budgeting literature.15 However, clearly, much of the influence of performance evaluation is driven by the desire of managers to please their superiors and thus gain some form of reward financial or otherwise. Finally, Ž . feedback loops are assumed to exist because of the regular reporting of typically Ž monthly accounting variances and the consequences that these engender. The virtue . of the budgetary control process is that it provides an encompassing framework by means of which all aspects of an organization’s activity are encapsulated into a single set of financial statements against which actual outcomes can be monitored. However, the downside of the narrowness of the budgetary process has been likened to driving a motor car solely by looking through the rearview mirror and a mirror that Ž provides only an imperfect reflection, at that .. There appears to be a growing dissatisfaction amongst practitioners with current budgeting practice see, for example, Bunce w et al. 1995 . The rate of change in the Ž .x current environment for many businesses means that the annual budget process is too infrequent; but if frequent budget revisions are undertaken, they prove to be time- consuming and can lead to control loss. The essentially hierarchical nature of budgetary control is in stark contrast to the focus on value chains and business processes that many organizations are adopting. The budget focuses only on financial results and, worse, does not necessarily pay sufficient attention to the means by which those results are to be achieved. Valid as these criticisms undoubtedly are, the budgeting process still represents the central coordinating mechanism often the only Ž co-ordinating mechanism that most organizations have. It is therefore not to be . discarded lightly, but the key areas needing improvement must be addressed. Some questions that arise from the preceding framework include: Questions:  1. How can budgeting be better tied to the achievement of strategic goals? 2.How can resource allocation be matched to strategic imperatives? 3.How can budgeting be adapted to monitor and control the business processes along the value chain running from the extraction of raw materials through to the delivery of products to the final consumer? 4.Are there better ways of setting budgetary targets than the usual incrementalism based on historic achievement? 5. Can we avoid the distorting effects that arise when managers are given a reward for achieving budget targets? 6. Can variances be used in processes of learning and adaptation rather than in the apportionment of blame? 7.  Above all, can the budget process be harnessed to add value to organizational activities rather than representing a drain on organizational and managerial resources?