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Accounting Notes > Management Accounting, Financial Mgmt & Organisations (AC310) Notes

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MODULE 1: Management Accounting in its Organisational Context - The Function of MCS Lecture 3 - Planning & Budgeting Jensen (2001)

* Employee compensation packages should not be linked to budgeting targets, instead companies should utilise purely linear bonus schedule

* 2 consequences of linking to budget targets: (1) Managers set low, easily achievable target (2) Focus on reaching targets no matter the cost, even if it hurts company LT

* Use linear bonus schedule - managers rewarded for performance but independent of targets (i.e. receive bonus for what they do not relative to what they say they can do)
Should consider performance measures used (ratios bad!!), position and slope of bonus line, level of max/min caps (outsider range that encourages gaming) Kaplan & Norton (1992)

* 'What you measure is what you get' - traditional financial indicators can give misleading signals
- alternative measurements recommended based on non-financial indicators

* BSC: set of measures that give managers fast, but comprehensive view of business (4 perspectives - customer, internal business, innovation & learning, financial)

* Advantages:
- Integrates disparate elements (customer orientation, response time, quality, teamwork)
- Guards against sub-optimisation - shows whether improvements in one perspective achieved at the expense of another
- Does not have control bias traditional measurement systems have
- Consistent with the concepts of cross-functional integration, customer supplier partnerships, global scale, continuous improvement, team accountability.
- BSC keeps companies looking - and moving - forward instead of backward Lecture 4 - Performance Measurement Ittner & Larcker (2003)

* Companies use standard frameworks (BSC) without adapting for specific context

* Non-FPM as susceptible to manipulation as FPM

* 4 Mistakes:
- Mistake 1: Not linking measures to strategy - show cause & effect relationship between drivers and strategic success
- Mistake 2: Not validating links (do not assume links self-evident - fast food example)
- Mistake 3: Not setting the right performance targets (e.g. 100% satisfaction despite not difference in spending between 80% satisfaction and 100%)
- Mistake 4: Measuring Incorrectly (validity & reliability e.g. measure complex PM using simple survey, collecting data before knowing what it is for, inconsistent methods, avoid hard to measure activities) Lecture 5 - Incentive Compensation Van der Stede (2007)

* For Business: Improves employee alignment and motivation; make compensation variable with business performance (pay higher compensation when can afford to)

* For Employee: Feel efforts rewarded more fairly as paid for performance not seniority

* PFP - stimulus: (1) Informational (2) Motivation, but can lead to:
- Distorted performance in multifaceted jobs
- Weak incentives may be best (e.g. garbage collectors)
- Attracting 'wrong sort' (come for money; likely to leave for money)
- 'More' not always 'better' - over-estimate concern with extrinsic > intrinsic

Van der Stede (2009) Organisations should scrutinise 3 elements of reward systems: (1) Incentive Strength - consider weak incentives (2) Incentive Types - consider subjective performance evaluation (3) Incentive Horizons - keep focus on LT

MODULE 2: Management Accounting and Human Behaviour Lecture 1 - Contingency Theory Donaldson (2001) Organisational effectiveness comes from fitting characteristics of firm (e.g. structure) to contingencies that reflect situation - adapt to changing contingencies Otley (1980)

* 'No universally appropriate accounting system which applies equally to all organisations in all circumstances'

* Technology: Production technique (unit production, small batch, large batch) influences design of internal accounting systems (determines what information available)

* Structure: Structure of organisation affects appropriate style of budget (e.g. low interdependence - budget-constrained; high interdependence - profit-conscious)

* Environment: Sophistication of accounting and control systems influenced by intensity and type (price, marketing or product) of competition a firm faces

* Reservations regarding contingency theory:
- Nature of appropriate contingent variables not yet been made clear
- CT of organisational design weak - link with organisation effectiveness tentative
- Highly interconnected nature of components of control package suggest MA information systems cannot be studied in isolation from wider context Tilemma (2005)

* Implementation of sophisticated MAS not always successful - failure blamed on implementation-related factors but often due to general characteristics of organisations - need to adopt contingency theory perspective

* Average scope - stable environment, varied nature/size of operating activities

* Broad scope - dynamic environment, well-established operating activities

* Both require financial objectives to be important, significant but unclear consequences Chenhall (2002)

* Appropriate design of MCS influenced by context (e.g. external environment, technology, organisational structure, size, strategy, national culture) in which they operate

* External Environment: Uncertainty - externally focused MCS; Hostility - formal MCS

* Generic Technology: Automated Technology - formal MCS; Uncertainty - less formal; Interdependent Technology - less formal

* Contemporary Technology: TQM - broad scope/external; JIT & FMS - informal/NFM; Supplier Partnerships - NFM, informal meetings

* Organisational Structure: Large, Centralised - formal/traditional; Task/Environmental Uncertainty - open/informal; Team-Based - participative/comprehensive PM

* Organisational Size: Large - formal, sophisticated, participative budgeting, divisionalised

* Strategy: Conservative (defender/cost leadership) - formal; Competitor-focused - broad; Entrepreneurial - combine formal & informal

* Culture: : National culture is associated with the design of MCS (Hofstede dimensions)

* Use other disciplines - psychological constructs (ethics); economics (agency theory) Lecture 2 - Operations Budgeting Hansen et al (2003)

* Practitioners express concerns about budgeting for planning & PE - must improve or abandon

* Most-cited weaknesses: Time-consuming, constrain responsiveness, not strategically focused, add little value, cost reduction > value creation, strengthen vertical command-and-control, do not adapt to network structures, encourage gaming, infrequent, unsupported assumption, reinforce departmental barriers, make people feel undervalued

* Activity-Based Budgeting: Connect financially-oriented budgeting process with operational model - connect operational loop (consumption/capacity) & financial loop (prices/resource costs)
- Requires new system - may be less radical way; long implementation time; many innovations fail

* Beyond Budgeting: Seeks to avoid annual performance trap - proposes replacing budgetbased evaluation with benchmarks using hindsight; use of NFM aligned with strategy; starting point for radical decentralisation
- Lack good relative performance data, bias, less radical alternatives - incentive plans, context Sivabalan et al (2007)

* 3 Key PE Constructs: (1) Budget Emphasis (2) Budget Participation (3) Budget Use - all constructs focus on budgets for evaluation not planning

* Operational Budget Reasons:
- Planning - resource co-ordination, action plan formulation, production capacity management, price determination, encouraging innovate behaviour, information provision to external parties
- Control - monitoring device for boards; control of costs
- Evaluation - staff evaluation and business unit evaluation

* Tests 4 hypotheses using survey with 10 reasons (6P, 2C, 2E); ranked on 7 point scale: (1) Planning and control budgets reasons are more important than evaluation ones (2) Planning & control reasons more important for rolling forecasts than annual budgets (3) Evaluation reasons more important for annual budgets than rolling forecasts (4) Rolling forecasts complement annual budgets Libby & Lindsay (2010)

* Historically budgets criticised by academics, but BBRT originates from practice - significant as previous academic research has been disconnected from practitioners

* Practitioners focused on improvement (bottom-up, rolling forecasts, align with strategy, less detail but more frequent) > abandonment

* Majority of firms indicated they were able to obtain considerable value from budgeting system Criticisms of Budgets (based on Hansen et al, 2003); L&L, 2010 survey findings (Canada; US) (1) Consumes managerial time: C ~6 weeks, US ~10 weeks; lower than Hope & Fraser (2003) (2) Inhibit firms ability to adapt: Use budgets to adapt to market change, recognise budget only somewhat effective - augment with other approaches; adjust targets to mitigate concern (3) Disconnect from strategy: Unfound - budgets help to promote strategically focused behaviour (4) Fixed performance contracts - unreliable PE: Fixed performance contracts rarely used by firms, employ subjectivity in PE/make allowances; gaming prevalent but LT effects unclear

* Significant correlation of budget value/performance: good budgeting system - high performance

* Neither size of business unit or division strategy correlated with budget value

* In US (but not Canada) business unit structure significantly correlated with budget value

* Negative and significant correlation between gaming and budget value Lecture 3 - Capital Budgeting & Human Behaviour Verbeeten (2005)

* Investigates whether specific uncertainties explain why firms use SCBP:
- Real Option Reasoning: Frames investments in terms analogous to financial options
- Game Theory: Analyses how strategic interactions among rational players produce outcomes with respect to preference of those players

* SCBP complicated & conceptually difficult - requires time & effort

* Tends to augment rather than replace traditional CB (DCF, payback period)

* Increase in financial uncertainty (FX, interest) affects sophistication of capital budgeting decisions but social (political, policy, society), market (competitive, output market), input (quality of labour & materials, R&D output) show no increase in SCBP

* Some industries more inclined as have characteristics that make it easier to implement

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