Management Control

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Management Control

• EMBA 5403
• Fall 2010
• Mugan

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Accounting?
AUDITING

• Financial
• Managerial
• Cost
• Auditing
• Tax

COST
FINANCIAL
TAX
MANAGERIAL
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The Role of Accounting
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Application of Managerial Accounting

• Applies to all types of business -
• Service, Merchandising, and Manufacturing
• Applies to all forms of business organizations
• Proprietorships, Partnerships, and Corporations
• Applies to not-for-profit as well as
  profit-oriented companies

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Accounting and Accountability

• Process of identifying, measuring, and
  communicating economic information to permit
  informed judgements and decisions by the users of
  the information (American Accounting Association,
  1966)
• Stewardship functionusually owners and managers
  are separate
• Increase shareholders wealth
• Financial Accounting

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Differences and Similarities

• Both deal with the same accounting data
• Both managerial and financial accounting deal
  with economic events of a business
• Both require that economic events be quantified
  and communicated to interested parties
• Financial external
• Managerial- internal
• Determining unit cost - managerial accounting,
• Reporting Cost of Goods Sold -financial accounting

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Managerial or Management Accounting

• Industrial Revolution more complex production
  process
• Cost became important
• Cost accounting (forerunner of managerial
  accounting)
• Cost of an object product, segment, division
• First book 1897 Garcke and Fell Factory
  Accounting
• 20th century multinationals, and large
  companies
• Performance evaluation
• Budgeting
• Management accounting term used after Second
  World War

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Management or Managerial Accounting

• Assist managerial decisions
• Provide timely and accurate information to
  control costs and to measure and improve
  productivity and devise improved production
  process
• Accurate costs important for
• Pricing decisions
• New product
• Response to rival products

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Main activities

• Planning- strategic and operational
• budgeting
• Implementing/Directing
• Generate, analyze and report relevant information
• Controlling
• Actual vs budget comparison
• Analysis and interpretation
• Feedback

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Managerial Accounting

• Process of
• Identifying
• Measuring
• Analyzing
• Interpreting
• Communicating information in pursuit of a
  companys goals
• Managerial accountants business
  partners/consultants in companies
• Provides information to managers

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Technology and Managerial Accounting

• New techniques created new roles for management
  accountants
• New technologies demanded new control techniques
• Emerging service organizations
• Teams with people from production,
  marketing, engineering, etc.
• More flexible approaches to effective cost
  controls

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Managerial Accounting Objectives

• Provide information for planning and decision
  making be a part of it
• Assist managers in daily control of operations
• Motivate the managers and other employees towards
  the company goals-goal congruence
• Performance measurement of managers
• Strategic planning determine competitive
  position and long-run success of the company

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Characteristics

• Internal manager oriented
• Future looking planning
• Involves estimates
• More timely and relevant data necessary
• Adaptive to changing business environment
• Cross-functional brings together production,
  marketing, managerial accountants and other key
  personnel

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Planning

• Objectives should be inline with the overall
  objective of increasing shareholders wealth
• E.g. increase sales by 10 in Central Anatolia
  objective

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Planning
Identifyalternatives.
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Directing

• Coordinate diverse activities and human resources
• Implement planned objectives
• Provide incentives to motivate employees
• Hire and train employees including executives,
  managers, and supervisors
• Produce smooth-running operation

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Controlling

• Process of keeping activities on track
• Determine whether goals are met
• Decide changes needed to get back on track
• May use an informal or formal system of
  evaluations
• Employee job assignments
• Routine problem solving
• Conflict resolution
• Effective communications
• Decision making is not a separate management
  function, but the outcome of the exercise of good
  judgment in planning, directing, and controlling.
• Feedback in the form of performance reportsthat
  compare actual results with the budgetare an
  essential part of the control function

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Management Control

• Assure that resources are obtained and used
  effectively and efficiently in the accomplishment
  of the organizations objective
• Has financial and non financial performance
  measurement
• Concerned with the implementation of strategies
  and
• Task control

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Planning and Control Cycle
Exh. 1-1
Formulating long-and short-term plans (Planning)
Begin
Comparing actualto planned performance
(Controlling)
Implementing plans (Directing and Motivating)
DecisionMaking
Measuringperformance (Controlling)
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Management accounting system

• To control costs
• To measure and improve productivity
• To devise improved production process
• To decide on new products
• To decide on obsolete products
• To decide on prices
• To respond to rival products (Johnson and Kaplan,
  1987)

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Cost Management Perspective

• Provide highest quality service/goods with lowest
  possible cost
• Objectives
• Determine cost of resources consumed in companys
  activities
• Eliminate non-value added activities as much as
  possible
• Determine efficiency and effectiveness of all
  major activities
• Identify and evaluate new activities that can
  improve the performance of the company

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Comparison
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Strategic Cost Management

• Value chain
• Get raw materials and other resources
• Research and development including quality
  assessment
• Product design
• Production
• Marketing
• Distribution
• Customer service
• Should understand the value chain
• Cost drivers in activities
• Managing the cost relationships to a companys
  advantage strategic cost management

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Making Planning Decisions
How should we finance our operations?
What customers should we target?
What price should we charge?
What products or services should we provide?
Which projects should we choose?
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Cost Benefit Analysis

• Cost- using resources to achieve a benefit
• Benefits- aspects of a decision that help the
  organization
• Analysis the process of analyzing alternative
  decisions to determine which decision has the
  greatest benefit relative to its cost

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Discussion Question

• A finance professor and a marketing professor
  were recently comparing notes on their
  perceptions of corporations. The finance
  professor claimed that the goal of a
  corporation should be to maximize the value to
  the shareholders. The marketing professor claimed
  that the goal of a corporation should be to
  satisfy customers.
• What are the similarities and differences in
  these goals? Zimmerman, 2003 p.24

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The Changing Business Environment

• Just-in-time production
• Total quality management
• Process reengineering
• Theory of constraints
• International competition
• E-commerce

Business environment changes in the past twenty
years
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Just-in-Time (JIT) Systems
Receivecustomerorders.
Complete productsjust in time toship customers.
Scheduleproduction.
Complete partsjust in time forassembly into
products.
Receive materialsjust in time forproduction.
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JIT Consequences
Zero productiondefects
Improvedplant layout
Flexibleworkforce
Reducedsetup time
JIT purchasing Fewer, but more ultrareliable
suppliers. Frequent JIT deliveries in small
lots. Defect-free supplier deliveries.
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Benefits of a JIT System
Reducedinventorycosts
Freed-up funds
Greatercustomersatisfaction
More rapidresponse tocustomer orders
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CHOPPING INVENTORIES AT PORSCHE Industry insiders were writing off Porsche as an independent carmaker in the earlier 1990s. Sales in 1992 were down to less than 15,000 cars, one-fourth their 1986 peak, and losses had mounted to 133 million. Thats when Wendelin Wiedeking became the top manager at the revered, but ailing, company. Wiedeking hired two Japanese efficiency experts to help overcome Porsches stubborn traditionalism. They immediately tackled a wasteful inventory of parts stacked on shelves all over the three-story Stuttgart factory. One of the experts handed Wiedeking a circular saw. While astounded assembly workers watched, he moved down an aisle and chopped the top half off a row of shelves. They proceeded to overhaul the assembly process, slashing the time required to build the new 911 Carrera model from 120 hours down to just 60 hours. They cut the time required to develop a new model from seven years to just three years. And a quality-control program has helped reduce the number of defective parts by a factor of 10. As a consequence of these, and other actions, the companys sales have more than doubled to about 34,000 cars, and earnings were about 55 million in the latest fiscal year. Source David Woodruff, Porsche Is BackAnd Then Some, Business Week, September 15, 1997, p. 57.
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Disadvantage Just-In-Time (JIT) systems have many advantages, but they are vulnerable to unexpected disruptions in supply. A production line can quickly come to a halt if essential parts are unavailable. Toyota, the developer of JIT, found this out the hard way. One Saturday, a fire at Aisin Seiki Companys plant in Aichi Prefecture stopped the delivery of all brake parts to Toyota. By Tuesday, Toyota had to close down all of its Japanese assembly lines. By the time the supply of brake parts had been restored, Toyota had lost an estimated 15 billion in sales. Source Toyota to Recalibrate Just-in-Time, International Herald Tribune, February 8, 1997, p. 9.
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Total Quality Management (TQM)
TQM improves productivity by encouraging the use
of fact and analysis for decision making and if
properly implemented, avoids counter-productive
organizational infighting.
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Process Reengineering

• Anticipated results
• Process is simplified.
• Process is completed in less time.
• Costs are reduced.
• Opportunities for errors are reduced.

A business processis diagrammedin detail.
The process is redesignedto eliminate
allnon-value-added activities
Every step inthe businessprocess mustbe
justified.
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Process Reengineering versus TQM

• Process Reengineering
• Radically overhauls existing processes.
• Likely to be imposed from above and to use
  outside consultants.

• Total Quality Management
• Tweaks existing processes to realize gradual
  improvements.
• Uses a team approach involving people who work
  directly in the process.

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Theory of Constraints

• A constraint (also called a bottleneck) is
  anything that prevents you from getting more of
  what you want.

The constraint in a system is determinedby the
step that has the smallest capacity.
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Theory of Constraints
2. Allow the weakest link to set the tempo.
Only actions that strengthen the weakest link in
the chain improve the process.
3. Focus on improving the weakest link.
1. Identify the weakest link.
4. Recognize that the weakest linkis no longer
so.
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THE CONSTRAINT IS THE KEY The Lessines plant of Baxter International makes medical products such as sterile bags. Management of the plant is acutely aware of the necessity to actively manage its constraints. For example, when materials are a constraint, management may go to a secondary vendor and purchase materials at a higher cost than normal. When a machine is the constraint, a weekend shift is often added on the machine. If a particular machine is chronically the constraint and management has exhausted the possibilities of using it more effectively, then additional capacity is purchased. For example, when the constraint was the plastic extruding machines, a new extruding machine was ordered. However, even before the machine arrived, management had determined that the constraint would shift to the blenders once the new extruding capacity was added. Therefore, a new blender was already being planned. By thinking ahead and focusing on the constraints, management is able to increase the plants real capacity at the lowest possible cost. Source Eric Noreen, Debra Smith, and James Mackey, The Theory of Constraints and Its Implications for Management Accounting (Montvale, NJ The IMA Foundation for Applied Research, Inc.), p. 67.
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International Competition
Competition has become worldwide in most
industries.
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GLOBAL FORCES Traditionally, management accounting practices have differed significantly from one country to another. For example, Spain, Italy, and Greece have relied on less formal management accounting systems than other European countries. According to Professor Norman B. Macintosh, In Greece and Italy the predominance of close-knit, private, family firms motivated by secrecy, tax avoidance, and largesse for family members along with lack of market competition (price fixing?) mitigated the development of management accounting and control systems. Spain also followed this pattern and relied more on personal relationships and oral inquisitions than on hard data for control. At the same time, other Western European countries such as Germany, France, and the Netherlands developed relatively sophisticated formal management accounting systems emphasizing efficient operations. In the case of France, these were codified in law. In England, management accounting practice was influenced by economists, who emphasized the use of accounting data in decision making. The Nordic countries tended to import management accounting ideas from both Germany and England. A number of factors have been acting in recent years to make management accounting practices more similar within Europe and around the world. These forces include intensified global competition, which makes it more difficult to continue sloppy practices standardized information system software sold throughout the world by vendors such as SAP, PeopleSoft, Oracle, and Baan the increasing significance and authority of multinational corporations the global consultancy industry the diffusion of information throughout academia and the global use of market-leading textbooks. Sources Markus Granlund and Kari Lukka, Its a Small World of Management Accounting Practices, Journal of Management Accounting Research 10, 1998, pp. 153171 and Norman B. Macintosh, Management Accounting in Europe A View from Canada, Management Accounting Research 9, 1998, pp. 495500.
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E-Commerce

• In recent years, many dot.com businesses failed
  that might have benefited from the application of
  managerial accounting tools
• Cost concepts
• Cost estimation
• Cost-volume-profit
• Activity-based costing
• Budgeting
• Decision-making
• Capital budgeting

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Code of Conduct forManagement Accountants

• The Institute of Management Accountants (IMA)
  Standards of Ethical Conduct for Practitionersof
  Management Accounting and Financial Management
  have two major parts offering guidelines for
• ? Ethical behavior.
• ? Resolution for an ethical conflict.

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Codes of Conduct onthe International Level
The Guidelines on Ethics for ProfessionalAccounta
nts, issued by the InternationalFederation of
Accountants (IFAC), govern the activities of
professional accountants worldwide.
In addition to competence, objectivity,
independence,and confidentiality, the IFACs
code deals withthe accountants ethical
responsibilities in Taxes Fees and
commissions Advertising and solicitation Handling
of monies Cross-border activities.
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• Accounting for Managers Interpreting Accounting
  Information for Decision-Making  By Paul M.
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