MACS

Control (Drury)

• process of ensuring that a firm’s activities conform to its plan and its objectives achieved

• done by setting standards / measuring performance / comparing actual with standards / deciding necessary corrective action

CIMA controls fop

• the ability to direct financial and operating policies of an entity with a view of gaining economic benefits from its activities

Controls (Drucker, 1964)

• Controls are measurements and information (means to an end ) while control is the direction

• Used to provide information to assist in determining the control action to be taken

• Controls are used to provide information to assist determing the control action while Control is the function that make sure that the actual work is done to fulfil the original intention

Organisation Huczynski and Buchanan 1991

• a social arrangement for the controlled performance of collective goals

Types of organisations

• Profit/non-profit/ charity 

• Hierarchy based 

• Government 

• Markets 

• Geographical coverage 

• Legal status

Management control system - Otley 1994

•  a system which gathers and uses information to evaluate the performance of different organisational resources like human, physical, financial and also the organisation as a whole considering the organisational strategies.

• MCS influences the behaviour of organisational resources to implement organisational strategies.

• formal or informal

why do organisations require management control systems

• Monitor performance.

• Align employee behaviour with organisational objectives.

• Improve efficiency and effectiveness.

• Support strategic implementation.

• Provide financial and non-financial information.

• Identify problems and corrective actions.

without controls

• boundaries

• guidance

• measurement

• compliance

• confidence / protection

Types of control - example

• External 

• Internal 

• Legal 

• Financial 

• Social / ethical 

• Behavioural

how does it differ from Financial accounting

• Time horizon 

• Objectives 

• Users 

• Output 

• Regulation

Role of management accountant

• moved from traditional management methods ie simple bookkeeping, towards and budgetary costing to things like balanced scorecard / value added management due to the change in technology

• now have to get more involved in strategy so accountants work more with others

• Otley (2001) - MA is both a social and a hard science ( numbers/relocating individuals / building a warehouse in green belt )

Effect of the SOX act - US

• to minimise costs of external auditors MA are now expected to do more in terms of risk management and compliance

• Process documentation and internal audit

Management control theories - system theory

• closed - independent of its environment

• open - depends on transactions with its environment, capable of self regulation, flexible and adaptable to its environment -ie amazon which relies on external sellers

Human relations theory

• looking at org as a scial science

• people are motivated to fufuil basic needs before moving on to others needs

• need to focus on team building/ employee retention

• Human relations insights must be integrated with modern HR analytics, digital work systems and diverse, globalised workforces.

Contingency theory - 1960s

• organisation defined as actitivies and people in the same envirment

• based on the premise that there is no universally appropriate accounting system applicable to all organisations in all circumstances.

• attempts to identify specific aspects of an accounting system that are associated with certain defined circumstances and to demonstrate an appropriate matching.'

• allows - flexibility, increased effectiveness

Otley contingency theory - contingency variables

• ·       environment

  ·       technology

  ·       size

  ·       strategy

  ·       culture.

Contingency theory issues - otley 2016

• Many studies add new contingencies (technology, uncertainty, culture, strategy, size, etc.), but measures differ across studies, producing conflicting or non‑cumulative results.

• can become mechanistic

Organisation Structure - Drucker 1974

• structure is a means for attaining objectives and goals of an organisation

• evolved from universal application and high volume manufacturing

organisation structure - classical management / scientific

• characterised by bureaucracy - top down

• narrow span of control - SMES family orgs risk management

• prescribed roles

• clear and formal procedures and relations

• limited freedoms

functional structure adv

• Specialisation – each department focuses on its own work
  • Accountability – someone is responsible for the section
  • Clarity – know your and others’ roles

Functional structure - disadv

• • Closed communication could lead to lack of focus
  • Departments can become resistant to change
  • Coordination may take too long
  • Gap between top and bottom

Divisionalised organisation - adv

• serve local needs better

• Positive competition

• More effective communication between firm and local customers

Divisionalised organisation - disadv

• conflict between local and central manageent

• duplication of resources and function

SMA - Hoque 2003

• process of identifying, gathering, choosing and analysing accounting data to help the management team to make strategic decisions and to assess organisational effectiveness

• was referring to only financial data at this point if redone today would take into consideration non-accounting data

Strategic management - Ward 1992

• An integrated management approach drawing together all the individual elements in planning, implementing, and controlling a business strategy

Guilding et al int comparison

• The term rarely used in practice and many practitioners have limited understanding of the label.

Organisation strategy

• process undertaken in order to achieve org mission

• concerned with scope of activities / matching activities to its environment and resource capability

Strategic planning - Merchant and van der stede - 2007

strategic planning processes can be described by six steps

1. develop a corporate vision

2. understabd present position, SWOT

3. decide on a corporate diversification strategy

4. decide on a strategy for each strategic business unit , path of action

5. prepare the strategic plan which is a qualitative and quantitative representation of the strategic options to be taken and the likely outcomes

Porter - gaining competitive advantage

• cost leadership - becoming a low cost producer and exploiting cost advantages

• differentiation - unique attributes of products, i.e., Apple cameras

Strategic planning - Mintzberg

• org are too dependent on beuracry / forecasts / budgets

• strategies are emergent devloping through learning and experimentation

• modern business enviroment is not predictable - outdated predictive models

  • some industries ie govt/ constrcution require it

Strategic planning - YIP 1989

• firms need global strategies as industries have become interconnected

• help firms reduce costs / achieve economies of scale/ gain compeitive adv

• issues - global strategies may ignore local cultures and customer preferences / expensive

• ie starbucks AUS failed to understand local coffee culture and used a US based model

Strategy and Structure - functional

• specialised, similar resources in one area of business

• allows for effeicny and economies of scale

• may lack a market focus especilly if there is a wide range of products in a diverse market

Strategy and structure - decentralised

• DM dispersed throughout org

issues with TMA - Lord

• too short term

•  Emphasis on profits for artificial accounting periods

• Backwards-looking / Inward looking

• Focussed on costs

• Reactive

• Programmed

Balance Scorecard

• provides managers with a roadmanp that indicates how the company intends to increase ROI

Criticism of ROI

1. Without BS management may not know how to increase ROI 

2. Managers often inherit many committed costs over which they have no control 

3. Managers evaluated on ROI may reject profitable investment opportunities 

internal audit

• reviewing anything in the org

• if you are a UK listed company you need an IA department/ function for any orf

• important for monitoring and improving of control system - covers both the financial and non financial

internal audit - insitiute of internal auditing

‘An independent, objective assurance ands consulting activity

• It helps an organisation accomplish its objectives by bringing a systematic approach to improve the effectiveness of risk management, control and governance processes’

why is audit necessary

• Report are needed for owners and managers to monitor the performance of org/ they need assurance that reports : 

  • Do not contain errors or fraud 

  • Are not misleading 

  • Are complete 

  • Include all relevant info 

  • Conform to the regulation ie internal or external regulations

External audit

• Statutory requirement for all companies with exemptions ie companies act 

• Audits appointed annually by shareholders 

• Report to shareholders 

• An important element of corporate governance

What do EA do

• Examining financial statements 

• Accounting records 

• Corporate governance 

• Testing amounts in the accounts ie testing sale invoices 

• Estimates by directors 

• Accounting policies 

• Assurance that fraud has not occured

why the new stress on risk

• Awareness of the possibility of fraud after the enron scandal there is a need to control and monitor management behaviour 

• Resulting in the introduction of the Sarbanes-Oxley Act 2002 by the US government which stresses the need for management to take responsibility for correct reporting 

  • Only us but if you are a subsidiary of a us listed companies and adhere to the Sarbanes-Oxley Act

Internal control - preventative

• designed to discourage or pre empt errors or irregularities from occurring. They are more cost effective than detective controls. Credit checks / segregation of duties are an example of a preventive control

internal controls - detective

• designed to Identify errors after they have occurred.

• more expensive than preventive controls, but still essential since they measure the effectiveness of preventive controls and are the only way to effectively control certain types of errors.

• Account reviews are an example of a detective control. 

Accounting information systems - Burns,Quinn, Warren oliveira 2013 

• a set of connected technologies and resources that collect, transform and disseminate informationn

Types of AIS

• Manual 

• Spreadsheets 

• Computerised accounting software 

  • Small business accounting software ie quick books 

  • Mid-range accounting software - sage 

  • Specialised accounting software - Oracle

how information tech influences accountants

• Information technology strongly influences the way most accountants work 

  • Access to internet 

  • Reporting/communicating remotely 

  • Paperless reporting

How MA use AI

• ABC

• Performance measurement

• budgetting

AIS issues

• information overload - big data effect

• Computers can’t sense check everything ie negative hours workers

• Audit trails are harder to follow

• data organisation and storage

• older systems are incompatible with modern tech

Big Data

•  'Extremely large collections of data (data sets) that may be analysed to reveal patterns, trends, and associations, especially relating to human behaviour and interactions.' With data sets are so large that regular methods of storing and processing the data will not work. Trend of big data has been propelled by growth in computer power, new sources of data, and infrastructure for knowledge creation 

  1. Characteristics - volume / variety / velocity / veracity / value 

  2. Sources - social / machine/sensor / transactional 

Big Data effect

• before big data finance departments were analysing using profitability and return on investment and structured information (spreadsheets) but also semi- and unstructured data, enriching traditional finance data such as SAP or management information systems with data from other departments,’

• survey by ACCA and IMA, 62% of companies globally cited big data as hugely important to the future of business

Big Data examples

• analysing customer social media sentiments/weather patterns/ predictive costing and pricing - companies analyse large datasets including competitor prices in real time to adjust their own pricing strategies

Key reasons sustainability is at the forefront of MA view

• Environmental audits

• Risk Management: monitoring and analysing Climate-related risks (droughts and resource scarcity) in relation to asset values, supply chains, and regulatory compliance builds resilience 

• Operational efficiency - sustainable practices often lead to cost savings ie reducing energy consumption can reduce operational expenses 

• Investor Expectations: Stakeholders increasingly demand transparency on ESG performance in line with changing worldview trends

• Regulatory Pressure: Governments and industry bodies are introducing stricter sustainability reporting standards

• Reputation and Trust: Ethical and sustainable practices build brand loyalty and public trust ie improving transparency

Sustainable accounting example

•  circular economy management - ikea is shifting from linear to circular business models using management accounting to monitor and track the financial viability to recycling and reusing products 

• Cut absolute emissions across their supply chain bh 50% compared to 2016 levels ncreased In FY24, despite broader economic challenges, IKEA reported a 3.3% rise in store visits and a 28% increase in online traffic, driven by, among other things, a focus on sustainability.

• Noted enhanced brand perception

Decentralised Organisation structure

• DM is spread throughout the org structure

• Netflix - tach and content teams are empowered to make localised descions independently enabling the firm to react quickly to global trends

Benefits of Decentralisation

• top management freed to concentrate on strategy

• Lower-level managers gain experience in DM

• lower level decision based of better information

• DM authority leads to higher job satisfaction

• improves the ability to evaluate managers

Disadvantages of Decentralisation

• may be a lack of coordination - causing risk silos -e UBS pre 2008 - lack of communication missed the big picture of risk

• lower level managers may make descions without seeing the big picture

• lower level managers’ objectives may not be align with organisation

• difficult to spread innovative ideas in the organisation

Segment

•  any part /activity of an organisation about which a manager seeks cost, revenue or profit data

• ie sales territory / individual shops / service centre

Cost centre

• a segment whose manager has control over costs but not over revenues or investment funds

• ie responsibility for sales and costs

Profit centre

segment whose manager has control over both costs and revenues but none over  investment funds

Investment centre

 segment whose manager has control over costs,revenue and investment in operating assets

Proper cost Assignment - issues

• Omission of some costs in the assignment process -

• The use of inappropriate methods for allocating costs

• assignment of costs that are really common costs of the entire org

Proper cost Assignment - issues - The use of inappropriate methods for allocating costs

Proper cost Assignment - issues - Omission of some costs in the assignment process

• costs assigned to a segement should include all costs attributable to that segment from the company entire value chain

Measuring managerial performance

• When truly decentralised investment centres become virtually independent businesses , competition can become high for investment funding

• Decided by 

  • Return on investment 

  • Residual income 

  • Economic added value

usefulness of ROI

• net operating profit

Transfer pricing

• charged when one segment of a company provides goods or services to another segment of the same company 

• Managers are interest how TP are set as they can have a dramatic effect on on the profitability of the division

Setting transfer pricing

• Market based 

• Marginal cost 

• Full cost 

• Cost plus markup 

• Negotiated

Target Costing

• customer-oriented process of determining a new product's maximum cost and developing a prototype that can be profitably made for that figure/cost management model/ long term

a) Determine the target price

b) deduct a target profit margin from the target price to determine the target cost

c) estimate the actual cost of the product

d) if the estimated actual cost exceeds the target cost, investigate ways of driving down the actual cost to the target cost

Target Costing

• may reveal an unpalatable view of internal operations

• may be too time-consuming

• OK for the car industry (Toyota)

• too slow for electronics- time to market must be minimised

• still need to estimate costs

Transfer pricing issues

• Divisional autonomy

• Suboptimisation 

• International issues 

• Motivation of divisional managers

Contingency theory and management accountants - Otley

• requires MA to identify / assess the impact of contingent variables on management accounting control system.

• concluded that the theory was more successful in identifying contingent variables than it was in assessing their impact

• partially explained by the fact that the theory focused exclusively on management accounting controls whereas, in fact, organisations use a much wider range of overall controls.

TMA

• Useful for short-term DM

• Concentrate on easy-to-measure events

• works well in stable conditions

• work well if manager predictions are reliable

SMA and strategic positioning

• firms should place more emphasis on particular techniques depending on the strategic position they adopt 

• Should the company be defender concentrating on reducing costs and/or improving quality, a prospector continually searching for market opportunities or

• an analyser which combines the defender and prospector positions? (Miles Snow)

• Should the company concentrate on cost leadership strategy, be the lowest-cost

• producer in an industry (Michael Porter).

• With a differentiation strategy the emphasis may be on managing quality through

• TQM programmes (Michael Porter).

• Prospecting new markets should require more information than a cost leader about

• new product innovations, design cycle times and research and development

Balanced Scorecard - Kaplan and Norton 1987

• Set of measures which gives top managers a fast but comprehensive view of the org

• Includes financial measures that give us the results of actions already taken 

• Complements the financial measures which operational measures on customer satisfaction, internal process and the org innovation and improvement activities - operational measures that are the drivers of future financial performance .

Balance Scorecard perspectives

• Way of monitoring and improving operational performance 

• or as a Tool to aid the formulation and implementation of organisational strategy

Financial perspective on pm

• ROI

• RI

• EVA

• some argue that by focusing on other perspectives, financial measures will take care of themselves

Customer perspective on pm

• Market share 

• Customer retention and loyalty - loyalty card (limited evidence this works ) 

• Customer acquisition 

• Customer satisfaction - reviews, surveys 

• Customer profitability 

Customer perspectives - example

• betting organisation 

  • Attracting new customers : Attractive sign up offers / Big advertising budget  / Partnerships with other companies through sponsorship / Brand history / Ambassadors - famous names from sport and social media 

  • Maintaining customers 

    • Automated journeys through the use of data science if a customer pattern change- generates an offer that is stronger than they usually get 

    • Use of scale markets - markets that are designed to engage and drive customers into loss leading offers 

    • Bad experience - high valuecustomer who are either losing or having a poor experience get bets and offers 

  • Customer satisfaction

    • On-site pop-ups 

    • Feedback capturing system 

    • Focus groups/ Weekly emails 

the learning and growth perspective

• Focuses on the infrastructure that the business must build to create long term growth and improvement in the categories : 

  • Employee capabilities 

  • Information system capabilities 

  • Motivation, empowerment and alignment

Internal business perspective

• Typical innovation measures include 

  • Percentage of sales from new products 

  • New product introduction vs competitors 

  • Product development break-even time

• Cycle time, Quality and Process costs

Total quality management

• Popular approach to continuous improvement 

• Focuses on serving customers and systematic problem-solving using teams of front-line workers 

• Uses the Plan-Do-Check-Act cycle

• Benchmarking

TQM - Critique

• Accused of draining innovation by standardising processes 

• Makes the company efficient, irrespective of whether they should be doing it

Business process reengineering

• BPR details , questions and redesigns business processes to minimise inefficiencies, errors and costs 

• Focuses on simplification and elimination of wasted effort

  • Kingson Communications - council organisation to a plc 

    • Actions can be hard to implement in practice 

    • Difficult to distinguish between value adding and non value adding activities and personnel 

    • can create employee resistance/ jobs will be eliminated 

SMA obstacles

• SMA has not become a branded technique such as ABC - companies are already responding to business challenges using the principles of SMA without a conscious adoption of an SMA package

Continuos Budgeting Frow et al. 2010

• combines budgeting with ongoing monitoring, communication, and strategic adaptation.

• Managers are allowed flexibility to:

  • revise plans / reallocate resources / respond to unexpected problems/ prioritise strategic goals.

  • Budget information is used both:

    • diagnostically (monitoring targets)/ and interactively (supporting discussion and strategic decisions).

Balanced Scorecard critic - Hoque 2014

• The relationships between the four perspectives are often unclear.

• It can be difficult to balance and prioritise different measures.

• Some organisations adopt BSC mainly for external legitimacy rather than real strategic improvement.

• Evidence on its effectiveness is mixed, and some studies question whether causal links truly exist.

Responsibility Accounting

• management accounting system that measures the performance of specific departments or managers by holding them accountable only for the revenues, costs, and investments they directly control

• RA as a Cost Control Tool - Case studies Lin & Lin, 2002 in China demonstrate RA’s effectiveness in cost reduction, performance evaluation, and profitability improvement. using typical analysis methods

• ex - Kyocera uses amoeba management breaking down firm into small independent units

issues of responibility accounting - (Le & Thanh, 2023).

• Lack of clear decentralisation or management authority in performance evaluation.

• Evaluation criteria are undeveloped across all management levels.- focuses solely on basic indicators like revenue, profits, and costs, neglecting non-financial indicators.

- Uncertainty among managers regarding the effectiveness of performance evaluation systems and the costs versus benefits of implementation.

Responsibility accounting - challenges to public sector implemetation

(Bloomfield et al ) show mixed success in implementing RA due to political constraints, centralised control, and weak information systems.

e. Behavioural and Organisational Dynamics

Rowe et al. (2007) highlight how RA shapes horizontal relationships between managers, influencing cooperation and competition.

f. Transfer Pricing and RA

Cools & Slagmulder (2009) show how RA interacts with tax-compliant transfer pricing, creating hybrid responsibility centre structures in multinationals.

Role of SMA in strategy formation

• SMA - Vague/fragmented / poorly integrated into organisations.

• Structuration theory - organisational structures influence people’s actions and vice versa

• Therefore, SMA systems both guide behaviour/ are shaped by managers and employees.

• SMA only effective when it aligns with culture, management support/ communication/ strategic goals.