Chapter 1

Management accountant provides info for:

• Planning
• Control
• Decision Making
• Performance measurement

Strategic Management accountant

 External orientation
 Future orientation
 Goal congruence

Strategic Planning:
 Process of deciding on objectives of the organisation,
 changes in these objectives,
 resources to attain these objectives and
 policies that are to govern the acquisition, use and disposal of these resources.

Management Control:
 Process where managers ensure that resources are obtained and used effectively and
efficiently in the accomplishment of the organization’s objectives.
 Sometimes called tactics or tactical planning.

Operational Control:
 Specific tasks carried effectively and efficiently.

Information flows back and forth in all levels of organisation to formulate plans, take decisions
and to prove need for control action.

Role of Performance Management in Strategic planning and control:

 Performance management systems help measuring performance against its goals and
objectives, and
 identify where performance to be improved in order to achieve those goals and
objectives.

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Performance management is a way to direct and support the performance of employees and
departments within an organisation to work as efficiently and effectively as possible.

Performance management tries to ensure that individual goals are aligned with the
organization’s overall goals and business strategy.

Performance management is a set of management processes:

 that enable organizations to define and execute their strategies and

 to measure and analyse performance in order to inform strategic decision making.
 The central premise of performance management is to improve an organization’s
performance.

Performance management systems have clear links between performance measures at different
hierarchical levels of organisation so that all departments and areas strive towards the same
goals.

Link between Performance Management and Strategic Planning and Control:

 Performance Management is any activity designed to improve an organization’s
performance and ensure that its goals are being met.
 Performance needs to be managed via judicious target setting that reinforces strategic
goals and objectives.

The role of management accounting information in performance management:

 To measure Performance - organisation as a whole, and/or of the individual divisions,
departments or products within the business. Performance reports provide feedback,
most frequently in the form of comparison between ACTUAL performance and BUDGET.
 To control the business – Performance Reports. In order to be able to control their
business, managers need to know the following:

o What they want to achieve (targets or standards; budgets)

o What it is actually achieving (actual performance)

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 By comparing both, and identifying variances, management can decide if action is
needed, and then take the necessary action when required.

 To plan for the future - Managers have to plan. The information they use is management
accounting information

 To make decisions - Managers are faced with several types of decision.

o Strategic decisions require information which is in summary form, relates to the

organisation as a whole and is derived from both internal and external sources.

In addition, strategic decision making:

 Is medium to long term
 Involves high levels of uncertainty and risk
 Involves situations that may not recur
 Deals with complex issues

o Tactical and operational decisions require information which relate to:

 short or medium term,
 department, product or division and
 more detailed and more restricted in its sources.

Planning and control at strategic and operational levels:

Strategic control focuses whether the strategy is being implemented as planned, and whether
the results produced by the strategy are those intended.
Operational control and operational performance measurement tends to focus

 on more detailed information, and on a much shorter time period

 Designed to ensure that day to day actions are consistent with an organization’s overall
goals and objectives.

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Differences between strategic and operational levels:
Strategic Operational
Broad Targets Detailed
Whole Organization Departmental
External information; wide Internal information; less
variety and sources variety and sources
External Focus Internal focus
Future orientated, feed Current performance against
forward control plan
Opportunity to change the Performance can change not
plan plan
Long term Short term

The achievement of long-term goals will require strategic planning which is linked to short-term
operational planning.
If there is no link between strategic planning and operational planning the result will be:

 unrealistic plans – too hard with too few resources

 inconsistent goals – additional costs for inconsistency
 poor communication – operational managers unaware
 inadequate performance measurement – unaware where to improve

Strategic Control:
Is the organisation on target to meet its overall objectives and is control action needed to
improve performance?

Many firms measure the wrong things and often fail to measure the right things

 False alarms motivate managers to improve areas where there are few benefits to the
organisation:
o Overemphasis on direct costs, when most costs are overheads.
o Labour efficiency measures manipulated and ignore labour effectiveness.
o Machine standard hours are irrelevant, as long as the firm has enough capacity.

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  Gaps are important areas that are neglected:
o New product introduction
o Customer satisfaction
o Employee involvement

Different measures apply to different industries.

In continuous processes, such as chemicals, throughput time is not important, as there will always
be buffer inventory. However, it is important in consumer electronics.

Linking Strategy to operations:

Budgets with purpose for PRIME.

Planning - Budget holders are forced to plan on achieving targets that should ensure the
organization’s overall strategic plan is achieved.
Responsibility - Budgets help allocate responsibility, and specify which managers control which
costs.
Integration - preparing budgets ensures that the planned activities of one area of an organization
do not conflict with another.
Motivation – Preparing budgets will motivate managers and employees to achieve targets.
Evaluation - Budgets allow trends in performance to be identified and investigated. Also acting
as strategic and financial control.

Budget reflects organization’s objectives and targets.

Negative effects:

 No incentive to try if figures are unrealistic

 Slack may be added to meet budgets.
 Only budget would be achieved and not further.
 Spending spree if budget funds remain unspent
 Budget might focus short-term results over long-term results

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Goal Congruence:
Goals should be related and mutually supportive:

 Hierarchically
 Functionally – colleagues collaborating
 Logistically – Shared or sequential resources
 Wider organizational sense – senior executives make decisions for operational

SWOT Analysis
SWOT analysis summarises the key issues from the business environment and the strategic
capability of an organisation that are most likely to impact on strategy development.

SWOT - used to guide strategy formulation from identified strengths and weaknesses, and from
identified opportunities and threats.
Strengths should be built on and consolidated, while strategies to address any weaknesses.
Strategies developed to exploit opportunities and to provide contingencies against the threats.

An organisation needs to understand its current strategic position, before evaluating the strategic
options available to it. It helps identify:

 things it does particularly well (strengths) or badly (weaknesses)

 factors that give the organisation potential to grow (opportunities) or make its position
weaker (threats).
SWOT analysis also assists in performance management:

 Identifying shortcomings (weaknesses) or limiting factors

 Identifying CSFs which will allow KPIs to be created and monitored
 Determining the information needs to measure and report KPIs
 Setting targets to build on its strengths and/or take advantage of opportunities, as well
as minimising its weaknesses and the threats.

SWOT will also let organisations know if the targets suggested are realistic and achievable.

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Boston Consulting Group Portfolio Matrix:
Market share > 1 is considered to a be a market leader.
10% of growth is often dividing line for high and low growth.

Quadrants of the matrix:

 Stars - high relative market share in a high growth market. In the short term, stars may
require significant investment in excess of the cash they generate in order to maintain
their market position. Stars promise high returns in the future.
 Cash Cows - markets become more mature and market growth slows, stars will become
cash cows. Cash cows are products or business units with a high market share in a low
growth (mature) market. Cash cows should require less investment than stars, they
should be able to maintain unit cost levels below those of their competitors (due to
economies of scale). cash cows should be able to generate high levels of cash income.

This is important because they can then generate cash to finance other products or
business units in an organisation. Performance measures for cash cows should focus on
cost control and cash generation.
 Question marks - low share of a high growth market. Question mark over ability to
achieve sufficient market retention to justify further investment. Question marks may
require significant investment to help them increase market share, and so they are likely
to be cash negative.
 Dogs - low share of a low growth market. Drain on cash, and disproportionate amount of
a company's time and resources. They should be allowed to die, or be killed off. In some
cases they may have a useful role to complete a product range or to keep competitors
out.

Metrics for business units in high growth industries should be based on revenue growth, profit
and ROI.
Metrics for business units in low growth industries (in particular, cash cows) should be focused
on margins and cash generation. Cost control to preserve profits, need for performance
measures looking at cost.

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The suggested strategies:
Star: Build
Cash cow: Hold, or Harvest if weak
Question marks: Build (if can increase their market share) or Harvest (if they will be squeezed
out by rivals)
Dog: Divest or Hold

Firm should have a balanced portfolio of products.

The BCG matrix helps with long-term strategic management: for example, highlighting the need
for new question marks or stars to eventually replace the current cash cows.
The matrix can also be useful for assessing performance.
For example, if contains primarily cash cows and dogs, explains why its revenue may only be
growing slowly or falling.

Weakness in Matrix:

 Two dimension
 Some products might fall in more than one quadrant
 Lower market share doesn’t mean weakness
 High growth doesn’t necessary mean strength
 Cash is not only the critical resource, innovation is required too.
 Higher market share doesn’t mean lower costs (economies of scale)
 Market cannot be easily defined
 Relationship between quadrants
 Behavioural implications – e.g.: cash cow profits invested in stars.

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Porter’s Five Forces Model:
Analyses factors which determine intensity of competition within industry and level of
profits which can be sustained.

 Threat of new entrants – Barriers and expected reaction.

 Threat of substitutes – innovation, responses to threat, propensity of buyers.
 Bargaining power of buyers - number of buyers.
 Bargaining power of suppliers – impact when there are fewer of them.
 Rivalry between existing competitors – number of competitors, market power…..

Threat of new entrants:

New entrant to industry – extra capacity and competition. The strength varies from
industry and depends on :

 Strength of threat.
 Response of existing competitors.
Barriers to entry:

 Scale economies. High fixed costs = high breakeven point, High breakeven point requires
large volume of sales. If market is not growing, large slice has to be captured from
competitors, which is costly. (Japanese company has done so)
 Product differentiation. Existing firms have a good brand image and customer loyalty. A
few firms may promote large number of brands to crowd out competition.
 Capital requirements. Requirements are high. Barrier will be strong and high risk.
 Switching costs. Customer cost to switch products. Consumer might have no costs,
retailer or distributor might have high costs.
 Access to distribution channels. They carry products to the end-buyer. New channels are
hard to establish and existing is hard to access.
 Cost advantages of existing producers, independent of economies of scale include:
o Patent rights.
o Experience and know-how.
o Government subsidies and regulations.
o Favoured access to raw materials.
Entry barriers might be lowered by the impact of change:

 Changes in environment
 Technological changes
 Novel distribution channels for products or services

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Threat from substitute products:
Good/service by another industry satisfying same need. E.g. air travel as sub for rail
travel, video conferencing as sub for business meetings.
THE INDUSTRY HAS TO BE DIFFERENT, ‘ AIRLINE ‘ INDUSTRY AND ‘RAIL’ INDUSTRY. ALTHOUGH
COULD BE ARGUED ITS ‘TRAVEL’ INDUSTRY.

Bargaining power of buyers:

How strong the position of customers will be – dependant on number of factors:

 How much a customer buys.

 How critical is the product to their own business.
 Switching costs
 Products are standard items (hence easily copied) or specialised?
 Customer's profitability: customer with low profits will insist on low prices from suppliers
 Customer's ability to bypass/takeover the supplier
 Skills of customer purchasing staff, or price awareness of consumers
 Quality-important customer less likely to be price sensitive, industry more profitable as a
consequence
Bargaining power of suppliers:
Suppliers to get higher prices dependant on number of factors:

 One/two dominant suppliers - monopoly/oligopoly prices

 New entrant/substitute to supplier industry
 Suppliers have other customers outside of the industry – less dependent.
 Importance of product to business
 Differentiated product?
 Switching costs
Rivalry among current competitors in the industry:
Intensity of rivalry will affect profitability of industry as whole. Price competition,
advertising battles, sales promotions, introducing new products, improving after-sales service or
providing guarantees or warranties.
Competition can stimulate demand, expanding the market, or it can leave demand
unchanged, in which case individual competitors will make less money, unless able to cut costs.
Factors for determining intensity of competition:

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  Market growth. Rivalry intensified when firms compete for a greater market share in a
market where growth is slow/stagnant.
 Cost structure. High fixed costs a temptation to compete on price, as in the short run any
contribution from sales is better than none. Perishable product produces the same effect.
 Switching. Suppliers will compete if buyers switch easily (e.g. Coke vs Pepsi).
 Capacity. Supplier has to increase in output capacity substantially, to reduce unit costs.
 Uncertainty. When unsure of competitor, tendency to respond by formulating a more
competitive strategy.
 Strategic importance. If success a prime strategic objective, firms likely to act very
competitively to meet targets.
 Exit barriers. Exit barriers make it difficult for an existing supplier to leave the industry.
These can take many forms.
o NCA with a low break-up value (e.g. no other use for them, or may be old)
o Redundancy payments to employees
o Division/subsidiary of a larger enterprise, effect on other operations within group.
o Reluctance of managers to admit defeat, loyalty to employees and fear for own
jobs.
o Government pressures on major employers, especially when competition from
foreign producers rather than domestic producers

Using the five forces model:

Determines attractiveness of an industry by assessing level of profits sustained.
Organisations decision to enter or leave industry.
Reveals useful insights on potential attractiveness in future, especially when used with PEST.
Knowledge about intensity and power of competitive forces help develop strategies to improve
own competitive position.

 E.g. Increasing brand loyalty (bargaining power of customers, threat of new entrants)
 Taking over a supplier (bargaining power of suppliers)
 Strategic partnerships/alliances with other firms (reduce competitive rivalry, threat of
substitute products).
Analytical model, not just to identify and describe forces but also to analyse strength of forces.
Understanding strength of forces provide info for performance measurement. Competition as
rivals attempt to increase market share – price wars or extensive advertising and promotional
campaigns. Expected to lead to declining margins.

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Five forces model and performance measures:
Model looks at the sources and strength of competition in an industry or sector.
Organisation needs to understand nature of its competitive environment to establish appropriate
strategies and achieve objectives.
Understanding nature of the competitive forces it is facing (the five forces), and particularly
appreciating which is the most important, it will be in a stronger position to influence forces
within the strategy and defend itself against any threats.
Helps to understand and measure its performance. Already identified that the strength of the
competitive forces in an industry affects the level of sustainable profits which can be earned in
that industry. Also relevant when assessing an organisation's performance.
Organisation operating in an industry which faces strong competitive forces, the profitability of
that organisation is likely to be lower than one operating in an industry with weaker competitive
forces.
As part of strategic performance evaluation, organisation could assess the strength of the
competitive forces it is facing. (The environment is dynamic, so the nature and relative power of
the competitive forces can change.) Some general performance metrics which an organisation
might consider looking at are:
Threat of new entrants: % of revenue from products protected by patents (as an indicator of
how much revenue is protected from new entrants); brand value; customer loyalty; fixed costs
as a proportion of total costs (as an indicator of capital requirements); assessment of how unique
certain cost advantages are; market share
Threat of substitutes: buyer's propensity to substitute (or conversely, buyer's loyalty to existing
products); relative price/performance of substitutes
Bargaining power of customers: number of buyers; size of buyers; price sensitivity; level of
discounts offered to customers; switching costs
Bargaining power of suppliers: cost of suppliers' product (or service) relative to ultimate cost or
selling price (e.g. oil companies have high bargaining power in relation to airlines - cost of oil is a
major part of the cost of a flight); degree of differentiation between suppliers; level of discounts
offered to customers; switching costs
Rivalry between existing competitors: market growth; market capacity; market share;
economies of scale; ongoing marketing expenditure

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Potential Issues:
Five forces model must be used with caution. Comprehensiveness can encourage false security
in those who use it. Unfortunately, no business can be aware of ALL the threats and opportunities
facing it, can never have perfect information about environment.
Model assumes relatively static market structures. However, not the case in today's markets,
which are increasingly dynamic, and also highly influenced by technological progress. For
example, rivalry in the fashion retailing industry increased following the entry of online
companies (such as Asos and Zalando) that do not operate from physical stores.
Equally, important to note that, the options an organisation can actually pursue are determined
not only by opportunities and threats in the external environment but also by its own internal
resources, competences and objectives.
Porter's five forces model focuses on the profitability of an industry. However, it underplays the
extent to which the competences and capabilities of individual firms can determine their
profitability within an industry ,even though an industry may be profitable.
An individual firm could earn higher margins than its competitors in an industry if it can deal more
effectively with key forces, or if it can develop some distinctive competences which provide it
with a sustainable competitive advantage in relation to its competitors.
Problem of market definition:
Major problem in using the model could also relate to actually identifying the industry (or
market).
Necessary to define what market or market segment is being analysed by the five forces. For a
large organisation or in complex environment, this may be extremely difficult.
BPP's provision of classroom training in accountancy is a good example. The market for training
for potential chartered accountants is subject to considerable customer bargaining power, since
few large accountancy firms that predominate. ACCA and CIMA courses, on the other hand,
subject to the rivalry from existing competitors since, as well as other commercial training
providers, universities and local higher education colleges are also sources of competition.
Competition has increased in recent years as new entrants have entered the market.
But does BPP have a single market (accountancy training) or does it have different markets
according to the different qualifications?
This issue around market definition identifies a potential problem with Porter's model. Analysis
of the different forces can get very difficult in more complex industries with lots of interrelated
segments/product groups.

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Competition or co-operation?:
Model based on idea of competition between firms. Underlying idea is that firms are constantly
competing against each other, and intensity determine profitability of an industry. Model
assumes that companies try to achieve competitive advantages over rivals, as well as over
suppliers or customers.
However, such an approach does not accurately reflect context of strategic alliances, electronic
linking of information systems of all companies along a value chain (or supply chain), or in a virtual
organisation, in which focus is primarily on collaboration rather than competition.

Benchmarking:

Benchmarking is done to identify relative levels of performance.

Involves gathering data about targets and comparators to find our performance levels.

Data used in benchmarking:

 Internal – different shops in their retail group.

 External – Shops in same industry.
 Wide External Data – Govt data about employee sick days.
Internal Benchmarking:
Easier than external. Unlikely to lead innovative or best-practice solutions. No
competitive advantage gained.
Industry benchmarking:
Two Types. Competitor and Non-Competitor

 Competitor Benchmarking:
Information about direct competitors gathered. Competitive advantage for
competitor is lost if core competence of competitor is matched. Competitor is unlikely to
disclose information about an area of competitive advantage. Reverse engineering could
be used.
• Non-Competitor Benchmarking:
Not For Profit organisations. E.g. exam success rates between schools. Since no
direct competition, info will be exchanged. Results may differ even if in same industry;

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 inherent reasons ( student from different background in school ). Benchmarking is just an
motivating factor when little or no control over results. Not an explanation of poor results.
Functional benchmarking:
Functional or best in class; compared with best external practitioners regardless of
industry. E.g. Telephone industry with banking service. New, innovative ideas and solving
threshold problems. Since comparator not competitor, less resistance to share info likely.
Stages of benchmarking:
Self evalution:

 Possible/easy to obtain competitor info ?

 Wide discrepancy between internal divisions?
 Similar process in non-competing environments? They willing to co-operate?
 Best practice operating ?
 We have time?
 Companies with similar obj and strat?
Steps for benchmarking:

 Set objectives and areas

 Key Performance Measures or Performance Drivers to measure.
 Select comparators.
 Measure own and comparator using (2)
 Compare and identify gaps.
 Design and implement improvement programme, assess how comparator achieved. If
we can do same
 Monitor improvements. Benchmarking not one off
Levels of benchmarking

 Resources – Resource audit – e.g. Quantity; Revenue/employee, Capital Intensity.

Quality; qualifications of employees, age of machinery and uniqueness.
 Competences in separate activities – Analysing activities – Sales call per salesperson,
material wastage.
 Competences in linked activities – Analysing overall performances – Market share,
Productivity.
In selecting what should be benchmarked, priority to CSFs. Analyse value chain. Analyse areas
with greater benefit.
Financial info easier than non-financial info. Reverse engineering, product literature, media
comment and trade associations for info on products.

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Info on processes is difficult to find. Can be obtained from group or non-competing org.

Benchmarking to asses current strategic position. E.g. reliability of its products against
comparator products. Positive findings in benchmarking for advertising.
Benchmarking to assess suitability of competitive strategy ( Cost leadership or differentiation ).
E.g. useful to know competitor costs before decision. Useful to know differentiator factors also.
Other reasons for benchmarking:

 Position audit – existing position and standards for performance.

 Spur to innovation.
 For setting objectives and targets – comparator results to have own budget targets.
 Different ways of doing things – cross comparison.
 Effective to implement change.
 Identify process to improve.
 Cost reduction.
 Improves effectiveness
 Services to defined standard
 Early warning of competitive advantage.
Disadvantages of benchmarking

 Implies there is only ONE best way. There could be other ways to secure competitive
advantage
 Old solutions to future problem.
 Catching up to current competitor performance, they might improve performance
differently later.
 Dependence on accuracy of info.
 Achieving profitable results could affect quality. For e.g. if specific targets are set, only
that would be focussed on.

Changing role of the management accountant:

Traditionally management accountant was kept separate from operational side.
Traditional view of accounting was as a mechanism for control. Accountant needed
independence to exercise independent and objective judgment and report to divisional
managers.

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Why Changes came:

 Burns and Scapens suggest it was fashionable. And it is important.

 The needs of info now differ – competition, org structure and business strategy.
However respondents didn’t think external financial reporting requirements were an important
reason nor imposition by parent was important.
Three main forces for change in role of management accountant:

 Technology
 Management Structure
 Competition
Technology:
Quality and Quantity of IT. Historically, IT was used for financial reports to management.
Only accounts department allowed to input data.
Sophisticated IT systems (MIS) allows users across organisation to input. But run reports only
once provided by the management accountant.
Management accountant is another user of the system, producing reports based on data often
by other departments.
Management Structure:
Shift in responsibility of budgeting from centre to operational management. Occurred as
organisations have undergone demergers and delayering, also resulting in increased employee
empowerment.
Operational managers have knowledge of budgeting and cost control. Accountable for own
budgets and managing costs. Financial measures not used to measure performance.
Produce forecast based on local knowledge, tend to look on future. Used with performance
indicators to give a statement of performance of the area under their control.
Management accountant another reporter to senior management. Their report serves to link
financial outcomes with strategic consequences of activities undertaken.
As Burns and Scapens note, 'the monthly management accounts do not provide new information,
rather they provide a summary, or breakdown, or benchmark, on how the business is progressing
month-by-month'.
Competition:
The most frequently cited was the competitive economic situation . The move can be seen as
consequence of need to respond to competition and deploy a more strategic focus.

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The focus on ‘bottom line‘ identified with short-termism. Future earning capacity more
important. Not just current profits.
Range of new performance measures to review performance. Many are strategic measures
looking at future profitability.
However, burns and Scapens note, return to short termism when economic conditions
deteriorate.

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Chapter 2
Mission and Mission Statements:
Mission – Purpose of business
Vision – Direction heading
Three aspects of vision:

 What the business is ?

 What it could be in an ideal world ?
 What is the ideal world ?
General sense of direction, enables flexibility, guiding idea.

Mission – organisation’s basic function in society for clients.

Four elements of mission:

 Purpose – Wealth for shareholders, satisfy needs of all stakeholders.

 Strategy – Defines the nature, products/services, competitive position, competences
and competitive advantages.
 Policies and Standards of behaviour - Mission converted to operations.
 Values and Culture – Basic, unstated beliefs of people in organisation.

Mission Statement:
 Brief
 Flexible
 Distinctive
 Emphasis on serving customer
Written declaration of central mission

Mission statement addresses the following:

 Reason for existence

 Identity of stakeholders
 Nature of business
 Ways of competing
 Principles of business
 Commitment to customers

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Mission statement characteristics:

 Brevity – easy to understand and remember

 Flexibility – change
 Distinctiveness – stands out
 Open ended – not in quantifiable terms
Avoid commercial terms and no time frames.

Mission and Strategic Planning:

 Inspires Planning – plans consistent with mission. Thus focus for strategies.
 Screening – Mission helps in screening strategies not consistent.
 Implementation – Corporate culture due to mission, better implementation of strategy.
Mission statement once established, aspects of performance and measurement important can
be measured.

Limitations:
 Perceived PR exercise, not actual portrayal.
 Highly generalized and impossible to have specific strategies.
 No point if employees not aware.
 Obsolete if not revised over time.

Goals and Objectives:

Goal, objective and target – some extent interchangeable.

Goal – Intentions behind decisions or actions. Difficult to quantify E: raise prod in manufac dpt.
Objectives – more precise and quantifiable over a period of time. E: inc Prod by 5% in 2 years
Targets – Numerical terms, easy to measure progress and performance. E: 100 finished units/day

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The need ? :
Mission statements are open ended and not time bound.

But ‘ things to be achieved ‘ are the goals, objectives and targets.

Thus achieve Goal Congruence. When these are consistent, operate together and support with
mission.
Strategic objectives translate mission to more specific milestones and targets.

Goals should be mutually supportive which do not conflict other area of business.

Related in several ways:

 Hierarchically
 Functionally
 Logistically
 Wider organisational sense.

Features of Goals and Objectives in organisations:

Goal Congruence:

 Across all departments

 At all levels
 Over time - consistent with each other

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Objectives
• SMART – Specific, Measurable, Attainable, Relevant and Time horizon
• Performance measure alone is not an objective. ( only M of SMART )

Disadvantages of Objectives:
• Tunnel vision, sub optimization, measure fixation
• Obsoleteness
• Not linked to shareholders, mission, strategy

Objectives CSFs and KPIs:

Once objectives are established, Key factors will have to be identified.
CSF – Factor crucial to success. ( Factors crucial to achieve objectives and thus the mission )
KPI – Measure of CSFs performance.

E.G. : Ensuring high quality – CSF. Number of complaints, Number of reported defects – KPI

Sources of CSF:

 Industry the business is in.

 Company and its position in industry – market leader or small company.
 External environment - consumer trends, economy, political factors.
 Areas of corporate activity currently unacceptable – e.g. high inventory levels.

Types of CSF:

 Monitoring – Short-term focus, existing situations. Operational mangers use to control

parts of business.
 Building - Longer-term focus, future orientated. Adaptive. Senior executive level.

Operational V Strategic and Tactical performance:

 Strategic – several years, external focus. Quantitative and qualitative.
 Tactical – Shorter than strategic. Objectives are more detailed. Focus on specific depts.
 Operational - Day to day, specific tasks. More detailed. Prepared more frequently.

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Planning and Control at different levels:
Plans made at higher level ; framework for plans in lower level.
Planning at higher level more significant.

 Corporate plans – Overall Performance, Sometimes qualitative, aggregate.

 Operational Plans – Specific, quantitative, detailed, short time horizons.
Control:

 Plans set targets.

 Control
o Measure actual against plan.
o Take action to adjust, or change plan.
Control therefore impossible without planning.

Feedback:
 Negative Feedback - results MUST be brought back on course.
 Positive Feedback – control action in current course. According to plan.
 Feedforward control – if forecast is bad, action taken in advance.

Two types of feedback:

 Single loop – e.g. : sales targets not met ; control action taken, no change in plan.
 Double loop – information to change the plan itself.

23
Chapter 3

Purpose
Budgeting – qualitative plan for specific time. Normally a year.

 Planning – forces to look future. Essential for survival.

 Control – compared against actual and appropriate action
 Communication – formal communication for junior and senior staff.
 Co-ordination - All parts of business
 Evaluation – manager evaluated over which they have control.
 Motivation – budget as target to aim
 Authorisation – formal authorisation for manager.
 Delegation – involved in setting budget. Realistic targets.

Participation in budget setting:

Top-Down budget – imposed by senior management.
Bottom-up budget – involves division manager participation in setting budgets.

Advantages of top-down:

 Avoids budgetary slack

 Avoids dysfunctional behaviour
 Senior retain control
 Budget setting process quicker
 Avoids problem of bad decisions from inexperienced managers.
Advantages of bottom-up:

 Increased motivation.
 Divisional managers understanding.
 Frees up senior management
 Improved decision making quality

24
Methods of budgeting:
 Fixed and flexible
 Incremental
 ZBB
 Rolling
 ABB
Fixed and flexible:
Fixed budget for single level of activity.
Flexible budget for all cost elements at number of activity levels. Can be flexed or changed to
actual.
Advantages of flexible:

 Comparing like with like.

Disadvantages:

 ‘Moving goal post’. Bonus lost despite beating original budget.

 Difficulty splitting fixed and variable.
 Long run all cost could be variable.

Incremental budgets:
Add incremental amount to cover inflation and other changes to previous budget.
Suitability:

 Stable business, cost stable.

 Good cost control
 Limited discretionary costs.
Advantages:

 Quick and easy.

 Only increment need to be justified.
 Avoids reinventing the ‘wheel’
Disadvantages:

 Builds on previous problems and inefficiencies.

 Uneconomic activities continued.
 Spend up to target to ensure increment next period.

25
Zero based budgets:
Each element justified as like first time. Without approval, budget allowance = 0
Suitability:

 Fast moving business/industry.

 Discretionary costs
 Public sector – local authorities.
Process:

 Specify individual responsibility centres.

 Each described a decision package stating costs and revenue expected. Able to evaluate
and rank against other packages.
 Ranked using cost/benefit
 Resources allocated to various packages.
Advantages:

 Inefficient/obsolete operations identified.

 Increased staff involvement. Better comms and motivation.
 Responds to changes.
 Knowledge and understanding of cost-behaviour enhanced.
 Resources allocated efficiently and economically
Disadvantages:

 Time and cost greater than for less elaborate methods.

 Short term benefits emphasised.
 Process becomes rigid enough to not react unforeseen opp/threats.
 Need for skills not present in org.
 Demotivation if more time in budgeting.
 Compare and rank – difficult.
 Ranking subjective when benefits are qualitative.

Rolling Budgets:
Continuously adding another accounting period when earliest has expired.
Suitability:

 Where accurate forecasts can’t be made.

 Business requiring tight control.

26
Advantages:

 Should be more accurate.

 Much better info to appraise performance.
 More relevant by end of traditional period.
 Forces management to take it more seriously.
Disadvantages:

 Costly and time consuming

 Increased budgeting time may lead less control of actual
 Budget may become last budget ‘ plus or minus a bit ‘
 Demotivation since targets change regularly.

Activity-based budgeting
 Activity-based costing
o ABC gives full production cost/unit. Alternate to absorption costing.
o Steps
 Production overheads into activities.
 Cost drivers for each act
 Calc OAR
 Absorb to product
 Full production cost and p/l
o Advantages
 More accurate cost/unit. Better pricing, decision making and perf
management.
 Better insight to overhead costs.
 Recognises not all overhead related to production and sales volume.
 Applied to all overheads. Not just production.
 Easily in service costing too.
o Disadvantages
 Limited benefit – overhead volume related/small proportion
 Impossible to allocate all.
 Choice of act and drivers may be inappropriate.
 Benefits < costs.
 Activity based management.
o Use of ABC info for management purpose to improve operations and strategy.
o ABM ensured unfeasible courses of action not taken.
o Assist in re-pricing or eliminating unprofitable products.
o Eliminate need to carry certain acts
o Identify ways to produce a product more efficiently.

27
 o Identify design improvements.
o Assist in improving relationships with customers and suppliers.
o Which products to develop and which strategies to pursue
 Two types of ABM
o Operational ABM
 ABC info to improve efficiency
 Acts to add value identified and improved
 Acts that don’t add value reduced and eliminated
o Strategic ABM
 ABC info to decide profitable products to develop and sell
 ABC info to identify profitable customer.
Activity based Management:
ABC principles to estimate future demand for resources and helps acquire resources efficiently.
Advantages:

 Attention to costs of overhead activities.

 Acts drive costs; control cause of driver and cost managed better.
 Info for control of act costs, assumption they are variable in long-run
 Info for TQM. Cost of act to level of service.
Disadvantages:

 Time and effort to establish ABB

 Inappropriate for organisation, its activities and cost structures.
 Difficult identifying individual responsibilities and activities.
 Short term OH costs not controllable. Not line with volume of activity. Only fixed OH
expenditure variance for each activity.

Variances:
Planning variance:

 Original standard V Revised one.

 Due to inaccurate forecasts or standards in original budget setting.
Operational variance:

 Remainder due to decisions of operational managers.

 Revised standard V actual performance

28
Line managers can concentrate more on operational matters.
Mostly variances are explained to be planning error. Revised are harder than original ones.

Variances:
Sales Variance

 Volume variance = (Budget Quantity – Actual Quantity) * Std profit/contribution

 Price variance = (Std Price – Act price) * Actual quantity
Materials Variance

 Total variance = (Std Qty * Std Price) – (Act Qty * Act price)
o Usage variance = (Std Qty - Act Qty) * Std Price
o Price variance = (Std Price – Actual price) * Act Qty
Labour Variance

 Total variance = (Std hours * Std Rate) – (Act hours * Act Rate)
o Efficiency variance = (Std Hours – Act hours) * Std Rate
o Rate variance = (Std Rate – Act Rate) * Act Hours
Production overhead variances

 Variable OH
o Expenditure variance = Flexed Budget OH – Actual OH
o Efficiency Variance = (Std hours– Act hours) * Std Rate
 Fixed OH
o Total variance = Actual OH – Absorbed OH
 Expenditure variance = Budgeted expenditure – Actual expenditure
 Volume variance = (Budgeted Qty – Act Qty) * Std Rate
 Capacity variance = (Budgeted hours – Act hours) * Std Rate
 Efficiency variance = (Std hours – Act hours) * Std Rate
 Total = Expenditure + Volume, Volume = capacity * Efficiency.
Reasons:

 Sales volume – poor performance, market conditions, brand reputation, lack of products
 Sales Price – poor performance, market conditions.
 Material usage – poor performance, substandard mats, faulty machine.
 Material price – poor performance, higher quality, increase by supplier.
 Labour efficiency – poor supervision, less skilled, low grade mats, customer, machinery

29
  Labour rate – high skilled, higher grades, change in labour market.
 OH spending – poor supervision, general increase.

Learning Curves:
 Initially slow to start, learns and gets faster. Learning stops at a point.
 Labour effort, repetitive, new, relative short-lived.
 Costs affected –labour, Variable OH(labour hrs), Material(scrap), Fixed OH(more units).
Application:
Learning curve can be used to:

 Marginal/incremental cost.
 Quote Selling price
 Realistic production budgets and efficient production schedules
 Realistic standard cots
Considerations:

 Sales projections, Ad expense and delivery dates.

 Budgeting with std costs.
 Budgetary control
 Cash budgets
 Work scheduling and OT decisions.
 Pay – productivity bonus
 Recruiting new labour
 Market share – economies of scale
Limitations:

 Not always present

 Stable conditions required. (labour TO)
 Assumes motivation
 Repetition in production immediately.
 Obtaining accurate data
 Disagreement by workers
 Techniques might change.

Responsibility and Controllability:

Managers only held accountable for what they have control over

30
Key issue – which items managers have control and don’t. Uncontrollable elements eliminated
from measurement or different reports for controllable and uncontrollable items.
Controllability principle difficult to apply because many areas do not fit neatly into controllable
and uncontrollable categories.
Controllable costs:
Performance of divisional manager only those items which are controllable by him. Costs only
controlled when incurred. Unfair to judge for performance not under their control.
However, if divisional performance only measured on costs they can control, economic
performance will be overstated. Therefore economic performance measurement will include
central costs plus int/taxes.

31
Chapter 4

Many studies have shown that different organisations arrange their activities according to variety
of influences. Three types of organisation form are:

 Functional form
 Divisional form
 Network form

Functional Form:
Departments defined by their functions. Traditional common sense approach. Primary functions
in manufacturing company:

 Production
 Sales
 Finance
 General Administration
 Marketing
o Sales
o Advertising
o Distribution
o Warehousing

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Information needs of functional structures:
Information flows up and down the organisation vertically. Senior management communicates
plans and decisions downward. Communication upward consists mainly reports on performance
for senior management to monitor progress.
Less communication across functions, as control is located higher up and functions tend to be
isolated.
Implications for performance management:

 Structure based on work specialism and therefore logical.

 Firm benefits from economies of scale.
 Does not reflect actual business processes where value is created.
 Hard to identify where profits and losses are made on individual products/markets.
 People won’t understand how the business works.
 Problems co-ordinating work of different specialisms.
Information needs of functional structures:
Planning and control tend to be centralised. Senior management need info on performance to
monitor and control progress. Performance of individual functions aggregated and sent to senior
management. Feedback given once aggregated.
Aggregation makes it hard to know how well individual products are performing. Management
and control being centralised , functional managers only receive limited info. Likely to add feeling
that functions are isolated. Countering this, managers need info about other functions within org
and business overall – complete picture and understanding effect on other functions.
Communication between functions vital.
Focussed on operational efficiency of each function. Info about efficiency of other functions,
variances to targets/budgets. Nature – efficient departmental tasks rather than specific products.

Divisional ( Diversified ) Form:

Information characteristics & needs in divisional organisation:

Autonomy to lower line managers. Prime co-ordination mechanism – Standardisation of outputs.
Usually performance measures, like profit set from top.

 Divisionalisation to autonomous regions/product businesses with own revenue, expense,

profit.

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  Communication between divisions and HO restricted – formal, related to perf standards.
HO influences by power to hire/fire division managers.
 HO influences prices and profitability when setting Transfer Price. Two way information
flow, HO relies on divisional information for prices. TP signals expected performance.
 Function of organisation size, in numbers and product-market activities.
Two types of divisional structure:
Concentration on particular product-market areas, overcomes problems of functional
specialisation. Responsibility devolved, central functions may be duplicated.

Subsidiaries – separate legal entities. Holding company can be firm with permanent investment
or one which buys and sells businesses.

Implications for performance management:

 Division should be free to use authority for their part of the organisation, but accountable
to head office (e.g. for profits earned).
 Division large enough to support quantity and quality of management required. Must not
rely on HO for excessive management support.

34
  Division must have potential for growth in own area of operations.
 Should have scope and challenge in job for management of division.
Divisions should exist side by side. Deal with each other, should be arm's length transaction.
When in contact, compete with each other. No insistence on preferential treatment to a 'fellow
unit' by another unit.
Advantages:

 Focuses attention of subordinate management on business performance and results.

 Management by objectives applied more easily. Manager of unit knows better than
others how they are doing, and needs no feedback.
 More authority to junior managers provides them with work - grooming them for senior
positions.
 Tests junior managers in independent command early in careers and at reasonably low
level in hierarchy.
 Reduces levels of management. Top executives in each division should be able to report
directly to chief executive of the holding company.
Inherent problems of adopting divisional form:

 Partly insulated by holding company from shareholders and capital markets, which
ultimately reward performance.
 Economic advantages over independent organisations 'reflect fundamental inefficiencies
in capital markets'. (different product-market divisions might function better as
independent companies.)
 Bureaucratic than independent corporations, owing to performance measures imposed
by strategic apex.
 HO tend to usurp divisional profits by management charges, cross-subsidies, head office
bureaucracies and unfair transfer pricing systems.
 Some businesses - impossible to identify completely independent products or markets for
which divisions would be appropriate.
 Divisionalisation only possible at fairly senior management level - limit to how much
independence in the division of work can be arranged.
 Halfway house - relying on personal control over performance by senior managers and
enforcing cross-subsidisation.
 Divisional performance not directly assessed by market.
 Problems of divisionalisation - conglomerate diversification. Each business might be
better run independently. Different businesses might offer different returns for different
risks, which shareholders might prefer to judge independently.

35
Information needs:
Self-contained and based on geography or product/service area. Good communication between
functions within division but divisional managers have more authority to act autonomously than
in a functional structure.
More decentralised than functional structure. Divisional managers clear about strategy and
objectives. Goal congruence – important.
Key role in budgeting and monitoring performance, performance information needs to be
available to all these managers. ( Monitor costs and revenue for their division )
Conversely, divisional managers having high degree of autonomy, HO needs information about
performance to assess being with line of HO’s objectives. Performance measured on basis of
divisions/strategic business units rather than according to business processes.
Managers accountable and rewarded for performance. Divisional performance measures ( ROI
and RI ) appropriate here.
Functional structure information aggregated for feedback by HO. Divisional structure
performance information available at lower level for divisions to provide feedback to senior
management.

Network organisations:
Characteristics and needs in network organisation:
Structure applied both within and between organisations. Term used to mean resembling both
organic organisation and structure of informal relationships exist in most org along formal
structure. Such loose, fluid approach used to achieve innovative response to changing
circumstances.
Communication is lateral and takes this form rather than command. Information and advice given
than instructions and decisions.
Visible in growing field of outsourcing. Complex relationships between firms, buy and sell to each
other or just buying in services.
Organisations manage trade-off between independency and autonomous, and interdependent
and co-operative. Virtual teams – interconnected groups of people not in same office or
organisation but who:

 Share info and tasks

 Make joint decisions
 Fulfil collaborative function of a team.

36
Implication for performance management:

 Staffing – Freelance/Contract workers undertake certain areas of org activity. More

flexible workforce within controlled framework
 Leasing – Machine, IT and accommodation more common
 Production outsourced – Even to offshore where labour is cheaper.
 Interdependence of organisations – Sharing of functions and services.
Databases and communication create genuine interactive sharing of and access to, common
data. Co-operation on non-core competence matters can lead to :

 Cost reduction
 Increased market penetration
 Experience curve effects.
Typical co-operation between competitors – R&D and distribution chains. Spread of Toyota
system of manufacturing, with emphasis on JIT, quality and the elimination of waste, led to a high
degree of integration between operations of industrial customers and suppliers.

Information needs:
Developed sense of collective responsibility between members of networks. Process of
continuous interaction and collaboration. Many physical products never touch the ‘core’
organisation at centre. E.g. Most Nike shoes are not touched by Nike employee and never see
inside of Nike Facility because of outsourcing.
Many org has outsourced customer service function yet level of overall satisfaction plays vital
role and is ‘ core ‘ of company.
Flow of information between network partners play key role. Traditional managers look to
monitor and control, in network rely on contracts, co-ordination and negotiations with network
partners. Managing relationships with network partners and resolving any conflicts.
Information required to maintain control. Goals and expectations specified in contractual
agreements or service level agreements detailing what ‘core’ company requires from partners.
Management info also required to show standards required are met.
Network structures mean that monitoring performance of divisions and functions now also has
to monitor outsource partners. Strategic level has to assess cost and benefit of outsourcing to
inform resource allocation decision.
Performance management initiatives cannot concentrate solely on performance within 'core'
company. Performance management initiatives need to focus on improving performance across
the whole value network.

37
Consequently, performance management also needs to recognise nature of relationships
between core organisation and its stakeholders. Issues such as transparency between the
network partners become important, and performance management needs to focus on building
trust instead of simply focusing on control. Trust, rather than control, helps improve performance
within a network relationship. Consequently, management processes should aim to build trust in
the relationship.
The dynamic of relationship between the organisations in a network also has important
implications for performance measurement. For each key network partner, the 'core' company
should monitor not only what it is getting from the partner, but also what it is providing to
partner. Failure to do so could leads to loss of key network partners, and could leave the 'core'
company unable to fulfil its commitments to its customers.
Different levels of information needs in network structures.

 Operational information –comprising data on the status of transaction; E.g. tracking the
progress of batch of shoes being manufactured by an outsourced partner
 Financial information – E.g. invoice and payment information
 Management information – which supplements operational information and could
involve sharing. E.g. skills and designs
Various activities must also be integrated. IT systems to play a crucial role here, in relation to
data sharing and integration between the 'core' organisation and its network partners. Equally
email likely to be important in sharing information and co-ordinating work

Information needs of manufacturing and service business:

 Cost Behaviour – Modern IT, more Overheads. High proportion of fixed costs.
o Planning – Standard outlined and compared with actual.
o Decision Making – estimates made and assessed.
o Control – Total monitored for best rates.
 Quality – Customer satisfaction is built in.
o Planning – According to specification.
o Decision Making – What level of quality. ‘fitness for use’
o Control – if quality falls, high cost low profit.
 Time – Bottlenecks, lead time, deadlines.
o Planning – Scheduled manufacturing time for efficiency. Effective capacity
utilisation
o Decision making – Keeping its promises to customer.
o Control – Speed of delivery, JIT, Bottleneck, New product development.
 Innovation
o Planning – New product development, speed to market, new process

38
 o Control – launch and design of new products.

Strategic, tactical and operational information: (Manufacturing)

 Strategic
o Future demand estimates
o New product development plans
o Competitor analysis
 Tactical
o Variance analysis
o Departmental accounts
o Inventory turnover
 Operational
o Production reject rates
o Materials and labour used
o Inventory levels

Characteristics of service business:

 Intangibility – Lack of substance. E.g. nothing taken from theatre.
 Inseparability/Simultaneity – Consumed same time. E.g. Haircut
 Variability/Heterogeneity – hard to attain consistency.
 Perishability – Consumption not stored for later.
 No transfer of ownership – right to use not own. E.g. rental car.

Types of service business:

 Mass service – Same, very standardised. E.g. Public transport. Quality or cost info
required.
 Personalized service – Financial Advice, Dentistry. Labour intensive. Input to output info.
 Mixed – high degree of interaction and customisation. Low degree of labour intensity.
Hospitals and restaurants.

Mass services:
 Large fixed costs
 Ensuring quality and consistency.

39
Strategic, tactical and operational information: (Service)
 Strategic
o Forecast sales growth and market share
o Profitability, capital structure

 Tactical
o Resource utilisation; average staff time charged out, number of customers per
hairdresser, number of staff per account
o CSR
 Operational
o Staff timesheets
o Customer waiting time
o Individual customer feedback

Business process re-engineering:

How business can redesign and re-engineer processes to improve efficiency.

Process – collection of acts that takes one/more input to create an output.

Characteristics:

 Several jobs combined to one.

 Workers often make decisions.
 Steps performed in logical order
 Work done where it makes most sense.
 Checks and controls reduced and quality, built-in
 Single point of contact.
 Advantages of centralised and decentralised operations combined.
Hammer’s principles of BPR:

 Processes designed to achieve desired outcome.

 Personnel who uses output performs the process.
 Info processing included in work, which produces info.
 Geographically dispersed resources treated as centralised.
 Parallel activities linked rather than integrated.
 ‘Doers’ allowed self-management. Distinction between workers and managers abolished.
 Information should be captured once at source.
Implementing BPR:

 Develop business vision and process objectives.

40
  Identify processes to be redesigned.
 Understand and measure the existing process
 Identify change levers.
 Design and built a prototype for new process.
Business process and technological interdependence between departments:

 Links can vary, hence relations to be managed. Different departments depend on each
other to complete their tasks.
 Pooled interdependence, each works independent.
 Sequential interdependence when a sequence with start and end point. Management
effort to ensure transfer between departments is smooth.
 Reciprocal Interdependence, departments acquire inputs and offer outputs to each other.
Key characteristics of organisations which have adopted BPR:

 Work units from functional departments to process teams.

o E.g. Functional – sales order by different people/departments/functions.
o Process – people are grouped. One team complete. Multi-skilled people.
 Jobs change. People responsible. Job enrichment and job enlargement.
 Roles change.
 Perf measures concentrate on results.
 Hierarchical to flat.
o Work of whole team. Team manages itself.
o Less managerial input
o Lines of communication ‘naturally’ develop around business process.
Problems with BPR:

 Narrowly defined targets

 Changes affect staff
 Improves effectiveness might ignore effectiveness.
 Potential of workers limited.
Implications of BPR for accounting systems:

 Perf Measurement – must be built around processes.

 Reporting – identify where value is added.
 Activity – ABC
 Structure – dependence on organisation structure.
 Variances – new ones.
Examples:

 Traditional to JIT
41
  Elimination of non-value adding acts.

Business Integration:
Importance of linkages. Ensure there is a fit. Acts and processes co-ordinated to create value.

McKinsey’s 7S’s Model:

Link’s between organisation behaviour whole and individually.

 Structure – division of tasks, hierarchy of authority.

 Strategy – competitive edge, achieving objects.
 Systems – technical systems; accounting, personnel, management info.
 Style – culture.
 Shared Values – belief for existing.
 Staff – people.
 Skills – things organisation excel in.
All elements pull in same direction for effectiveness
McKinsey’s 7S’s model and performance management:

 If S elements are properly aligned and supportive.

 If found no, necessary re-alignment.
 Improves performance. Which is key to performance management.

The Value Chain:

 Functions – familiar departments. Reflect formal organisation structure.
 Activities – What actually goes on and work that is done. Creates value. Incur costs and
earns revenue.

42
Procure inputs, Process them, add value and then generate outputs.
Activities:

 Inbound Logistics – receiving, warehousing.

 Operations – Conversion into final product.
 Outbound logistics – Delivery to customers, testing, packaging.
 Marketing and sales – Ads, Promotions.
 After-Sales service – Installing, repairing, upgrading and etc.
Support Activities:

 Procurement – Acquire inputs

 Technology Development – Design improve process and/or resource utilisation.
 Human Resource Management – Recruit, train, develop and reward
 Firm Infrastructure – Management, planning, finance, quality control, public and legal
affairs. Crucially important to an organisation’s strategic capability.
Linkages:

 Activities in value chain affect one another. E.g. costly/quality product less after-sales
service.
 Requires Co-ordination. E.g. JIT requires smooth function of operations, outbound
logistics and service activities such as installation.
Value system:
Adding value doesn’t stop at organisation’s boundaries. E.g. even if items added in food is
selected by cook, it’s the quality of the farmer.

 Understand nature and location of skills and competence

 Framework for cost analysis.
 Securing competitive advantage:
o New/Better ways.
o Combine activities
o Manage linkages in own value chain
o Manage Linkages in value system
Value Chain and performance management:

 Measuring performance in key areas where value is created.

 Assess how effectively, comparing is vital. Benchmarking.

43
Influence on structure, culture and strategy on performance measurement
methods and techniques:
 Structure
o Emphasis on flexibility and adaptability.
o Shift towards task-centred structures such as multi-disciplinary project teams.
o Concept for matrix organisation. Dual reporting to functional manager and area
manager.
o Formal and constrained structures, restrict flow of ideas.
 Culture
o willingness to embrace new methods and techniques.
o If predictability and reliability valued and formal ways encouraged, continue tried
and tested methods for reliability.
o If innovation and creativity prized and individual participation encouraged with
risk taking not frowned. Tend to use ABC and new methods.
o JIT and Total Quality management, ideas from Japanese management.
 Strategy
o Focus on quality, time and innovation. By adopting TQM and JIT.
o Highlights importance of non-financial aspects of performance.
o Performance measures an appropriate mix of financial and non-financial.
o Organisation pursuing cost efficiency use activity based costing, life cycle costing
and customer profitability analysis.

Contingent approach to management accounts:

No universal approach applicable to all. Efficiency dependant on awareness to environmental
factors which influence them.

 Environment
o Degree of predictability.
o Degree of competition faced
o Different product market faced
o Hostility exhibited by competing organisations.
o Budgets less reliable in dynamic/uncertain environment.
 Structure
o Size
o Interdependence
o Degree of decentralization
o Resource availability
 Technology

44
 o Nature of production process
o Routine/complex of production process
o Relationship between output and input
o Variety or complexity in each task
Competitive Strategy:

 Cost Leadership – info about cost control and cost reduction

 Differentiation – performance in areas differentiated from competitors

Contingent Variables:
Observations made by different researchers in light of investigations into particular cases.

Environment:

 Sophistication based on intensity of competition.

 Accounting info used differently based on type of competition faced.
 Budget info evaluated by senior managers, rigid in tough environment but flexible in
liberal environment
 More dynamic = more frequent reports
 Large number of product markets = more decentralised control system.
 More severe competition = more sophisticated accounting info system.
 Accounting system and environment between two extremes, Simple/complex and
Static/dynamic.
 More complex structure = more accounting control tools.
 Turbulence / discontinuity requires replacement of control tools.
 Structure and control systems based on environment.
 Uncertainty = subjective methods of performance evaluation.
 Accounting system affected to extent of manipulation of self by other org.
Technology:

 Nature of production process determines type of costing system. Cost allocation than
apportionment.
 Complexity of task affects financial control structure.
 How much data, what about, how used. Correlates with things that could go wrong,
procedures to investigate.
 More automated = more formality in budget systems.
 Less predictable = more budgetary slack.
 Structure and process of operational units tend to be related to technological variables.
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  Structure and process of planning units tend to be related to environmental variables
Size:

 Organises to functional basis. Reorganise into semi-autonomous divisions. Applied to en

block to each individual division.
 Large org = great degree decentralisation = greater participation in budgeting.
 Large org a bureaucratic approach. Small organisations more personal approach.
 Grow by acq, diff in accounting system used by acq company disappear. Conforms to
practices used by acquiring company.
Culture:

 Control system inconsistent with values/language/symbol likely to create resistance

 New systems threaten to alter existing power relation maybe thwarted
 Control process most effective operated corporate culture supportive of org aims,
objectives and methods of working consistent with demands.

Limitations of contingency theory:

 No more than a framework for describing existing accounting systems.

 Nature of variables not been elucidated
 Organisational effectiveness vital part. Much neglected topic. Development urgently
needed.
 Organisational design weaker than own literature. Same contingent affects both
organisational structure and accounting system design.
 Interconnected nature of components make up control package, cannot be studied in
isolation.
 Highly abstruse style. Fellow academics rather than practicing accounts.
 No means clear how various contingent variables affect management accounting system.
 Plays down importance of power, both the power of the strategically placed managers
and the power of the organisational itself.
 Financial accounting does not go one way, but does not allow many alternatives. Odds
with contingency approach.
 Ignores influence of aspects of an org context which are more difficult to quantify.

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Chapter 6
Risk and Uncertainty:
Risk – where outcomes are not known, but probabilities can be estimated.
Uncertainty – outcome can’t be predicted or assigned probabilities
Exogenous variables – variables determined externally. E.g. cost of raw material imposed by
supplier.
Types of risk and uncertainty:
Physical – Earthquakes, fire, flooding, and equipment breakdown. In long term climatic changes
can be included.
Economic – Assumptions about economic environment might turn out wrong. Not even
government forecasts are perfect.
Business – Lowering of entry barriers (e.g. new technology); changes in customer/supplier
industries leading to changed relative power; new competitors and factors internal to firm (e.g.
culture or technical systems); management misunderstanding of core competences; volatile cash
flows; uncertain returns; and hanged investor perceptions increasing the required rate of return.
Product life cycle – Different risks exist at different stages of life cycle.
Political – Nationalisation, sanctions, civil war and political instability can all have an impact on
the business.
Financial – Financial risk has specific technical meaning: the risk to shareholders caused by debt
finance. The risk because debt finance providers have first call on company's profits. The need to
pay interest might prevent capital growth or the payment of dividends. The converse is that when
business is buoyant, interest payments are easily covered and shareholders receive the benefit
of the remaining profits.

Accounting for Risk:

Return – Raised to compensate for risk
Payback - Within certain period of time, lower the better.
Finance – financed under strict conditions ( E.g. from profits only. )

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Planners try to quantify risk to compare risks:
Rule of thumb – range of values from worst possible result to best possible.
Basic Probability Theory – likelihood of forecast occurring.
Standard Deviation – spread of values with different possible outcomes, calculating SD of EV.

Decision rules useful in strategic planning:

 Maximax – Optimistic
 Maximin – Pessimistic
 Minimax Regret – Neutral
Decision trees, when choices are mutually exclusive and risk can be quantified.

 Clarification when complex.

 Using risk as input to quantify
 Ranking relative costs and benefits of options
EV only useful for comparative purposes. Not a prediction of actual outcome. EV = Σ p x
p - probability, x – value of outcome

Basic Probability theory and expected values:

Probabilities to different decisions – EV or weighted average. EV can be highly subjective.

Risk Preference:
Risk seeker – secure the best outcomes, even if small chance.
Risk Neutral – most likely outcome.
Risk Averse – assumes worst outcome.

Stakeholders’ risk appetites:

Risk appetite - risk an organisation is willing to take/prepared to accept in pursuing strategic
objectives. Risk appetite can vary between organisations and also vary according to the type of
risk incurred.
Different stakeholders different risk appetites. Different perspectives.

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Pest Analysis:
To identify main factors affecting performance in the macro-environment. Four segments
which are namely:

 Political
 Economic
 Socio-cultural
 Technological
Public concern for natural environment, CSR, sustainability and legal matters, have brought
Economic and Legal making PESTEL
P5 focus on how factors help managers assess org’s performance. E.g. Govt increases sales tax –
slowdown in org’s sales.
PEST analysis reveals opportunities and threats, likely to affect strategy and behaviour of org,
which then affects org’s performance. Responding quick to environmental changes will give a
competitive advantage over rivals.

Political Factors:

 Government policy encourage firms to increase/reduce capacity? Incentives to locate in

a particular area?
 Organisation affected by government divestment/rationalisation?
 Government policy discouraging entry into an industry; restricting investment or
competition or by making it harder, by use of quotas and tariffs, for overseas firms to
compete in the domestic market?
 Government policy affecting competition?
o Government's purchasing decisions will have a strong influence on the strength of
one firm relative to another (such as in the armaments industry).
o Regulations and controls - affect the growth and profits (such as minimum product
quality standards).
o Governments and supra-national institutions might impose policies which keep an
industry fragmented and prevent the concentration of too much market share.
 Government regulate new products (such as pharmaceuticals)?

Economic Environment:

 Gross domestic product

o Grown/fallen?

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 o Demand for goods/services affected by growth/fall?
 Local economic trends
o Local businesses rationalising/expanding?
o Office/factory rents increasing/falling?
o Direction house prices are moving?
o Labour rates increasing?
 Inflation
o High rate making it difficult to plan, uncertainty of future financial returns?
Inflation and expectations help to explain short-termism.
o Rate depressing consumer demand?
o Rate encouraging investment in domestic industries?
o High rate leading employees demand higher money wages to compensate fall in
the value of their wages?
 Interest rates
o Affect consumer confidence and liquidity, and therefore demand?
o Cost of borrowing increasing, thereby reducing profitability?
 Exchange rates
o Impact these have on cost of overseas imports?
o Prices that can be charged to overseas customers affected?
 Government fiscal policy
o Consumers increasing/decreasing the amount they spend due to tax and
government spending decisions?
o Government's corporation tax policy affecting the organisation?
o Sales tax (VAT in the UK) affecting demand?
 Government spending
o Organisation a supplier to the Government and affected by the level of spending?
 Business cycle
o Economy booming/recession?
o Follow business cycle or counter-cyclical industry?
o Forecast state of the economy?
 International factors
o How does characteristics of overseas markets affect demand/supply?

Socio-Cultural Factors:
Divided into subcultures, due to social differences.

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Class – different social classes different values; position of society.
Ethnic background – some as distinct cultural group.
Religion – related with ethnic.
Region – Regional differences by past effects of physical geography; Accents.
Age – age profiles in different countries; different demand. ( Pensions and life insurance )
Gender – Targeted at men/women.
Work – different corporate culture. Shared values might be different.

Knowledge on culture of society have an effect on performance.

 Culture influences tastes and lifestyles, so what products should be offered influenced.
 Marketers adapt accordingly to the sizeable market. Important in export markets.
 Human resource managers has to know different cultural differences. Ethnic body
languages will otherwise be hard to interpret by interviewers.

Technological Factors:
Adapting themselves to technological change in environment. Activities of organisations
affected in number of ways:

 The type of products or services made and sold. E.g., consumer markets have of
smartphones, while car manufacturers looking at alternative sources of fuel.
Technological change - direct impact on a product's life cycle and demand for the product.
 The way in which products are made:
o Modern production equipment reduces need for labour. As technology increases
manufacturing productivity, more people involved in service jobs.
o Technology can also develop new raw materials.
 The way in which services are provided; E.g., instead booking holiday through a travel
agency, consumers now book holidays directly over internet.
 The way in which firms are managed. IT helped in the 'delayering' of organisational
hierarchies, also facilitated the emergence of network and virtual organisations.

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  The means and extent of communications with external clients affected by technological
change.
 The way in which products are sold – growth of e-commerce.
Legal factors.

 Employment law. Impact of Social Charter provisions? Minimum wage? Anti-

discriminatory legislation?
 Marketing and sales. Laws that protect consumers (such as on refunds and replacements)
affect the organisation?
 Environment. Laws on pollution control and waste disposal affect the organisation?
 Regulators. Organisation subject to regulators (such as electricity, gas and water) who
have influence over market access, competition and pricing policy?

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Chapter 7

Management accounting info supports strategic:

 Planning
 Control
 Decision making
Differs from traditional accounting- has an external and a future orientation.

Management control concerns – efficient and effective use of resources to achieve objectives.
Operational control concerns – efficient and effective completion of tasks.

Information needs:
Focus Nature Sources
Strategic Planning, Future Broad, long term, uncertain Mostly external

Tactical Some planning, more about How to use, targets, set benchmarks, Largely internal
control, effeci and effecti of short to medium term
resources
Operational Focus on control Narrow, high structured, Short term, Internal,
detailed, terms of units, hours etc. Transaction data
rather than monetary terms – customer order.

 Information tailored for user.

Information requirements and management structure:

 Information according to responsibility.
 ROI for company with multiple divisions showing perf of each division.
 Functional structure – operational efficiency of each division.
 Divisional manager – all aspects of divisions. Selling and manufac strat. Invst policy
 Functional manager – only about own functions. Aware of other functions to co-ordinate.
 Network org – about each network partners. Compared with targets set.

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  Virtual org – integration of IT system. Info across organisation equally.
 Shamrock organisation – prof core, self- employed prof/technicians, contingent
workforce, consumers.
 Alliances – informal relationships with R&D of other companies as well as JV , takeovers
and mergers. Main problem being integration of knowledge.

Objectives of management accounting and management accounting information:

 Info to enable decision makers make good decisions.
 Management accounting – use of managers.
 Financial Accounting – shareholders and interested external parties.
 Cost accounting – inventory valuation meeting external reporting requirements to
shareholders
Managers need more detailed and Forward looking info. Data analysed suiting their requirement.

Management act information used for :

 Measure performance. – analyse as whole/individuals. Provide feedback.

 Control business – performance reports (what required, what actual), take necessary act
 Future plan – info for planning.
 Making decisions – strategic, tactical and operational

Evaluation management accounting information:

 The provision of good information – relevant to needs. Purposeful. Accurate. Inspires
confidence. Times. Appropriate communication
 Provision of value for money service – charge incurred = level of service and quality of
info provided.
 Availability of informed personnel – staff answers queries and resolve their problems.
Cost/benefit.
 Flexibility – response to user requests for info and reports.

Management accounting information within the management accounting

information system:

control information sources:

 Salespeople/market researchers – customers and sales demand

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  Quality controllers info about product quality.
 Maintenance staff – maintenance, repair work required. Reasons for breakdowns.
 R&D Staff – progress of product development projects
Highly user-specific and localised.
Management accounting systems, feedbacks on every aspect, common denominator – MONEY

Division of responsibilities in a typical system:

Enterprise Resource Planning Systems (ERPS)

 Support and automate. Medium and large sized enterprise.
 Identifies, plans enterprise-wide resources needed.
 Manufacturing, distribution, inventory, invoicing and accounting.
 HRM, Marketing.
 Supply chain management soft for links with suppliers and customers.
 All operations integrated in one system.
 Support performance measures such as balanced scorecard and strategic planning
 Lower costs, increase flexibility and efficiency of production.

Disadvantages:

 Cost, implementation time

 Lack of scope for adaptation for specific business

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  Problem with one function affects all.
 One link in supply chain
 High switching cost.

SEMS – Strategic Enterprise Management Systems

 Primary focus on strategic management.

 Improve process and procedures and decision making. To have competitive edge.
 Extension of balanced scorecard approach. Capability to support financial consolidation.
 Strategy and performance management in one software. SAP SEM
 Supports:
o Financial reporting.
o Planning, budgeting and forecasting.
o Corporate perf mgmt. and scorecards.
o Risk management.

Lean management information systems:

 Known as Toyota production system – developed there.
 Get right things at right time, first time while minimising waste and being open to change.
 Minimises amount of resources.
 Focus on :
o Continuous improvement
o Increased productivity
o Improved quality
o Improved management.
 Systematic elimination of waste:
o Over production
o Waiting
o Transportation
o Inventory
o Motion
o Over-processing
o Defective units
Characteristics of lean:

 Single piece continuous work flow.

 Value chain integration – partnership with supplier, distributor.
 JIT – moves to production, processed immediate, moved immediate to next operation.

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  Short order to ship cycle times and small batch production capability synchronised to
shipping schedules.
 Production based on orders than forecasts, driven by demand/‘pull’
 Minimal inventories
 Changeovers of machine and equipment
 Production layout based on product flow
 Workers involvement – improve quality and eliminate waste
 Defect prevention
 Team-based work to make decisions.
Other benefits:

 Waste reduction
 Production cost reduction
 Manufacturing cycle times decreased
 Labour reduction - maintaining/increasing throughput
 Inventory reduction - increasing customer service levels
 Capacity increase
 Higher quality
 Higher profits
 Higher system flexibility
 More strategic focus
 Improved cash flow through increasing shipping and billing frequencies

Applying lean to management information systems:

 Organising, exchange and retrieval methods – effort for retrievals and accessing.
 How its organised and presented. – no duplication, unnecessary detail
 Flow to users more efficient.
Scope for improvement – information managed and shared.
Value adding – only produced if value added and required.
Flexibility – to ad hoc requests.
Quick.

Lean management:

 Delivering value efficiently to customer – what is valued? Efficiently provided.

 People lead and contribute fully.
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  Discovering better ways of working – problem identification and resolution.
 Connecting strategy, goals and meaningful purpose – clear direction, everything in
context to daily work. Roles understood.
Lean org – each guy matters. Guys who don’t matter are made redundant.

Implementing Lean Principles. – THE 5 ‘S’s:

 A place for everything and everything goes in its place.

 Seirl (sort) – only things important retained. Introduce order where possible.
 Selton (simplify) – arranging for easy access.
 Selso (scan) – Tidy, avoid clutter. Non-conformity stands out.
 Selketsu (standardise) – maintain consistent standards.
 Shitsuke (Sustain) – repeat the whole cycle. Continuous improvement
Difficulties with implementing lean principles:

 Should be treated as a fundamental approach.

 Simply having lean will not help. Requires change in thinking and culture.
 Often viewed as cost-cutting exercise rather than fundamental commitment.

Human behaviour and management accounting systems:

 People with needs and motivations - separate from objectives.
 People don’t respond same way to same info.
 Not necessarily sending information they ought to send.
Management systems develop ways to overcome these.

Dual-process framework:

 Heuristic/holistic planning and analytic/systematic processing

 Heuristic – respond on broad brush or rule of thumb to interpret.
 Analytical – respond on detail of information.
 Determined by cognitive and motivational factors.
Implications for management accountants:

 Looked in detail only if relevant.

 Key issue – MAS output tailored to particular users.

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Ways of presenting information:

 Table? Graph? Chart?

 Pie charts for percentages/proportions.
 Bar charts for comparison
 Line Charts for trends.
 Not to use too many charts/graphs in one report.

Information and responsibility accounting:

 Responsibility accounting – segregates revenue and costs into personal responsibility to
monitor and assess each part.
 Responsibility centre – part of org headed by manager with responsibility for perf.
 Level of detail provided and frequency its provided. Cost/benefit.
 Modern systems, information overload possibility.
 Task of MA – what info is needed, what form, what interval
o Cost centres
o Revenue centres
o Profit centres
o Investment centres

Controllability:

 Which can be controlled and which cant be.

 Reports that are distinguished for controllable and non-controllable elements.
Responsibility centres and information requirements:

 Costs centres – actual cost with budget cost.

 Revenue centre – revenue generated info.
 Maximising sales at expense of profit might be an issue.
 Bring profit centres. Both revenue and costs are monitored

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Chapter 8

Sources of management accounting information:

Internal sources:

 System for collecting/measuring.

 Informal communication.
 Communication between managers.
 Payroll, production dept, VFM – purchase dept., marketing dept,
 Time spent on clients recorded,
Monetary information – ledgers, cash books, controls for transactions, inv control system.
Non-Monetary information – inv control system data(speed, quality), market research.
Questionnaires, interview, meetings
External Sources:

 Tax specialists - changes in tax law

 Legal expert/company secretary – new legislation on laws.
 R&D official – work done by govt/another company.
 Marketing managers – research
 Employees- from daily life.
 Invoice and ads – from customers and suppliers.
 Directories
 Associations – published data
 Government agencies – economic, industry and population and general economic info
 Published sources – digests, pocket books and periodicals
 Syndicated services – purchase of data from research companies.
 Consumer panels – set of houses buying activity monitored.

Information from customers – questionnaires, market research, comments, complaints.

Information from suppliers:
o Bid info – before deal
o Operational – stages of manufac. Process
o Pricing
o Technology – developments in supplier industry

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Internet:
 Richness of external data and cost reduction.
 Cheap
 Speedy & impersonal.
o Supplier website
o Should not be relied as sole source
o Number of business to business sites.

Database information:
 Provide with useful flow of relevant info
 Easy to use and access
o Some newspapers computerised
o Public databases for inspection
 Databases of external organisation

Online databases:
 Managed by host companies
 Revenue through charge for users
 Around the clock access

Data warehouses:
 Data from range of internal and external sources
 Drill down to transaction level detail
 Coherent set of info for using across the org in analysis and decision making
 Use of data mining to identify trends and patterns

Costs of information:
 Costs of capturing, processing but also using information inefficiently.
 Direct data capture – employee time filling timesheets, secretary time in taking minutes.
 Processing – Payroll dept time processing and analysing, personnel to input data to MIS
 Inefficient use of info – unrequired info, stored longer than needed, disseminated than
required, duplicate info collected
 System change – modification of systems to ensure compatibility
Cost of external information:

 Direct search costs – market survey cost, subscriptions, download fee

 Indirect access costs – time spent on useful and unsuccessful info, time theft
 Management costs – Recording, processing and dissemination, overload, excessive

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  Infra costs – Installation and maintenance – servers, networks
 Time theft – abuse of facilities, lost time, monitor and discipline, overload.

Benefit and limitations of external data:

 Benefits
o Quality of decisions
o Avoiding risk/uncertainty
o Ability to respond/improve
 Limitations
o Reliability of sources, completeness
o Reason for collection
o Method.
o Relevancy
o Defined parameters
Advantages & Disadvantages of secondary data opposed to primary:

 Advantages
o Time and money saved
o Cheaper
o Parameters set
o Provides guidance
o Assimilate private research
o Sampling parameters defined
 Disadvantages
o Relevancy
o Some might be costly
o May not be available
o Bias
o Accuracy

Information for planning and control:

 Performance measurement
 Control
 Future plans
 Decision making
o Strategic
o Tactical and operational
Control and feedback:

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  Compare with actual for required measures
 Plans – awareness of environment, current perf.
 Achieved via feedback.
 Supply management with data for control
 Info on payroll, wage payments, inventory levels, customer data
Control and benchmarking

 Comparing actual against targets/budgets.

 Benchmark performance against suitable comparators.
 Between depts. Between key areas.
External info for planning and control:

Management Types of Example

function information
Planning Demand estimates Expanding foreign – expected demand, social
Market research economic factors for demand, competitors,
strength, barriers to entry
Decision Demand estimates Prices – price effect on demand, market research,
Making Market research competitor & govt policy, competitor launching
Competitor research plans
Control Benchmarking if cost leadership – costs kept low, external
Customer benchmarks comparing costs and efficiency
expectations

Quality – difficult to assess/guarantee. Quantitative information easier to feed into MAS.

Benchmarking:

 Setting targets using external information

 Tool for external comparison
 Has weakness and strengths.

Pg 231

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