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© Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse.

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Presentation on theme: "© Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse."— Presentation transcript:

1 © Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

2 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Management Accounting Managing organizations (Strategy and control) Chapter 6

3 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Objectives Balance the assignment of responsibilities, the choice of performance measures and compensation based on performance Link responsibilities with individuals who have the specific knowledge to make the decision Recognize self-interest in motivating individuals within organizations Identify the costs and benefits of monitoring members of the organization Choose performance measures that reveal actions of members of an organization Create a balanced scorecard to articulate the strategy of the organization Design compensation contracts based on performance measures and responsibilities assigned Design internal control systems by separating the planning process from the control process Identify control issues within an organization

4 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Framework for Organizational Change Revisited Control systems within an organization: 1.Assign responsibilities 2.Measure performance and 3.Provide compensation for performance

5 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Framework for Organizational Change Customer Preferences Technological Change Globalization Strategy for Customer Value Product/Service Innovation Quality, Low Cost Control Decisions Responsibilities Performance Measures Compensation Planning Decisions Product/Service Design Production and Delivery Customer Services Organizational Value Customer Value

6 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Control Within an Organization Control is the process of getting members of the organization to work toward the goals of the organization An organization is economically viable only if the benefits of having the organization are greater than the costs of control within the organization Management Accounting plays an important role in control

7 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Knowledge and Decision Making Within an Organization The distribution of knowledge throughout the organization is an important issue in the assignment of responsibilities. Knowledge is costly to acquire, store, and process Transfer of knowledge (through use of accounting numbers and documents Knowledgeable individual Manager The manager retains responsibility

8 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Knowledge and Decision Making Within an Organization Delegation of responsibility Knowledgeable individual Manager Control (including accounting performance measures) The manager transfers responsibility but creates a control system

9 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Motivating Individuals to Support Organizational Goals Measurement of individual performance Rewarding individual performance Concepts that underlie organizational-control self-interested behaviour of individuals The monitoring costs to reduce self-interested behaviour The monitoring costs to reduce self-interested behaviour through

10 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Self-Interested Behaviour/Monitoring Costs In accepting a new member, an organization must recognize that the individual is influenced by self-interest and devise a mechanism that motivates them to act in the best interest of the organization When an individual joins an organization, the individual perceives that the benefits of joining the organization are greater than the cost. The individual is motivated by self- interest Monitoring costs are a drain on the organization, but are necessary to encourage appropriate behaviour

11 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Performance Measurement Performance measures describe how well an individual has performed a task Cultural differences influence performance measurement A good performance measure reveals the actions of the individual being evaluated and Motivates individuals to act in the organization’s best interest

12 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Performance Measurement Certain aspects of financial accounting systems exist today because of the demand for performance measures Multiple performance measures generally will reveal an individual’s actions more accurately than a single measure

13 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse The Balanced Scorecard Financial Perspective creating organizational value for owners/shareholders Customer perspective process adding value for customers Customer perspective process adding value for customers Internal business process ensuring efficiency and quality in the value chain Internal business process ensuring efficiency and quality in the value chain Learning and growth investing in organizational infrastructure Strategy

14 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse The Balanced Scorecard Outcome performance measures measures to determine whether the objective has been realized Outcome performance measures measures to determine whether the objective has been realized Driver performance measures measures of input activities to achieve the objective Driver performance measures measures of input activities to achieve the objective Each organizational objective has driver performance measures and outcome performance measures e.g. the number of employee training sessions is a driver performance measure for the objective of increasing employee skills to serve customers e.g. the number different services that an employee can offer a customer

15 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Example Balanced Scorecard ObjectivesInitiativesPerformance measureTarget Financial Perspective Increase shareholder wealthDevelop new productsReturn on assets25% GrowthIncrease online sales% growth in sales30% Customer Perspective Increase market shareIncreased advertising% market share10% Customer satisfactionIncrease post-sales service% satisfied through survey99% Internal business perspective Reduce throughput timeReduce non-value-added activities Average throughput time4 hours On-time deliveryStreamline delivery process% pm-time delivery90% Reduce defectsQuality teams% defects0.01% Learning and growth perspective Multi-skilled workforceEmployee training% of employees with multiple skills 80% Improve information systemsHire new employees in computing Number of employees in computing 20 Reduce employee turnoverPay higher salaries% annual turnover10%

16 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Limitations of the Balanced Scorecard Over reliance on the financial perspective leads to an unbalanced scorecard which focuses on the short term The addition of too many measures leads to a unwieldy scorecard where managers are left to determine the relative importance of measures subjectively It is difficult to optimize performance across the 4 perspectives while making the appropriate trade-offs necessary to do so

17 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Rewarding Performance Through Compensation Contracts An organization can be viewed as a set of contracts that identify the assignment of responsibilities, the performance measures to evaluate the members, and how the benefits generated by the organization are shared Compensation is often used as a motivational tool

18 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Separating Steps of Decision Process Decision planning process Decision control process 1. Initiation 2. Ratification 3. Implementation 4. Monitoring

19 © Pearson Education Limited Management Accounting McWatters, Zimmerman, Morse Management Accounting Managing organizations (Strategy and control) End of Chapter 6


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