1 Management control and the role of management accounting 1.Outline of the module Organisational Context of Management Accounting’ ‘ Organisational Context of Management Accounting’ 2.Management accounting and management control Exercise 3.Cybernetic control Case Break 4.Organisational context, strategy & control 5.Ouchi’s control mechanisms Discussion Question for the week: ‘What controls management control, and for whose purposes?’

2 Learning outcomes The module critically examines assumptions underlying theory and practice of management accounting and control, using a range of theoretical perspectives, which put this theory and practice into their behavioural, organisational, political, cultural and social context

3 Learning outcomes The module critically examines assumptions underlying theory and practice of management accounting and control, using a range of theoretical perspectives, which put this theory and practice into their behavioural, organisational, political, cultural and social context Upon successful completion of the course, you will be able to: 1. Explain the implications of relaxing key assumptions, including assumptions of certainty 2. Demonstrate the behavioural, organisational, political, cultural and social implications 3. Analyse cases, using several paradigms and a variety of theories 4. Critically evaluate solutions to management control problems 5. Formulate a coherent argument, drawing on a range of theories and weighing up evidence, and communicate this argument in essays

4 Seminar topics – term 1 1.Management control and management accounting Introduction 2.Alternative paradigms 3.Interpretive paradigm and organisational culture Alternative paradigms 4.Radical paradigms and postmodern views 5.Systems theory 6.Management control for strategy and learning Alternative theories 7.Agency theory 8.Transaction cost economics 9.Organisational structure Organisational context & 10.Beyond structure implications 11.EVAand value based management Recent developments There will be some flexibility so that the focus can be more on discussion of implications than on covering all listed topics

5 Seminar topics – term 2 12.Guided reading No seminar 13.Multiple performance measures Performance measurement 14.The ‘Risk Society’ 15.Risk assessment in face of uncertainty Risk & uncertainty 16.Psychology of risk 17.Capital budgeting 18.Culture & institutions as response to uncertainty Managing risk & uncertainty 19.Enterprise risk management 20.Economic, social and ethical performance Competing demands 21.Revision There will be some flexibility so that the focus can be more on discussion of implications than on covering all listed topics

6 Assessment Essay due Friday week 8, up to 2,500 words on material from weeks 1 – 525% Essay due Friday week 14, up to 2,500 words on material from First term25% Exam, Summer % –Section A: compulsory seen case, unseen question –Section B: choice of 1 from 3 essays –Section C: choice of 1 from 3 essays Each section worth 1/3 of marks for the exam

7 Assessment criteria Well argued essay: Focused on answering the question

8 Answer the question Coursework essay February 2004: Evaluate the formal management control systems of Restaurant Division and the informal processes within the Division as control towards objectives. 20% of students did not answer the question,

9 Answer the question Coursework essay February 2004: Evaluate the formal management control systems of Restaurant Division and the informal processes within the Division as control towards objectives. 20% of students did not answer the question, Comment on a coursework essay last year: You give an excellent analysis of management control theory, using the case to compare the radical structuralist, functionalist and interpretive paradigms. You support your argument well with a wide range of literature. However, you do not reach a conclusion, and have not evaluated the strengths and weaknesses of Restaurant Division’s MCS and informal processes. Therefore you have not answered the question. I have reduced marks for what otherwise was a very good essay.

10 Assessment criteria Well argued essay: Focused on answering the question For a case, relate to the facts described in the case Use a range of theories and research paradigms Cite references, where relevant to your argument to literature that you have READ: Give author and year, e.g. Otley & Berry (1980) As explained in Student Handbook CD to real life cases, e.g. Enron When asked to ‘evaluate’, reach a conclusion drawing on arguments that you have made for and against

11 Learning methods Seminars: Several lecture slots in weekly seminar 9am – 12 noon Exercise on unprepared materialSeveral exam Prepared case or issuequestions may be Discussion of implicationsbased on these Generally focuses on ‘Question for the week’ Reflection on learning – 1 minute student review

12 Learning methods Seminars: Several lecture slots Exercise on unprepared materialSeveral exam Prepared case or issuequestions may be Discussion of implicationsbased on these Generally focuses on ‘Question for the week’ Reflection on learning – 1 minute student review Reading: ** Required – essential knowledge needed to pass course * Recommended – for more depth of understanding, for higher grade Suggested – alternative perspectives & explanations Seminar material & reading lists on Blackboard

13 Learning methods Seminars: Several lecture slots Exercise on unprepared materialSeveral exam Prepared case or issuequestions may be Discussion of implicationsbased on these Generally focuses on ‘Question for the week’ Reflection on learning – 1 minute student review Reading: ** Required – essential knowledge needed to pass course * Recommended – for more depth of understanding, for higher grade Suggested – alternative perspectives & explanations Seminar material & reading lists on Blackboard Preparation BEFORE each seminar: Print seminar material from Blackboard Prepare your solution to the case ready for student discussion Read at least two of the readings for the seminar AFTER each seminar: Review updated material on blackboard Read further to develop understanding of key areas

14 Reading for week 1 Anthony, R. N., & Govindarajan, V. (2001) Management Control Systems, Chapter 1 * Berry, A., Broadbent, J. and Otley, D. (1995) 'The Domain of Organisational Control. Chapter 1', Management Control: theories, issues and practices, London. UK: Macmillan Press Ltd. * Otley, D. (1994) 'Management control in contemporary organizations: towards a wider framework', Management Accounting Research, 5: 289 – 299 ** Otley, D. and Berry, A. (1980) 'Control, Organisation and Accounting', Accounting, Organizations and Society, 5: and EOM readings ** Ouchi, W. (1979) 'A Conceptual Foundation for the Design of Organizational Control Mechanisms', Management Science, 25: The reading list will be put on Blackboard before each week

15 2. Management accounting & management control Management control: Towards objectives Aligning behaviour Survival & adapting to changing environment Managing uncertainty Management accounting financial information for: Planning, Decision-making Control Performance measurement Attention directing

16 Exercise Identify: key roles for management accountants within organisations and society in 2004, and what challenges management accountants face in fulfilling these roles Individually list your ideas Compare and discuss in groups of 4 or 5

17 Roles and challenges for management accountants today Roles: Performance measurement Preparation of internal accounts Planning, budgeting & variance analysis to cut costs Control, e.g. supplier selection, authorising payments Pricing decisions Disaster recovery And a few more not raise in the seminar: Focus on creating shareholder value and communicating with shareholders Ensuring financial viability of strategy Risk management, delivering dependable performance Challenges: Uncertainty, e.g. September 11 th Fostering simultaneous control, knowledge management and creativity Integrating business and financial strategy Balancing competing demands

18 3. Cybernetic control Process with measures Outputs with measures Inputs with measures (Otley and Berry 1980) Input Behaviour Output control controlcontrol Role of accounting: Measure inputs and outputs Identify appropriate measures for objectives, inputs and outputs Analyse, summarise & communicate Role of control: Provide reasonable assurance that objectives will be achieved

19 3. Cybernetic control (Otley and Berry 1980) Process with measures Outputs with measures Inputs with measures Predictive model Objective for the process Implement chosen action Generate & evaluate alternative action Change: Inputs Objective Predictive model Process

20 3. Cybernetic control Assumptions: There is an objective for the control system which is known Output and at least either input or process can be measured The predictive model is known There are alternative relevant actions (Otley and Berry 1980) Process with measures Outputs with measures Inputs with measures Predictive model Objective for the process Implement chosen action Generate & evaluate alternative action Change: Inputs Objective Predictive model Process

21 Case: St. Augustine School Read and discuss the case in groups Each group give their evaluation of the WICHE system for St. Augustine School In your evaluation consider: –the objectives and uncertainties that the system may help the school and its staff (faculty)to address, and –how well it may help them address these

22 Cybernetic control (Otley and Berry 1980) Process with measures Outputs with measures Inputs with measures Predictive model Objective for the process Implement chosen action Generate & evaluate alternative action Change: Inputs Objective Predictive model Process

23 Uncertainty that limits cybernetic control of organisations Objectives often vague, multiple and conflicting, priorities uncertain and subject to change Measures often subjective, incomplete or unavailable Predictive model is incomplete concerning people, markets, and effects of external environment Alternative actions usually constrained

24 Uncertainty that limits cybernetic control of organisations Objectives often vague, multiple and conflicting, priorities uncertain and subject to change Measures often subjective, incomplete or unavailable Predictive model is incomplete concerning people, markets, and effects of external environment Alternative actions usually constrained Management control systems (MCS) cannot match the complexity of organisations “Control in the full cybernetic sense will never be achieved in the context of a human organisation” (Otley and Berry, 1990, page 242)

25 4. Organisational context, strategy & control Anthony & Govindarajan : “management control is the process by which managers influence other members of the organisation to implement the organization’s strategies” Management Control Systems (1998, page 6) Strategy formulation Management control Task control

26 4. Organisational context, strategy & control Anthony & Govindarajan : “management control is the process by which managers influence other members of the organisation to implement the organization’s strategies” Management Control Systems (1998, page 6) Strategy formulation Management control Task control Systematic implementation of strategies, including behavioural implications Goals, strategies and policies Efficient and effective performance of individual tasks

27 Organisational context, strategy & control Otley (1994, page 298) : “Management control … intimately bound up with both strategic decisions about positioning and operating decisions that ensure the effective implementation of such strategies”

28 Organisational context, strategy & control Otley (1994, page 298) : “Management control … intimately bound up with both strategic decisions about positioning and operating decisions that ensure the effective implementation of such strategies” Berry, Broadbent and Otley (1995, page 4) : “Management control is the process of guiding organisations into viable patterns of activity in a changing environment”

29 Organisational context, strategy & control Otley (1994, page 298) : “Management control … intimately bound up with both strategic decisions about positioning and operating decisions that ensure the effective implementation of such strategies” Berry, Broadbent and Otley (1995, page 4) : “Management control is the process of guiding organisations into viable patterns of activity in a changing environment” They see management control as concerned with: –Survival within changing uncertain environment –Strategy formulation and implementation –Complexities of: Behaviour, cultures and institutions Competing objectives Politics and competing interests –Control of operations, dependent upon particular contingencies of markets, technologies, products, structure & size of organisation

30 5. Ouchi’s control mechanisms Pure forms: 1.Market control Competition, outsourced activities, comparison of prices Reciprocal acceptance of contracts

31 5. Ouchi’s control mechanisms Pure forms: 1.Market control Competition, outsourced activities, comparison of prices Reciprocal acceptance of contracts 2.Bureaucratic control Rules, hierarchy, comparison (costs, profits, output, quality etc.) to standards, cybernetic control Legitimate authority

32 5. Ouchi’s control mechanisms Pure forms: 1.Market control Competition, outsourced activities, comparison of prices Reciprocal acceptance of contracts 2.Bureaucratic control Rules, hierarchy, comparison (costs, profits, output, quality etc.) to standards, cybernetic control Legitimate authority 3.Clan control Shared values, ethos of organisation and professions, indoctrination into values and traditions, social control Culture

33 5. Ouchi’s control mechanisms Knowledge of transformation process PerfectImperfect Bureaucratic control High Ability to Market measure control outputs Low

34 5. Ouchi’s control mechanisms Knowledge of transformation process PerfectImperfect Bureaucratic control High Ability to Market measure control outputs Low Behaviour or output measurement e.g. Mars rocket

35 5. Ouchi’s control mechanisms Knowledge of transformation process PerfectImperfect Bureaucratic control High Ability to Market measure control outputs Low Behaviour or output measurement e.g. Mars rocket Behaviour measurement e.g. Factory

36 5. Ouchi’s control mechanisms Knowledge of transformation process PerfectImperfect Bureaucratic control High Ability to Market measure control outputs Low Behaviour or output measurement e.g. Mars rocket Output measurement e.g. Fashion shop Behaviour measurement e.g. Factory

37 5. Ouchi’s control mechanisms Knowledge of transformation process PerfectImperfect Bureaucratic control High Ability to Market measure control outputs Low Behaviour or output measurement e.g. Mars rocket Output measurement e.g. Fashion shop Behaviour measurement e.g. Factory Ritual & ceremony Clan control e.g. Research laboratory

38 Discussion ‘What controls management control, and for whose purposes?’ Are objectives ‘correct’? By what standards should performance towards these objectives be measured? How can we know if a control system is effective?

39 Discussion of Aston University’s management control system Objectives: Teaching Research Position on league tables for teaching and research Reputation Generating the skills that the country needs Jobs for lecturers What would students do without universities? Controls: Input control: grade requirements for students Monitoring student numbers Controls over allocation of resources Controls over funds for teaching and for research Controls over staff recruitment and development of their skills

40 Discussion of Aston University’s management control system Are the objectives correct? Need to have objectives and goals Need to choose priorities, as ALL the objectives may be ‘correct’ By what standards should performance be measured? Completion rates by students (of modules & degrees) Employment of graduates, in the right job Student evaluation forms League tables comparing universities But not mentioned in the seminar: Is performance towards the objectives being measured, i.e. do the key performance indicators (KPIs) measure progress towards objectives or only what is easy to measure? How can we know if the control system is effective? Benchmark the control system against other universities Incidence of controllable surprises Are we achieving our objectives

41 Student 1 minute reflection on learning Complete sheet anonymously: –What was the main point that learnt today? –What are you least clear about? Leave sheet in lecture theatre when you leave