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SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2004 Colin Drury
Part Four: Information for planning, control & performance Chapter Sixteen: Management control systems
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.2
Results or output controls
The focus is on reporting information about the outcomes of work effort. Results controls involve the following stages: 1. Establishing performance measures that minimize undesirable behaviour. 2. Establishing performance targets. 3. Measuring performance. 4. Providing rewards or punishments.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.4
Fig.16.2 The measurement reward process with imperfect measures (Source: Otley (1987)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.5
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Responsibility accounting
Responsibility accounting is a fundamental part of the MACS. Four types of responsibility centres: 1. Cost or expense centres (Two types:standard cost centres and discretionary cost centres). 2. Revenue centres 3. Profit centres 4. Investment centres
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.7b
MACS process involves: 1. Setting performance targets. 2. Measuring performance. 3. Comparing performance against target. 4. Analysing variances and taking remedial actions. Responsibility accounting is implemented by issuing performance reports similar to that on sheet 16.8. Issues that must be addressed by responsibility accounting include: 1. Distinguishing between controllable and non-controllable items (i.e.the controllability principle). 2. Determining how challenging the targets should be. 3. Determining how much influence managers should have in the setting of targets.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.8
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.9a
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.9b
Adjustments for the distorting effects of uncontrollables can be made either before or after the measurement period.
Adjustments before the measurement period: 1. Specify which budget line items are uncontrollable (eliminate or report separately in performance report). 2. Insurance Adjustments after the measurement period: 1. Variance analysis 2. Flexible performance standards (e.g.flexible budgeting and ex post budget adjustments) 3. Relative performance evaluations 4. Subjective performance evaluations
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Ensures that managers are accountable for the conditions applying during the period and not those envisaged when the budget was set.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.11a
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Literature identifies a theoretical relationship between budget difficulty, aspiration levels and performance (see slide 16.12).
Hypothesized relationships suggest that budget level that motivates best performance is unlikely to be achieved most of the time ( do not adopt punitive approach for adverse variances)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.12
The effect of budget difficulty on performance (Otley 1987)
The effect of budget levels on aspiration and performance (Source: Hofstede 1968)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.13a
Arguments in favour of setting highly achievable budgets
Conflict between planning and motivational purposes. Psychological benefits (e.g.achievement and self-esteem). Shields managers from adverse impact of environmental changes. Alleviates harmful side-effects of controls.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.13b
Empirical studies provide conflicting evidence on the effectiveness of participation. Factors influencing the effectiveness of participation: 1. Personality variables: Authoritarianism Locus of control 2. Work situation 3. Job difficulty
Limitations on the positive effects of participation: 1. Budgetee has the opportunity to negotiate lower targets. 2. Depends on personality traits and work situation. 3. A top down approach may be preferable where a large number of similar units exist.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.14a
Side-effects arising from using accounting information for performance evaluation Hopwood observed three different styles of managerial use of accounting information for performance evaluation: 1. A budget-constrained style 2. A profit-conscious style 3. A non-accounting style Hopwood s findings Style of evaluation BudgetProfitconstrained conscious Involvement with costs Job-related tension Manipulation of accounting information Relations with superior Relations with colleagues High High Extensive Poor Poor High Medium Little Good Good
Nonaccounting
Low Medium Little Good Good
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
16.14b
Otley replicated Hopwood s study and found no significant differences in terms of budget-constrained and profit-conscious styles in terms of undesirable behaviour. Conflict in findings attributed to differences in managerial interdependency and task uncertainty.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury