Management Accounting Control Systems
Different School of Strategy Styles
Design School
The design school is represented primarily by and others from the Harvard Business School, first of all in its basic textbook and then in one pf the school’s seminal works. defined corporate strategy as the pattern of decisions in a company that determines and reveals its objectives, purposes and goals, and defines the range of business the company is to pursue, the kind of economic and human organization it intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities (cited in 2002, ). stressed the crucial role of the Chief Executive Officer in corporate strategy as the organization leader, personnel and the architect of organization purpose. He summarized the four responsibilities of the Chief Executive Officer as:
1. Securing the attainment of planned results in the present
2. Developing an organization capable of producing both technical achievement and human satisfaction
3. Making a distinctive personal contribution
4. Planning and executing policy decisions affecting future results
distinguished clearly between the formulation of strategy, which involves matching external opportunity with corporate capability and attaches estimates to risk to open option, and its implementation. He summarized the four main components of strategy as
1. Market Opportunity
2. Corporate competence and resources
3. Personal values and resources
4. Acknowledged obligations to people in society other than shareholders
In summary, he suggested that regardless of the size of the organization, the essential elements of the strategic management process are the same:
1. Participation by key individuals in the identification of problems and strategic opportunities.
2. Inclusion of personal preferences, organization values, and corporate capability in the analysis.
3. The marshalling of accurate and relevant data on further market growth.
4. The recognition of financial constraints with respect to capital sources and projected return.
Planning School
At the same time as Harvard was publishing its original textbook on corporate strategy, at the Carnegie Institute of technology was publishing his classic work, ‘Corporate Strategy’. Planning school, as those who became associated with ’s ideas came to be known, had many similarities with the design school. However, did not believe that the process could be kept simple and informal, and proposed a complex model of strategic planning. The three basic premises of the Planning School are:
1. Strategy formation should be controlled and conscious as well as a formalized and elaborated process, decomposed into distinct steps, each delineated by checklists and supported by techniques.
2. Responsibility for the overall process rests with the Chief Executive in principle; responsibility for its execution rests with the staff planners in practice.
3. Strategies come out of this process fully developed, typically as generic positions, to be explicated so that they can then be implemented through detailed attention to objectives, budgets, programmes and operating plans of various kinds. The particular model that developed in the first edition of Corporate Strategy has a number of key features. First, the strategic options of growth and expansion are potentially various combinations of new and existing products and new and existing markets. developed a matrix of the various possibilities, to show that there are only four basic strategic options, as follows:
1. Sell existing products in existing markets
2. Sell new products in existing markets
3. Sell existing products in new markets
4. Sell new products in new markets
Comprehensive planning is a systematic procedure for selecting goals and strategies that define, respectively, standards for the future success of a business or corporation and the deliberate pursuit of those standards through objective-seeking work (, 2004 ). A sound plan is founded on a solid understanding of the firm’s present capabilities, as much as it is on appraisal of future requirements. Comprehensive planning requires management to evaluate internal and environmental business conditions to select from alternative goals and strategies, to decide how strategy best can be implemented, and to perform these functions continuously. When business conditions change, strategy must change. Perpetual replanning is essential, because no plan remains viable for very long. Indeed, any single plan of business that is not modified from time to time and implemented long enough probably will lead to a firm’s eventual failure, simply because internal and external business conditions change continually (, 2004 ).
Positioning School
, a professor at Harvard, in his seminal work ‘competitive Strategy’ used economic perspectives to analyze strategy and argued that the profit available in a particular industry was strongly affected by competition ( 2002, ). This competition could be analyzed using five key factors:
1. The rivalry among existing firms in the industry
2. The threat of new entrants to the industry, depending on how easy of difficult it is to enter the industry
3. The bargaining power of buyers
4. The bargaining power of suppliers, including labor
5. The threat of substitute products
To , the purpose of formulating a competitive strategy is to find a position where the company can best defend itself against these forces, or can influence them in its favor. Unlike the design and Planning Schools, which put no limitation on the type of strategies that an organization can adopt, Porter argued that there are only three generic strategies to deal with these five forces:
1. Overall cost leadership
2. Differentiation
3. Focus on a very particular market segment or geographical area and meeting their specific requirements better than competitors who compete more broadly
From ’s perspective, strategists do not so much design strategies but rather select them from a list of generic strategies ( 2002, ).
PEST
PEST is the analysis of the Political, Economic, Sociocultural and Technological factors. It is very important for a firm to analyze its environment first before starting the marketing process. The political factor analysis has a big impact on the firm’s business regulations. Issues that must be considered include the stability of the political environment, the government’s position on marketing ethics, the policy on the economy, and others. The firm must also consider the state of the economy before formulating a marketing strategy. The firm must consider different factors such as interest rates, level of employment level per capita, Gross Domestic Product and so on. Social and cultural factors must be considered because they have an impact on the business. Factors such as religion, attitudes to foreign products, language, roles of men and women and so on must be considered. One advantage that a firm can use is technology. Technology is a major driver of globalization and can help a firm to create an edge against its competitors if used properly. Factors such as the effects of technology on the standard of quality, innovative products and services, impacts of technology on distribution and so on must be considered. Management Accounting Control Systems can be applied to Political, Economic, Sociocultural, and Technological Factors Analysis and can aid the management in making informed business decisions by providing and using accounting information.
Management Accounting Control Systems
Budgeting
Operating budgets and strategic palms should be connected seamlessly. Operating budgets should be used as a representation of how the strategic plan will be implemented. There are a number of budgeting and progress evaluation techniques that are being used today by different organizations. However, there are alternative approaches to classic budgeting procedures available today such as Zero Base Budgeting (ZBB). This budgeting technique can be used to give the planning manager a better match between objectives and overhead resources utilization. Rather than assuming the same functions will be performed by staff and other support organizations year after year, the ZBB method recognizes that objectives eventually are achieved and that some functions need to be repeated perpetually. ZBB is more effective in providing a more rational basis for resource allocation of an organization by matching those functions to strategic objectives.
ABC Method/ Activity-Based Costing
According to (1996), the full cost of a manufactured product or line of products includes direct labor, material, variable, overhead and fixed costs. Direct labor and material are normally observed and measured by manufacturing and maintained as ‘standards’. The overhead costs are reported by responsibility centers, such as departments or plants. The difficult decision is what to do about allocating overhead costs to products and territories (). ABC practitioners believe that making costs known creates opportunities for savings. ABC makes all costs explicit, reducing distortions caused by arbitrary allocations of overhead to products and customers. ABC also traces costs back to the economic events that caused them, making it possible to judge the reasonableness of costs in light of these events ( 2002, ). ABC is seen as a method of improving the organization’s behavioral, business and accounting practices. ABC systems are often implemented in order to achieve better performance. ABC focuses on costs associated with activities, but also evaluates whether those activities add value, thus providing a means of understanding how to most effectively reduce costs ( & 2003, ). ABC also provides managers a means of effectively monitoring project performance thus leading to an improved costing of products, management of costs, sound decision making and competitive advantage.
Investment Appraisal
Investment appraisal is the process by which an organization appraises a range of different investment projects with a view to determining which is likely to give the highest financial return ( 1999, ). Investment appraisal techniques are used in order to evaluate each of the organization’s alternative and make a sound decision. Three of the most common investment appraisal techniques are as follows:
1. Payback Period – is a simple investment appraisal technique that is used to calculate the number of periods it will take for the investment to pay for itself.
2. Net Present Value – is one of the most popular investment appraisal techniques. NPV adds the dimension of the time value of money in choosing between different investments. NPV may consider the profits, or the cash flow generated by a particular venture compared to its associated costs.
3. Cost-Benefit Analysis – the general technique used to evaluate the total social costs and benefits associated with a project.
Variance Analysis
Variance analysis is the analysis of variance in standard costing and budgetary control in order to seek their causes. Parameters that must be examined when conducting a variance analysis include expenditure, usage, and efficiency variances. Variance analysis in management accounting is a tool for controlling budgets that evaluates the performance using variances between budgeted amount, standard amount and the actual amount.
Management Accounting and Strategic Management
Management accounting is primarily used to gather and provide managers with information that will be useful in the organization’s planning and controlling activities (., 1993). Information is gathered in a sequential manner in management accounting (., 1983; , 1985; ., 1991). According to and (1994), the management control system is a means for the management to evaluate the performance of a business unit. Management accounting plays an important role in the decision making process of an organization. It is used as a way of information provision ( 1993; . 1997). Management accounting also involves non-financial information such as risk assessment and performance measurement gathering (, 2006). Management accounting controls, coordinates, and facilitates the management’s decision-making. Institutional rationality is achieved by using management accounting (, 2004). Accounting management according to . (2000) influences the organization’s decision makers. Management accounting’s fundamental objective is to facilitate and support all the aspects of an organizations decision making. Strategic planning is the process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use, and disposition or resources. Accounting management influences managerial action by measuring and providing operational and financial information. Management accounting systems use financial and non-financial metrics in reporting the results of the organization’s operations. The main function of a management accounting system is to aid an organization in achieving its strategic goals.
Management Accounting Control Systems in Not-for-Profit Organizations
As traditional accounting systems are oriented towards profit and as this goal is not the most important objective of NPOs, standard financial and managerial accounting systems are inappropriate. Cost or profit goals may be important for NPOs to the extent that they need to work efficiently and contain costs. Efficiency may be part of their systems objectives but this goal, which is tied to the profit purpose, is usually dominated by not-for-profit goals. NPOs usually need information and accounting systems, which are oriented towards their primary objectives. Otherwise the use of traditional accounting systems could be inimical to their pursuits. If, for example, a state university used traditional financial and cost accounting systems geared for the commercial sector needs, its decisions on the selection of students and professors, the structure and the contents of the studies, research projects, etc. could be oriented towards costs instead of quality. With profit-oriented accounting systems, NPOs cannot be managed and controlled adequately. Whereas commercial accounting systems are the core of the information system in the profit sector and most of their information is monetary, NPOs need more diversified information systems. They have to work with and produce non-monetary as well as monetary data in order to produce measures of the not-for-profit objectives of the organization. These data reflect the activities of the organization. for this purpose they relate to the input, the processes, and the output of its activities. Therefore, the information system must include data which show
1. The input of material, labor, machines, money and other resources
2. The duration, the capacity utilization, and other characteristics of its processes
3. Characteristics of its output
Financial Accounting System of a University
The basis of a financial accounting system is the cash flow statement, which reveals the flow of money received from the government and others. In a public university, a balance sheet can primarily show and classify assets. As the liabilities of such universities are often not high, they are not of great interest. As long as universities do not offer their activities in education and research on a free market and as they do not pursue a profit goal, an income statement is useless and could be misleading. Instead of this, it could be useful to show the changes of the net values of its assets in time. Then the financial accounting system of a university may consist of three types of economic information systems, the cash flow statement, the balance sheet and a statement of net value change of the asset. Such a system is used as a basic instrument to review the university by auditors and by government ( 2003, ).
The example given above only shows that a management accounting control system must fit the type of organization in order for it to effectively support its strategic goals. In presenting accounting information, it is of utmost importance that the type of organization must be considered. In the example given above, A not-for-profit organization like a public university requires different accounting information in order for the management to formulate a sound decision and strategy. A performance information system of a not-for-profit organization like a public university should show the monetary expenses and costs of input on the one side and the non-monetary output in education, research, and service processes on the other side.
Conclusion
Management accounting control systems’ function is to help management focus on the core business opportunity, to support resource allocation, and to provide timely corrective action whenever necessary (, 2003 ). Accounting management control systems measure past and estimate future business activities in monetary terms. Most decisions in all areas of a private firm like procurement, operations and marketing management, investment and finance are based on accounting information (, 2003). Accounting systems use and give information on monetary data like assets and liabilities, revenues, expenses and costs, gains and losses. Management accounting control systems include formalized procedures for cost accumulation, product costing, budgeting, performance evaluation, and resource allocation. Business strategies define how a firm decides to compete in a given business and positions itself among competitors. The strategy style adopted needs to be supported by adequate and appropriate management accounting techniques. The strategic style chosen is an important determinant of the principles, techniques, and systems of management accounting adopted. The determination of the appropriate strategic style is important to both internal and external users of management accounting information of a given firm as it may show the nature of the ‘fit’ between the strategic style and the management accounting system supporting its enactment, formulation, and implementation (, 1992).
Management accounting information is useful in aiding the decision makers in the formulation of quality goals using different financial and non-financial measures and reports.
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