Mdc Lecture 1
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Management Decisions and Control 22421/0
Management Decisions and Control Lecture 1 Introduction to Management Accounting 1
Lecture Objectives 1.
Objectives of MDC
3.
Approaches of MDC
5.
Planning & Control Decisions
7.
The Major Purposes of Accounting
9.
History of Management Accounting
11.
Management Accounting and Other Disciplines
2 Management Decisions and Control 22421/0
Objectives of MDC On successful completion of this subject students should be able to: 1. Understand, apply and critique the application of a range of different decision models used to enable managers to solve problems, control and evaluate performance within an organisational context. 2. Within the social context of an organisation, evaluate the impact of different decisions, control systems and performance evaluation methods. (See Figure 1) This builds on and extends the knowledge and skills developed in 22321 Cost Management Systems (CMS) for the following objectives: 1. Critically understand the role of management accounting in modern organisations; 2. Appreciate both historical and contemporary views of how management accounting creates value for organisations; 3. Further develop a capacity for independent research and learning; 3 4. Further develop communication and teamwork skills; and Management Decisions and Control 22421/0
Approaches to MDC I am absolutely committed to helping you pass (or better) this subject therefore; If you want to PASS the subject, you need to: 1. Meet all the criteria for assessment, 2. Read the chapters in the textbook before attending the lecture, 3. Attend the lecture, listen and take notes, 4. Complete the key questions for the homework before the tutorial, 5. Attend the tutorial and get involved in the class discussion, 6. Ask questions in the tutorial on things you don’t understand, 7. Get involved in the Case Study, 8. Think about the subject and the way it links together, 9. Revise before your exams.
4 Management Decisions and Control 22421/0
Approaches to MDC If you want to FAIL the subject, make sure you; 1. Do not meet all the criteria for the assessment, 2. Do Not read the chapters in the textbook before attending the lecture, 3. Do Not attend the lecture, listen and take notes, 4. Do Not do the key questions for the homework before the tutorial, 5. Do Not attend the tutorial and defiantly Do Not get involved in the class discussion, 6. Do Not ask questions in the tutorial on things you don’t understand (which will probably be everything), 7. Free-ride on your group members in the Case Study, 8. Do Not Revise before your exams. 9. Cram and try to learn the questions from the tutorials before each exam. 10. Do not think about the issues and make connections between them. 5 Management Decisions and Control 22421/0
Planning Decisions and Control
Planning Decisions The process of choosing goals, predicting results under various ways of achieving these goals and then deciding on how to attain the desired goals.
Control Covers both the actions that implement the planning decision and performance evaluation of the personnel and operations undertaken in the achievement of goals.
Opportunity Space – Simons (1995)
6 Management Decisions and Control 22421/0
The Major Purposes of Accounting The accounting system is the principal “quantitative” information system in business organisations. The system should provide information for 5 broad purposes:
Formulating overall strategies and long range planning Resource allocation decisions Cost planning and cost control of operations and activities Performance measurement and evaluation of people Meeting external regulatory and legal reporting requirements.
The above may be summarised to include:
Routine Internal Reporting Non-routine internal reporting External Reporting
Management Decisions and Control 22421/0
7
The Organisation
Policies & Guidelines
Problems & Decisions Solution 1
Assumption 1
Solution 2
Assumption 2
Solution 3
Standard Costing Cost Behaviour
Assumption 3
CVP Analysis Budgeting Relevant Costing
Information
Pricing Decisions Control Systems Performance Evaluation
8 Management Decisions and Control 22421/0
Theory Many students think that theory is just some abstract thing that has no relation to the real world or what I will do in practice. This is a common misconception. In fact, you develop and use theories every day. There is nothing as practical as a good theory (Alfred North Whitehead) eg consulting practice Theory explains How and Why! Why have so few firms adopted ABC? Why are our managers making the wrong decisions in the operations of our company? There is theory underpinning all subjects in your business degree, however it is often only implicit in the subject. Theory is a central (explicit) focus in MDC. History of Management Theory Management Decisions and Control 22421/0
9
History of Management Accounting The history of management accounting is closely tied to the development of management. Cottage Industries (Pre-19th Century) Pre-19th Century: subcontracts its production Financial accounting system provides sufficient information to assess the efficiency and profitability of the enterprise There was little need for cost (management) accounting) information Control through external markets Industrial Revolution (Early 19th Century) Early 19th Century: emergence of factory to take advantage of economies of scale. Internal production replace market transactions Separation of ownership & management Management accounting information are required to: Motivate managers at remote site Evaluate the performance of managers
Emergence of cost management systems
Management Decisions and Control 22421/0
10
History of Management Accounting Scientific Management Movement (mid-19th Century to early 20th Century) Different products that consumes different amount of resources created the need for cost accounting information Scientific Management engineers studied work processes: In order to redesign material and work flow and to decompose complex processes into a sequence of simpler and more controllable processes The objective is to simplify the work, improve workers efficiency, develop standards to monitor workers’ efforts. Fordism: large scale production to reap benefit of economy of scale. Management control for diversified organisations (created to capture the potential gains from economies of scope): Problems of controlling diverse activities of conglomerates (DuPont: 1903) Divisionalisation & decentralisation Use of budgets for coordination 11 Management and ROI Control 22421/0 Decisions Use of to:
History of Management Accounting Human Resources Approach (Early to mid 20th Century) Mangers get things done through people Cannot view people simply as machines in order to get things done, need to understand what motivates people and reward them accordingly Management Science (Operations Research) (mid to later part 20th Century) Application of the mathematical and statistical models developed in WWII Focus is on Optimisation models, information models computer simulation linear programming Used extensively in management decision making and control decisions Contingency Approach (later part 20th Century) Management is like life, it is not based on simple ideas and one approach or idea does not fit all situations. Management Decisions and Control 22421/0
12
History of Management Accounting Sociological Approach (later part 20th Century to 21st Century) Institutional Theory examines organised systems of social relationships which embody common values and procedures in order to meet the needs of society. Labour Process Theory looks at the way work process raw materials and are transformed into social use under capitalistic economic systems and the tension that exists between the workers and the capitalists. Focus can then be applied to the type of control systems used. Critical discourse looks at the use of discourse and speech in the behaviour and functions of social groups.
From cost management to cost accounting (1925 – 1985) Demand for product cost information for financial accounting Conventional two-stage cost allocation Overhead costs are accumulated in large cost pools Management Decisions and Control 22421/0
13
Recent Developments in Organisations (Since 1980’s)
TQM JIT (reduce inventory & manufacturing cycle times) Computer integrated manufacturing (flexible manufacturing produce small batches) All of these manufacturing technologies are different from traditional manufacturing environment of mass production of standardised products Traditional cost accounting measures were inhibiting the introduction of innovative manufacturing processes and technologies:
eg. attempts to absorb overhead into products by producing items well in advance of when they are needed and Fordism which stresses large scale production results in increase in profit but the practice undermines the company’s effort to:
reduce inventory level eliminate manufacturing defects speed throughput times improve responsiveness to customers
Management Decisions and Control 22421/0
14
Recent Developments in Organisations (Since 1980’s) Growth of service organisations and virtual Firms Carries no stock Produces heterogenous products (vs. fordism which stresses large scale production of homogeneous products) Importance of quality of service and innovation (intangible assets) Inadequacies of scientific management which stresses efficiency and ROI (financial measures of performance)
Challenges of the future To develop new management accounting systems to create competitive advantage
15 Management Decisions and Control 22421/0
Management Accounting and Other Disciplines Management Accounting draws on a number of other disciplines and theoretical frameworks.
Managemen t Theory
Economics Finance
Managemen t Accounting
Operations Research
Behavioural Science 16 Management Decisions and Control 22421/0
Management Accounting and Other Disciplines Economics and Finance Economics is based around the problem of scarce resources. Firm based economics addresses this issue. Finance issues of investment and financing influence the information that is relevant for those types of decisions.
Operations Research and Management Science These disciplines have provided analytic and optimisation models for management accounting. In addition they have added useful frameworks on firm processes which relate to the provision of information to managers for decision making. Management Theory and Organisational Behavior Due to the fact that management accounting information is driven by the provision of information for managers to manage, the way individuals manage will influence what type of information is provided and how management accounting is viewed within this 17 context. Management Decisions and Control 22421/0
Misconceptions of MDC and Content Please answer True False Performance evaluation is “the meaning of life” True / False
18 Management Decisions and Control 22421/0
Management Decisions and Control Lecture 1 Introduction to Management Accounting 1
Lecture Objectives 1.
Objectives of MDC
3.
Approaches of MDC
5.
Planning & Control Decisions
7.
The Major Purposes of Accounting
9.
History of Management Accounting
11.
Management Accounting and Other Disciplines
2 Management Decisions and Control 22421/0
Objectives of MDC On successful completion of this subject students should be able to: 1. Understand, apply and critique the application of a range of different decision models used to enable managers to solve problems, control and evaluate performance within an organisational context. 2. Within the social context of an organisation, evaluate the impact of different decisions, control systems and performance evaluation methods. (See Figure 1) This builds on and extends the knowledge and skills developed in 22321 Cost Management Systems (CMS) for the following objectives: 1. Critically understand the role of management accounting in modern organisations; 2. Appreciate both historical and contemporary views of how management accounting creates value for organisations; 3. Further develop a capacity for independent research and learning; 3 4. Further develop communication and teamwork skills; and Management Decisions and Control 22421/0
Approaches to MDC I am absolutely committed to helping you pass (or better) this subject therefore; If you want to PASS the subject, you need to: 1. Meet all the criteria for assessment, 2. Read the chapters in the textbook before attending the lecture, 3. Attend the lecture, listen and take notes, 4. Complete the key questions for the homework before the tutorial, 5. Attend the tutorial and get involved in the class discussion, 6. Ask questions in the tutorial on things you don’t understand, 7. Get involved in the Case Study, 8. Think about the subject and the way it links together, 9. Revise before your exams.
4 Management Decisions and Control 22421/0
Approaches to MDC If you want to FAIL the subject, make sure you; 1. Do not meet all the criteria for the assessment, 2. Do Not read the chapters in the textbook before attending the lecture, 3. Do Not attend the lecture, listen and take notes, 4. Do Not do the key questions for the homework before the tutorial, 5. Do Not attend the tutorial and defiantly Do Not get involved in the class discussion, 6. Do Not ask questions in the tutorial on things you don’t understand (which will probably be everything), 7. Free-ride on your group members in the Case Study, 8. Do Not Revise before your exams. 9. Cram and try to learn the questions from the tutorials before each exam. 10. Do not think about the issues and make connections between them. 5 Management Decisions and Control 22421/0
Planning Decisions and Control
Planning Decisions The process of choosing goals, predicting results under various ways of achieving these goals and then deciding on how to attain the desired goals.
Control Covers both the actions that implement the planning decision and performance evaluation of the personnel and operations undertaken in the achievement of goals.
Opportunity Space – Simons (1995)
6 Management Decisions and Control 22421/0
The Major Purposes of Accounting The accounting system is the principal “quantitative” information system in business organisations. The system should provide information for 5 broad purposes:
Formulating overall strategies and long range planning Resource allocation decisions Cost planning and cost control of operations and activities Performance measurement and evaluation of people Meeting external regulatory and legal reporting requirements.
The above may be summarised to include:
Routine Internal Reporting Non-routine internal reporting External Reporting
Management Decisions and Control 22421/0
7
The Organisation
Policies & Guidelines
Problems & Decisions Solution 1
Assumption 1
Solution 2
Assumption 2
Solution 3
Standard Costing Cost Behaviour
Assumption 3
CVP Analysis Budgeting Relevant Costing
Information
Pricing Decisions Control Systems Performance Evaluation
8 Management Decisions and Control 22421/0
Theory Many students think that theory is just some abstract thing that has no relation to the real world or what I will do in practice. This is a common misconception. In fact, you develop and use theories every day. There is nothing as practical as a good theory (Alfred North Whitehead) eg consulting practice Theory explains How and Why! Why have so few firms adopted ABC? Why are our managers making the wrong decisions in the operations of our company? There is theory underpinning all subjects in your business degree, however it is often only implicit in the subject. Theory is a central (explicit) focus in MDC. History of Management Theory Management Decisions and Control 22421/0
9
History of Management Accounting The history of management accounting is closely tied to the development of management. Cottage Industries (Pre-19th Century) Pre-19th Century: subcontracts its production Financial accounting system provides sufficient information to assess the efficiency and profitability of the enterprise There was little need for cost (management) accounting) information Control through external markets Industrial Revolution (Early 19th Century) Early 19th Century: emergence of factory to take advantage of economies of scale. Internal production replace market transactions Separation of ownership & management Management accounting information are required to: Motivate managers at remote site Evaluate the performance of managers
Emergence of cost management systems
Management Decisions and Control 22421/0
10
History of Management Accounting Scientific Management Movement (mid-19th Century to early 20th Century) Different products that consumes different amount of resources created the need for cost accounting information Scientific Management engineers studied work processes: In order to redesign material and work flow and to decompose complex processes into a sequence of simpler and more controllable processes The objective is to simplify the work, improve workers efficiency, develop standards to monitor workers’ efforts. Fordism: large scale production to reap benefit of economy of scale. Management control for diversified organisations (created to capture the potential gains from economies of scope): Problems of controlling diverse activities of conglomerates (DuPont: 1903) Divisionalisation & decentralisation Use of budgets for coordination 11 Management and ROI Control 22421/0 Decisions Use of to:
History of Management Accounting Human Resources Approach (Early to mid 20th Century) Mangers get things done through people Cannot view people simply as machines in order to get things done, need to understand what motivates people and reward them accordingly Management Science (Operations Research) (mid to later part 20th Century) Application of the mathematical and statistical models developed in WWII Focus is on Optimisation models, information models computer simulation linear programming Used extensively in management decision making and control decisions Contingency Approach (later part 20th Century) Management is like life, it is not based on simple ideas and one approach or idea does not fit all situations. Management Decisions and Control 22421/0
12
History of Management Accounting Sociological Approach (later part 20th Century to 21st Century) Institutional Theory examines organised systems of social relationships which embody common values and procedures in order to meet the needs of society. Labour Process Theory looks at the way work process raw materials and are transformed into social use under capitalistic economic systems and the tension that exists between the workers and the capitalists. Focus can then be applied to the type of control systems used. Critical discourse looks at the use of discourse and speech in the behaviour and functions of social groups.
From cost management to cost accounting (1925 – 1985) Demand for product cost information for financial accounting Conventional two-stage cost allocation Overhead costs are accumulated in large cost pools Management Decisions and Control 22421/0
13
Recent Developments in Organisations (Since 1980’s)
TQM JIT (reduce inventory & manufacturing cycle times) Computer integrated manufacturing (flexible manufacturing produce small batches) All of these manufacturing technologies are different from traditional manufacturing environment of mass production of standardised products Traditional cost accounting measures were inhibiting the introduction of innovative manufacturing processes and technologies:
eg. attempts to absorb overhead into products by producing items well in advance of when they are needed and Fordism which stresses large scale production results in increase in profit but the practice undermines the company’s effort to:
reduce inventory level eliminate manufacturing defects speed throughput times improve responsiveness to customers
Management Decisions and Control 22421/0
14
Recent Developments in Organisations (Since 1980’s) Growth of service organisations and virtual Firms Carries no stock Produces heterogenous products (vs. fordism which stresses large scale production of homogeneous products) Importance of quality of service and innovation (intangible assets) Inadequacies of scientific management which stresses efficiency and ROI (financial measures of performance)
Challenges of the future To develop new management accounting systems to create competitive advantage
15 Management Decisions and Control 22421/0
Management Accounting and Other Disciplines Management Accounting draws on a number of other disciplines and theoretical frameworks.
Managemen t Theory
Economics Finance
Managemen t Accounting
Operations Research
Behavioural Science 16 Management Decisions and Control 22421/0
Management Accounting and Other Disciplines Economics and Finance Economics is based around the problem of scarce resources. Firm based economics addresses this issue. Finance issues of investment and financing influence the information that is relevant for those types of decisions.
Operations Research and Management Science These disciplines have provided analytic and optimisation models for management accounting. In addition they have added useful frameworks on firm processes which relate to the provision of information to managers for decision making. Management Theory and Organisational Behavior Due to the fact that management accounting information is driven by the provision of information for managers to manage, the way individuals manage will influence what type of information is provided and how management accounting is viewed within this 17 context. Management Decisions and Control 22421/0
Misconceptions of MDC and Content Please answer True False Performance evaluation is “the meaning of life” True / False
18 Management Decisions and Control 22421/0
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