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Learning Objectives

◉ Identify the accounting information requirements and describe the

different types of information systems used for strategic planning,
management control and operational control and decision-making.
◉ Define and identify the main characteristics of transaction processing
systems; management information systems; executive information
systems; and enterprise resource planning systems.
◉ Define and discuss the merits of, and potential problems with, open
and closed systems with regard to the needs of performance
management.

1 Introduction
Planning, Control and Decision-making

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Key Terms

◉ Planning
◉ Decision-making
◉ Strategic decisions
◉ Control

Information for planning,

control and decision-making
Top Strategic
Long-term planning
decisions

Middle Tactical
Medium-term planning and
management control decisions

Bottom
Operational
Operational/short-term decisions
routine processing of transactions

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Management
accounting
2 information
for strategic planning, control and decision-making

Future Uncertainty

◉ Strategic plans may cover a long period into the future

◉ Many strategic plans involve big changes and new ventures

Inevitably use forecasts and estimates

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Future Uncertainty

◉ Management should incorporate some risk and uncertainty analysis

◉ For longer-term plans, discounted cash flow techniques ought to be
used in financial evaluation
◉ The management accountant will be involved in the following:
○ Project evaluation
○ Managing cash and operational matters
○ Reviewing the outcome of the project (post implementation review)

External and Competitor

Orientation

◉ Strategic planning and control decisions involve environmental

considerations.
◉ A strategy is pursued in relation to competitors.

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The Challenge for

Management Accountants

◉ Direction towards financial reporting

◉ Misleading information
◉ Neatness rather than usefulness
◉ Internal focus
◉ Inflexibility

The challenge lies in providing more relevant information for strategic

planning, control and decision-making.

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The Challenge for

Management Accountants

◉ Historical costs are not necessarily the best guide to decision-making.

◉ Strategic issues are not easily detected by management accounting
systems.
◉ Financial models of some sophistication are needed

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What is Strategic
Management Accounting?

◉ a form of management accounting in which emphasis is placed on

information about factors which are external to the organization, as
well as non-financial and internally generated information.

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What is Strategic
Management Accounting?

External Orientation:
◉ Competitive advantage is relative.
◉ Customers determine if a firm has competitive advantage.

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What is Strategic
Management Accounting?

Future Orientation:
A criticism of traditional management accounts is that they are backward
looking.
◉ Decision-making is a forward- and outward-looking process.
◉ Accounts are based on costs, whereas decision-making is concerned
with values.

Strategic management accountants will use relevant costs

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What is Strategic
Management Accounting?

Goal Congruence
◉ Strategic management accounting translates the consequences of
different strategies into a common accounting language for
comparison.
◉ It relates business operations to financial performance, and therefore
helps ensure that business activities are focused on shareholders'
needs for profit.

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What information could

Strategic Management
Accounting provide?
◉ Competitor’s costs
◉ Financial effect of competitor
response
◉ Product profitability
◉ Customer profitability
◉ Pricing decisions
◉ The value of market share
◉ Capacity expansion
◉ Brand values
◉ Shareholder wealth
◉ Cash flow
◉ Effects of acquisitions or
mergers
◉ Decisions to enter or leave a
business area

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Management
accounting
3 information
for management control

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Management accounting
information for Management
Control
Management control is concerned with:
◉ Resources
◉ Efficiency
◉ Effectiveness

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Examples of Tactical Planning

Activities

◉ Preparing budgets
◉ Establishing measures of performance by which profit centers can be
gauged
◉ Developing a product for launching in the market

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Examples of Management
Control Activities

◉ Ensuring that budget targets are reached, or improved on

◉ Ensuring that other measures of performance are satisfactory, or even
better than planned
◉ Where appropriate, changing the budget because circumstances have
altered

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Information Requirements

Features of management control information

◉ Primarily generated internally
◉ Embraces the entire organization
◉ Summarized at a relatively low level
◉ Routinely collected and disseminated
◉ Relevant to the short and medium terms
◉ Often quantitative
◉ Collected in a standard manner
◉ Commonly expressed in money terms

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Information Requirements

Types of information:
◉ Productivity measurements
◉ Budgetary control or variance analysis reports
◉ Cash flow forecasts
◉ Manning levels
◉ Profit results within a particular department of the organization
◉ Labor revenue statistics within a department
◉ Short-term purchasing requirements

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Information Sources

◉ A large proportion of this information will be generated from within

the organization (it has an endogenous source) and it will often have
an accounting emphasis. Tactical information is usually prepared
regularly; perhaps weekly or monthly.

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Management control vs.

Strategic planning

Management control Strategic planning

tends to be carried out in a in contrast, might be irregular
series of regular planning and and occur when opportunities
comparison procedures arise or are identified.
(annually, monthly, weekly).

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Management
accounting
4 information
for operational control

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Example:

Link between strategic plans and operational/management control

decisions:
◉ Senior management may decide that the company should increase sales by 5%
per annum for at least five years – a strategic plan.
◉ The sales director and senior sales managers will make plans to increase sales
by 5% in the next year, with some provisional planning for future years. This
involves planning direct sales resources, advertising, sales promotion, and so on.
Sales quotas are assigned to each sales territory – a tactical management control
decision.
◉ The manager of a sales territory specifies the weekly sales targets for each sales
representative. This is an operational control decision: individuals are given tasks
which they are expected to achieve.

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Operational control activities

◉ Decision-making occurs in all aspects of an organization's activities.

◉ Operational control activities can also be described as short-term
non-strategic activities.

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Information Requirements

◉ Operational information is information which is needed for the

conduct of day-to-day implementation of plans.
◉ It will include much 'transaction data', such as data about customer
orders, purchase orders, cash receipts and payments and is likely to
have an endogenous source.
◉ Operating information must usually be consolidated into totals in
management reports before it can be used to prepare management
control information.

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Information Requirements

◉ The amount of detail provided in information is likely to vary with the

purpose for which it is needed, and operational information is likely to
go into much more detail than tactical information, which in turn will
be more detailed than strategic information.
◉ Whereas tactical information for management control is often
expressed in money terms, operational information, although
quantitative, is more often expressed in terms of units, hours,
quantities of material, and so on.

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Types of
Information
5 Systems

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Transaction Processing
Systems

Transaction processing systems (TPS) collect, store, modify and retrieve

the transactions of an organization.

The four important characteristics of a TPS are as follows.

◉ Controlled processing.
◉ Inflexibility.
◉ Rapid response.
◉ Reliability.

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Processing Systems
Transaction

Properties of a TPS
◉ hardware
◉ software.
◉ people.
○ Users
○ Participants
○ People from the environment

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Processing Systems
Transaction

Types of TPS
◉ Batch transaction processing (BTP)
◉ Real time transaction processing (RTTP)

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Management Information
Systems

◉ Management information systems (MIS) generate information for

monitoring performance (eg. productivity information) and
maintaining co-ordination (eg. between purchasing and accounts
payable)
◉ MIS have the following characteristics:
○ Support structured decisions at operational and management control levels
○ Designed to report on existing operations
○ Little analytical capability
○ Relatively inflexible
○ An internal focus

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Executive Information
Systems

◉ Executive information systems draw data from the MIS and allow
communication with external sources of information. EIS are designed
to facilitate senior managers' access to information quickly and
effectively. They have:
○ Menu-driven user friendly interfaces
○ Interactive graphics to help visualization of the situation
○ Communication capabilities linking the executive to external databases

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Typical EIS
EIS Workstation

-- Menus

- Graphics
Communications
EIS Workstation
- Local processing
EIS Workstation

Internal Data External Data

-- Menus TPS/MIS Data Share prices -- Menus

- Graphics
Communications
Financial Data Market research
- Graphics

- Local processing
Office Systems
Modeling/analysis
Legislation
Competitors -
Communications
Local processing

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Enterprise Resource Planning

Systems

◉ Executive resource planning systems (ERP systems) are modular

software packages designed to integrate the key processes in an
organization so that a single system can serve the information needs
of all functional areas.

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Typical ERP
Operations
Controls inventory throughout the supply chain,
from procurement to distribution

Finance ERP Software Accounting

Reports customer's Manages information Records sales and
credit rating and flow among all payments and tracks
current selling database applications business performance

Marketing Human resources

Co-ordinates sales activities Recruits, trains, evaluates and
and handles customer compensates employees
relationship

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Enterprise Resource Planning

Systems

◉ ERP systems primarily support business operations – those activities

in an organization that support the selling process, including order
processing, manufacturing, distribution, planning, customer service,
human resources, finance and purchasing. ERP systems are function-
rich, and typically cover all these activities – the principal benefit
being that the same data can easily be shared between different
departments.
◉ ERP systems work in real time, meaning that the exact status of
everything is always available. Further, many of these systems are
global.

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Enterprise Resource Planning

Systems

Benefits
◉ Allowing access to the system to any individual with a terminal linked
to the system's central server.
◉ Decision support features, to assist management with decision-
making
◉ In many cases, extranet links to the major suppliers and customers,
with electronic data interchange facilities for the automated
transmission of documentation, such as purchase orders and invoices
◉ A lot of inefficiencies in the way things are done can be removed; the
company can adopt so-called 'best practices‘

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Enterprise Resource Planning

Systems

Benefits
◉ A company can restructure its processes, so that different functions
work more closely together to get products produced
◉ An organization can align itself to a single plan, so that all activities, all
around the world, are smoothly coordinated
◉ Standardizing Information and work practices so that the terminology
used is similar, no matter where you work in the company
◉ A company could do a lot more work for a lot more customers
without needing to employ so many people

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Open and Closed

5 Systems
Systems can be open or closed

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Closed Systems

◉ A closed system is isolated and shut off from the environment.

Information is not received from or provided to the environment.
◉ Closed systems can be created to eliminate external factors and then
used to investigate the relationship between known variables in an
experiment.

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Open Systems

◉ An open system accepts inputs from its surroundings, processes the

inputs in some manner and then produces an output. The input
parameters can be foreseen or unpredictable. Similarly, outputs can
either be predicted or unforeseen.
◉ All social systems, including business organizations, are open systems

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Open and Closed Systems and

Performance Management

◉ Systems are rarely either open or closed, but open to some influences
and closed to others. Organizations must carefully choose the form of
management accounting system based on the respective scenario.

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Open and Closed Systems and

Performance Management

Advantages of an Open System

◉ It encourages strong communication
◉ It adapts to the changing environment
◉ It highlights the interdependencies of different operations and
processes within a business and the environment in which it operates
◉ It helps business leaders and managers to focus on the external
factors

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Open and Closed Systems and

Performance Management

Limitations of an Open System

◉ Non-linear relationships could exist among variables.
◉ It could prove difficult to measure the success of the system.

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