 CHAPTER 5: Visual Overview

CHAPTER 5: Visual Overview

Objective: To explore the influence of business structure and other factors on the m
CHAPTER 4: Visual Overview

Objective: To appraise alternative methods of budgeting for control.

1.1 Top-Down v Bottom-Up Budgeting
Top-down budgeting is where budgets are prepared centrally, usually by senior management. These
are then imposed on more junior managers.

Bottom-up budgeting means that junior managers prepare their own budgets initially. These are
then reviewed by the finance department and/or senior management – some negotiation may take
place before the final budget is achieved.

Activity 1 Top-Down and Bottom-Up Budgeting

State the advantages of top-down budgeting and the advantages of bottom-up budgeting.
*Please use the notes feature in the toolbar to help formulate your answer.

1.2 McGregor's Theories of Human Behaviour

McGregor suggests that the circumstances in which top-down or bottom-up budgeting would be
more appropriate depends on the nature of the employees.

The two types of employees are the Theory X and Theory Y employees:

1. Theory X

 People dislike work.

 People dislike responsibility.

 They are only motivated by money.

 They must be told what to do.

2. Theory Y

 People seek responsibility.

 They want to participate in decision making.

The type of employee working for an organisation therefore has implications for the budgetary
process.
Features

Employee Y
Employee X
 Junior management prepare budgets;
 Senior management prepare budgets;
 Senior management review to ensure consi
 Imposed on junior management; with organisation objectives;

 Quicker than bottom-up approach.  Risk of budget bias/slack.

1.3 Fixed v Flexible Budgets

At the end of the period, actual results are compared to the budget, and action taken to remedy any
deviations from the budget in future periods. However, a problem arises if the budget is prepared at
one activity level and the actual activity is very different; comparison is less meaningful, as it is
difficult to differentiate between deviations due to the different level of activity and those due to
other factors. The following three types of budget are defined by how they deal with variances
between actual levels of activity and budgeted, if at all.

1.3.1 Fixed Budgets

A fixed budget is prepared at the beginning of the period based on the expected activity level (sales
units, production units, etc). No adjustment is made to this budget at the end of the year when
comparing actual performance against the budget. This means that the budgeted activity levels may
be very different from the actual activity levels, making comparison meaningless, as different levels
of activity would incur different levels of cost.
 1.3.2 Flexible Budgets

When the budget is prepared, several versions of the budget are prepared. So a budget may be
prepared, for example, for 12,000, 14,000 and 16,000 units. At the end of the year the budget that is
closest to the actual activity level is used for the comparison of actual results against the budget.

This provides a range of possible outcomes across a variety of scenarios, for better understand on
how costs and revenues would behave at different activity levels, and allow for evaluation of
performance that is more fair.

Such an approach requires knowledge of cost behaviour – which costs are fixed, so they will not vary
with output, and which are variable.

1.3.3 Flexed Budgets

At the end of the year, prior to comparing the actual figures against the budget, the budget is
recalculated (flexed) using the original budget assumptions, but the actual activity levels. This means
that the comparison is more valid.

Example 1 Flexed Budget

Original budget

$000

Sales (50,000 items @ $100)

Production (55,000 units)

Materials (55,000 × 40) 2,200

Labour (55,000 × 3) 165

Variable overheads (55,000 × 9) 495

Fixed overheads (55,000 × 15) 825

Budgeted cost of production 3,685

Less: Closing inventory (5,000 @ $67) (335)

Standard cost of goods sold

Budgeted profit (50,000 @ $33)

Example 1 Flexed Budget

Actual sales were 53,000 units and production was 56,000 units. The flexed budget would be
calculated as follows:

Flexed budget

$000

Sales 53,000 × $100

Production costs

Materials 56,000 × $40 2,240

Labour 56,000 × $3 168

Variable overheads 56,000 × $9 504

Fixed overheads 56,000 × $15 840

Less: Closing inventory (201)

Cost of goods sold

Profit

Note: the above budgets have been prepared using absorption costing, as the fixed overheads absorbed into cost of sales
and closing inventory has been flexed.

1.3.5 Disadvantages of Flexed and

1.3.4 Advantages of Flexed and Flexible Budgets Flexible Budgets

 Easier comparison of actual results against

the budget since like is being compared with
like.
 During the planning stage, management has
better knowledge of cost behaviour, and
therefore what impact changes in output will
have on total costs.
 In the modern business world,
many costs are fixed – so flexible
and flexed budgets may add
little value.
 Difficulty of identifying variable
and fixed costs.

Activity 2 Fixed v Flexible Budgeting

 Good Trip is a travel agency. It employs a team of five staff – an accountant, three sales staff and a
manager. The agency does not organise holidays directly, but acts as an agent for big package
holiday companies. The company receives a commission on each booking that is made.

Required:

Discuss whether fixed or flexible budgeting would be more appropriate for Good Trip.

*Please use the notes feature in the toolbar to help formulate your answer.

4.1.4 Rolling Budgets (Rolling Forecasts)

1.4 Rolling Budgets (Rolling Forecasts)

1.4.1 Weaknesses of Traditional Periodic Budgeting

 Traditional periodic budgets are prepared in advance for the full budget period (typically one
year). The problem with this approach is that the budget itself may become outdated very
quickly due to changes in the external environment.

In response to this weakness, many organisations prefer to use rolling budgets.

Definition

Rolling budget – a system of budgeting where the budget is continuously updated. The budget horizon (typically one year) is
kept constant by adding another month (or quarter) to the end of the budgeted period as each month (or quarter) expires.

Example 2 Rolling Budget

A budget is prepared for the year 20X0.

At the end of January 20X0, the actual performance for the month of January is compared against
the budget. Based on this comparison, it may be decided that the budgets for the period 1
February to 31 December 20X0 should be changed to reflect changes in external factors. Once this
has been done, a budget is also prepared for January 20X1. The new budget therefore covers the
period from 1 February 20X0 to 31 January 20X1.

1.4.2 Advantages and Disadvantages of Rolling Budgets

 There will always be a budget for the next 12  Time consuming.

months. This can be useful for planning things such
 Budgets may be changed to hide operationa
as cash flows.
inefficiencies.
 Managers will be more motivated as the budget is
 Not necessary in a stable environment.
more realistic, since it will be updated to take
account of changes that occur that are outside of
 their control.

 The budget is always updated to reflect external

changes. It is therefore more relevant and more valid
for comparison against actual performance.

Activity 3 Use of Rolling Budgets

Betterbuys is a food retailer that runs a supermarket in northern England.

Pear develops portable communication devices and music players for the top end of the market.
Pear’s products have short life cycles due to the competitive nature of the market.

Required:

Discuss whether rolling budgets would be appropriate for each of the two organisations.

*Please use the notes feature in the toolbar to help formulate your answer.

1.5 Incremental Budgeting

In incremental budgeting:

 The process starts with the previous period’s budget or actual results.

 Incremental amounts are added/subtracted to cover:

o Any known changes to the business;

o Inflation.

This approach may be appropriate for a stable business with good cost control.

1.5.1 Advantages of Incremental Budgeting

 Only the increment needs to be justified.

 Easy and quick to prepare the budgets.

1.5.2 Disadvantages of Incremental Budgeting

 Unnecessary costs will remain in the budget because they were in the previous year’s
budget. Inefficiencies will therefore be compounded.

 Does not encourage a detailed examination of where improvements could be made to

increase efficiency.

 Budgeted expenditure is not related to the activities that the organisation wishes to
perform.

4.1.6 Zero-Based Budgeting (ZBB)

1.6 Zero-Based Budgeting (ZBB)

1.6.1 Basic Features

Zero-based budgeting attempts to overcome the weaknesses in incremental budgeting – in

particular, the criticism that costs will be included in a budget because they were in previous year’s
budgets. It requires managers to plan what projects they wish to do, and base the budget around
these.

 The process starts with the assumption that the budget for next period is zero.

 Budget holders identify what programmes their department wishes to perform in the next
year.

 Budget holders prepare a “decision package” for each programme which includes:

o Goal of the programme;

o Level of funding required and benefits;

o Consequences to the company of the department not performing its function.

 Senior management (usually a budget committee) decide which decision packages to accept
based on predetermined criteria. Decision packages are ranked in terms of priority for
allocation of funds, based on their importance and fulfilment of the criteria set.

 Resources are allocated to departments according to ranking of decision packages accepted

and approved for disbursement.

1.6.2 Advantages of ZBB 1.6.3 Disadvantages of ZBB

 Too costly and time consuming – th

it has never achieved the popularit
proponents expected.

 Should reduce budgetary slack as costs must be justified based  Not appropriate for non-discretion
on the activities they relate to. expenditure such as costs of produ
these depend on quantities of outp
 Useful for discretionary spending and support activities such
as advertising and research and development where  Budget holders, staff and trade uni
management can choose how much to spend on a particular feel threatened – that they have to
item. their existence.

 Resources will be allocated to the programmes that best  The ranking and selection of packa
achieve the objectives of the organisation. be subjective.

1.6.4 Use of ZBB

Many organisations have used a partial version of ZBB – applying it to some departments that
undertake discretionary-type activities, such as marketing.

Other organisations have used ZBB as a “one-off” exercise to identify potential cost savings before
returning to more traditional incremental types of budgeting in future periods.
 Example 3 Use of ZBB in Large Global Companies

An Accenture plc study released in February 2018 provided the following insights on ZBB:

 Historically ZBB has been used in the consumer goods sector but has gained popularity
among a broader range of organisations looking to cut costs, with approximately 300
large global companies currently using the technique. Kraft, Heinz, Unilever, Tesco and
Diageo are among the organisations that use ZBB, as well as others in consumer goods,
life sciences, chemicals, automotive and retail sectors.

 The organisations surveyed by Accenture saved on average $280 million per year with the
help of ZBB.

 Organisations also make the budgeting technique applicable to a wider number of tasks.
More than 90% of surveyed firms used it to reduce their spend on travel, facilities, legal
and professional services.

 Over half of organisations cut their sales and marketing budget applying ZBB, and more
than 40% reduced their headcount (by 43%) and their cost of goods sold (by 42%).

 More savings are possible by combining ZBB with big data analysis and artificial
intelligence.

 Half of the organisations surveyed did not pursue a staged approach when introducing
ZBB but launched it simultaneously across all of their markets.

4.1.7 Activity-Based Budgeting (ABB)

1.7 Activity-Based Budgeting (ABB)

1.7.1 Principles of Activity-Based Budgeting

Activity-based budgeting follows the principles of activity-based costing (ABC) “in reverse”. (ABC is
assumed knowledge from the Performance Management exam.) Having decided how many units to
produce and sell, the organisation then needs to define the cost of the activities required to produce
them. These depend on the drivers identified for each activity. A typical ABB exercise may follow the
following steps:

1. Estimate the expected output (units) for each product.

2. Identify the number of units of each activity that will be required to produce the output. This
is based on knowledge of the relationships between the output and the activities that are
required to be performed to produce the output.

3. Determine the resources needed to perform the activities required. This is based on
knowledge of the drivers – the factors that influence the price of the activities.

4. If the current commitment of resources is such that too many or too few resources exist to
perform the activities required in Step 2, adjust accordingly.
 Example 4 Activity-Based Budgeting

Alex uses activity-based costing, and wishes to adopt an activity-based approach to budgeting.

Having estimated the total budgeted sales for the next financial year (Step 1 above), Alex has
identified that one of the activities needed to support the budgeted sales is “Processing sales
orders”. Alex has identified that 2,800 orders will be received next year based on the budgeted
sales level (Step 2).

One of the resources needed for processing orders is staff. Each member of staff in the Sales
Order department can handle 60 orders per month, or 720 order per year. Since Alex expects
2,800 orders next year, the company will need 3.9 (i.e. four) members of staff (Step 3).

Currently Alex employs six members of staff in the Sales Order Processing department. Alex
should consider relocating two members of staff to other departments.

4.2.1 Variance Investigation

2.1 Variance Investigation

Definitions

Variances – differences between actual prices and standard prices and actual quantities and
standard quantities.

Variance analysis – the process of calculating and interpreting variances.

The main purpose of variance investigation is to improve operations.

 Actual cost and performance is compared with the standard cost of actual performance.

 The differences between actual results and what should have happened according to the
standards are variances.

 Management should consider both the nature (“why did it arise?”) and magnitude (“by how
much has it increased/decreased”?) of any variance.

 A corrective action could include re-calibrating/re-setting the specifications of an item of

equipment or changing a supplier.

 An amended standard cost may be prepared for the next period.

2.2 Controllability

The controllability principle is that managers should be judged only on things within their control.

In a system of responsibility accounting, managers are given responsibility for particular areas of the
organisation. At the end of the period, the performance of managers may be judged at least in part
by variances:

 which are attributed to their department;

 between actual and budgeted revenues, costs and profits.

Managers' remuneration may also be linked to this (e.g. bonuses could be paid if managers achieve
their budgeted profit figures). It is clearly important therefore that the performance management
system is fair.

Activity 6 Controllability

Rehan is the production manager of a factory making ball bearings. His performance is judged using
variance analysis. The variance analysis for the last month has just been performed and includes the
following:

 An adverse materials price variance due to a change in the supplier. The supplier was
changed because Rehan complained that the quality of the products sold by the previous
supplier was substandard.
  A labour idle time variance caused by two factors:

1. A strike lasting two days over pay.

2. A machine breakdown, meaning staff could not work until the machine was fixed.

 A fixed overhead variance caused by an increase in factory rent. All rental contracts are dealt
with by the company's legal department.

Required:

Discuss which of the events above (if any) are outside of Rehan's control and should, therefore, be
ignored when assessing his performance.

*Please use the notes feature in the toolbar to help formulate your answer.

4.2.3 Revision of Budgets and Standards

2.3 Revision of Budgets and Standards

At the end of a budget period, prior to comparing the actual performance of an organisation against
the budget, budgets may be revised to take account of changes within the environment which were
not anticipated when the budget was prepared.

The reason for such revision is that because managers are judged on how they performed relative to
the budget, it is unfair to use a budget that turns out to be incorrect.

The principles that should be applied when revising budgets are as follows:

 If something occurred during the budget period that was outside the control of the manager
and meant that the budget was not achieved, it should be revised.

 If, in retrospect, it appears that the original budget was unrealistic, the budget may also be
revised.

 Management should not revise budgets to hide inefficiencies.

 Senior management should approve only appropriate revisions.

Activity 7 Budget Revisions

The budget for an airline for the year ended 31 December 20X1 was prepared in October 20X0. Since
the budget was prepared, the following events occurred:

 The price of oil increased 25% on world markets. This caused airline fuel prices to increase.
Fuel accounts for 50% of the airline's costs.

 Due to a strike, the airline could not operate for four weeks of the year. There was no
revenue during this period.

 The airline lost an additional two weeks of revenue due to the eruption of a volcano and the
associated ash cloud.
Required:

For each of the events above, discuss which should result in budget revisions and which should
not.

*Please use the notes feature in the toolbar to help formulate your answer

2.4 Planning and Operational Variances

Traditional variance analysis compares:

If the actual environment differs from what was anticipated when the original standard was set,
management should consider revising the standard (revised standard).

Even if the environment has not changed, hindsight might show that an unrealistic standard was
used (e.g. ideal standard). Again, management should consider revising the standard.

The factors to consider in deciding whether to revise a standard are essentially the same as whether
to revise a budget (as above).

The variances calculated by comparing actual performance against the revised standard
are operational variances (or operating variances). The calculation of these is exactly the same as
the method used to calculate “traditional” variances in your ACCA studies to date; the only
difference is that a revised standard is used.

The difference between the revised standard and original standard is the planning variance
(or budget revision variance). These variances can relate to any element of the standard product
specification or indeed to sales or production volumes.

Definitions

Planning variance – arises when an original budget is revised with the benefit of hindsight ("after the fact").

Operational variance – arises when actual performance differs from a revised standard.

4.2.5 Planning Cost Variances

2.5 Planning Cost Variances

There are various methods of calculating planning variances. The following approach starts with the
traditional variance (e.g. a material price variance), which is then analysed into planning and
operational variances.

2.5.1 Materials Price and Labour Rate

The approach to calculating the materials price and labour rate variances is the same, so these two
variances are dealt with together here.

 For materials, the references to quantity are to quantities of materials;

 For labour, the quantities are labour hours.

Traditional Price/Rate Variance

Actual quantity x Actual price x

Actual quantity x Standard price x

Price variance x

If the standard price is subsequently revised, the traditional variance can be analysed into planning
and operational variances, as follows:

Planning Price Variance

This shows the effect of revising the standard cost by comparing the standard cost of actual
materials using the old and new standard cost:

Actual quantity x Original standard price x

Actual quantity x Revised standard price x

Planning price variance x

 This is adverse if the revised standard price is higher than the original standard price.

Operational Price Variance

The calculation of the operational price variance is very similar to the calculation of the traditional
price variance. The only difference is that the actual price is compared with the revised standard
instead of the original standard:

Actual quantity x Actual price x

 $

Actual quantity x Revised standard price x

Operational price variance x

 This is favourable if the actual cost is less than the revised standard cost.

2.5.2 Materials Usage and Labour Efficiency

The approach to calculating the materials usage and labour efficiency variances is the same, so these
two variances are dealt with together here.

Traditional Usage/Efficiency Variance

Kilos/Hours, etc

Actual quantity used x

Standard quantity for actual output x

Difference x

At standard price/rate per unit/hour $x

Materials usage/labour efficiency variance $x

Planning Usage/Efficiency Variance

Kilos/Hours, etc

Original standard quantity for actual output x

Revised standard quantity for actual output x

Difference x

At standard price/rate per unit/hour $x

Materials usage/labour efficiency planning variance $x

 This is adverse if the revised standard quantity is greater than the original standard quantity.

Operational Usage/Efficiency Variance

 Kilos/Hours, etc

Actual quantity used x

Revised standard quantity for actual output x

Difference x

At standard price/rate per unit/hour $x

Materials usage/labour efficiency operational variance $x

2.6 Market Size and Market Share Variances

2.6.1 The Concept

A traditional sales volume variance may result from:

 a market size variance, which arises because the size of the market was different from
expected due to a change in the external environment (e.g. economic growth); or

 a market share variance, which arises because the share of that market was different from
budget (e.g. due to effective advertising).

If the actual market size for a product is known, the sales volume variance can therefore be split:
 Key Point

Sales managers can control the market share variance, but not the market size variance.

2.6.2 Market Size Variance

Kilos/Hours, etc

Budgeted sales quantity x

Revised budgeted quantity

(Actual market size × Budgeted market share) x

Difference x

× Standard contribution/profit per unit x

Market size variance $x

Key Point

If marginal costing is used, multiply the variances by standard contribution per unit.
 Key Point

If absorption costing is used, multiply the variances by the standard profit per unit.

2.6.3 Market Share Variance

Units

Actual sales quantity x

Revised budgeted quantity x

Difference x

× Standard contribution/Profit per unit x

Market share variance $x

4.2.7 Evaluation of Revision of Standards

2.7 Evaluation of Revision of Standards

Advantages Disadvantages

 Distinguishes between those variances

caused by bad planning or unavoidable
factors and those which are the result
of operating factors.

 Adverse operating variances provide

feedback control on processes which
need correcting.
 Extra data requirements (e.g. market size).
 Planning variances can be used to
update standards to current conditions.  More time consuming.

 Motivation may improve if managers  Managers may claim that all adverse
know they will only be assessed on variances have external causes and all
variances under their control (i.e. favourable variances have internal causes
operational variances). (i.e. manipulation of revised standards).

2.8 Manipulation
From the previous discussion, it should be apparent that budgets and standards prepared at the
start of the year may need revision at the end of the year if they are inappropriate because of
factors which occurred outside of the control of the organisation.

Care clearly must be taken to ensure that budget revisions are only made when appropriate.
Managers who have not achieved their budget targets, or who experience adverse variances, may
try to hide these by revising the budgets and standards.

In practice, there may be some debate about whether an organisation should revise a standard or a
budget.

4.3.1 Criticisms of Traditional Budgeting

3.1 Criticisms of Traditional Budgeting

For many years there has been much criticism of the traditional budgetary processes. Hope and
Fraser detail these criticisms in their book Beyond Budgeting. This looks at the problems inherent in
the traditional budgeting process, and suggests an alternative approach to performance
management, the "Beyond Budgeting" model.

In discussing budgets, Hope and Fraser use a broader definition of budgeting than simply producing
a financial plan. They mean the whole performance measurement process of agreeing on the
targets, setting reward schemes based on achieving those targets, using budgets to allocate
resources, and controlling performance based on this process. They refer to this as the "fixed
performance contract".

The main criticisms of this budgeting model as described by Hope and Fraser are as follows:

3.1.1 Budgets Take Up Too Much Time

The budgeting process takes up too much of the time of senior management, and does not add
sufficient value to the organisation to justify this.

3.1.2 Budgeting Is Out of Kilter with the Modern Business Environment

In the more competitive environments that have existed since the 1980s, businesses must react
quickly to customer needs. This requires transferring power from the centre to managers who are
closer to the customers. The old "command and control" structure of organisations represented by
traditional budgeting process has become outdated.

The primary drivers of shareholder value in the modern business world are intellectual capital such
as brands, loyal customers and proven management teams. These are outside of the orbit of the
budgetary control system.

3.1.3 The Extent of Gaming

Budgets were initially introduced as a planning tool for managing costs and cash flows. However,
over time budgets also came to be used as performance management tools for managing the
business. The "fixed performance contract" was introduced, as follows:

 A fixed target – usually expressed in terms of budgeted sales, costs, profits and ratios such as
return on capital employed.
  Incentives were introduced based on achieving these targets, such as bonuses and
promotions for achieving the budgets.

 Resources are allocated to departments based on the budget.

This system sounds good in theory, but in practice it can lead to an annual "performance trap"
whereby the actions of all managers are focused on meeting the performance targets of the current
year.

This may lead to dysfunctional behaviour, or gaming. Gaming means manipulating a system to
achieve some advantage (e.g. building slack into budgets).

During their research, Hope and Fraser encountered the following examples of gaming:

 Managers negotiate the lowest targets and the highest rewards.

 Always make the bonus whatever it takes (e.g. by "window dressing"). For example, ensuring
that sales targets are met by making sales on a "sale or return" basis at the end of the
financial year to a friend. The following year the goods are returned.

 Never put the customer above the sales targets.

 Never share knowledge or resources with other teams.

 Ask for more resources than you need. You will be cut back to what you actually need.

 Always spend what's in the budget or you will lose it.

 Always be able to explain adverse variances on causes beyond your control.

 Never provide accurate forecasts – hide bad news or you will be expected to compensate.

 Always meet the numbers, never beat them.

 Never take risks.

3.2 Beyond Budgeting Model

Definition

Beyond Budgeting – a set of guiding principles to enable an organisation to manage its performance and decentralis
decision-making process without the need for traditional budgets.

Hope and Fraser suggest that the traditional budgetary control process should be replaced by the
following system:

 Replace financial targets with targets based on key performance indicators (KPIs) and use
"stretch goals" for planning that are not linked to reward schemes.

 Appraise managers using comparisons with peers and benchmarks and reward them
accordingly.

 Devolve responsibility for planning away from the centre.

  Manage resources to be available for worthwhile opportunities.

 Use rolling forecasts, performance league tables and other KPIs to measure and control
performance rather than just relying on comparison of actual performance against the
budget.

3.2.1 Setting Targets

Definition

Stretch goal – a goal that requires an organisation or person to push themselves to their limits.

Where managers rewards are linked to achieving fixed financial targets, managers negotiate the
lowest targets. This means that the organisation does not achieve its potential. Beyond budgeting
encourages managers to set challenging targets or "stretch goals" that cannot be achieved by
making small improvements to existing performance.

 Managers are asked what their department could achieve if it aimed to maximise
performance over the short to medium term.

 Since their rewards will not depend on achieving these targets, managers will not have an
incentive to simply negotiate easy targets. Raising targets encourages maximum profit
potential.

 Setting targets based on KPIs is quicker than setting detailed financial budgets, therefore
reducing the time spent on budgeting.

 Targets set are more aligned with the strategy of the organisation than financial targets.

3.2.2 Rewarding People

In traditional budgeting, fixed targets are set at the start of the year and managers are rewarded if
they achieve those targets, regardless of any external changes in the environment. This leads to
manipulation of data and gaming – an attitude of "make the target whatever it takes".

 Beyond budgeting uses relative targets (e.g. how managers perform compared to peers) or
benchmarks (e.g. profits compared to competitors or market share)..

 Targets are therefore more relevant and realistic, unlike internally set targets.

 Targets are also fairer, as they take into account changes in the external environment
automatically; if the economy is not doing well in a particular year, the competitor's profits
will also be lower. This helps to eliminate gaming as managers now see that the targets are
fair.

3.2.3 Action Planning

In traditional budgeting, budgets are often prepared at the start of the year using top-down
methods. These fix the behaviour that is expected of the managers. The problem is that in a dynamic
business environment, organisations need to be able to react quickly to changes (e.g. to customer
demand). The traditional budget limits such reaction.

 In the beyond budgeting model, business unit managers and front-line staff develop their
own plans for maximising customer satisfaction and shareholder wealth.
  The role of senior management is to provide higher-level targets and to challenge the plans
produced by business unit managers.

 Unit managers will typically prepare medium-term goals on an annual basis and short-term
goals on a quarterly basis. They can therefore respond to changing demand and anticipate
business threats and opportunities. This continuous and open process allows teams to
create value.

3.2.4 Managing Resources

In traditional budgeting, budgets are used as the basis for deciding how resources should be
allocated to each department. If new projects become available that were not envisaged when the
budget was prepared, funds may not be made available for them. This may lead to good business
opportunities being missed.

 In the beyond budgeting model, resource decisions are devolved to front-line teams, making
them more responsive. Managers are more accountable; there is greater ownership and less
waste.

 Funds are allocated to projects based on a "fast track" review process (i.e. if front-line teams
need additional resources, they will be approved if they meet agreed criteria).

3.2.5 Coordinating Actions

In traditional budgeting, the budgets of all departments are coordinated. According to Hope and
Fraser, although the departments may be coordinated with each other, they are not aligned with the
strategy of the organisation. An additional problem is that it is not enough to perform this
coordination once every year.

 In beyond budgeting, coordination occurs through cross-company interaction.

 Service level agreements between the different departments are used to coordinate their
activities. Under such agreements one department commits to providing goods or services
to another, based on expected demand, covering an appropriate time frame.

 Operating capacity rises and falls according to demand, rather than to meet a
predetermined budget. Production is more flexible and there is less waste as fewer items are
made for inventory.

3.2.6 Controlling Performance

In traditional budgeting systems, control is exercised by comparing actual performance against

budget and asking managers to explain any variances. Corrective action is then taken to bring actual
performance back into line with the budget. This leads to too much focus on the short term,
according to Hope and Fraser. Few organisations focus beyond the end of the current financial year.

 Beyond budgeting model uses a more diverse range of forward-looking indicators to manage
performance. There is a greater focus on trends and forecasts.

 Extensive use of rolling forecasts and leading indicators provide managers with a view of
what will happen in the future.
  There is also greater use of comparison of KPIs achieved against benchmarks and the use of
league tables. This provides managers with a more sophisticated view of performance and
should eliminate manipulation of data.

4.3.3 Evaluation of Beyond Budgeting

3.3 Evaluation of Beyond Budgeting

3.3.1 Advantages

 Divisional managers will be more motivated as they will be given autonomy to plan for their
own business units.

 Creates a climate based on competitive success. Using relative performance measures and
comparing performance with external benchmarks encourages managers to focus on
beating competitors rather than other managers.

 Faster response to changes in customer needs as managers can react quickly to new threats
and opportunities rather than adhere to an outdated budget. Resources will also be made
available for new projects if they are worthwhile even if not originally in the budget.

 Performance is not only focused on financial numbers but on KPIs, which reflect more
faithfully the overall objectives of the organisation (see Chapter 15 for examples).

 More customer-focused attitude of departments that supply other internal departments.

3.3.2 Disadvantages

 The organisational culture may not support this approach (e.g. where senior managers are
accustomed to a command-and-control style of management).

 May not be appropriate in organisations in which financial control is crucial to success (e.g.
in public sector organisations where funds are limited).

4 Summary and Quiz

Summary and Quiz

 Various budgetary systems exist for comparing budgeted performance
against actual including fixed, flexible, flexed, periodic and rolling.
 Incremental budgeting is a traditional approach to budgeting which takes
the current year's budget as a starting point in preparing the next year's
budget.
 Zero-based budgeting tries to improve on this by starting the budgeting
process with a zero base, and basing the budget on the activities that the
organisation wishes to perform.
 The main purpose of analysing variances is to improve operations by
taking action when variances are identified.
 Prior to performing variance analysis, budgets and standards may be
revised to take into account unexpected changes in the environment or
correct standards that are found to be unrealistic. Comparing actual
performance against a revised standard may lead to a fairer evaluation.
Operational variances compare actual performance with a revised budget or
standard;
Planning variances compare the original standard with the revised standard
for actual output.
The Beyond Budgeting model aims to replace traditional budgetary control systems
with a more modern approach which replaces financial targets with key performance
indicators.

anagement accounting practices of an organisation.

5.1.1 Functional Form

1.1 Functional Form

1.1.1 Traditional Structure

This is the traditional structure of a business. Departments are defined by their
function (sales, finance, production, etc).
An organisation chart for a functionally organised company might look like this:

1.1.2 Implications for Performance Management

The functional structure has significant implications for performance management:
 There is a need for coordination of all the departments. This coordinating
role would be performed by the directors.
 The directors are likely to have responsibilities related to functional
oversight as well as a high-level strategic role. They will therefore require
detailed information from the levels below.
 Budgets and management accounts are likely to be based around the
structure, and so reinforce the structure. Each department will have its
own budget. Since most of the departments are cost centres, these
budgets will mostly simply show budgeted costs. Only directors will see
budgets and actual reports that include profits.
 It may be difficult to see where profits or losses are made. It is unlikely that
information would be available for profits by product, for example, since
many of the organisation's costs would be considered to be overheads
(e.g. finance costs).
 Approaches such as activity–based costing, whereby overhead costs are
included in product costs, may be difficult to apply if functional information
is siloed.
 It is difficult to see where value is added.
Activity 1 Management Accounting Information
Describe the likely nature of the management accounting information in an
organisation that adopts a functional form.
*Please use the notes feature in the toolbar to help formulate your answer.
Information will be centralised. Management at the top will require detailed
management accounts to monitor the business.
Information will flow up and down the organisation. There may be little flow of
information horizontally – between the functions.
There may be a top-down approach to budgeting.
Analysis of profitability, for example, information by customer or by product, will be
difficult due to the inability to allocate the expenses of the different functions to each
customer/product.

5.1.2 Divisionalised Form

1.2 Divisionalised Form

Divisions are created whereby the divisional managers have autonomy to run their
business area as they wish.
 Divisions may be based on geographical areas or along business/product
lines.
 Typically each division is organised along functional lines.
Each "division" may be a separate legal entity, owned by the parent.

1.2.1 Implications for Performance Management

Divisional managers are likely to be given a large amount of autonomy. The head
office would not be involved in operational matters and so would only require high-
level information, such as return on investment of the division.
The challenge for the head office is to ensure that the divisional directors are
managing their divisions in such a way that they contribute to achieving the goals of
the organisation as a whole. For commercial organisations, it is assumed that the
primary objective of the organisation is to maximise the wealth of the owners. In this
case, divisional managers must work towards this goal by only investing in projects
that maximise the wealth of stakeholders.

1.2.2 Information Needs of Divisional Organisations

In a divisional organisation, the head office does not require detailed management
accounting information from the divisions. Instead, it will use higher-level measures
to ensure that the divisional managers are achieving the objectives of the
organisation. For example:
 Return on investment;
 Residual income; and
 Economic value added
Such divisional performance measures (see Chapter 10 for details) may be
supplemented by non-financial KPIs.
Divisional managers do require detailed information to enable them to manage their
division. These managers are likely to define for themselves what management
information they want.
 Activity 2 Divisional Form v Functional Form

Explain how the management accounting information in a divisional organisation

might differ from the management accounting information in a functional
organisation.
*Please use the notes feature in the toolbar to help formulate your answer.
Information needs of the organisation
As mentioned in Activity 1, in a functional organisation, information received by top
management is likely to be very detailed, as the head office manages all the
functions. In a divisional structure, each division is accountable to top management
at "head office" for its performance. The information provided to top management is
likely to be less detailed, and may include high level information such as:
 Divisional profits and cash flows; and
 The achievement of other corporate objectives (e.g. market share).
Divisional managers will need detailed information to enable them to manage their
divisions

1.3 Network Organisation

1.3.1 Types of Network

A network organisation is a collection of autonomous business units which are
coordinated centrally to behave as a single larger organisation:
 Internal networks are organisations that see their units as separate profit
centres and encourage them to sell outside the organisation as well as
inside. Corporate headquarters acts as a broker. The rationale is that if
units have to work with prices set by the market, they will be more efficient.
 A stable network is an organisation that outsources much of its work.
 Dynamic networks outsource even more dramatically. A majority of the
functions of the business will be outsourced including core business
activities, with the head office acting as a coordinator.
Example 1 The Fashion Industry

Network organisations are fairly common in the fashion industry. Rather than employing designers and
staff to manufacture the clothes, all of the functions may be outsourced. The "company" itself may be a
small group of individuals who involve themselves in marketing the brand (the label), and coordinating the
design and manufacture of the clothes by the organisations to which they are outsourced.
H&M (Hennes and Mauritz), for example, a popular global brand, has outsourced the production and
processing of its products to different countries, the majority being in Asia and South East Asia.

1.3.2 Implications for Performance Management

The use of outsourcing means that management of the network organisation does
not need to become involved in detailed management of the activities that have been
outsourced. Performance management is likely to focus on whether or not the
partners are providing the appropriate level of quality at the appropriate price. The
 organisation may also be interested in ensuring that its suppliers comply with the
organisation's ethical standards.
Although outsourcing can make managing an organisation simpler in some senses, it
can lead to additional challenges:
 Reliance on third parties to perform critical business processes. If they do
not perform to the required level of quality or quality of service, this can
adversely impact the reputation of the organisation.
 There will be a loss of confidentiality as it may be necessary to share
business sensitive data with the partners.
 Performance measures and targets will need to be set and agreed with the
partners. It may be difficult to monitor these accurately, as measurement
may be performed by the partners, who will have an incentive to ensure
that only good news is reported.
Example 2 Apple Inc

Apple Inc., the manufacturer of iPhones, iPads and Mac computers, makes extensive use of outsourcing
partners. The following statement from Apple's annual report explains the performance management
issues that this brings:
"Substantially all of the Company's manufacturing is performed in whole or in part by outsourcing partners
located primarily in Asia. A significant concentration of this manufacturing is currently performed by a
small number of outsourcing partners, often in single locations. The Company has also outsourced much
of its transportation and logistics management. While these arrangements may lower operating costs, they
also reduce the Company's direct control over production and distribution. Such diminished control may
have an adverse effect on the quality or quantity of products and services, or the Company's flexibility to
respond to changing conditions. Although arrangements with these partners may contain provisions for
warranty expense reimbursement, the Company may remain responsible to the consumer for warranty
service in the event of product defects and could experience an unanticipated product defect or warranty
liability. While the Company relies on its partners to adhere to its supplier code of conduct, material
violations of the supplier code of conduct could occur."
Source: Apple form 10-K (annual report) for the fiscal year ending 24 September 2018.

1.3.3 Information Requirements of Network Organisations

In a network organisation, the head office has a mainly coordinating role. The
information that would be required for such an organisation would primarily include:
 Non-financial performance indicators relating to the performance of the
partners. For example, quality of goods manufactured by partners, number
of deliveries on time.
 Information about prices charged by the partners. These will likely be
agreed in a service level agreement.
 Compliance with ethical, environmental and health and safety standards of
the company by the partners.
Information about the performance of partners will often be gained through
integrated IT systems. This can be supplemented by audits of suppliers.

2.1 Accounting Needs of Traditional Manufacturing

Industry
Much of the management accounting literature and ideas were developed for
manufacturing industries. However, service industries are becoming increasingly
important parts of the economies of many countries. This section considers how the
management accounting needs of the two differ.
The objectives of management accounting information in manufacturing industries
can be categorised as follows:
 Cost behaviour – used for planning, controlling and costing for inventory
valuation.
 Quality of production – this will be measured against the product
specification.
 Time taken – manufacturing time, bottlenecks, etc to gain more efficiency.
 Innovation – required in new products and new processes.
 Valuation – even in the world of just-in-time manufacturing, there may be
some inventory. Valuation may also be performed for other purposes such
as pricing.
Manufactured goods may be standardised – which makes the objectives above
simpler to deal with

5.2.2 Service Industries

2.2 Service Industries

There are four characteristics of services that make the measurement of

performance in service industries more difficult than in manufacturing industries.
These can be easily remembered with the mnemonic SHIP:
 Simultaneity/inseparability: services are consumed at the same time as
they are produced, which means that the organisation cannot stop the
customer from experiencing a bad service.
 Heterogeneity/variability: each service provided could be unique
because people are involved and hence the quality of services can never
be standardised.
 Intangibility: a service cannot be touched or viewed, so it is difficult to
know in advance exactly what service they will receive.
 Perishability: services cannot be stored. Organisations must therefore
have sufficient resources to produce sufficient services to meet peak
demand. This can have implications for resource utilisation, as the
organisation will have the problem of unused capacity at non-peak times.

5.2.3 Management Accounting Needs in Services Industries

2.3 Management Accounting Needs in Services
Industries
While the objectives of management accounting in services industries will be broadly
the same as that of manufacturing industries, there are some differences:
 More emphasis on quality of service. However, quality of service is harder
to measure, due to simultaneity and heterogeneity.
 Because of intangibility, it will be necessary to identify several measures of
quality.
 Many service industries provide "personalised service" – that is, each
service is different, based on specific needs of the customer. This makes it
difficult to define a standard cost which could be used for variance
analysis.
 A higher portion of the cost of a service may be overheads, which means
activity-based approaches to costing may be more appropriate.
 More contact with customers. In a manufacturing environment, the product
is made in the factory. In a service industry, the service is usually
performed while the client is present.
 Because of perishability, the organisation needs to strike the correct
balance between having sufficient resources to meet peak demand and
being over resourced. There is therefore likely to be emphasis on resource
utilisation measures.
 The appropriate cost unit may be harder to define in a service industry
than in manufacturing. In a hospital, for example, the cost unit could be
patients, beds or even doctors. Most of the time, a composite cost unit
might need to be used, such as bed-nights, or passenger-kilometres.
Activity 3 Quality of Service

Identify some aspects of the quality of service provided by an airline that are likely to
be important to a frequent traveller.
*Please use the notes feature in the toolbar to help formulate your answer.
Being a service, the quality of intangibility applies – this means that different
passengers value different aspects of the service, for example:
 Punctuality of flights
 Speed of check in
 Comfort of the seat
 Quality of the in-flight entertainment
 Quality of the food
 Safety record
 Attitude of staff

The management accounting information for service industries may therefore

include:
 Monetary information (i.e. information that may be expressed in money
terms).
 Non-financial quantitative information (e.g. market share).
 Qualitative information (i.e. information that cannot be expressed in
numbers).

5.3.1 Business Processes

 3.1 Business Processes

Business processes are the activities that are carried out within an organisation. One
process may spread across several departments.

Definition

Business process – a set of linked activities that take an input and transform it to create an output.
A business process is essentially a collection of interrelated tasks. Ideally, the
transformation that occurs in the process should add value to the input and create an
output that is more useful and effective to the recipient either upstream or
downstream. There are three types of business processes:
1. Management processes are the processes that govern the operation of a
system. Typical management processes include "corporate governance"
and "strategic management".
2. Operational processes are the processes that constitute the core
business and create the primary value stream. Typical operational
processes are purchasing, manufacturing, marketing and sales.
3. Supporting processes support the core processes and include
accounting, recruitment and IT.
3.2 Business Process Re-engineering (BPR)
Definition

Business process re-engineering – the fundamental rethinking and redesign of business proces
achieve dramatic improvement in critical measures of performance such as cost, quality, service a
speed.
– Hammer and
When organisations began to introduce computer systems for the first time, the
systems were often used simply to automate existing business processes. Hammer
and Champy pointed out that organisations missed an opportunity to question
whether those business processes were really necessary, particularly in a
computerised environment.
Hammer and Champy proposed business process re-engineering (BPR) as a way
that organisations can achieve a large, one-off improvement in performance.
 BPR implies starting with a clean sheet of paper and designing the
business processes from scratch.
 A business process should only be performed if it "adds value" (i.e. it does
something that the customer wants).
 Many processes that are performed in paper-based manual systems
become unnecessary in computerised systems.
 BPR is not only about reducing costs. It is also concerned with allowing
the organisation to become more responsive to the needs of customers.
Linked with BPR are the concepts of "business automation" and "business
rationalisation". BPR is not automation or rationalisation. It goes far beyond. The key
words are: fundamental, radical, dramatic and process.
Definitions

Business automation – the use of computerised working methods to speed up the process of existing
tasks.
Business rationalisation – the streamlining of operating procedures to eliminate inefficiencies.

Example 3 Hallmark Cards

Hallmark used to spend three years bringing new products (various types of greetings card) to the market.
With more niche markets identified, its executives were convinced that the product development process
needed to be redesigned. Using BPR, the goal was set to reduce the cycle time to one year.
They found out that two-thirds of the product cycle was spent on planning and conceptualising the card,
rather than printing and production as had previously been thought. The concept spent 90% of the time
waiting for a member of the creative team to complete a new iteration until the product was eventually
finalised.
By creating a cross-functional team for product development, a new line of cards was brought to market
ahead of schedule in eight months.

5.3.3 Principles of BPR

3.3 Principles of BPR

1. Process should be designed to achieve a desired outcome rather than

focusing on existing tasks.
2. Under BPR, the people who will use the output from a process should,
ideally, perform the process. Individuals who require the output to enable
them to proceed are less likely to accept delays, which should
reduce bottlenecks.
3. Information gathering and processing should be performed at the same
time.
4. Geographically dispersed resources should be treated as if they
are centralised. This allows the benefits of centralisation to be obtained
(e.g. economies of scale through central negotiation of supply contracts)
without losing the benefits of decentralisation (e.g. flexibility and
responsiveness).
5. Parallel activities should be linked rather than integrated. This would
involve, for example, coordination between teams working on different
aspects of a single process.
6. "Doers" should be allowed to be self-managing. The traditional distinction
between workers and managers can be abolished: decision aids (e.g.
expert systems) can be provided where they are required.
7. Information should be captured once at source. Electronic distribution of
information makes this possible.
3.4 Implementation of BPR
There are various methodologies for re-engineering and redesigning business
processes after a project area has been identified. Davenport and Short (1990)
prescribe a five-step approach:
1. Develop the business vision and process objectives: BPR is driven by a
business vision, which implies specific business objectives (e.g. cost
reduction, time reduction, output quality improvement, learning and
empowerment).
2. Identify the processes to be redesigned: Most organisations use the high-
impact approach, which focuses on the most important processes or those
that conflict most with the business vision. A lesser number of
organisations use the exhaustive approach, which attempts to identify all
the processes within an organisation and then prioritise them in order of
redesign urgency.
3. Understand and measure the existing processes: For avoiding the
repetition of old mistakes and for providing a baseline for future
improvements.
4. Identify IT levers: Awareness of IT capabilities can and should influence
process design.
5. Design and build a prototype of the new process: The actual design should
not be viewed as the end of the BPR process. Rather, it should be viewed
as a prototype, with successive iterations.
The introduction of BPR can have the following effects on the organisation:
 The organisation structure may change to reflect process teams rather
than functional departments.
 Staff roles may change from a limited number of tasks to multi-dimensional
work.
 Staff will be empowered (e.g. front-line staff will be able to make decisions
without requiring authorisation from more senior staff).
 Performance measurement will change. Traditional measures that focus
on particular departments (e.g. the costs of the marketing department
against the budget) would no longer be consistent with the process view of
BPR. Instead, performance measures are likely to focus on the whole
process and to measure the output of the process against a target (e.g.
the total cost of making a sale). This may be assisted by the use of
activity-based management (see Chapter 15).

5.3.5 Influence of BPR on Systems Development

3.5 Influence of BPR on Systems Development

The implications of BPR for accounting systems include the following:

 Information systems must be based around processes, not departments,
to facilitate performance measurement. This is likely to affect the design of
responsibility centres.
 Systems may be shared across the organisation, rather than having one
system for each functional department.
 Reports will need to be based on the value-added activities.
 3.6 Evaluation of BPR

BPR became very popular in the 1990s, particularly in the US. Although many
organisations reported excellent improvements in performance as a result of
implementing BPR, others were disappointed with the results.
Advantages from many well-reported cases include:
 Eliminating bureaucratic procedures which allowed service businesses to
deal with customers more quickly. For example, a US life insurance
company that took 22 days to process new applications reduced this to
only five days after re-engineering.
 Reducing headcount and thereby saving costs. For example, Ford was
able to reduce headcount in the accounts payable department by 75% by
automating and reorganising the process of matching purchase orders,
receiving documents and invoices.
 Creating value (what the customer wants) and eliminating non-value-
added activities. For example, Taco Bell grew from a $500-million revenue
company in 1982 to a $3-billion company in 1992. Its re-engineering
included increasing the seating capacity from 30% of the restaurant area
to 70% and reducing the kitchen area from 70% to 30%. Regional
managers were also eliminated and restaurant managers given profit and
loss responsibility.
Criticisms of BPR include:
 Too much focus on efficiency and the use of BPR as a pretext for large-
scale redundancies.
 The assumption implicit in BPR that existing processes are not effective.
This is not always the case.
 That BPR is simply a "buzzword" that became very fashionable in the
1990s to describe something that was not new. For example, the changes
made to the factory in the 1920s by Henry Ford were a type of BPR.

 5.4.1 Meaning
 4.1 Meaning
Definition

Business integration – the result of viewing an organisation as a linked group of business processes,
adding value to the customer, rather than viewing it as a group of separate functional departments.

 In traditional functionally organised companies, it is easy for the various
departments to lose sight of the fact that they are working towards a common
goal. Business integration attempts to look at the business processes
holistically, and to de-compartmentalise them.
4.2 Porter's Value Chain
4.2.1 Overview
Porter's value chain focuses on the value-added activities that an organisation
performs rather than its organisational structure.

Example 4 Porter's Value Chain

4.2.2 The Primary Activities

The primary activities of an organisation are related to producing the product or
service of the organisation:
 Inbound logistics – receiving, handling and storing goods, materials and
inputs for production;
 Operations – converting the inputs into the final product;
 Outbound logistics – delivering the product to the customer;
 Marketing and sales – informing customers about the product;
 After sales service – repairing products, provision of replacement parts,
etc.

4.2.3 The Secondary Activities

The secondary activities support the primary activities.
 Procurement –buying the inputs; evaluating reliability of supply;
negotiating prices, management of lead times and quality standards;
 Technology development – product design, improving processes;
  Human resource management – recruiting, training, developing and
rewarding people;
 Firm infrastructure – support activities such as management, finance,
etc.

4.2.4 Use of the Value Chain

The value chain is a strategic planning model that can be used by management to
analyse the critical success factors (CSFs) of the organisation and to coordinate the
activities of the various activities. The linkages between primary and support
activities can be clearly understood.
 The value chain identifies CSFs.
 It provides a structure for identifying cost drivers for ABC.
 It can be used to analyse rivals, for comparison purposes.
Exhibit 1 Starbucks

A prime example of creating value for customers is Starbucks. Through its operations, it creates
connections throughout the world, guarantees high-quality flavour and works to build a sustainable future.
"Starbucks ... invests in coffee communities, sharing agronomy practices and our coffee knowledge," the
company stated in its 2018 Global Social Impact Report. "We leverage technology to develop new
approaches to ensure the future of high-quality coffee, including a new traceability pilot project announced
in 2018."
Starbucks' value chain, like many others, is complex, but ensures value that will impress customers and
keep them invested in the company. Starbucks begins by tasting a variety of coffees that use beans from
locations such as Latin America, Africa, Arabia, Asia and the Pacific (inbound logistics). The company
spends time visiting coffee growers and building lifelong relationships. Starbucks creates partnerships all
over the world to ensure the best coffee for its customers. Its coffee is sold in stores worldwide
(operations, outbound logistics) and allows customers to enjoy high-quality flavours at home or in a local
Starbucks.
Another part of Starbucks' value chain is interacting with customers and ensuring it provides an excellent
service. Its social media accounts are a prime spot for interaction, where Starbucks offers twists on its
classic drinks to provide a unique experience to customers each time they visit (marketing and sales,
service). Alongside these processes, Starbucks maintains HR, technology development, finances and
other operations.
Starbucks presents its coffee as "the end of a long journey – from the land, to the farmer, to the roaster, to
your eagerly waiting hands. Each step is important in defining what that coffee will taste like."’
Source: “What is Value Chain Analysis?” by Kayla Harrison, 28 August 2019 www.businessnewsdaily.com

5.4.3 McKinsey’s 7S Framework

4.3 McKinsey’s 7S Framework

McKinsey's 7S framework is designed to assist organisations to assess how the

various organisational elements work together to achieve corporate strategy. The
model focuses on seven internal factors. The idea of the model is that the objectives
of these factors need to be aligned in order for the organisation to be effective.
The factors are categorised as either "hard" or "soft" as follows:

4.3.1 Hard Factors

Hard factors are elements easily identified, defined and controlled by management.
 Strategy – the plan to achieve competitive advantage.
 Structure – the organisational structure.
 Systems – the organisation’s daily activities and procedures.

4.3.2 Soft Factors

Soft factors are more intangible, formless, and often influenced by corporate culture
and the informal organisation. Management can take measures to influence soft
factors, but cannot control them directly.
 Shared values – the core values of the organisation, including the culture
and general work ethic.
 Skills – the specific skills and competencies of the people working for the
organisation.
 Style – the style of leadership used.
 Staff – the staff who work for the organisation.

4.3.3 Using the 7S Framework

The framework is often depicted as follows, showing the interdependencies of the
seven factors with shared values at the centre:

The model can be used to:

 Identify what areas need to be aligned; and
 Ensure that all the factors remain aligned during a restructuring or other
change.
 Example 5 7S Framework

Fab Cars is a former state-owned car-manufacturing business based in Homeland. During state
ownership, the quality of the cars produced was very low and the company relied on a heavy state
subsidy to continue as a going concern. The company has just been privatised and acquired by Super
Cars, based in Awayland.
A new management team has been installed at Fab Cars and it has formulated a new mission: "To
produce high-quality family cars, by continuously finding ways to improve quality in everything we do."
Management is aware that many changes will need to be made before this strategy can become a reality.
It has decided to use the 7S framework to help plan the changes and identify some KPIs to help manage
the changes to ensure that the other six Ss are in line with this strategy.
1. Structure: The factory is currently organised using a traditional production line; each employee
has a particular role in the production process. This will be replaced by cell production in which
the factory will be organised into teams. The KPI to measure the success of this will be the
number of cars produced per week.
2. Systems: The existing information systems provide traditional costing information (e.g. budgets
and detailed variance analysis) without any consideration of quality. A new system will be
introduced that provides information about quality-related costs so that management can
monitor the costs of increasing quality (conformance costs) and the costs of bad quality (failure
costs). It is expected that, as quality improves, the costs of bad quality will fall considerably.
KPIs will be set for all quality costs.
3. Style: Currently relations between factory workers and management are not constructive.
Middle-management style is very much control based with managers watching staff and
monitoring hours worked. The new management wishes to change this to a more proactive
culture in which staff members are motivated and take pride in their work. It is hoped that this
will be achieved partly through the change in structure and partly through staff changes. Staff
turnover and the number of ideas that are suggested by factory staff will monitor this.
4. Staff: Management wishes to give staff more autonomy and ensure they support the changes.
Extensive staff training will be necessary to persuade staff of the benefits of the changes.
Although it is hoped that redundancies can be kept to a minimum it has been agreed that
employees who are resistant to changes should be made redundant as soon as possible. The
KPI will be the number of days lost due to absenteeism, which is currently high.
5. Skills: The new cell structure will require extensive staff retraining as employees will need to be
able to do a much wider range of tasks within their cell. It is hoped that this will motivate staff.
KPIs will be based on a certification system and the number of staff who gain the company's
"basic skills" certificate.
6. Management has published a new guide to the proposed changes and meetings have been
organised to communicate these to staff. Included in the document is a section on "shared
values" which emphasises the commitment to quality.

5.4.4 Information Systems

4.4 Information Systems

Information systems that were once thought of as a "back office" function are now
recognised as strategic resources which support an organisation's strategy.
Information systems exist in a dynamic environment. Management should be aware
of the need to update their information systems for the following reasons continually:
 The organisation may change considerably over time, requiring additional
information to help manage new and/or changing areas.
 Advances in technology provide new ways of doing business and new
forms of information systems.
 Organisations need to focus more and more on the external environment
to see what is changing around them; they need information systems that
can provide external and internal information.
This means that the requirements of the system will change over time. Therefore,
organisations must continually refine and develop their systems to remain
competitive.
Information systems and management accounting information systems are
considered in more detail in

5.0 Influence on Performance Measurement

How might changing an organisation’s structure, culture and strategy influence the
adoption of new performance measurement ideas?

5.5.1 Structure

5.1 Structure

Organisations that adopt a traditional, functional structure are less likely to embrace
change, and are probably not so likely to adopt new performance measurement
systems.
In heavily centralised structures managers have insufficient authority to try out new
performance measurement methods and techniques.
Organisations that are more decentralised, where line managers have more
responsibility, are more likely to be more responsive to change – so new techniques
have a better opportunity of being tried out.

5.2 Culture

Bureaucratic cultures, in which job descriptions define tasks and work routines, are
likely to restrict the adoption of new ideas. On the other hand, cultures which are
more open and participative, are likely to encourage the adoption of new
performance measurement methods and techniques.
The difficulty is in building the appropriate type of culture that best suites the needs
of the organisation. Managements role is to build a performance evaluation system
and interactions with employees that enables the desired culture to flourish.
The Japanese developed many of the manufacturing ideas in the 1990s (e.g. Just-in-
Time (JiT) and Total Quality Management (TQM)). This was partly because of
geography and partly because of culture. The Japanese belief in continuous
improvement promotes the adoption of new ideas whereas a "if it works, don't fix it"
culture will stifle new ideas.

5.5.3 Strategy

5.3 Strategy

Organisations that operate in competitive industries will continue to be under

pressure to adopt not only the latest manufacturing technologies, but also the latest
performance measurement systems to support them.
Increasing focus on quality, innovation and customer satisfaction is a driver to adopt
performance measurement methods and techniques which embrace non-financial
measures such as the balanced scorecard and performance pyramid (see Chapter
15).
Summary and Quiz
 Management accounting methods depend on many variables. One of
these is the structure of a business. Businesses may take a functional
structure, in which case more traditional management accounting methods
may be used, and the information flows in a vertical upward direction.
 Modern businesses may adopt a divisional or network structure – in these
types of organisations, the management information is likely to be less
detailed and more focused on the objectives of the organisation.
 Performance management in services businesses is complicated by the
following features:
o Simultaneity
o Perishability
o Heterogeneity
o Intangibility
 Business integration means that all the different parts of a business are
coordinated, as they all work together on activities.
 The structure, culture and strategy of an organisation will affect the extent
to which new management accounting techniques are adopted.
 CHAPTER 6: Visual Overview

 Objective: To discuss how stakeholder groups and ethical issues may affect
the strategy and performance of an organisation.
 

1.1 Typical Stakeholder Groups

Definition

Stakeholder – a person, or group of people who have an interest in or are somehow affected by an
organisation.

Key Point

Note the important bi-directionality of stakeholders – they can be both affected by and can affect an
organisation. Some stakeholders can be both.

The following groups are usually identified as the stakeholders of an organisation:

 The owners of the business;
 The management of the business (may also be the owners);
 Employees and trade unions;
 Pressure groups and lobby groups;
 Customers;
 Suppliers;
 Lenders;
 Governments;
 The local community;
  The general public.
The complexity and range of stakeholders relevant to an organisation will depend on
that organisation’s size and activities. For example, a global brand will have many
more stakeholders than an owner-manager business with one retail outlet.

6.1.2 Stakeholder Claims

1.2 Stakeholder Claims

As far as an organisation is concerned, a stakeholder does not simply exist but

rather makes demands on it.
In basic terms, a stakeholder “wants something” from an organisation – some want
to influence or affect what an organisation does, while others are or could be
concerned with the way they are affected by an organisation (and so want to change
the activities of the organisation in some way).
It is sometimes difficult to identify stakeholder claims, however, because some
stakeholders may not know they have a claim against an organisation, whereas
others may know they have a claim but not know what it is.
Stakeholder claims are either:
 Direct – made by stakeholders with their own “voice”, these are usually
unambiguous and typically made directly between the stakeholder and the
organisation (e.g. by trade unions, shareholders, employees, customers,
suppliers and sometimes communities).
 Indirect – made by “voiceless” stakeholders, such as those who appear
powerless (e.g. an individual customer of a large organisation), these have
no voice (e.g. the natural environment) or are remote from the organisation
(e.g. producer groups in distant markets).
It can be difficult to interpret indirect claims – for instance, how does an organisation
interpret the needs of the natural environment and to what extent are environmental
pressure groups reliable interpreters of the needs/claims of the natural environment?
Such issues make it difficult to include these claims within a decision-making
process.

6.1.3 How Stakeholder Groups Operate

1.3 How Stakeholder Groups Operate

Many stakeholder groups may actively organise themselves, and enter directly into
discussion (or even confrontation) with the organisations with whom they are
associated. The following are examples of stakeholder groups interacting with
organisations.

1.3.1 Shareholders
Financial institutions, such as pension funds, often account for a large share of the
ownership of many listed companies. Such institutions meet with the management of
 the companies in which they invest on a regular basis, to review strategy and
discuss the performance of the business. Such interactions are often beneficial to
both parties. The investors obtain more detailed information about the companies in
which they invest. They also provide an opportunity for the management of the
companies to obtain an independent opinion and advice on proposed strategies.

Example 1 Shareholder Activism

Activist shareholders use a shareholding in a company to buy influence over the management. If t
shareholders exercise significant influence, even without overall control, they can influence manag
The goals of activist shareholders range from financial, such as increasing the dividend, through to
financial, such as adopting a more ethical stance on certain issues.
For example, in December 2018 a shareholder resolution was filed against ExxonMobil, asking it t
disclose short-, medium- and long-term greenhouse gas targets consistent with the Paris Agreeme
climate change.
And in July 2019, Vodafone’s CEO and CFO requested a cut to their bonuses, sidestepping a pote
shareholder revolt after a dividend cut and poor recent share price performance.

1.3.2 Trade Unions

Employees' interests may be represented by trade unions which negotiate with an
organisation's management on a range of issues relating to salaries and working
conditions.

1.3.3 Interest Groups and Pressure Groups

Pressure groups may be formed where individual stakeholders have limited power to
influence an organisation.
 Cause groups may be formed to promote particular issues (e.g. "eco-
warriors" such as Greenpeace).
 Interest groups may be formed to defend the interests of particular groups
(e.g. local interest groups may be formed to campaign against the building
of a new factory in an area of outstanding natural beauty).
Example 2 Brent Spar

Brent Spar was a floating oil storage buoy in the North Sea, co-owned and operated by Shell. When the
structure became obsolete, the preferred disposal option involved towing the rig to deep water 150 miles
to the west of Scotland, breaking it up with explosives and sinking it, along with the residual oil, sludges
and waste products remaining in it tanks.
Thinking that the fate of Brent Spar could establish a precedent for the deep-sea disposal of many other
North Sea installations, activists from the veteran campaigning organisation Greenpeace boarded Brent
Spar in April 1995. They occupied the installation for nearly a month, enduring water cannon
bombardment and attracting support from many north European countries.
An unprecedented consumer boycott of Shell ensued, leading to a 20% drop in sales in Germany and the
firebombing of one of its service stations near Hamburg. In June, in a climate of shifting public opinion and
threat of escalating violence, Shell announced it was dropping the deep-sea disposal plans and would
 Example 2 Brent Spar

seek an alternative solution.

1.3.4 Consumers
In many countries, consumers are represented by powerful consumer groups who
can influence businesses in many ways. In the UK, for example, an attempt by a
large retail bank to introduce charges for using its ATM machines was stopped after
adverse publicity by a large consumer protection group.

1.3.5 Suppliers
Large suppliers may be able to influence business strategy. For example if the
business is thinking of opening a new location, it will need to consider whether its
suppliers can also supply the proposed location.

1.3.6 Government
Governments can clearly affect business planning in a number of ways:
 Governments and government bodies produce regulations that
organisations must comply with covering areas such as health and safety
and employment law.
 Governments set the rates of corporate tax; this has implications for
multinational companies in planning where to locate.
 Governments may have pro- or anti-business policies and this will
influence the strategy-setting process.

1.3.7 The Local Community and General Public

The local community will be affected by an organisation in many ways. The
organisation may be a large employer, and this will have a positive effect on the local
community. Negative impacts may include the creation of pollution, the laying off of
staff in economic hard times, and even closing down entirely.
The local community may form action groups to stop activities and impacts such as
pollution. Typically such action groups aim to publicise their cause to put pressure on
the management of the organisation to stop the activity that is causing harm. They
may also involve local politicians.

6.1.4 Impact on Strategy Formulation and Implementation

1.4 Impact on Strategy Formulation and Implementation

The development of stakeholder theory and the emergence of corporate social

responsibility (CSR) have shown that, in maximising the wealth of shareholders,
directors cannot afford to ignore the impact of stakeholders.
Stakeholder theory implies that it is only by taking account of the interests of
stakeholders, as well as shareholders, that companies can achieve long-term profit
maximisation.
In considering any stakeholder interest, a business case for inclusion of that interest
must be made. This implies high levels of stakeholder dialogue and engagement.
This in turn will be viewed by investors as indicators of quality management.
Literature and empirical evidence show that companies that follow a strong
stakeholder approach (including corporate social reporting and corporate
governance) to maximising their wealth are outperforming those that do not.
Donaldson and Preston (1995) suggested that there were two basic views of
stakeholder management:
1. An instrumental view
2. A normative view.

1.4.1 Instrumental View

The instrumental view is that the ultimate objective of company decisions is success
in the marketplace. Stakeholder management is therefore a means to an end;
something the company has to do to maximise wealth. The concerns of stakeholders
only enter a company's decision-making process if they have strategic value for the
firm (e.g. not losing customers, retaining talented/productive staff and fully maximise
wealth).

1.4.2 Normative (Intrinsic) View

In this view, an organisation establishes fundamental moral principles (not just based
on what is best for the company) on how it will take account of the concerns and
opinions of others. These guide how the firm does business, and in particular, how it
treats stakeholders beyond the basic legal requirements relating to shareholders.
There is the belief that stakeholder interests have intrinsic worth in that stakeholder
claims are also often based on fundamental moral principles.
Such stakeholder claims must be addressed as part of, or prior to, strategic
considerations. There is a wider moral duty to take account of the concerns and
opinions of others rather than a narrow perspective of what is right just for the
company. This suggests philanthropic and altruistic attitude to business.

6.1.5 Stakeholder Classification

1.5 Stakeholder Classification

There are numerous ways in which stakeholders can be classified:

 1.5.1 Internal, External and Connected
Internal/External is the easiest classification to understand – those stakeholders
inside the organisation (e.g. employees, management) and those outside (e.g.
government, the public, lobby groups).
A third, hybrid, classification is “connected” and relates to those stakeholders who
are external to the organisation but who have an internal connection (e.g.
shareholders, customers, suppliers, lenders). The connection is usually a financial
one (meaning transactions occur that affect both the firm and the stakeholder).

1.5.2 Narrow and Wide

Key Point

This classification concerns the effect that an organisation's strategy, policies and actions will have on the
stakeholder.
Narrow stakeholders are those most affected (e.g. shareholders, management,
employees, key suppliers and customers, local community and environment).
Wide stakeholders are those less affected and typically include government, minor
suppliers and customers and the wider community and environment.
Basically the further away from any impact created by the organisation, the "wider"
classification applies. This could imply that narrow stakeholders demand a higher
level of accountability and responsibility from the organisation.

1.5.3 Primary and Secondary

 Key Point

This classification concerns the effect that the stakeholder has on the organisation.
A primary stakeholder is one without whose continuing participation the organisation
cannot survive as a going concern. For example, shareholders, management,
employees, major customers and suppliers, government (laws, infrastructure,
support), banks (supporting loans).
A secondary stakeholder is one that would have little influence on the going concern
status of the organisation (e.g. community, environment, minor customers and
suppliers).

1.5.4 Active and Passive

Active stakeholders include management, employees, institutional shareholders (as
noted above), trade unions, regulators, and pressure groups. They seek to be active
within the organisation's activities.
Passive groups can include government, local communities and individual
shareholders. Being passive does not imply that the stakeholders are less interested
or less powerful than active stakeholders – just that they do not seek to become
involved in the organisation's policy making and strategy.

1.5.5 Voluntary and Involuntary

Voluntary stakeholders are those who have a choice as to whether or not they
interact with the organisation. Examples include management and employees (they
can change employers), most customers, suppliers and shareholders.
Involuntary stakeholders have no, or little, choice (e.g. government, communities,
competitors).
Stakeholder’s positions may change, for example:
 a footballer may voluntarily sign a contract with a club, but once signed
becomes an involuntary stakeholder – bound by the terms of the contract
for the length of the contract;
 suppliers of a supermarket start as voluntary stakeholders, but may later
depend on the supermarket and therefore become involuntary.

1.5.6 Legitimate and Illegitimate

As actions may be moral or immoral depending on a point of view, what seems
legitimate to one person may seem illegitimate to another.
Those stakeholders that have a strong economic relationship with an organisation
will always be considered legitimate.
Other groups that do not have such links may be considered illegitimate by some
and not worthy of consideration as a stakeholder. For example, an organisation that
has a direct relationship with the environment, may consider:
 Greenpeace (an NGO in environmental activism) to be legitimate; but
 Sea Shepherd (a non-profit marine conservation society) to be illegitimate,
because its controversial direct-action policy has a history of “aggressive
non-violence”.
1.5.7 Recognised and Unrecognised
An extension of the legitimate and illegitimate classification involves stakeholders
who are considered to be illegitimate by an organisation and will not be able to get
their stakeholder claim recognised by the organisation. Therefore decisions made by
the organisation are unlikely to take into account unrecognised stakeholders and/or
illegitimate stakeholders.

1.5.8 Known and Unknown

Known stakeholders are easy to further classify and deal with because, by definition,
the organisation knows about them. If a stakeholder is unknown, it is far more
difficult to consider if any claim can be considered as legitimate.
At one end of the spectrum of unknown stakeholders would be those that, by
extrapolation, should be known about or be relatively easy to establish (e.g. local
communities and the environment around overseas suppliers). At the other end
would be as yet undiscovered animal species.
Proponents of the full-inclusion approach to stakeholder theory consider that it is the
moral duty of organisations to consider all known and unknown stakeholders in
reaching decisions. This will result in minimum impact policies being adopted.

1.6 Mendelow's Matrix

Mendelow (1991) suggested that the influence of each stakeholder on key strategic
decisions could be "mapped" on a grid by looking at two aspects of their relationship
with the business.
 Power factor – the stakeholder's ability to influence strategic objectives
(how much they can).
 Interest – the stakeholder's willingness (how much they care).
Influence = Power × Interest
The difficulty is in identifying all the stakeholders who have an interest in the
organisation's strategy, their level of interest and their power to influence the
strategy.
In addition, as organisations operate in an open and dynamic environment,
stakeholders will change and can easily move around the grid. It is important that
once stakeholders are identified, they are continually tracked.
1.6.1 High Interest, High Power = Key Players
Most of the organisation's efforts need to be placed on the key players (high interest,
high power) as the organisation cannot operate without them. They have the ability
(interest and power) to prevent the organisation achieving its strategy (e.g. upsetting
customers will drive them to competitors). A specific difficulty may be that there will
be a number of conflicts between stakeholders in this category that have to be
managed.
For example, the local council would be a key player in a firm’s project to build a
residential building in a neighbourhood, as it would have high interest in the impact
of the project on the community, and wields significant power on its implementation.
If the local council does not grant planning approval, the project cannot proceed. It
would be in the firm’s best interest to ensure the council has an active voice in the
decision-making process. The firm should seek to understand the motivations and
requirements of the council and mitigate any concerns it may have.

1.6.2 Low Interest, Low Power = Minimal Effort

Diametrically opposite are the stakeholders with low interest and low power.
Mendelow indicates that these stakeholders can be largely ignored when considering
strategic objectives. However, from an ethical/moral view they should still be
considered, as to ignore them may awaken their interest.
This group should be observed in case of events that make this group of
stakeholders become more interested in the firm’s activities, or events that grant
them significant power, resulting in movement to other quadrants of the matrix.

1.6.3 High Interest, Low Power = Keep Informed

High interest, low power stakeholders need to be kept informed and not
underestimated. Because of their high interest they care a lot and can be useful to
the organisation in forming positive lobby groups. Alternatively, they may join forces
to form a stronger grouping and so move towards the high power sector and become
lobbyists against the organisation.
This group may attempt to influence Key Players or Keep Satisfied stakeholders, to
increase their own influence and indirect power. They might also try to gain
increased general interest from the Minimal Effort group, through activities designed
to increase awareness.

1.6.4 Low Interest, High Power = Keep Satisfied

Lastly, the low interest, high power stakeholders need to be kept satisfied and stay
dormant. If, for whatever reason, they become more interested, they can easily
become key players and, for example, frustrate the adoption of a new strategy.
By using the Mendelow framework and approach, organisations can:
 understand if their current strategy is still in line with stakeholders' interests
and power;
 identify who will provide support to a strategic project and who has the
ability and aim to stop it;
 try to reposition stakeholders to increase support or reduce threats to a
strategic objective;
 encourage stakeholders to stay in their appropriate category or prevent
them moving to another category; and
 identify change within stakeholders that may imply that the current strategy
needs to be re-thought with the possibility of a new strategy being
developed.
Activity 1 Stakeholder Mapping

Bellafuel operates an oil refinery near a major city. The following stakeholder groups
have been identified:
An institutional shareholder who owns 30% of the shares of Bellafuel.
The operators who work on the refinery. They are all members of a trade union that
has used strikes several times over the past few years.
The local office of Greenpeace, which is organising campaigns to force Bellafuel to
reduce carbon dioxide emissions. Greenpeace has 100 members in the city. The
population of the city is 2 million.
The city council, which operates a "laissez-faire" attitude to businesses, arguing that
this is good for the economy and local jobs.
Required:
Discuss in which of the FOUR quadrants of the Mendelow's matrix each of the
stakeholders mentioned would be categorised.
*Please use the notes feature in the toolbar to help formulate your answer.
 The institutional shareholder would almost certainly be allocated to the
high interest, high power (“manage closely”) quadrant. As a 30%
shareholder, the shareholder may not control the company, but would
certainly be very influential. Institutional shareholders tend to meet with the
directors of companies in which they invest to discuss strategy; so they are
likely to exercise their power.
 The operators may also appear in the manage closely quadrant. If they
strike, they could probably bring the refinery to a standstill – so are likely to
be powerful. In the past, they have gone on strike, so the probability of
them exercising their power also seems to be high.
 The local Greenpeace office – while they are undoubtedly active, and
likely to use their power, they are not likely to actually have much power.
They would probably appear in the high interest, low power (keep
informed) quadrant.
 The city council – would probably have a lot of power, but it seems they
are reluctant to use it – so they would probably be categorised as low
interest, high power (keep satisfied).

6.1.7 Management Response to Stakeholder Groups

1.7 Management Response to Stakeholder Groups

As stakeholders can influence the strategy adopted by an organisation and its

performance in relation to those strategies, powerful stakeholders in particular
require careful management. Management’s potential response to the needs of
different stakeholder groups falls into the following categories:
 Prioritise – possibly based on stakeholder mapping.
 Negotiate and satisfice – finding the minimum outcome acceptable to all
parties.
 Sequential attention – focusing on a different group of stakeholders during
each period. For example, updating the staff facilities one year; spending
money on cleaning up the environment around the factory the next.
 Side payments – giving a group some benefit to take their attention away
from what they want (e.g. sponsoring the local football team to take
attention away from job cuts or pollution).
 Exercise of power – when a powerful stakeholder group is in a position to
force through a decision (e.g. a powerful trade union).
2.1 Approach to Ethics in Strategy Formulation

2.1.1 Relevance of Ethics to Business

Ethics is concerned with right and wrong. Often there may be conflicts between the
objective of maximising the wealth of the shareholders and behaving in an ethical
way.
Ethical behaviour by organisations may be considered necessary for the following
reasons:
 Legal requirement – the organisation must abide by ethical standards set
by governments, otherwise it risks fines or even imprisonment of its
directors.
 Long-term shareholder interest – while ethical behaviour may cost a
business in terms of lost business opportunities or more expenses, being
seen to be ethical may actually improve sales.
 Ethical behaviour is right – some organisations go beyond legal
requirements for ethical behaviour simply because they believe it is
morally right to do so.
Corporate ethics may be considered in three contexts:
1. The influence of an organisation on society;
2. Corporate behaviour; or
3. Individual behaviour.
Exhibit 1 Ethical Conflicts in Business

1. Having outsourced production of products to countries like Vietnam and Indonesia, Nike
backlash from consumers over allegations of “sweatshop” production and poor labour
conditions at its suppliers. At the end of the 90s, faced with falling demand and protests
its practices, Nike embarked on a major reform of its supply chains, conducting significa
more factory audits, enforcement of its revised code of conduct and labour standards on
suppliers, and the publication of efforts in corporate social responsibility reports.
https://purpose.nike.com/code-of-conduct
2. Enron, an energy trader and supplier, was at one time America’s 7th largest corporation, wi
reported revenue at one point almost reaching US$100 billion. In 2001, it dramatically colla
into the largest bankruptcy in history at the time, wiping out almost US$65 billion in market
after it was revealed that it was hiding major losses in its energy-trading business using off-
books special-purpose-vehicles (SPEs), and colluding with its auditor, Arthur Anderson, wh
destroyed documents relating to its audits of Enron.
https://www.britannica.com/event/Enron-scandal/Downfall-and-bankruptcy
3. Facebook was embroiled in a data-privacy scandal when it was revealed that Cambridge A
one of the companies which uses data from its platform, had harvested raw personal inform
from more than 80 million Facebook users without their consent. This was used to create ta
campaigns which attempted to sway public opinion during national polls in America, leading
Facebook’s CEO Mark Zuckerberg being forced to testify in Congress in 2018. Facebook h
implemented more privacy controls and changed the way in handles privacy on platforms, a
critics are still sceptical whether this led to any real improvements in user privacy.
https://www.theguardian.com/news/2018/mar/17/cambridge-analytica-facebookinfluence
election

2.1.2 Influence of an Organisation on Society

Organisations may influence the political, economic and social framework of the
markets in which they operate. For example, as members of trade associations, the
organisation may be able to influence government policy in a number of areas. The
organisation should have developed policies and opinions on such areas.

2.1.3 Corporate Behaviour

 Definition

Corporate behaviour – the behaviour of a company or group acting as a single body.

A corporate code of conduct typically covers:
 Health and safety
 Environmental issues
 Employment policies
 Political activity.
Many organisations now have a policy on environmental behaviour and how the
organisation will limit the amount of environmental damage it causes.

Exhibit 2 Green Power Project

Tesco announced a major green electricity project to source green electricity directly from wind farms,
solar farms and solar panels on its own stores. The move is the next significant phase of the retailer’s
commitment to use 100% renewable electricity across the Tesco Group by 2030 and will save 90,000
tonnes of CO2 per year.
The project will see the creation of 5 onshore windfarms and 1 solar farm across the UK as well as solar
panels fitted to 187 Tesco’s UK stores. Combined, the new sources of green electricity could power the
equivalent of 140,000 homes.
The project will be the biggest of its type ever completed by a retailer in the UK. It will create more than
400 new jobs in the UK renewables industry.
The solar panel installations on Tesco stores will contribute to the company’s ambition to generate 10% of
the electricity it uses on-site by 2030.
Source: www.tescoplc.com/news/2019/tesco-announces-major-green-power-project-in-the-uk

2.1.4 Individual Behaviour

Organisations may impose guidelines on the behaviour of their own staff, often by
means of an ethical code. This is because as representatives of the organisation,
staff should behave in a manner that is consistent with the ethics of the organisation.

2.1.5 Influence on Strategy Formulation

Ethical considerations mean that the primary objective of maximising the wealth of
shareholders may be "subject to" achieving other stated ethical objectives.

6.2.2 Ethical Behaviour and Business Performance

2.2 Ethical Behaviour and Business Performance

2.2.1 Cost of Ethical Behaviour

Good business performance is normally understood to mean maximising the wealth
of shareholders, or increasing profits. Behaving ethically may conflict with this in
many circumstances. Many large multinational organisations have indulged in
 unethical practices in an attempt to increase profits of shareholders. Examples
include:
 Paying bribes to officials so that the business is given permission to
operate in certain countries or awarded lucrative contracts in those
countries.
 Using child labour in low-cost countries.
 Failure to maintain adequate safety or environmental standards.
 Investing in countries whose governments do not uphold human rights or
cooperating with such governments.
 Tax evasion is clearly unethical. Many companies are also criticised for
locating offices in low-cost countries, even though their profits may come
from higher tax economies.
 Selling products that may harm the health of the consumers of those
products.
 Lending money at very high interest rates to less well-informed members
of society and using aggressive tactics to ensure that they repay with the
high interest.
 Making unrealistic or untrue suggestions in advertising, either explicitly or
implicitly.
ACCA does not condone nor encourage the above practices. We hold our members
to the stringent ethical standards, and prescribed in our Rulebook and Code of
Ethics and Conduct.

2.2.2 How Ethical Behaviour May Improve Business Performance

 Companies may use their ethical behaviour as a means of promoting their
businesses to attract new customers.
 Many investors now focus on investing only in ethical companies, and
avoid lending to those whose behaviour is considered unethical. Unethical
companies may therefore find that the cost of their capital increases.
 Employees of ethical companies may be more motivated, and this may
therefore improve the efficiency of the companies.
 Environmentally friendly behaviour may also lead to a reduction of costs
(e.g. fuel costs due to more efficient use of energy).
 Failure to adhere to ethical behaviour may lead to large fines or even
sanctions against companies in their own countries.
Exhibit 3 Increasing Interest in Ethical Practices of Companies

A survey of 2,000 consumers in the UK in 2017 showed that consumers are taking an increasing interest
in the ethical practices of the companies they buy from, with almost half saying that they have abandoned
brands due to poor corporate behaviour.
Half of consumers said that they are willing to pay more for a brand that supports a cause that is important
to them, while 63% said that they believe brands have a responsibility to give back to society.
A total of 80% said that companies must take steps to minimise their impact on the environment.
However, 65% suspect that companies are overstating their environment-friendly credentials and 45%
admitted they were sceptical of any brands claiming to support good causes.
Increasing awareness around issues such as diversity and climate change in recent years means brands
 Exhibit 3 Increasing Interest in Ethical Practices of Companies

must make sure their message feels more authentic than ever before.
In April 2017, Pepsi faced a fierce backlash on social media after it released an advert featuring Kendall
Jenner joining a peace march and handing a police officer a can of the brand’s flagship drink. The
company pulled the advertisement after just one day.
Source: www.independent.co.uk, 22 May 2017

6.3.1 The Issue

3.1 The Issue

The global profile of environmental issues has risen significantly during the last two
decades, which has led to a general questioning of business practices and
numerous calls for change. As a result, businesses have become increasingly aware
of the environmental implications of their operations, products and services.
Poor environmental behaviour may have an adverse effect on the profits of a
business due to the following:
 Consumer boycotts;
 Fines;
 Lawsuits;
 Opportunity cost of potential savings (e.g. energy saving measures).
The main problems with conventional management accounting are:
 Most management accounting techniques significantly underestimate the
cost of poor environmental behaviour.
 Environmental costs are invariably hidden within overheads, so
management is unaware of them and does not take steps to reduce them.
In an ideal world, accounting processes would reflect environmental factors and
provide more information to help management manage the environmental impact of
the organisation.
The major areas for the application of EMA, which is an attempt to integrate best
management accounting thinking and practice with best environmental management
thinking and practice, are:
 Assessing the annual environmental costs of an organisation;
 Reflecting environmental costs in product pricing;
 Budgeting to include environmental costs and savings;
 Calculating the costs and savings of environmental projects;
 Setting quantified performance targets.

6.3.2 EMA Framework

3.2 EMA Framework
Definition

Environmental management accounting (EMA) – the identification, collection, analysis and use of two
types of information for internal decision making:
1. Physical information on the use, flows and rates of energy, water and materials (including
wastes); and
2. Monetary information on environment-related costs, earnings and savings.
In short, it is the generation and analysis of both financial and non-financial
information that is needed to support internal environmental management processes.
It is complementary to the traditional management accounting approach and is as
wide-ranging in its scope, techniques and focus. A multi-dimensional framework of
EMA (Burritt et al, 2002) considers the distinctions between five dimensions:
1. Internal vs external
Internal means using management accounting information, either
monetary or physical, on the environmental aspects of corporate activities
for analysis, decision-making, and accountability;
External, for the purposes of regulatory reporting of environmental impact.
There is a similar approach to how costs of quality are categorised (where
the costs of ensuring environmental objectives are satisfied are compared
to the costs of internal and external failure).
2. Physical vs monetary classifications
Monetary means information that is translated into costs and revenues
(such as cost of fines for breaking environmental laws, or capital
investment for environmental compliance and improvement);
Physical is measurements of a corporation’s environmental impact,
expressed in physical units (such as kilogrammes).
3. Past and future timeframes
Information related to environmental impact is either looking into the past
(standards, variances, reporting, etc), or forecasted into the future
(planning, budgeting, or appraisal).
4. Short and long term
The degree of reporting and action regarding environmental impact,
ranging from the operational level (short-term) to strategic (long-term).
5. Ad hoc vs routine information gathering.
Whether environmental information is produced routinely through existing
accounting / measurement processes, or ad hoc on a “needs” basis, for
specific decision- making.
Burritt, R.L., Hahn, T. and Schaltegger, S., 2002. An integrative framework of
environmental management accounting—consolidating the different approaches of
EMA into a common framework and terminology. In Environmental management
accounting: Informational and institutional developments (pp. 21-35). Springer,
Dordrecht.
The different techniques of EMA (e.g. environmental cost accounting and lifecycle
costing) can be placed in and assigned to this framework. Management then
chooses appropriate tools on the basis of its information needs.

6.3.3 Techniques
3.3 Techniques
 3.3.1 Environmental Costs
There is no one definition of environmental costs. The US Environmental Protection
Agency suggests the following types of costs:
 Conventional costs – raw material and energy costs having environmental
relevance;
 Potentially hidden costs – costs that are recorded, but included in
overheads, so management are unaware of them;
 Contingent costs – contingent liabilities, incurred at a future date, such as
future clean-up costs;
 Image and relationship costs (e.g. the costs of producing environmental
reports).
Such costs are insignificant when compared against the costs associated with
irresponsible behaviour.

Exhibit 4 3M Sustainability Report

3M, the multinational conglomerate operating in the fields of industry, worker safety, health care, and
consumer goods, produces a detailed Sustainability Report which sets out the state of sustainability in all
facets of the organisation’s business, in all parts of the world.
The report highlights the requirement for objectives, targets and metrics:
Our Actions
Setting and implementing global environmental policies, management systems, and key performance
metrics enables 3M to continually integrate and drive environmental stewardship in our business groups
globally, assuring consistency and innovative reflected by our environmental performance indicators and
2025 Sustainability Goals, environmental stewardship is a core corporate commitment backed by decades
of proven performance.
Environmental Management Implementation
Our approach calls for each site to establish, implement, and maintain documented environmental
objectives and targets. When establishing an EMS plan, each 3M location must address financial,
technological, operational, and business considerations. The objectives and targets should be measurable
and consistent with our environmental policy, including our commitments to prevent pollution and comply
with applicable regulations and other requirements.
Metric Tables
The 2020 report provides five-year metric tables including the following:
 Social performance, employees
 Financial performance
 Community engagement
 Environmental performance
o Environmental management system – metric
o Greenhouse gas – metric
o Air emissions – metric
o Energy – metric
o Waste – metric
o Water – metric
 Exhibit 4 3M Sustainability Report

 Health and safety

 Supplier responsibility
Metrics reported include:
 Total monetary value of significant fines (million $USD)
 Environmental liability accrued at year end (million $USD)
 Total greenhouse gas (GHG) emissions (million tons of CO2)
 Renewable energy (% of total electricity use)
 Waste by disposal type, landfilled (metric tons)
 Total number of suppliers and supplier reviews
Source: 2020 Sustainability Report, www.3m.com

3.3.2 Environmental Activity-Based Costing

Environmental activity-based costing applies ABC principles to environmental costs,
so that the environmental costs are apportioned "correctly" to the products that use
the drivers that cause the costs to be incurred.
Normally many environmental costs are hidden within general overheads and
therefore apportioned to products using inappropriate drivers. This can mean that
product costs do not truly reflect the environmental costs associated with making
them.
Under environmental ABC:
 Environment-related costs are attributed to joint environmental cost
centres such as sewage plants or incinerators.
 Environment-driven costs, on the other hand, are hidden in general
overheads (although they vary with the amount of throughput) and do not
relate directly to a joint environmental cost centre. Such costs are
allocated to environmental activities using the key drivers of the activity.
For example, one activity may be monitoring emissions and the driver of
this may waste emissions in kg. The costs of monitoring emissions can
then be apportioned to products based on kg of emissions produced by
each product.
The main methods of allocating these environment-driven costs (the allocation keys)
might be the following:
 Volume of emissions or waste;
 Toxicity of emission and waste treated;
 Volume of emission treated;
 The relative costs of treating different types of emissions.

3.3.3 Life-Cycle Costing

The product life cycle describes the life of a product over four stages − introduction,
growth, maturity and decline.
 Life-cycle costing is particularly relevant for environmental costs, because many
environmental costs are not incurred during the production phase. Clean-up costs
may be significant, but are not incurred until after the production process is finished.
The European Union "End of Life Vehicles Directive" makes it compulsory for car
manufacturers in the EU to collect and dispose of old cars that have reached the end
of their useful life. Such costs should therefore be considered by manufacturers
during life-cycle costing exercises.

Example 3 Life-Cycle Costing

Xerox Ltd leases photocopying machines to clients. These machines are returned to the company at the
end of their lives. One cost that had previously been ignored was the cost of packaging. Xerox would
provide packaging for the new machines that were delivered to the customer. The customer would then
dispose of this packaging, and have to pay to re-pack the old machine that was being returned to Xerox.
As a result of including the costs of packaging in the life-cycle costs of the photocopying machines, the
company was able to see how large these costs were. The company now uses a standard re-usable pack.
When a machine is delivered to a customer, the package in which it is delivered is used to pack the old
machine that is being returned to Xerox. Two standard types of packing have been developed that cover
all of Xerox's machines. This led to a reduction in packaging costs, and increased customer satisfaction.

4.1 Increasing Integration and Scrutiny

4.1 Increasing Integration and Scrutiny
As there is ever greater demand for integrated reporting, particularly in the area of
sustainability and environmental, social, and governance (ESG) areas, management
accountants will have a greater role to play in the data collection and reporting of
performance in these areas.
There is opportunity for management accountants to play a greater role in preparing
sustainability reports and capturing non-financial information. They would be the
purveyors of Environmental Reporting (ER) and Environmental Management
Accounting (EMA) protocols and would be primarily responsible for their
implementation.
According the ACCA’s paper Sustainability Matters, currently over 3,000 companies
worldwide – including over two-thirds of the Fortune Global 500 – issue annual
sustainability reports. Sustainability needs to be measured, reported and assured
and all these areas fall under accountants’ remit.
Accountants have an important role to play in helping companies embed
sustainability into their corporate strategies, and are very well placed to do so,’
confirms Gordon Hewitt, sustainability adviser at ACCA. ‘A company’s finance
function is responsible for producing much of the management information that forms
the basis for internal strategy as well as reports for external stakeholders.’
A business can only modify its behaviour if they have good quality, trusted
information.
When looking to address sustainability issues, companies can only manage what
they can measure so it’s important that accurate, complete and reliable information
gets collected.
In organisations where sustainability reporting is yet to be adopted, accountants
have just the right knowledge and skills to help develop a credible standard of
reporting.
They recognise the need to be accountable to external stakeholders and the need to
operate to good governance and ethical standards; they can develop performance
metrics and monitoring/auditing systems, they can set budgets, produce strategic
plans and manage risk.
Many accountants are also good team-players and able to work with colleagues in
the areas of the business beyond the finance function, which is important as
sustainability reporting requires inputs from across the organisation and incorporates
a lot of non-financial data.
However, they must also be prepared to acquire new skills in developing verifiable
non-financial measures for issues that cannot be easily monetised, and in enhancing
estimation techniques and forward planning, especially in areas that are more
subjective than many traditional accounting measures such as environmental or
health impacts.
Practice clients also now expect their accountants to be ‘trusted business advisers’,
including on the issues of corporate sustainability, rather than just ‘number-
crunchers’.
 The accountant’s role has shifted from a reporter of historical performance to being
much more the forecaster and the business planner.
This trend will almost certainly continue as the financial services industry is now
increasingly pointing out that historic performance is no indication of future
performance.

Exhibit 5 Sustainability Matters

ACCA believes that accountants, whether working in business, in public practice or the public sector, have
an important role to play in making organisations more accountable in the pursuit of sustainable
development. At the international and national levels, it will be necessary to develop new metrics and
measurements of progress that look beyond economic output to factor in non-traditional measures such
as human wellbeing and natural capital. Accountants working within both the public and private sectors
will need to develop methodologies to address factors such as these, since their effective management is
critical to the health of the planet, and society as well as to individual businesses.
The shift to a sustainable economy will require significant changes in the way in which goods are
produced and consumed. Governments and regulators are increasingly using economic instruments, such
as emissions trading schemes, environmental taxes and subsidies, to change individual and corporate
behaviour. Accountants, with their experience in the design and operation of such mechanisms, have an
important role to play here.
Companies that want to reduce their environmental and social impacts can only manage what they
measure. It is therefore vital to ensure that organisations collect reliable data, so that performance can be
monitored and targets for improvements set. Accountants have significant experience in the design of
well-controlled information systems, so helping companies to assess and manage their impacts better is
another area to which accountants can contribute.
The communication and verification of reliable information is key in monitoring solutions to global
sustainability issues such as climate change. Given the profession’s pivotal role in preparing corporate
reports and providing external assurance, this aspect is arguably one where its expertise will be most
demanded and valued. As a result, the profession has much to offer for building trust in corporate
disclosures on sustainability matters.
Consistency of approach is also an important consideration, as it is important to make fair comparisons
when assessing, comparing and consolidating the sustainability performance of organisations. The
accountancy profession has worked hard to develop financial reporting and auditing standards that can be
applied worldwide, so lessons can be learnt from the profession for the development of sustainability
reporting standards and reporting frameworks that are also applicable at the global level.
Sustainability Matters, ACCA
https://www.accaglobal.com/uk/en/technical-activities/technical-resources-search/2014/april/
sustainabilitymatters.html

Exhibit 6 Role of the Management Accountant

Companies need to have management accountants in strategy-setting roles in order to achieve the best
sustainability outcomes. There is a worldwide move toward ‘integrative’ reporting incorporating non-
financial as well as financial data.
Management accountants are ideally placed to provide the alignment mechanisms and collaborate with
senior management in producing fully integrated reports, reflecting sustainable strategies adopted by
 Exhibit 6 Role of the Management Accountant

organisations which fulfil the needs of stakeholder groups.

many management accountants are fulfilling their traditional role of financial specialist but not yet acting
as collaborators in driving toward sustainability as a goal. For a business, collection and analysis of good,
issue-specific data is crucial to sustainability decisions.
Sustainability requires accountants to monitor and manage non-traditional data to guide strategic
decisions. Management accountants are ideally placed to fulfil this role.
There is sustainability divide between those taking economic advantage of this global trend and those who
are falling behind.
There is increasing evidence that the current practice of sustainability reporting with traditional annual
reporting cycle is perceived as selective and been criticized as “greenwashing”, as well as being too static
to fit the dynamic nature of sustainability. There is a need to capture the holistic approach of the actions of
management for business and stakeholder well-being.
Overall, there is potential for management accountants to be collaborators in the achievement of
sustainability goals but the potential has yet to be fully grasped.
Sustainability and the role of the management accountant, CIMA

6 Summary and Quiz

Summary and Quiz

 The objective of an organisation may be to maximise the wealth of its

shareholders. However, most organisations are increasingly recognising
the importance of other stakeholder groups.
 Many stakeholder groups are able to directly influence the formulation and
implementation of strategy through dialogue with the management of the
company.
 Organisations may use "stakeholder mapping" exercises, such as
Mendelow's matrix, to identify the various stakeholder groups and decide
how much importance is given to satisfying each group's needs.
 Sound ethical behaviour is becoming increasingly important in the modern
business world. Poor ethical behaviour can harm the reputation of an
organisation. Some large organisations also recognise the importance of
using their influence in an ethically sound way for purely moral reasons.
 There may be a conflict between poor ethical behaviour and increasing
short-term profits. However, there may be many indirect costs of poor
ethical behaviour.
 Environmental Management Accounting means providing information to
management to help them manage the impact that the organisation has on
the environment.
 Accountants, whether working in business, in public practice or the public
sector, have an important role to play in making organisations more
accountable in the pursuit of sustainable development, to develop of
methodologies including new metrics and measurements of progress that
 look beyond economic output, and to factor in non-traditional measures
such as human well-being and natural capital.

7.1.1 Management's Information Requirements

1.1 Management's Information Requirements

A key role of the management accountant is to provide information to management

to assist in performance management.
While this part of the syllabus is described as "performance management systems",
the focus is on the information provided rather than the underlying systems.

Exam advice

You need to be able to comment on whether particular information is useful to an organisation. This
chapter considers the factors that determine what type of information is appropriate to a particular
organisation.
Many exam questions provide details about an organisation and the management information it uses, and
then require comments on the usefulness of the management information provided or suggestions for
improvements. The following is an extract from the examiner's approach article:
Candidates must ensure that they can:
 Assess the current situation of an organisation (e.g. its existing information systems).
 Consider how to apply a new approach to performance management.
 Consider whether this new approach will be an improvement.
For performance management purposes, management will require information that
will assist in the following activities:
 Setting the objectives of the organisation;
 Planning how to achieve the objectives;
 Setting targets and measuring performance against targets;
 Monitoring the performance of staff and rewarding them appropriately.

7.2.1 Principal Sources

2.1 Principal Sources

2.1.1 Internal Sources

The principal sources of management information from within the organisation are:
 Accounting system – provides information on costs and revenues, and can
provide sophisticated information such as cost of a product using activity-
based costing.
 Inventory system – contains information about movements in and out of
inventory.
 Payroll system – contains information about employee costs by
department.
  Purchase processing system – contains information about suppliers
(invoices, addresses, key personnel, costs and invoices received).
 Sales processing system – often contains detailed information about all
customers' purchases and preferences. In retail businesses, many
customers use loyalty cards, so whenever they buy from the company,
information is recorded about who is buying what.
 Qualitative type information (e.g. customer satisfaction) comes from
customer surveys, for example.
While these systems have a primary purpose, the information they hold can be
interrogated and used to provide other useful management information. For
example, information in the sales processing system could be used to analyse sales
by customer or by product, which could be used for marketing purposes.

2.1.2 Costs and Limitations of Internal Sources

 Information from internal sources should be relatively cost effective to
obtain. The information already exists within the organisation, so the cost
will be in designing reports or database queries to obtain the information in
a format that is required.
 Internally generated data may not be sufficient to support strategic level
management, which requires external information such as economic
forecasts.

2.1.3 External Sources

External information is likely to be used for strategic purposes. This includes
information about competitors, markets, the economy and so on.
Primary information is where tailored information is provided specially to meet an
organisation's need. Examples include:
 Market research into new products;
 Obtaining information about prices charged by competitors.
Secondary information is data that is produced for general use rather than
specifically for the organisation in question. Examples include:
 Government statistics.
 Country reports by firms of consultants.
 Business directories containing detailed information about the activities of
organisations.
 Trade magazines or other similar publications, which may provide useful
information about external factors affecting a business.

2.1.4 Costs and Limitations of External Data

 External data will cost more than internally generated data. Primary data
is likely to be considerably more expensive than secondary data.
For example, in order to procure reliable external data, the organisation
might need to purchase relevant data sets or commission research
projects from research agencies, or design and implement their own
research projects; this may be contrasted with internal information which
may be procured from internal information processes, which might have
high initial implementation costs, but will have decreasing marginal costs
in the longer-term.
  Much external data will also be available to competitors, so will not provide
a competitive advantage.

2.1.5 Intranets
An intranet is a private internal network within an organisation. The aim of an intranet
is to allow the sharing of information throughout the organisation. Controls should
exist to ensure that employees only have access to information that is relevant to
their function. It would be inappropriate, for example, if all employees have access to
the human resources files.

2.1.6 Internet
The Internet is a useful source of information. The following may prove useful:
 Competitors' own websites;
 Online newspapers with access to back copies.
Online databases may contain useful information such as the names and addresses
of potential customers.

2.1.7 Reliability of Information

Reliability essentially means that information is a true reflection of the reality.
Reliable information is accurate and free from bias. When assessing information
from the sources above it is important to consider how reliable it is for decision-
making purposes.
 Information from internal sources should be reliable provided that the
organisation's internal systems are reliable. It will be possible for
managers to verify any data they are not sure about because it has been
generated from internal records.
 External primary information is more likely to be reliable than secondary:
o Primary information is specifically prepared for the
organisation and there should be no reason for the information
provider to introduce bias.
o Secondary statistics may include bias. Government
statistics, for example, may be influenced by the government's
wish to show a positive view of its governance and some bias
may have been introduced (e.g. through changes in
geographical or administrative boundaries relevant to the
collection of data).
 Information from the Internet may not receive the same amount of scrutiny
as information published in paper format.
o Published articles, for example, will be checked many
times to ensure accuracy.
o Information posted on the Internet may not have been
subject to any checks.
2.2 Use of Information for Planning and Controlling
Activities
 The use of management accounting information for planning and control has already
been discussed. This section looks at the subject in more detail.

2.2.1 Long-Term Planning

Planning involves looking at the future and making decisions today so that the
objectives of the organisation can be achieved. Long-term (strategic) planning
normally involves a time horizon of more than one year. Much of the information for
long-term planning will be external to the organisation.
Examples of types of information and how they can be used in long-term planning
include:

Information Use in Planning

 Market research into new  Price decisions

products  Whether to launch product or not
 Target costing

 Country reports by firms of  Decisions to invest in a new country

consultants  Producing high-level forecasts of future profits and cash
flows from foreign investments
 Forecasting revenue from exports

2.2.2 Short-Term Planning

Short-term planning involves planning for the next 12-month period. The most
obvious example of a short-term plan is the annual budget.
Short-term plans are likely to be more detailed than long-term plans. Examples of
information and how it can be used to assist in the budgeting process include:

Information Use in Planning

 Benchmarks  Setting targets

 Economic forecasts  Forecasting sales volumes

 Detailed cost information from the accounting  Calculating budgeted cost per
system unit
 Calculating total budgeted costs
 Planning resource requirements

2.2.3 Information for Control

Control involves comparing the actual performance of the organisation against the
budget or against plan and taking action where the actual performance deviates from
the plan.
Examples of information and how it can be used for control include:
 Information Use in Planning

 Monthly costs and revenues  Identifying costs that are out of control and taking
versus budget action to remedy these
 Variance analysis

 Quality statistics  Taking action to improve poor quality

7.3.1 Objective

3.1 Objective

The objective of management accounting can be summarised as providing

information to management for the following purposes:
 Planning: developing the objectives and strategy of the organisation, and
formulating medium- and short-term plans to meet those objectives.
 Controlling: ensuring that the organisation is on course to meet its
objectives.
 Decision making: providing information to management to enable them to
make decisions that are consistent with the overall strategy of the
organisation.

7.3.2 Information
3.2 Information

Different types of information will need to be provided by the management

accounting information system on each of the areas of planning, control and decision
making:
 Planning information is generally forward looking. As described in Chapter
1, planning takes place at three levels within the organisation: strategic,
tactical and operational.
 Control activity involves comparing actual results against a plan and taking
necessary action where there are large deviations from the plan. At the
strategic level, control activities tend to focus on high-level performance
indicators (e.g. the overall profitability of the organisation and divisions
compared to budgets). Further down the organisation, the control activities
become more detailed.
 Longer-term decisions (e.g. investing in new products or markets) will
require forecasts. These may not be detailed and will be subject to
uncertainty, as they deal with the future. Shorter-term decisions will require
information about relevant costs of the decision, as many costs may be
fixed or committed in the short term.

3.2.1 Strategic Planning

Strategic planning is generally carried out at the board level. Much of the information
will relate to the external environment and use tools such as PESTEL analysis to
analyse the external environment. Information about the competitive nature of the
environment could be provided using tools such as Porter's 5 Forces model.
Sources of information that would be useful to assist in PEST analysis include:
 Country reports by agencies such as the World Bank and the IMF and
many private sector organisations that provide information on the political
situation and economic trends and forecasts.
 Consulting firms that provide information about legal regulations and
taxation that are relevant to businesses.
 Trade departments of local embassies, which can provide a range of
information relating to the political, economic, social and cultural issues for
businesses considering investing.
 International news publications.
The following are examples of information that may be useful for evaluating the
effect of each of Porter’s 5 forces:
 Threat of new entrants
o Capital required to start up
o Revenue from patented products
o Time to develop new products
o Number of competitors
 Bargaining power of customers
o Number of customers versus number of providers
o Estimated switching costs of customers
 Bargaining power of suppliers
o Number of suppliers in the industry
o Estimated costs of switching suppliers
 Threat of substitutes
o Number of substitutes available
o Analysis of technical specification of substitutes
compared to own products
o Market research
 Competitive rivalry in industry
o Market share

3.2.2 Strategic Control

Strategic control means reviewing the actual performance of an organisation at a
high level and taking action if the strategy is not being achieved.
Information for strategic control includes a wide range of strategic performance
measures depending on the industry and models such as the Balanced Scorecard
(see Chapter 15) are useful. See Chapter 9 for private sector performance measures
and Chapter 12 for performance measurement in not-for-profit organisations.

3.2.3 Tactical Planning and Control

Tactical planning involves planning the activities of the organisation over the medium
term to make the strategy become a reality. It focuses on the efficient and effective
use of an organisation's resources to achieve its objectives.
Much of the information for tactical planning and control is internally generated,
although there will still be some external requirements. Examples of planning and
control information are as follows:

Planning information Control information

 Budgets  Comparison of actual

performance against
budgets

 Pricing  Competitors' pricing

 Standard costs  Variance analysis

 Quality costs  Actual quality costs

 Number of defective
products

 Resource requirements  Cash flow statements

(money, people, materials  Headcount statistics/staff
machines) utilisation
 Inventory reports

 Medium-term finance  Cash flow statements

 Working capital
requirements

3.2.4 Operational Planning and Control

Operational planning involves planning for the day-to-day operations. Examples of
operational plans include:
 Production schedules;
 Staff rotas;
 Cash planning;
 Materials purchases.
Operational control aims to ensure that everything goes according to plan.
Supervision of staff may be the most effective way to achieve control at this level.
Most of the information at the operational level is internal and transaction based. The
management information systems will be one of the most important sources of
information.
For example, various MIS vendors now integrate a variety of information systems,
encompassing process control, human resource management, inventory control,
transaction processing, etc, into a single package, with embedded database,
research, and intelligence (analysis) functions hosted on the cloud.
This allows for relevant management information to be accessed from managers in a
real-time basis, answering their queries and providing what they need to know to
perform their functions effectively and efficiently.
 7.4.1 Integrated Information Systems

4.1 Integrated Information Systems

Accounting systems, including the management accounting system, were often the
first formal information systems to be introduced into many organisations. Prior to the
development of computerised information systems, the management accounting
data may well have been the main source of information for management to run the
business.

Definition

Management information system - specific category of information system providing reports on

organisational performance to help middle management monitor and control the business.
With developments in information technology, many organisations have invested in
Management Information Systems, of which the management accounting system is
just one part. These systems cover all areas of the organisation, not just accounting.
The distinction between what is "accounting" and what is "non-accounting"
information is becoming blurred – largely as a result of these integrated systems. As
discussed in Chapter 1 the scope of management accounting is also much broader
than under traditional management accounting and includes financial and non-
financial information as well as internal and external information.
4.2 Enterprise Resource Planning (ERP) Systems

Definition

Enterprise resource planning (ERP) system – a group of software applications integrated to provide a
seamless flow of information across the whole organisation using a shared database.
Before ERP systems, departments would use separate systems – the warehouse
would have an inventory system, the finance department would have an accounting
system and so on. These systems were not linked, so traditional communication
methods such as notes, emails, and memos were used for inter-departmental
information sharing. Often the same information was entered into two or more
systems, so time-consuming reconciliations had to be carried out.
Organisations with overseas subsidiaries whose systems were not linked to head
office's, had to wait for monthly management accounts to get a view on the
performance of those subsidiaries.
Transcription errors, where a word or figure is wrongly entered, and transposition
errors, where characters in a word or number have are in wrong places, were often
made by data input by human operators.
An ERP system is designed to integrate the main functional areas of business
processes into a unified “enterprise-wide” system and to serve the whole
organisation. Typical “modules” include:
  Accounting and finance (general ledger)
 Inventory control
 Supply chain management (SCM)
 Material requirements planning (MRP)
 Customer relationship management (CRM). See Chapter 8.
Increasingly, ERP systems also include HR management.

4.2.1 Benefits
 Senior managers can access all data from one place, rather than using a
number of systems. They therefore have a more holistic view of the whole
organisation and can gain additional insights into operations.
 Less duplication of data, reduction in data entry and reconciliation time,
fewer input errors.
 Cost savings (although the initial investment may be considerable). Saves
time finding information and reduces costs of training as there is only one
system.
 The risk of errors arising from using incorrect data is reduced (further
reducing costs).
 Improved collaboration as everyone has access to the organisation-wide
data they need.
 Better analytics (e.g. custom KPIs) and faster reporting facilitate decision
making (e.g. forecasting demand and labour budgets). Access levels to
reports ensure that only relevant staff see valuable data.
 Improved productivity as tedious tasks (e.g. monitoring inventory levels
and tracking orders) are automated and redundant tasks (e.g. data entry)
are eliminated.
 Improved customer service and satisfaction through better understanding
of customers’ wants and needs (e.g. order history).
 Simplified regulatory compliance as built-in tools document information for
reporting to the relevant governing body.
Examples of ERP software providers include Oracle, SAP, Sage, NetSuite and
Epicor.

4.2.2 Implications for the Management Accountant

A large proportion of management accounting information can be produced
automatically (e.g. variances), removing many of the routine tasks traditionally
performed by the management accountant. Non-financial managers can also
increase their own accounting knowledge and produce their own reports.
The management accountant is needed to help interpret the information produced by
the system, and hence needs to become an internal consultant rather than a
scorekeeper.

4.2.3 ERP and BPR

Integrated ERP systems support organisations that wish to adopt a process-based
structure rather than a functional-based structure, and so ERP has been adopted at
the same time as BPR has been implemented in many organisations and supports
performance management strategies such as activity-based management.
7.5.1 Lean Information Systems
5.1 Lean Information Systems

Definition

Lean - the principle of getting the right things to the right place at the right time in the right quality,
achieve perfect work flow, while minimising waste and being flexible and able to change.

5.1.1 Lean Production

Lean production includes the following principles:
1. Flexible production lines that can easily be switched from making one part to a
different one without long set-up times. This facilitates smaller batch sizes than in
traditional manufacturing.
2. Greater involvement of employees in discussions about how to continuously
improve the production process.
3. Elimination of non-value-adding activities (e.g. the employment of supervisors
or line managers to supervise workers, but whom do not actually do any work).
4. Identifying the root cause of defects and finding ways to overcome them, rather
than just fixing faulty products.
5. Constructive relationships with suppliers, rather than selecting the supplier
that offers the lowest price. Suppliers are important in improving the overall product.
6. Greater contact with customers to really understand what customers want.
Example 1 Lean

Toyota Motor Corporation's vehicle production system is a way of making things that is sometimes
referred to as a "lean manufacturing system," or a "Just-in-Time (JIT) system," and has come to be
known and studied worldwide.
This production control system was established based on many years of continuous improvement
the objective of making the vehicles ordered by customers in the quickest and most efficient way,
to deliver the vehicles as swiftly as possible. The Toyota Production System (TPS) was establishe
on two concepts: "jidoka" (which can be loosely translated as "automation with a human touch"), a
a problem occurs, the equipment stops immediately, preventing defective products from being pro
and the "Just-in-Time" concept, in which each process produces only what is needed for the next p
in a continuous flow.
https://global.toyota/en/company/vision-and-philosophy/production-system/

5.1.2 Lean Information Systems

Applying the lean principle to information systems suggests that a lean information
system has the following characteristics:
 Reports that do not add value are eliminated. Recipients should be
surveyed to find out if they still use them.
 Reports/emails are only sent to those people to whom the information is
relevant.
  Information is processed without delay.
 Duplication of data is eliminated and information only needs to be entered
into the system once.
 Information systems are continuously improved.
 Information systems are flexible so ad hoc reports and changes to regular
reports can be accommodated.

5.1.3 The 5Ss of Lean

A tool designed to assist with achieving lean production is the "5Ss", which aims to
reduce waste, improve productivity and remove variation in production and output.
The 5Ss are (with original Japanese terms):
 Structurise (Seiri, or Sort ) – eliminate unnecessary items from the
workplace.
 Systemise (Seiton, or Set in order ) – put items in the best place.
 Sanitise (Seiso, or Shine) – constantly scan the workplace for things that
are out of place, as well as perform routine maintenance tasks.
 Standardise (Seiketsu) – set standards and procedures once the
workplace has been sorted and simplified.
 self-discipline (Shitsuke, or Sustain ) – the model should become part of
the workplace routine.
One problem with this approach is that many organisations see it as the ultimate
goal of lean. It is not – the ultimate goal is to reduce waste by reducing non-value-
adding activities.
Applying the 5Ss to information systems:
 Sort – eliminate information or steps in the information flow that are not
needed.
 Set in Order – identify the best methods of communicating information,
and the best structures to store information.
 Shine – check that information is being used effectively.
 Standardise – establish best practice such as routine report distribution
lists.
 Sustain – develop a self-sustaining system where the above 4S are
embedded within the workflow, software, and training of operators.
In summary, applying the 5Ss should ensure that only useful information is produced
on a timely basis.

5.1.4 Benefits of a Lean Information System

A lean information system:
 Can provide information to support the whole value chain. This may also
involve the information systems connecting into the information systems of
business partners using electronic data interchange (EDI) so that
information can be shared.
Definition

Electronic data interchange (EDI) – a service which allows data to be passed from one process to
another. Often coded in a common language such as Extensible Markup Language (XML) to allow
transfer and operations on data to occur between processes without human intervention.
  Reduces the amount of wasted time due to difficulty of accessing
information from the system.
 Reduces the amount of wasted time due to inaccurate data or information
being included in the system.
 Provides better presentation of information, avoiding information overload
(i.e. too much information loses sight of the really important areas).
 Provides better, quicker flow of information so that users do not have to
wait for new informatioN
5.2 Potential Value of Information Provided

Benefits of a good information system include:

 Better decision making
The information system would maintain the quality of information (such as
relevance, reliability, etc) necessary to inform a good decision.
 Fewer delays
Managers would have their information queries fulfilled in a timely manner.
 Better service to customers
Mangers would have access to customer-related information with the
necessary attributes to understand their situation and serve them better.
 Gaining competitive advantage
The information system would allow information to be analysed and
interpreted for better understanding of which of the organisation’s
attributes are value drivers and sources of competitive advantage.
 Staff and operating cost savings
A well-integrated information system with automated workflows would
reduce operational staff count associated with management of data, and
reduce human intervention in data processes, while maintaining quality of
information provided.
Most of the benefits may be difficult to quantify in monetary terms. However, there
are two solutions to this problem when ascertaining the value of the information
provided:
1. Using assumptions about the effect on the business, quantify all the
benefits in terms of cost savings or increased revenue. A system
introduced for use by one department may result in additional costs or
benefits for another department.
2. Recognise that the benefits are qualitative, and assess the project without
using the traditional quantitative techniques.
Example 2 Receivables Ledger System

The receivables ledger system at Alpha Co is very old. Invoices are prepared manually and sent out to
customers. Details of each invoice are recorded in the ledger manually and there is currently a delay of
two to three days between sending and recording invoices.
Receipts from customers are recorded from bank statements. Bank statements are normally received
daily but sometimes arrive late due to delays in the postal service. The system uses batch processing,
which means that all the data input during the day is only updated overnight and therefore not reflected in
the system until the following morning.
The receivables report runs to several pages; customers are arranged alphabetically and all invoices and
cash receipts are itemised. It is difficult to identify "open" (i.e. unpaid) invoices.
The credit controllers find this system to be unwieldy. Before calling a customer to chase a late payment,
they have to call the bank to confirm that there have been no receipts from the customer in the last two
days. Occasionally, customers have exceeded their credit limits because delays in recording invoices
meant that credit controllers were not aware that the customers' balances were approaching their limits
and so did not put a stop on additional sales.
The sales department has also complained about the system. It is not integrated into the department's
sales system so the department has to ask the receivables ledger clerks for any analysis of sales by
customer reports the department may need. Because the receivables ledger clerks are already
overworked, they are not always able to produce these on a timely basis.
The receivables ledger system is not lean at several levels:
 There is waste in terms of inaccurate and out-of-date data, meaning that the credit controllers
have to check customer balances before calling them to chase late payments. Investing in an
automated system whereby invoices are produced and recorded at the same time would not
only save clerical time but provide an up-to-date receivable ledger in respect of invoices. Online
access to bank transactions could ensure that receipts are recorded on a timely basis.
 There is an unnecessary level of detail in the receivables report. Itemising all invoices and
payments makes it difficult to identify open invoices. Listing customers' balances alphabetically
rather than by monetary amount makes it more time consuming to identify the large outstanding
balances. A new system should be chosen that allows the user to select the parameters of an
aged receivables report (e.g. whether to list in order of increasing/decreasing balances, whether
to include all invoices or only unpaid invoices, etc).
 There is difficulty sharing the information with other users, particularly the sales department,
who are frustrated about having to ask the receivables ledger clerks to prepare special reports.
This could be overcome by using an ERP system whereby all departments are linked into the
same database.

6.1 Contingency Theory

Definition

Contingency theory of management accounting – there is no universally appropriate accounting system

applicable to all organisations in all circumstances. Rather, specific aspects of an accounting system are
associated with, and can be appropriately matched to, certain defined circumstances.
Is there a single management accounting system that can be used for all
organisations? The answer to this is obviously no.
According to the contingency theory of management accounting, the type of
management accounting system that is most appropriate to an organisation depends
on "contingent factors" (i.e. factors specific to the organisation designing it). The
major classes of contingent variable can be categorised as:
 External/Environmental;
 Competitive strategy and strategic mission;
 Technology;
 Firm and industry/Size and complexity;
  Human behaviour/Culture.
 6.2 External Factors

 Factors relating to the external environment would focus on the uncertainty of
the environment (e.g. the degree of competition faced by the organisation).
 In more uncertain environments a more subjective performance measurement
system would be expected, while in a more stable environment more concrete
targets might be used.
 Hopwood discovered that the budget constrained style in an organisation led
to dysfunctional behaviour. However, another writer, Govindarajan, suggests
that the reason for this is that Hopwood's research was carried out in
industries operating in uncertain environments. Had he carried out his
research in more stable environments, he may have discovered that a budget-
constrained approach was more appropriate.
 6.3 Competitive Strategy

 Contingency theory suggests that different types of strategy would require a
different focus in the management accounting system.

Example 3 Porter's Strategies

Two of the generic strategies proposed by Michael Porter are:

Cost leadership – producing standardised goods at the lowest possible cost, and selling at high volumes;
Differentiation – making the product appear unique to customers – perhaps through the use of brands or
superior customer performance.
The different approaches that might be applied to management accounting systems are:
Cost leadership – the system is likely to involve close control of labour and materials costs;
Differentiation – the system is likely to be based more on non-financial performance indicators. An
example would be global airline might be frequency of non-stop connections between top tier cities.

7.6.4 Technology

6.4 Technology

Technology relates to the production process used. The contingency theory

suggests the following relationship between the nature of production process and the
management accounting system.
 Standardised, automated processes would be matched with traditional
budgetary systems with formal controls.
 Less standardised processes, where different tasks are performed, would
rely more on personal controls than on accounting performance measures.
For instance, the costing systems used by service organisations will be affected by
the facts that:
 a large proportion of the total cost of the services provided will be
overheads; and
 services are often consumed at the time of purchase.
  6.5 Firm and Industry Factors

 Larger organisations are more likely to adopt more sophisticated management
accounting techniques such as activity-based costing.
 Large organisations also have more formalised procedures, such as budgets.
 Manufacturing industries are more likely to use standard costing and variance
analysis, as their costs need to be covered or absorbed by production and
sales of product.
 Costs in non-manufacturing industries depend on the nature of the industry
they operate in. Some might have high fixed overheads (like airlines, hotels,
and logistics operators), and would have to control costs without affecting
quality of service.

6.6 Human Behaviour

When designing a system of management accounting, management must consider

the impact of the system on the behaviour of managers and staff who are affected by
it. In the chapter on budgets, the behavioural aspects of budgeting were discussed.
Many of the behavioural aspects relating to budgeting relate to management
accounting systems in general.
Management Accounting Systems are used as a means of control, by which the
organisation attempts to ensure that employees work towards achieving the
objectives of the organisation.
There are various approaches taken to controls:
 Behavioural controls – these involve watching the employees to ensure
they behave as they should; e.g. the factory supervisor watching factory
staff to ensure they do their jobs correctly.
 Behavioural constraints (action controls) – these aim to prevent people
from doing what should not be done. For example, setting financial limits
for capital expenditure.
 Personal and cultural controls – involve fostering a sense of solidarity
and teamwork in the organisation. Staff who are not working towards
achieving the organisation's goals will be made to feel that they have let
the "team" down.
Organisations that rely on such controls are likely to have management accounting
systems that are far less detailed. Less accounting data will be collected because
accounting controls are not so necessary.
 Results or output controls – this is where results are compared to a
target. For example, comparing actual performance against budget as a
way of controlling the manager of a department.
On the whole, management accounting systems rely on results or output controls to
motivate individuals.
Activity 1 Relying on Output Controls
 Identify THREE advantages and THREE disadvantages of relying on results/output
controls in a management accounting system.
*Please use the notes feature in the toolbar to help formulate your answer.
Advantages
 Motivational – line managers are given some autonomy, and are judged
on results.
 Achievement of the targets should contribute to the goals of the
organisation.
 It is an objective and fair way of controlling a manager.
Disadvantages
 Targets and organisational objectives may not be aligned.
 Target may not be met due to factors outside of the control of the
manager.
 Managers may take actions to improve the reported target without
necessarily achieving the underlying purpose of the target.

7.7.1 Data Silos

7.1 Data Silos

Definition

Data silo - a collection of data held by one group in an organisation that is not easily accessible by other
groups in the same organisation.
There are pockets or "silos" of data scattered across applications, databases,
departments, and geographic locations. Some data silos could be even be formed by
individuals.
Data silos arise in data management protocols that allow work groups to operate in
isolation, generating data and creating information, with little or no interaction with
the rest of the organisation.
Although this might lead to efficiency of data within the specific workgroup, it limits
the capability of the organisation to effectively use information where collaboration
between workgroups is vital, or where coordination between workgroups based on a
united vision and analytical picture is needed.
Data silos have the following drawbacks:
1. Limit view of data at the enterprise level.
Certain types of strategic decisions would be not be made optimally, due
to little visibility of a coherent data picture from operational workgroups.
For example, a large global firm with manufacturing facilities across the
globe, would find it hard to take advantage of opportunities for cost
savings in supply chain, if it did not have a clear data picture of the supply
chain for each facility.
2. Reduce data integrity and reliability
Data held at the enterprise level may not be up to date, and its accuracy
and completeness might not be verified with data from operational
workgroups in a timely manner.
 3. Waste resources
There might be duplication of resources and analysis that apply to the
various data silos. For example, the IT team might be purchasing or
subscribing for data services in duplicate, increasing costs. Multiple
redundancies might also contribute to reduced data integrity, as there
might be confusion on which data set is reliable and up-to-date.
4. Inhibit collaboration
Data held in silos might not be directly comparable or transferrable with
other workgroups creating the need to translate, reformat or repackage
data before it can be used in by other workgroups. This increases delays
and costs, and reduces the quality of data. Data protocols and processes
might differ between workgroups, reducing comparability and
understanding of data.
7.2 Impact on Accounting Function

Initiatives such as Basel II, IFRS, and Sarbanes–Oxley, that all mandate clarity and
transparency, have brought integration – or the lack of it – to the forefront for many
organisations. Finance professionals increasingly find themselves in the position of
having to sign off on numbers and, in doing so, vouch for the validity of the
underlying data. To do so they need to be able to access this data quickly and easily.
This requires a systems infrastructure that can provide a window into the operational
data that drives the numbers; something that enables the finance function to drill
down and across its financials to customer level and product level, and relate these
to other aspects of the financial infrastructure, if necessary. But this is tricky when
systems are not integrated.
Some organisations try to deal with their need for better integration by reinventing
the wheel; they simplify their systems by replacing the many with one or more better
connected or integrated alternatives. Others opt for the sort of add-on that promises
to provide the appearance of integration, without delivering the reality. This can take
the form of single subject or departmental "data marts", where data is taken from a
number of systems and transformed into a common format, so that it can be
available for interrogation and analysis by various users or systems. Or it could take
the form of data warehousing, where the same sort of process takes place, but on a
much larger scale.
Unfortunately, these approaches are as complex (and costly) as they sound, whether
for a multinational with thousands of different systems across the world, or a small
firm of accountants that purchased its accounting, contact management, and
personal tax products from different suppliers.
Web services may offer a way forward. Combined with data integration technology,
they could make interoperability problems a thing of the past. Thanks to common
standards, widely supported by software developers and vendors, web services
make it a lot easier for disparate systems to talk to one another.

Exhibit 1 TÜV SÜD

Like many organisations, TÜV SÜD's historic approach to planning and budgeting has suffered from two
 Exhibit 1 TÜV SÜD

key challenges:
Reducing the complexity of the process and the information required. Ultimately great planning,
budgeting and forecasting should be a useful tool for commercial decision making, it must be agile and
informative enough for the organisation to take corrective actions in a timely manner. Companies need a
process which is well governed has clear accountability and where individuals can be incentivised around
aspects of the process which are in their control. Planning and budgeting must be kept as simple as
possible.
Collaboration: historically the finance team has been part of the planning process. However, it was never
entirely connected to the wider business planning process to be effective. We are now on a journey to
much better integrated business planning across the organisation that joins together the different planning
and forecasting activities. Finance has a huge role to play in facilitating this greater integration, but we
also need advocacy and support from the top across the business.
What finance should report on:
Performance management reporting can risk over reporting Think about the 80-20 rule – trying to report
100% on everything is too time-consuming and non-value adding for the finance team and for the
business. Be clear on what matters in your organisation, the activities that are important and that drive
value. Focus your reporting around these to drive better decision making.
Culturally it is a big step for finance to report on 'less' and so it is difficult to instil this discipline, but it is
incredibly important.
https://www.accaglobal.com/gb/en/professional-insights/global-profession/enterprise-performance-
management/enterprise-performance-management-case-study.html

CHAPTER 8: Visual Overview

Objective: To describe the sources and costs of management information and their
uses in control.

1.1 Appropriate Methods

The appropriate method for recording and processing in a management accounting

system depends on a number of factors:
 Size and structure of the organisation. The management information
needs of an owner-managed business operating from a single site will be
very different to those of a multi-national organisation with operations and
staff in numerous markets.
 Nature of an organisation's business. The information requirements of
service businesses are different to those of manufacturing organisations
(see Chapter 5).
 Speed with which information is needed. Supermarkets use electronic
point of sale (EPOS) systems to keep their inventory levels up-to-date and
facilitate reordering.
 Volume and complexity of data processed. Supermarkets need to use
real-time processing (transactions are processed as they arise) to ensure
 inventory records are up-to-date, whereas a small convenience store is
likely to only need to update its inventory records at the end of the day
using batch processing (i.e. transactions are collected into batches and
processed at periodic intervals).
 Accuracy, which is the correctness of data for what it is supposed to
represent. Organisations for which accuracy is crucial are more likely to
use batch processing (e.g. banks entering payment transactions or
cheques may use batch processing).
 1.2 Combining Batch and Real-Time Processing
Definition

Batch Processing – performing operations on a group or set of data at a time. It means that multiple
transactions are processed in a single operation run, usually without human intervention once the batch
process has started.
Real Time Processing – performing operations on data or transactions as soon as they are received, in a
continuous manner. There is no delay between the receipt of the transaction, the start of the data
operation, and the recording of the output. The process is usually automated.

 Many organisations can combine batch and real-time processing.
 A chain of retail outlets (e.g. supermarkets) will need real-time processing at
each location for local management control over sales, inventory levels,
ordering, etc. At the end of each day or trading period, the information stored
in the master files can be transferred to the organisation's head office (i.e.
batch processing) for analysis by the senior managers of the entity. The
facility will also be available for the head office to interrogate each location's
system as necessary.

8.1.3 The Effect of IT Developments on Management Accounting Systems

1.3 The Effect of IT Developments on Management
Accounting Systems

1.3.1 Radio Frequency Identification (RFID) Technology

Radio frequency identification tags are microchips that contain information and can
be attached to objects (e.g. high-value items). RFID scanners can then read the
information contained in these tags (sometimes from several metres away). Several
applications of RFID have been made in accounting:
 To keep track of inventory with a short shelf-life (using information such as
sell by or best before dates, etc). This is useful for ensuring that older
items are sold first, before they expire, and so limiting obsolescence.
 To monitor non-current assets (e.g. their location) to assist in maintaining
the non-current assets register. Multiple assets can be located quickly
without having to physically reach them and identify them individually.
Benefits include:
 Reducing time spent on inventory counting/asset inspection;
  Providing real-time physical quantities;
 More timely information for decision making (e.g. in placing orders);
 Faster location of critical items of equipment;
 Improved security by preventing assets from leaving premises and
keeping designated assets out of unauthorised areas.

1.3.2 Unified Corporate Databases

Definition

Unified corporate database – a multidimensional, multi-layered, multidisciplinary database that s

information from all functions in one place rather than in multiple applications or separate database
Advantages include:
 Data only needs to be entered once, reducing duplication of data.
 Information can be shared across functions.
 Security is easier to manage as all the data is held in one place.
The key principles of a unified corporate database are:
1. Data is stored in a single location, usually on a cloud or network storage.
2. Data is presented as a unified database, even if the data sources are
federated (meaning from different sources).
3. Data can be queried and manipulated across sources and in combination
without need for further translation or alteration to make it comparable and
useable.
4. The unified database can be accessed through various modules as
needed by management.
At a corporate level, the unified corporate database of Shell, for example, holds all
data relating to daily operations (e.g. planned/actual surveys), which is shared
seamlessly with stakeholders in its wells. As a result, its wells are safer and more
efficient.
Many business automation and consultancy companies now offer business solutions
to companies of all sizes that take advantage of unified databases. These provide:
 rights to access, use and update common information according to the
user's status and responsibilities;
 single-entry of all transactions needed for bookkeeping, management
accounting, financial reporting and tax accounting; and
 the ability to create financial reports in accordance with different
accounting standards (e.g. IFRS and national accounting rules) and
different currencies.
Exhibit 1 Citicore Power

Citicore is a renewable energy provider in the Philippines, with a portfolio of 8 solar power plants,
biomass energy forest plantations and bulk water supply solutions. Citicore embarked on a digital
transformation to help them hit their target to produce 1,000 MW of clean energy within five years.
Citicore had experienced slow, manual reporting across separate systems, while running two diffe
finance and operations systems across 21 subsidiaries required duplicate accounting and reportin
activities to get a consolidated view of the whole business.
 Exhibit 1 Citicore Power

The disconnected finance and operational processes limited coordination between departments
Citicore embraced an end-to-end digital supply chain transformation to accelerate their progress, w
ERP supplier.
Now, with centralised data and processes that facilitate seamless communication and information
between departments, requestors, preparers and approvers, Citicore can use real-time analytics a
reporting dashboards help management make data-driven decisions –and as a cloud-based syste
is available anytime, anywhere
The more the business uses the system, the more potential they see for cost savings and efficienc
https://www.sap.com/sea/documents/2020/09/1ec8578d-b17d-0010-87a3-c30de2ffd8ff.html

1.3.3 Process Automation

Definition

Process automation –the use of technology to automate business processes to sequentially tran
from one task to the next with minimal human intervention.
Business process automation (BPA) is used for workflow logistics for various
processes across divisions such as human resources, sales, finance, management,
operations, IT, etc. It removes manual processing tasks that typically lead to
unnecessary delays and inevitable human errors.
BPA is often applied to organisational tasks that are repetitive in nature and do not
require significant human intervention (e.g. on-boarding of new employees).
Benefits of business process automation include:
 Standardized and streamlined processes;
 Greater time and cost savings;
 Better allocation of resources;
 Improved customer experience;
 Improved compliance to regulations and standards;
 Higher employee satisfaction;
 Improved visibility into process performance.
In Robotic Process Automation (RPA), processes are automated through the use of
robots. Such processes are typically performed within a back-office function and
have one or more of the following characteristics:
 Repetitive;
 Prone to error;
 Rules based;
 Involve digital data; and
 Time critical and seasonal.
Overall, RPA provides an opportunity to accelerate business strategy and maximise
both growth and organisational performance through the automation of select
processes and the redeployment or removal of excess capacity.
 Exhibit 2 Robotic Process Automation

RPA software automates repetitive, rules-based processes usually performed by people sitting in
computers. By interacting with applications just as a human would, software robots can open ema
attachments, complete e-forms, record and re-key data, and perform other tasks that mimic huma
Robots can be seen as a virtual workforce assigned to middle- and back-office processing centres
are also applications for which software assists front-office staff—for instance, prompting contact c
agents during customer interactions and automatically capturing call close notes, a mode known a
“attended automation.
For instance, a large consumer and commercial bank redesigned its claims process and deployed
software robots, or bots, running 13 processes, handling 1.5 million requests per year. As a result,
bank was able to add capacity equivalent to around 230 full-time employees at approximately 30 p
of the cost of recruiting more staff. Additionally, the bank recorded a 27 percent increase in tasks
performed “right first time.
Some RPA efforts quickly lead to the realization that automating existing processes is undesirable
that designing better processes is warranted before automating those processes.
The integration of cognitive technologies with RPA makes it possible to extend automation to proc
that require perception or judgment. With the addition of natural language processing, chat-bot
technology, speech recognition, and computer vision technology, for instance, bots can extract an
structure information from speech audio, text, or images and pass that structured information to th
step of the process. Another example: Machine learning can identify patterns and make prediction
process outcomes, helping RPA prioritize actions.
Virgin Trains has deployed cognitive RPA to automatically refund customers for late running trains
customer emails arrive, a natural language processing tool reads, understands meaning and senti
categorizes, and then recognizes key information in the text to service the customer quickly and cl
From discerning the customer’s complaint with cognitive computing to actively issuing the refund w
software bots, the entire process has been automated. The cognitive automation solution has redu
daily processing time and manual labour involved in dealing with customer emails by 85 percent.
https://www2.deloitte.com/us/en/insights/focus/signals-for-strategists/cognitive-enterpriserobotic- p
automation.html

1.3.4 Internet of Things (IOT)

Definition

Internet of Things – a system of web-enabled smart devices (almost anything – phones, electron
goods, car sensors, heart monitors) that can transfer data without human intervention.
Applications include:
 Smart-homes (automated control of lighting, appliances, etc);
 Smart-motorways (active traffic management techniques increase capacity
through variable speed limits and lane management);
 Wearables (e.g. smart watches, belts, glasses, safety helmets); and
 Smart-city (to help solve problems of traffic, pollution, etc).
Examples of uses in performance management include:
  Improving work processes – data about the conditions that products are
kept in can be used to help predict with precision the life of individual
products within a larger batch. This is particularly important in the food
industry, where shelf life can vary according to harvesting, holding,
processing and distribution arrangements.
 Generating efficiencies – information provided by smart devices used in
manufacturing operations can help prevent bottlenecks. Efficiencies also
include reduction in the use of resources (e.g. better energy management
in buildings).
 Monitoring for potential problems – “predictive maintenance” uses data
relating to the condition of equipment to estimate when maintenance
should be performed. The timing of maintenance will be partly determined
by when it is cost-effective, but also trying to ensure that it happens before
there is likely to be a loss in performance.
Example 1 System monitoring

British supermarket group Tesco has operations in several countries around the world. In Ireland,
company developed a system to analyse the temperature of its in-store refrigerators. Sensors wer
in the fridges that measured the temperature every three seconds and sent the information over th
internet to a central data warehouse. Analysis of this data allowed the company to identify units th
operating at incorrect temperatures. The company discovered that a number of fridges were opera
temperatures below the -21◦C to -23◦C recommended. This was clearly costing the company in te
wasted energy. Having this information allowed the company to correct the temperature of the frid
Given that the company was spending €10 million per year on fridge cooling costs in Ireland, an e
20% reduction in these costs was a significant saving.
The system also allowed the engineers to monitor the performance of the fridges remotely. When
identified that a particular unit was malfunctioning, they could analyse the problem then visit the st
the right parts and replace them. Previously the fridges would only be fixed when a problem had b
discovered by the store manager, which would usually be when the problem had developed into
something more major. The engineers would have to visit the store, identify the problem, and then
second visit to the store with the required parts.

1.3.5 Network Technology

Network technology refers to the broad range of technologies by which two or more
computers are connected and communicate information. For example:
 Local Area Network (LAN) – a group of computers connected across short
distances. Can be connected to a WAN using a router.
 Wide Area Network (WAN) – for example, the Internet, connects
computers around the world.
 Storage-Area Network (SAN) – a dedicated high-speed and high-
performance network that connects shared pools of storage devices to
several servers. It does not rely on a LAN or WAN.
 Enterprise Private Network (EPN) – built and owned by a business to
securely connect its various locations to share computer resources.
 Virtual Private Network (VPN) – users access a private network across the
internet to send and receive data as if their devices were connected to the
private network.
 As network technology allows employees working from home to connect to their
organisation's systems as if they were physically in the organisation it has played an
important role in increasing flexibility of the workforce.

1.3.6 Cloud Technology

Definition

Cloud technology – technologies that enable IT departments to increase or add capabilities as needed
without having to purchase equipment and software, train employees to support it or use office space,
power and cooling to house it.
Cloud computing provides on-demand access to a shared pool of computing
resources at a relatively low cost. Computing resources may be:
 Storage-as-a-service (e.g. MS OneDrive, Dropbox and Google Drive);
 Software-as-a-Service (Saas) – provides access to software (e.g. MS
Office 365);
 Platform-as-a-Service (Paas) – for programmers to develop applications;
 Infrastructure-as-a-Service (Iaas) – provides networking, storage and
servers.
A cloud may be:
 Offered over a public network (e.g. Amazon and Google cloud services);
or
 Private (i.e. operated by an organisation).
Note that the cloud still has a physical site where the cloud infrastructure resides.
Corporate data would be held offsite at these locations, which are run by the cloud
service provider.
For example, Amazon Web Services (AWS) has physical databases in 26 regions
around the globe as at March 2022, including Australia, Singapore, China, United
Kingdom, and the United States.
Benefits
 Cost savings as resources are shared. Smaller firms can afford the
additional capabilities as cost is relatively minimal, with no capital
expenditure.
 Turns what is normally a fixed cost into a variable cost as users are
normally charged for the amount they use, rather than making a large up-
front investment; this makes systems scalable.
 Saves time as large dispersed organisations can access a global centrally
managed system via the internet in a fraction of the time it would take to
set up local, interconnected networks at each location.
 Allows organisations to standardise their information systems globally.
 There is easy access from any device at any time (with a network
connection). This may facilitate faster and more collaborative decision
making.
Potential concerns
 Data security in a public cloud. There may be less control over who can
access systems and data.
 Supplier “lock-in” (i.e. inability to change providers without incurring costs
or changing systems).
  Legal issues – where is data stored (geographically)? What data
protection laws apply?
Influence on management accounting systems
 Gives access to decision-making information in new ways (e.g. 24-7 using
a smart device).
 The much greater calculating power of cloud servers enhances the
amount of data that can be analysed to provide timely, accurate
information for decision making. Calculations that might otherwise take
hours, now take only seconds.
 Enables the provision of information in a mixed graphical/numeric format
which may be easier to understand and so simplifies the preparation and
communication of key business reports.
 Lowers the barrier to accessing management accounting information
which helps to raise awareness of issues that concern management
throughout the organisation.
 Offers the potential to substantially reduce costs (e.g. no need to employ
technical support teams). Relatively affordable to small and medium-sized
businesses
.4 Instant Access to Data

1.4.1 Background
Before IT systems, management information was provided almost exclusively by
management accountants. There would often be a delay of several days between
the end of an accounting period and the availability of such information.
With modern IT systems, such as ERP systems, managers can access the
information they need, often on a real-time basis, from the system.
Managers often prepare their own reports using reporting packages that integrate
the databases in which the company-wide data is stored.

1.4.2 Impact on Business Performance

Example 2 Supermarkets

The use of EFTPOS systems in supermarkets means that when customers buy products, the
supermarket's inventory records are immediately updated when the goods are scanned at the checkout.
This means the supermarket has up-to-the-minute inventory levels. If any products are selling quickly and
inventory levels are low, new orders can be placed with suppliers – often automatically using electronic
data interchange (EDI) systems. This means that companies do not lose potential sales due to lack of
inventory.
 Management can respond more quickly to customers' needs, since they
will have more up-to-date information. This should lead to greater
customer satisfaction and ultimately higher sales.
 Comparison of actual performance against budget can take place much
more frequently, and control action taken to react to any deviations.
 Management can control inventory levels more effectively because it has
up-to-date information about these. This leads to cost savings.
1.5 Previously Unavailable Data

1.5.1 Uses
Modern management information systems provide instant access to previously
unavailable data that can be used for benchmarking and control purposes, and so
help improve business performance.
Management can perform more detailed analysis of the data they have. This leads
to:
 better decision making;
 identifying better business opportunities (e.g. through data mining).
Definition

Data mining – the process of discovering interesting and useful patterns and relationships in large
volumes of data. The field combines tools from statistics and artificial intelligence (such as neural
networks and machine learning) with database management to analyse large digital collections, kn
data sets.

Example 3 Customer Loyalty Schemes

Many businesses introduce customer loyalty schemes, whereby customers sign up for a loyalty ca
receive points or discounts each time they purchase goods or services. The points can then be us
buy products. The businesses record all transactions that these customers make, and this provide
valuable information that can be used to assist in more effective marketing campaigns.

1.5.2 Data for Control Purposes

Better cost information can be used to identify potential for cost savings. For
example, the introduction of activity-based costing, assisted by computerised IT
systems, can lead to a better understanding of cost behaviour.
Computerised inventory records mean that inventory values hold up-to-the-minute
information about inventory balances.
Greater analysis of data can take place relatively easier to provide management with
more depth of information. For example, profitability analysis by product or by
customer can be performed, provided that sufficient data was entered into the
system in the first place.
Computer applications can be used in the planning process – more sophisticated
"what if" models, sensitivity analysis and simulation models can be developed using
spread sheet applications.

1.5.3 Benchmarking
Benchmarking was discussed in Chapter 1. IT can make the benchmarking process
more accessible due to the following factors:
 Much information is available on the Internet about competitors and other
organisations – this could be used as a basis for a benchmarking exercise.
  Databases have been developed which contain benchmarking data
compiled from surveys carried out by many organisations. One such
database is the Open Standards Benchmarking Collaborative (OSBC)
project performed by APQC. This organisation encourages organisations
to provide information through surveys, and from this, to establish industry
best practice in a number of areas. For more information
see www.apqc.org

1.5.4 Artificial Intelligence (AI)

Definition

Artificial intelligence – using machines to copy the cognitive functions of the human brain in lear
solving problems.
Applications of AI include:
 Fraud protection;
 Cyber-security;
 Virtual assistants (suggestions for you);
 Online customer support (using AI chat bots); and
 Autonomous (self driving) vehicles.
In terms of improving business performance, AI can be used to:
 Improve customer services – e.g. use virtual assistant programs to
provide real-time support.
 Automate workloads – e.g. collect and analyse data from smart sensors.
 Optimise logistics – e.g. plan transport routes.
 Increase manufacturing output and efficiency – e.g. automate
production line by integrating industrial robots into the workflow and
teaching them to perform labour-intensive or mundane tasks.
 Prevent outages – e.g. use anomaly detection techniques to identify
patterns that are likely to disrupt business, such as an IT outage.
 Predict performance – e.g. use AI applications to determine when
performance goals might be met, such as response time to help desk
calls.
 Predict behaviour – e.g. analyse patterns of online behaviour to detect
credit card fraud or target appropriate adverts.
 Manage and analyse data – e.g. interpret and mine data more efficiently
and provide meaningful insight into customers.
 Improve marketing and advertising – e.g. track user behaviour and
automate many routine marketing tasks.
Example 4 AI and Performance Feedback

How AI can help accurately assess performance and provide management with the right feedback
1. Enabling predictive appraisals
A typical appraisal process includes combining data from historical records with the line manager’s
opinion of the employee’s potential. This process is fundamentally flawed from the outset if data is
incomplete or the employees performance changes dramatically between appraisals. AI analyses
recommend future performance levels which allows managers to remunerate employees for what
 going to achieve rather than what they have already done.
2. Eliminating bias from performance reviews
An assessment of performance by AI will be based solely on historical data and the achievement o
performance metrics in making predictions about future performance. AI provides objective perform
feedback that is free from management bias, favouritism, etc.
3. Initiating immediate recommendation
AI can deliver prescriptive analytics which outline clear recommendations for managers to take. Fo
example, an AI-based performance feedback solution developed by IBM (the International Busine
Machines Corporation) told managers that a 10% salary increase to certain employees would dec
the risk of their leaving by 90%.
Prescriptive analytics can also indicate performance gaps for training and development.

1.5.5 Enterprise Resource Planning (ERP)

ERP systems, which were introduced in the Chapter 7, can be used:
 To control inventory levels and thereby improve working capital
management;
 To facilitate regulatory compliance;
 To improve efficiency by reducing or eliminating repetitive manual
processes;
 To assist in the adoption and enforcement of industry best-practice
processes;
 To build and maintain customer relationships through end-to-end tracking;
and
 To improve business performance through increased collaboration, more
coherent workflows and more streamline completion of tasks.

1.5.6 Knowledge Management Systems (KMS)

Definition

Organisational knowledge – the collective and shared experience accumulated through systems
routines and activities of sharing across an organisation.
– Johnson, Scholes and Wh
Managing organisational knowledge is important because as an organisation gets
larger, it becomes more difficult to share what people know. The organisation
increasingly does not “know what it knows” and, as a result, makes unnecessary
mistakes, duplicates activity and misses opportunities. It is important to distinguish
between data and information and knowledge.
Data are raw and unprocessed facts and figures.
Information is data that has been processed into a more meaningful form.
Knowledge is primarily associated with the discovery of trends or patterns of
behaviour.
Definitions

Tacit knowledge – knowledge stored in the mind, gathered through personal experience, insight,
 Definitions

intuition, emotions, and observations. It is created through cognitive process and highly specialize
individual that has it, making it difficult to explain or codify for dissemination.
Explicit knowledge – Knowledge that is in base form and may be codified and transferred into a m
(such as documents, videos, manuals, etc) for dissemination to other individuals.
Knowledge management is the systematic management of “knowledge”. It converts
information and experience into collective knowledge (“lessons learnt”) that can be
shared widely throughout an organisation.
 It is often described as an audit of “intellectual assets”. It highlights unique
sources, critical functions and potential bottlenecks, which hinder
knowledge flows to the point of use.
 It is the collection of processes which govern the creation, dissemination
and use of knowledge.
 It complements and enhances other organisational initiatives such as total
quality management (see Chapter 13).
A KMS is resource intensive in terms of technology. A conventional, personalisation-
based KMS is typically based around an intranet application where all explicit
knowledge about processes, procedures, standards, products, customers and
policies are stored. Staff within the organisation are often asked to share their
knowledge and the system will allow staff to input any information they think other
staff should know about. Such repositories are convenient places to locate explicit
organisational knowledge and they have practical benefits, such as eliminating the
costs of storage, printing and distribution.
A KMS may help and improve business performance by:
 Focusing on business processes, information management and
knowledge capture to meet critical business objectives at all levels –
individual, departmental and organisational.
 Improving workforce behaviours through opportunities to collaborate and
interact with work-related knowledge.
 Capturing more explicit project, team and departmental knowledge in an
efficient and consistent way that can be discovered (searched for) and
reused.
 Requiring top-down management support – management must lead by
example to make a KMS work.
 Providing information to new staff, which may reduce the time to learn the
job.
 Helping customer service centres answer customer’s queries.

1.5.7 Customer Relationship Management Systems (CRM)

Definition

Customer relationship management (CRM) – the practice, strategies and technologies used to manage
customer interactions and data, to improve customer service, retain customers and drive sales growth.
At a basic level, CRM software consolidates customer information and documents
(e.g. purchasing history, demographics and returns) for easy access and
 management. Functions that have been added to CRM systems that make them
more useful include:
 Automating workflow process (e.g. tasks, calendars and alerts).
 Contact centre automation (e.g. pre-recorded messages to assist in
problem solving).
 Marketing automation (e.g. to sending marketing materials to sales leads).
 Sales force automation to track all customer interactions (e.g. e-mail,
phone, meetings).
 Geolocation technology to base marketing campaigns on customers’
physical locations.
CRM captures, analyses and distributes all relevant data from customer and
prospect interactions to everyone in the organisation. This distribution of information
helps an organisation better meet customer, product and service needs. For
example:
 Improving sales performance through:
o following quality leads and reducing time wasted following
prospects;
o identifying and addressing weak links in the sales
process (e.g. unanswered e-mails).
 Using data to create target customer profiles to find opportunities to upsell
and/or reward them for their loyalty.
 Improving business processes, for example, identifying defective batches
of products from a customer complaint to recall and replace products.

1.5.8 Data Warehouses

Definition

Data warehouse – a central data store (database) that is used for reporting and analytical purposes. It
provides a repository for historical data which is collected, integrated and organised from various
operational systems (e.g. sales, procurement) and external sources.
Information in a data warehouse is not held for operational purposes. Managers can
drill down (data mine) the data to access details at a transaction level and use
analytical tools to discover previously unknown relationships between data which
can then be used to guide decision making and predict future behaviour.
Features of data in data warehouses:
 Subject-oriented – i.e. organised around customers, suppliers, products
and activities (rather than function such as sales and purchases).
 Integrated – i.e. data must be consistently coded and formatted (data must
therefore be “cleaned” before it is warehoused).
 Time-variant – i.e. organised by time periods to show data as it was at that
time.
 Non-volatile – i.e. it cannot be changed – only housed and retrieved.
Benefits
 Quick and easy access to data from multiple sources also saves
management time, with little or no support from IT.
 Better decision making as more information can be retrieved to provide
business intelligence.
  Provides historical intelligence that cannot be obtained from a
transactional operating system. Ability to analyse different time periods
and trends assists in making future predictions.
 Enhanced data quality and consistency; the standardisation of data
improves accuracy.
1.6 Qualitative Data

Qualitative data means non-numeric data. For example, customer opinions would be
qualitative data.
Because qualitative data is not numeric, it is harder to record and process than
numeric data because:
 It is likely that input into the system will be manual (using a mouse and
keyboard). This is slow and time consuming and therefore expensive.
 Qualitative information cannot be summarised automatically like
quantitative data. For quantitative data, totals, averages and other useful
analyses can be calculated by the system. Qualitative information will
require judgement in reporting it so, again, human input will be necessary.
This may also introduce bias and errors into the process.
Information systems frequently do not record the qualitative effects of quantitative
information, even though those effects might have a significant impact on the
organisation. For example the reduction in an organisation’s product range would
affect that organisation’s image in the market but the effect would not be recorded.
It is possible for qualitative data to be approximated using some form of quantitative
scoring (such as using a Likert scale) or via the valuation of certain pre-
determineddimensions (such as asking data sources to value certain attributes by
assigning points from a fixed available quantity).
However, these methods may not result in clear values due to issues such as the
lack of objective anchoring (situation where a certain quantitative value has different
meanings to different people). This is due to the nature of quantitative expression in
numbers being distinct and discrete, something which doesn’t always apply to
qualitative information.

8.2.1 Background

2.1 Background

The increasing use of the Internet and, in particular, social network sites has led to a
huge increase in data that is available to organisations. If analysed appropriately, the
increased business intelligence can be used to improve the performance of an
organisation. For example, intelligence about consumer trends can be used to
identify new marketing opportunities, leading to improved sales.
Traditionally, the information available to organisations was mainly internal, relating
to transactions and operations of the business.
Today there are many additional external sources of data that may also be useful to
organisations. For example:
 discussions on social media about an organisation's products and brands;
and
 the behaviour of visitors to the website.

8.2.2 Big Data

2.2 Big Data

Definition

Big data – extremely large data sets that may be analysed computationally to reveal patterns, tren
associations, especially relating to human behaviour and interactions.

2.2.1 Characteristics

 The commonest fourth V that is sometimes added is Veracity: is the data

true and can its accuracy be relied upon?
 Another common V is Value. There is little point in going to the effort and
expense of gathering and analysing the data if this does not ultimately
result in adding value to the company. It is important for companies to
consider the potential of big data analytics and the value it could create if
gathered, analysed and used wisely.
 2.2.2 Software for Big Data
Massive amounts of data are so variable and complex that they are extremely
difficult to analyse using traditional database and software applications. However, as
the ability to harness and analyse big data has the potential to add value to a
business, software solutions are now available.
 Apache Hadoop is a software framework designed to allow for the
distributed processing of large data sets across clusters of computers
using simple programming models.
 Apache Spark is a data processing framework that can perform
processing tasks on very large data sets, and is able to distribute tasks
across multiple computers (distributed processing).

2.2.3 Big Data Analytics

The processing of big data is generally known as big data analytics and includes:
 Data mining: analysing data to identify patterns and establish relationships
such as associations (where several events are connected), sequences
(where one event leads to another) and correlations.
 Predictive analytics: a type of data mining which aims to predict future
events (e.g. the chance of someone being persuaded to upgrade a flight).
 Text analytics: scanning text such as emails and word processing
documents to extract useful information. It could simply be looking for key
words that indicate an interest in a product or place.
 Voice analytics: as above but with audio.
 Statistical analytics: used to identify trends, correlations and changes in
behaviour.
The analytical findings can lead to:
 Better marketing;
 Better customer service and relationship management;
 Increased customer loyalty;
 Increased competitive strength;
 Increased operational efficiency;
 The discovery of new sources of revenue.
Example 5 Google Analytics

Performance management in e-commerce is concerned with measuring the online experience:

 Customer acquisition – getting visitors to the company’s website and converting them into sales.
 Customer retention – persuading first-time customers to return.
 Customer extension – selling additional goods or services to existing customers.
Google Analytics is a web analytics service that tracks and reports website traffic:
 Website owners install a tracking code on their website;
 The tracking code is activated on a visitor’s browser (unless blocked);
 Information about the visitor and their visit is collected by Google Analytics.
This provides a large amount of standard data and analyses which website owners can also customise to
provide their own reports or metrics. For example:
 An audience report provides a high-level overview including the percentage of visitors that are
 Example 5 Google Analytics

new, their location and language.

 An acquisition report shows how visitors arrived at the website and provides information about
the effectiveness of the different channels used to attract visitors (e.g. organic visitors via a web
search engine, such as Google).
 A behaviour report analyses what visitors do on the website. This provides feedback to the
designers about user engagement and whether, ultimately, the visitor bought a product or
service. Behaviour flows show a visitor’s progression – where they landed and “dropped off”,
etc. Important statistics include:
o Bounce rate – the proportion of visitors who land but do not interact further;
o Conversion rate – the proportion that make a purchase during their visit.

2.2.4 Risks and challenges

Despite the examples of the use of big data in commerce, particularly for marketing
and CRM, there are some potential risks and challenges.
 Cost: It is expensive to establish the hardware and analytical software
needed, though these costs are continually falling.
 Regulation: Some countries and cultures worry about the amount of
information that is being collected and have passed laws governing its
collection, storage and use. Breaking a law can have serious reputational
and punitive consequences.
 Loss and theft of data: Apart from the consequences arising from
regulatory breaches, companies might find themselves open to civil legal
action if data were stolen and individuals suffered as a consequence. For
example the EU has brought in the General Data Protection Regulation.
Exhibit 3 Big Data Opportunities and Challenges

Recent research highlights the following opportunities and challenges with big data for management
accounting:
Phase Opportunity Challenges

Data  Integration of traditional,  Large volumes of data.

generation structured databases with new  Information overload and data
and storage unstructured data (e.g. from social veracity.
media) to provide insights on  Lack of resources (knowledge,
customer and supplier relations qualified personnel).
and employees, for example.  Lack of buy-in by senior
 Automatic gathering of data. management and other
 Cost savings through the use of employees.
cost-efficient technologies such as
cloud computing.
 Increasing value of data as it is
available much faster.

Data  Time savings.  Necessity of new technologies

 Availability of data in real time for data analysis given the
 processing, (e.g. from RFID, internet volumes of data.
verification applications and sensors).  Analysis may be carried out by
and individuals rather than the
management accounting
analysis function due to increased
automation of data processing,
verification and analysis.

Reporting  Improved decision support for top  Changing cost structures

and management. (business models based on
decision  Improved operational planning data provision may have very
(e.g. simulations). different cost drivers and
support  Improved strategic planning structures).
(improved transparency of data  Making false decisions faster
means trends and risks can be (there is still a need for human
estimated faster). wisdom).
Source: The Routledge Companion to Accounting Information Systems, Routledge, 2018, Chapter 13
Issues with Big Data, Bernhard Gärtner, Martin R.W. Hiebl

 Incorrect data (veracity): If the data held is incorrect or out of date

incorrect conclusions are likely. Even if the data is correct, some
correlations might be spurious leading to false positive results.

8.2.3 Big Data Strategies

2.3 Big Data Strategies

Various business big data strategies may be classified based on two dimensions:
1. Data type: the nature of the data used, which can be either transactional
data (e.g. customer history) or non-transactional data (e.g. discussions on social
media);of social media content (e.g. the number of times a video posted on
Facebook is viewed);
2. Business objective: the use of the data – either measurement or
experimentation.
 2.3.1 Performance Management
This involves the use of transactional data that exists on the business's internal
information systems to measure performance using predetermined queries (e.g.
sales by customer or sales by market segment). Powerful analytical tools can be
used to obtain more complex queries.
Performance management may use business intelligence tools. These enable users
to generate their own reports and queries and to drill down to obtain more detailed
analysis of the data.

Example 6 Big Data Solution

A retail company trades under three separate brand names. Although the company has collected details
about customer transactions and promotions for many years, this data is held in separate data
warehouses.
The company wants to offer customised promotions to its customers based on their historical purchases
from all three brands. However, because customer data is held in three different data warehouses, this is
a time-consuming exercise.
A big data solution would be to use a software programme to combine historical data from all three
separate warehouses into one source and also to store incoming data from all brands into one location.
This would allow the company to see the complete purchase history of each individual from all three
brands and enable it to make customised offers to customers based on these.

An example of performance management would be a sales analysis by sales person

and region. This would help the organisation identify which regions to focus on and
which sales persons need additional training.

2.3.2 Data Exploration

Data exploration also uses transactional data, but attempts to use it to predict future
behaviour by identifying attributes that managers may not previously have
considered.
Cluster analysis is a technique that may be used to identify:
  customer (market) segments that marketing departments may not even be
aware of;
 behaviours common to groups of people with similar attributes.
Example 7 Cluster Analysis

An analysis of purchases of certain combinations of products, such as unscented lotions and vitamin
supplements, by women was used to determine a "pregnancy prediction score". Promotions on products
for pregnant women and clothes for newborns were then targeted at women based on their scores,
leading to an increase in sales of the advertised products.
 A danger of such a marketing approach is that people may feel that they
are being "spied on" and be put off buying products that are targeted at
events in their lives.

2.3.3 Social Analytics

Social analytics measures non-transactional data, particularly the exposure that
organisations achieve on social media sites (e.g. Facebook and Twitter).
Organisations may use social media to advertise new services and products. Social
analytics typically measures three aspects of the business's presence on social
media:
1. Awareness – of social media content (e.g. the number of times a video posted on
Facebook is viewed);
2. Engagement – activity initiated by the users (e.g. the number of visits to the
page);
3. Reach or word of mouth – the extent to which content is sent by users to other
users (e.g. the number of times an item is shared on Facebook).
Example 8 Clout

Virgin America offered 120 "influencers" free flights on a new route to Toronto in the hope that they would
comment on their flight experience on social media sites (they were not obliged to). The campaign
resulted in high brand awareness of the new route.
Recent developments in social analytics allow organisations to identify high clout
individuals (i.e. people who have a large following on a social media) and whose
messages are shared with others. These individuals are targeted as "influencers" to
help market a brand.
 The disadvantage of social analytics is that measuring awareness and
engagement does not measure the effect that these have on revenue and
profits.

2.3.4 Decision Science

Decision science involves the analysis of non-transactional data for decision making.
For example, releasing ideas about new products and discovering how successful
they might be by analysing discussions about them on social media.
Decision science can be supported by several tools:
 Crowdsourcing – obtaining ideas, services or content by collecting
contributions from a large community or specific group of people (usually
online).
  Textual analysis – a data-gathering process that examines and interprets
the characteristics of narrative or other visual messages.
 Sentiment analysis – a type of textual analysis that aims to analyse the
mood of a community.
2.4 Impact on the Role of the Management Accountant

Data management is becoming a business-critical function as leaders seek ways to

use the resource of big data strategically and unlock the insights that transform
companies – without threatening relationships with customers or exposing
themselves to unacceptable risks.
New technology offers the chance to replace traditional skills. As automation and
self-service data take over some of the traditional roles in internal reporting, the
management accountant’s time is freed up for a more strategic and proactive
organisational role.
Trained in the core skills of gathering, analysing and benchmarking information and
using data in modelling and forecasting, management accountants can provide a
new and critical service: making big data smaller and more structured – distilling vast
amounts of information into actionable insights.
Responsible for the integrity of reports and accounts, management accountants can
help act as custodians of non-financial datasets and set quality and ethical standards
for the information used in making strategic decisions.
Management accountants need to be able to use big data and data analytics:
To offer more specialised decision-making support – often in real time –

and decide when data can most usefully be shared with internal and
external stakeholders.
 To identify risks in real time and evaluate the risks and rewards of long-
term investment in new products and new markets.
Management accountants must find ways:
 To use big data as a measure of organisational performance;
 To make internal datasets more reliable, secure and robust for decision
making;
 To measure the intrinsic value of big data as an organisational asset;
 To extract value from big data through data analytics; and
 To interpret the meaning of big data in visual language that can be used in
executive dashboards.
The trend towards integrated reporting <IR> and the inclusion of non-financial
capitals in company reports and accounts makes adopting this approach more
relevant. It is becoming more necessary to combine hard financial data with softer
and non-financial datasets to provide the bigger picture of performance.

8.2.5 Methods of Data Analysis

2.5 Methods of Data Analysis
Analytics in Finance and Accountancy, ACCA Professional Insights Report, 2020
To date, the approach taken to making sense of the different types of analytics
available to an organisation is a maturity model (Zych 2017, as shown above).
Expectations are moving from use of analytics for descriptive purposes to diagnostic,
predictive and prescriptive uses. This requires users to move through the different
phases of analytics use.

2.5.1 Descriptive Analytics

The commonest type of analytics CFOs and finance team members consider and
use is descriptive analytics. These analytics methods are intended to provide a
concise representation of past and present data.
Descriptive analytics is the analysis of data to observe what has been and is
currently happening. Examples of this could be to analyse data by product, by outlet
and by customer. Such analytics would allow the business leader to observe past
trends, to analyse and classify data in different ways to draw conclusions about the
data which might be relevant to informing strategy or to support or make more
effective decisions, such as minimising risks or exploiting opportunities.

Example 9 Retail Sales

Retail data on the sales, cost of sales (COS) and gross profit margin (GP) in six retail outlets of a r
within each store are tracked over time to establish trends.
By looking at the overall figures for the company as a whole, or even by individual product across
store as a whole, the business leader may not notice any unusual trends or departures from the ex
chart or graph of these measures. This may be seen through the charts below:
 Example 9 Retail Sales

Only by analysing and charting these trends more closely by product in each individual store (such
could the business leader detect if and where there is any specific fraud or loss and such discrepa
more apparent if this type of micro level descriptive analysis is undertaken. In the above example i
problem with Product 2 in Store 6.

In the above example when the trend for Product 2 in Store 6 is examined more closely, it can be
falls from 33% down to about 17% and it is nothing to do with sales which remain constant, but is c
change in COS which rises from just above $800 in periods 1 and 2 to $1000 by period 5. In this c
would be looking at a potential loss or theft of inventory relating to this product and would need to

Often descriptive analytics is enhanced using graphs or charts as commonly

available in spreadsheet packages and pivot tables are particularly useful for
presenting information in different ways. Pivot tables are a powerful spreadsheet tool
which allows the business analyst to reclassify, filter and present information in a
variety of ways so that better visualisation of the data and insights into it can be
achieved.

8.2.6 Alternative Methods of Data Analytics

2.6 Alternative Methods of Data Analytics
Most of the data collected is unstructured (meaning, it doesn’t conform to a
prescribed format that readily lends itself to analysis). Such data is often stored as
images, texts, voice recordings, video, etc.
Certain data analytics procedures are available to process unstructured data and
quantify their inherent attributes for further analysis and insights.

2.6.1 Text Analytics

A process of translating large volumes of unstructured text into quantitative data to
uncover insights, trends, and patterns. This quantified data is often categorized and
visualized in charts and reports.
For example, a firm might perform text analysis on customer feedback that has been
made, quantify key words and topics, and present them in an actionable report (for
example, an insight might be that a large number of customers have used negative
terms when commenting on a specific product feature).
This would also provide source data for sentiment analysis.

2.6.2 Image Analytics

A process of identifying logical information for categorization and analysis from
images. This can range from identifying objects and people from images for
categorization of images (for example, certain gallery apps will categorize
photographs on user’s phones by topics, such as cars or pets), to extracting key
insights from captured images (such as personal identification security through facial
attributes, or detection of cancer through microscope images of cells). Other
commercial applications include quality control (where images taken of product are
examined automatically for defects), or for security (such as automated baggage
inspections at airports).

2.6.3 Video Analytics

Takes image analytics a step further, with analysis across frames of videos. In
additional to image-related analytics, temporal (related to time) insights may be
gathered. An example could be the prediction of social behaviour (identification of
individuals lingering in one place), to predictions of temporal phenomena (such as
observation of vehicle movements to predict traffic conditions).

2.6.4 Voice Analytics

Examines and quantifies logical insights from audio samples. This can range from
phonetic (sound of words) and transcription (voice translated into text), to identifying
sound patterns that can give indicators to emotional state (such as pitch and tone of
voice).
This may assist in improving efficiency where there is a large volume of voice-based
information to be processed (such as a call centre).

2.6.5 Sentiment Analysis

Analysis of various mediums to determine the emotional sentiment prevalent in an
individual or social group. This would include the capability to classify inputs by:
An example would be the analysis of positive or negative sentiment regarding a
firm’s currently pricing, by analysing social media postings and quantifying negative
or positive words.
 Intent (what the individual or group wants to do)
 Desire (what the individual or group wants)
 Context (what the individual or group is talking about)
 Emotional state (what the individual or group feels)

 8.2.7 Ethical Issues regarding Data Analytics

 2.7 Ethical Issues regarding Data Analytics


 Ethical considerations regarding big data is moving beyond regulatory

concerns, recognising that the data belonging to the organisation undergoing
audit needs to be treated with care and respect within the context of an ethical
framework.
 The impact of regulation, legal requirements and ethics becomes difficult to
decouple. while finance professionals abide by a code of conduct, the
situation for analytics in finance is viewed somewhat differently, even by the
professionals themselves. The ethics perspective is almost a given, owing to
the involvement of accountancy and finance professionals, but this underlines
the need for a fundamental rethink of ethics and analytics to make a direct
linkage between the two. The certification of data sets by the finance function,
much as an auditor’s confirmation that transactions have been recorded
accurately or an accountancy professional’s signing off accounts, creates a
direct link with ethics not previously seen in the handling of data.
 Such a sign-off can go so far as including the location of the data and security
level, ensuring that the data is not readily subject to manipulation. Given that
for most organisations data represents a major asset, the involvement of the
CFO and finance team communicates the value of the data and therefore of
the analytics applied to the data. Indeed, the ethical aspect is further
reinforced as this might provide an ideal foundation for determining returns
from investments in analytics projects.
 By focusing on ethics and data from the outset, if any decisions made using
the analytic insights create risk, that risk can be understood and managed.
But it is the use of the analytics that causes the greatest concern and the
public need to trust that any use of their data is ethical and will not impinge on
the civil rights of individuals.
 One major area of concern is whether bias and discrimination are built into
algorithms and artificial intelligence that are in a position to make
recommendations based on social inputs. Although basically an algorithm is
simply step-by-step procedures for accomplishing a task, the advent of
machine learning has complicated matters.
 There is increasing evidence that machine learning algorithms inherent the
biases used in its training. This is particularly true of the training data set is
already biased or skewed in favour or against a specific social attribute
(example, like skin colour, or age).
  It is near impossible to inspect the inherent bias within machine algorithms,
mainly since the evaluation layers of the learning algorithm contain math so
complex and in large volume that it is impossible to document and evaluate.
 Care must be taken by programmers to carefully limit or remove social bias
from training data sets. Steps may be taken by algorithm designers to include
explanations in the process, where the algorithm also produces a report that
indicates how it arrived to a particular conclusion, and what was the
weightage it gave to data attributes that led to that decision.
 Governments have begun to signpost the possibilities and there are some
attempts to regulate the risk. The Algorithm Charter for Aotearoa New
Zealand (New Zealand Government 2020) demonstrates the ethical use of
data in government departments. Other governments are following different
approaches with similar outcomes.
 2.7.1 Professional Scepticism
 The application of professional scepticism is essential in understanding
changes to financial statements, potential risks or errors. Data scepticism or
data curiosity is a key foundation and prompts questions to ask about the
origin of data, and how it is collected. And what might be missing? What
alternative data should we review? For the data scientist and data analyst,
professional scepticism training is a helpful adjunct to using the BI tools and
data technology infrastructure, especially as the complexity of algorithms
increases with the use of predictive and prescriptive analytics.

Exhibit 4 Algorithm Bias

Amazon has disbanded a team that was working on a machine learning hiring tool that vet’s resumes, due
to gender bias against women.
The company’s experimental hiring tool used artificial intelligence to give job candidates scores ranging
from one to five stars - much like shoppers rate products on Amazon, some of the people said.
“Everyone wanted this holy grail,” one of the people said. “They literally wanted it to be an engine where
I’m going to give you 100 resumes, it will spit out the top five, and we’ll hire those.”
But by 2015, the company realized its new system was not rating candidates for software developer jobs
and other technical posts in a gender-neutral way.
That is because Amazon’s computer models were trained to vet applicants by observing patterns in
resumes submitted to the company over a 10-year period. Most came from men, a reflection of male
dominance across the tech industry.
In effect, Amazon’s system taught itself that male candidates were preferable. It penalized resumes that
included the word “women’s,” as in “women’s chess club captain.” And it downgraded graduates of two all-
women’s colleges, according to people familiar with the matter. They did not specify the names of the
schools.

 Treating the analytic computations as black boxes will not be acceptable,

especially in situations reliance is placed on the computation, such as the
sign-off of an audit. Tools must be approved for use with identified information
flows, and a combination of data specialists and finance teams have to work
 together to use the tools and identify insights in the context of multiple client
situations and core processes.
 3.1 Evaluating the Output Reports

 Reports from a management information system may be printed reports, or
may simply be shown on the screen of the user's workstation. Reports may be
short summaries running to one or two pages, such as summarised
statements of profit or loss, or may run to several pages, for example
inventory balance reports.

8.3.2 Presentation of Reports

3.2 Presentation of Reports

3.2.1 General Principles

The following should be considered in relation to the presentation of reports:
 Use of standards. Standards may be contained in a style guide and aim to
ensure that all reports are prepared in a consistent format. This makes it
less likely that managers will become confused by inconsistent treatments
in different reports. Certain standard fields may be defined for all reports
such as:
o Report header.
o Page number (defined as n or N).
o Font size.
o Name of person who extracted the report.
o Date the report was extracted and the effective date of
information (if different).
o End of report – a message stating that the report has
ended.
 The data in a report should be presented in a logical way, which
emphasises the important details. In an aged receivables report, for
example, customer balances might be listed in order of the amount
outstanding, so that the customers with the largest balance are shown
first.
 An appropriate level of precision should be used. In a monthly statement
of profit or loss, for example, it may be appropriate to show all amounts to
the nearest $1,000 or even higher, depending on the size of the company.
However, a monthly report showing costs by employee would probably
need to be shown to the nearest $1.
 Use of sub-headings and appropriate sub-totals to emphasise key
information.
 The use of % makes information in reports much easier to understand. In
a statement of profit or loss, for example, it would be useful to include the
gross profit as a % of sales as well as a monetary amount, and %
increases in revenues and costs are often more meaningful than simply
showing the absolute amounts for the periods under review.
 3.2.2 Executive Dashboards
In order to reduce the amount of paper that is used, many organisations use
"executive dashboards." These are screen reports that include up-to-the-minute
information on certain key aspects of the business. Many such dashboards include
graphics and diagrams, and may support drill down facilities.

Definition

Drill down facility – an interactive feature that allows the user to see more detailed information about a
particular item or number.

3.2.3 Data Visualisation

Definition

Data visualisation – the graphical representation of data in order to interactively and efficiently convey
insights to clients, customers, and stakeholders in general, especially with increasingly large datasets.
 One of the key skills of a data scientist is the ability to tell a compelling
story, visualising data and findings in an approachable and stimulating
way.
 MS Excel, for example, can be used to identify correlations, clusters or
patterns and split data to create a variety of “infographics”, charts and
graphs.
 3.3 Objectives of the Report/Organisation

 The report designer must consider what the report is to be used for. The
monthly management accounts should include information about the
organisation's critical success factors, for example, rather than simply
providing financial information.
 A past exam question required candidates to evaluate the monthly
management report that had been prepared for a restaurant business. One of
the weaknesses was that it only included financial data and did not contain
any information about the level of customer service or customer satisfaction,
even though these are crucial elements in a restaurant business.
 The key principles that should be kept in mind include relevance (information
that managers need to know to perform their tasks), controllability (information
over factors that managers have control over), and timeliness (manager
receives in a timely manner that facilitates decision making).
 In the current era of unified databases and management dashboards, the
report designer might also need to consider what type of information should
be shown in real-time (possibly as a live widget on the manager’s daily
dashboard), or if the information could be collated and compiled into a weekly
or monthly report.

Example 14 Trully

Trully Co is a company that manufactures customized skin care products based on customer selections
from a range of natural active ingredients, and markets them directly to consumers through e-commerce
 Example 14 Trully

platforms.
Currently Trully is experiencing rapid growth as acceptance of its innovative products on the markets, and
Trully has had to manage its production capacity to fill customer orders satisfactorily. Also, there are
significant inflationary pressures on some of the raw materials used in Trully’s products, meaning careful
cost control and procurement strategy is important to prevent erosion of margins.
Competitors have noticed the popularity that Trully enjoys and have started to roll out competing
customizable skincare regimes. Trully needs to monitor its sales effectiveness carefully and react to any
significant drop in sales.
Trully’s managing director has the primary objectives of cost control, observation of the effectiveness of
sales strategies, and throughput to fill customer demands.
Trully’s managing director must handle both production and marketing sides of the firm. He has worked
with his reporting team on a good mix of financial and non-financial measures in various reporting
timeframes.
His daily dashboard would contain key production measures such as inventory levels and prices, work in
progress, and order fulfilment and capacity, while also containing live measures for digital marketing
effectiveness and sales order pipeline, as well as customer satisfaction and retention measures.
His weekly report would contain aggregated data on production and sales variances, as well as
commentary and analysis on any significant exceptions. He also includes a social listening report to
measure how Trully features among the latest trends in skincare in the online communities.
Monthly reports are compilations of product range performance, as well as some information and analysis
on external conditions and competitive trends. It also includes reports and measures for focus group and
test product scores for new products under development, with projected timelines that detail costs,
revenues, and key non-financial indicators to fulfil.

3.4 Needs of the Readers

It is good practice to determine exactly what information the readers of a report want
before designing it. Generally, managers want accurate and timely information
tailored to their needs. The report should also cover the area over which they have
responsibility and should not include data which is not relevant.

3.5 Information Overload

Information overload refers to the difficulty that a manager may have understanding
an issue and making decisions when there is too much information available. It
generally refers to the amount of information (e.g. too many reports or e-mails)
which makes it difficult for managers to reflect and see the "big picture". It can lead
to confusion and missing the important information.
Exam advice

Use the approach that follows for critiquing a report in an exam question.
A good approach to designing a report to avoid this is to consider the following:
 What is the purpose of the report? Is it a high-level report looking at the
strategic performance of the organisation or looking in detail at some
operational aspect?
 If it is a strategic performance report:
o What is the objective of the organisation? This may be
set out in a mission statement.
o The sub-objectives would be outlined by the mission
statement and should be linked to identified critical success
factors (CSFs), achievement of which would be crucial for fulfil
the objectives of the organization. The strategic performance
report should show whether these CSFs are achieved.
o Does it clearly show whether the organisation is
achieving this?
 Is all the information necessary? For example, senior executives are
clearly interested in profit but may not be interested in a detailed analysis
of administrative expenses.
 Is there comprehensive coverage? For example, does the report include
non-financial performance indicators, if relevant?

8.3.6 Use of Graphics and Narrative

3.6 Use of Graphics and Narrative

3.6.1 Graphics
Layout must help users to understand the information presented and to see quickly
the important amounts, trends, results and explanations. Graphical displays can be
used to greatly enhance performance information.
A few principles should be taken into account when designing the graphics of a
report, whether it will be printed or displayed on a computer screen:
 The information contained in the report must be the information that the
users need.
 For consistency, standards should be produced for the whole organisation
(e.g. the use of colours and fonts).
 Graphics should be simple. Too many graphics can lead to confusion and
make understanding more difficult.
Simple graphics include pie charts and bar charts.

Exam advice

Knowledge of these is assumed knowledge from Management Accounting.

3.6.2 Narrative
In addition to numbers and graphs, narrative is often necessary to provide
explanations. For example:
 commentary on performance;
  explanation of unusual trends, changes in trends or deviations from
budgets.
Although narrative can enhance the information contained in the report, it should be
kept relevant and concise. If readers are presented with large amounts of narrative
that contain unimportant information their attention will soon be lost. Again,
information overload should be avoided.
Activity 1 Information from Report

An extract of a report for an inbound call centre is shown below. The report usually
extends over several pages:
Report dated 12/03/20X8 Extracted for 08:00 to 08:31

Date Time Waiting Time Answered by Outcome Duration

12/3 08:00 0:1 Eric Bristow Enquiry 1:12

12/3 08:15 0:03 Jockey Wilson No sale 1:04

12/3 08:16 0:4 Eric Bristow Enquiry 1:12

12/3 08:30 0:4 Keith Deller Quotation 12:50

12/3 08:31 0:5 Tony Eccles Enquiry 1:03

Required:
Suggest ways in which the information in this report extract could be used,
including suggesting the use of graphics and illustrations to highlight
actionable trends. Include references to other sources of data where deemed
necessary.
*Please use the notes feature in the toolbar to help formulate your answer.
 An activity graph can be shown throughout the time day, which could
highlight times of heavy activity. Management could use this information to
ensure enough operators are available during peak times.
 Call outcomes could be classified by name of operator and included on a
report card. This report card should also include the average customer
rating given for interactions with that operator.
 A distribution graph for wait times could be produced, to identify the
average wait time, and deviations. From the report the unit of
measurement is unclear (it would be quite poor performance if had to wait
between 1 minute to 5 minutes for an operator to pick up the phone).
Waiting times could be measured in seconds.
 A distribution graph for duration of call can be produced and classified by
type of call as well. It might be that certain types of calls need more time to
resolve, while others are simple (and could potentially be automated).

8.3.7 Misleading Reports

3.7 Misleading Reports
 Reports may provide a misleading view of performance. The managers preparing
performance reports may misrepresent the performance of their department or
division to show it in a favourable light.

Definition

Misrepresentation – giving a false or misleading account (e.g. creatively reporting results to suggest that
a performance measure is acceptable).

3.7.1 Potential Issues with Numerical Data

It is often assumed that quantitative (numerical) performance information is more
reliable than qualitative information. This is not necessarily the case. Numerical data
can be unreliable or misleading for a number of reasons:
 The data is incomplete (e.g. some product lines are omitted from a
revenue performance report).
 There is too much detail – providing too much detail on marginal issues
can hide the more important points of a report.
 The data is out of date – which is a particular issue in a rapidly changing
environment.
 The data is biased – for instance, if conclusions are based on sample data
and the sample is not random.
 There are inconsistencies in how data has been used – such as if the
basis upon which performance metrics are calculated varies from period to
period.

3.7.2 Selective Use of Measures

Example 15 Funds Management

Advertisements for funds or wealth management typically show how well funds have performed compared
with a market index (e.g. Standard & Poor's 500) in order to persuade potential investors that they can
beat the market. These advertisements are infamous for the tricks used:
 Reporting the performance of a small sample of funds where performance really has exceeded
that of the market over a particular period. If a manager looks after a large number of funds, it is
likely that some will do very well due to good luck rather than to the excellent skills of the
manager.
 Carefully selecting the time period to use for comparison so that a period is chosen when the
performance of the fund exceeded that of the market.
The selective use of performance measures, typically to reflect favourably on
performance, does not show the full story. One commonly used approach in
published financial statements is the use of alternative non-GAAP measures of profit
such as underlying profits, which excludes certain items of expenditure on the
premise that they are exceptional or one-off expenses that do not reflect the entity's
true performance.

3.7.3 Misleading Graphical Tools

 Although graphical tools can be used to add clarity and transparency to a report,
they also can be misused to provide a distorted view.
 One method is to show only a section of the values on a particular axis,
rather than all values starting from zero up to the maximum value in the
data set.
Example 16 Bar Chart

The following bar chart shows the value of revenue in two consecutive years:

Analysis
Although revenue in Year 2 is only 1% higher than that of Year 1, the range of values shown in the y axis
is limited to values close to actual revenue. The comparative sizes of the bars give a misleading
impression that revenue has more than doubled. This clearly distorts the fact that growth has increased by
only 1%

A similarly distorted view can be achieved by using percentage changes (e.g. in

growth) rather than absolute amounts.

Example 17 Distortion

A company's profit after tax was for the last four years, as follows:
Year 1 Year 2 Year 3 Year 4

Profit ($000) 1,000 1,050 1,155 1,300

Analysis
If the profit is plotted on a line chart, growth in profits does not look particularly impressive:
If percentage growth in profits is used as the vertical axis, growth can be made to appear much more
impressive:

3.7.4 Misleading Narrative

Narrative used with the data may be used to mislead. Commentaries may try to play
down the significance of bad performance by focusing the reader's attention on
things that have gone well (e.g. discussing the excellent growth in revenue while
ignoring the poor profit figures).
If non-financial performance indicators are based on surveys (e.g. customer
feedback forms), leading questions may influence the answers resulting in biased
positive responses (e.g. rather than asking, "Were you happy with the service
provided?" ask, "Do you agree that the service was excellent?").
 Online surveys may ask additional questions when a poor score is given, such as,
"Can you please explain why you feel that the level of service was not excellent?"
This may discourage people from giving a score of less than excellent because they
may not want to spend time explaining it.

3.7.5 Unreliable Data

Metrics may be distorted so that they do not show the true situation. Examples
include:
 Selective rather than random sample selection (e.g. only handing out
customer surveys to customers who appear to be enjoying the service);
 Use of data that is not confirmed (e.g. "customer surveys show that our
product is the best" without reference to which surveys were used);
 Use of out-of-date data that may subsequently have been disproved.
A common error, whether accidental or intentional, is to make comparisons without
adjusting the baseline. For example, reporting increasing trends in revenue or profits
without adjusting for inflation.

8.4.1 Aims of IR
4.1 Aims of IR

Definition

Integrated report – a concise communication about how an organisation's strategy,

governance, performance and prospects, in the context of its external environment, lead to the creation
of value over the short, medium and long term.
– The International Integrated Reporting Council
IR aims to fill in the gaps left after an examination of the latest annual report and
financial statements so that existing or prospective investors better understand the
organisation.
The IR Content Elements
Organisational overview and external environment: What does the
A. organisation do and under what circumstances does it operate?

Governance: How does the governance or leadership structure support its

B. ability to create value over time?

C. Business model: What is the business model?

Risks and opportunities: What are the specific risks and opportunities that
affect the organisation's ability to create value over time, and how are they
D. dealt with?

Strategy and resource allocation: Where does the organisation want to go,
E. and how does it intend to get there?
 Organisational overview and external environment: What does the
A. organisation do and under what circumstances does it operate?

Performance: To what extent has the organisation achieved its strategic

objectives for the period and what are the effects on capitals? (Not just
F. financial capital but including manufactured, intellectual and human capital.)

Outlook: What challenges and uncertainties are likely to be encountered and

G what are the potential implications for the business model and
. future performance?

Basis of preparation and presentation: How are issues to be included in

H. the IR determined and quantified or evaluated?
https://studymaterials.accaglobal.com/app/advanced-performance-
management-apm-for-exams-from-september-2023-june-2024#read/section/
842-the-six-4.2 The Six Capitals

The International Integrated Reporting <IR> Framework was first developed by the
International Integrated Reporting Council (IIRC) to provide a foundation of the future
in communicating value creation.

Source: International <IR> Framework (January 2021)

 Sustainable value creation by organisations relies on a broad set of inputs (capitals),
which are increased, decreased, or transformed by the organisation’s activities. The
principle is that organisations are part of an interconnected system, and
understanding how this integration applies to sustainability helps build more resilient
businesses that generate value over time.
Organisations should strive to understand how their operations create and erode
value in these capitals. For example, producing polluting vehicles for sale may
increase financial capital (profit) but erode natural capital (pollution, depletion of
resources).

Capital Description Value Creation Value Erosion

The pool of  Generating

funds profits
available to an  Obtaining  Generating losses
Financial organisation. financing  Bankruptcy

Manufactured
physical  Creating
objects that assets
are available  Maintenance  Destroying/
Manufacture for use by the / scrapping assets
d organisation. rejuvenation  Deterioration

 Creation of
intellectual
Organisation’s property  Piracy
knowledge-  Developmen  Loss of critical
based t of know- knowledge/know-
Intellectual intangibles how how

Competencies
, capabilities,
experience,
and motivation  Increase in  Upheaval and chaos
of the morale  Loss of morale
organisation’s  Alignment of  Resistance to
Human people interests change

Relationships  Collaboratio
between n
communities,  Embracing
stakeholders, diversity  Prejudice
and other  Social  Bias
Social networks acceptance  Social stigma

Natural Renewable  Improving  Pollution

and non- the natural  Global warming
renewable environment  Ecological
 environmental  Increasing
resources biodiversity destruction
An organisation polluting the local environment may generate profits (financial) but
pollute the local environment (natural) and may suffer repercussions from the
disadvantaged local community (social).

4.3 Role of the Management Accountant

Exam advice

Integrated reporting should not be thought of as an entirely separate topic as much of the management
accountant's involvement in integrated reporting amalgamates techniques discussed in other sections of
the APM syllabus.
The traditional role of the management accountant is to provide internal reports for
management rather than to provide reports for external stakeholders. However, the
skills of the management accountant and the tools used in performance
management are ideal for helping in the preparation of the integrated report. The role
of the management accountant in supporting the preparation of an integrated report
can be matched with the content element categories as follows:
 Strategic management accounting aims to provide information to help
senior management develop and monitor strategy, using stakeholder
analysis or PEST analysis, say. This directly matches the requirement for
content element A (organisational overview and environment).
 Management accountants assist decision makers in making decisions
under risk. Dealing with risk is covered in content element E (strategy and
resource allocation).
 SWOT analysis (see Chapter 1) is also relevant to content element D
(risks and opportunities).
 Much of the work of the management accountant, and syllabus area A of
APM, deals with allocation of resources. This is relevant to content
element E (strategy and resource allocation).
 Content element F (performance), which measures the performance of the
organisation, covers the core part of the work of the management
accountant, as covered by areas C and D of the APM syllabus.

Defining the challenges and uncertainties facing the business, which is

covered in content element G (outlook) of the report, is an area for business

analysts. Management accountants may have a role in collating 8.4.4 Information

about Performance
4.4 Information about Performance

An IR contains qualitative and quantitative information about performance.

This may include:
 Quantitative indicators relating to targets and risks and opportunities
(including explanations of their significance, implications and methods and
assumptions used in compiling them).
 Linkages between:
o past and current performance; and
o current performance and the organisation's outlook.
 KPIs that combine financial measures with other components (e.g. the
ratio of greenhouse gas emissions to sales).
 Explanation of regulatory matters that have a significant effect on
operations, for example:
o a constraint on revenues as a result of regulatory rate
setting (e.g. on public utilities such as electricity); or
o significant effects of non-compliance with laws or
regulations.
The discussion of the potential implications for future performance may include:
 The external environment and risks and opportunities (with an analysis of
how these could affect the achievement of strategic objectives).
 The availability, quality and affordability of capitals used (e.g. continued
availability of skilled labour or natural resources).
 Lead indicators and sensitivity analyses.
 If forecasts or projections are included in the IR, a summary of
assumptions.
 Comparisons of actual performance to previously identified targets to help
evaluate the current outlook.
 information about the external environment to assist in this.

8 Summary and Quiz

Summary and Quiz

 Various features of an organisation, such as its size and structure, will
affect the recording and processing methods it uses.
 IT developments, including cloud technology, influence management
accounting systems.
 Business performance is improved by instant access to data using, for
example, CRM systems and AI.
 There are difficulties in recording and processing qualitative data,
 It is important to ensure that reports do not mislead users.
 The increase in use of the Internet and social media has led to a huge
increase in data available to organisations. Data analytics refers to the
analysis of this big data to reveal trends and patterns that may help a
business to improve its performance.
 Various methods are available for data analytics. Users should have a
strategy to approach data analytics, with emphasis on good data
governance and ethics.
 An integrated report is a concise communication about how an
organisation's strategy, governance, performance and prospects create
value.
 The management accountant can provide a significant amount of key
information for an integrated report.