Topic 1:

Introduction to Management Accounting

Systems (MAS) and the Importance of
Business Strategy to MAS Design
Objectives

On completion of this topic you should:

• Understand why organisations need Management

Accounting Systems (MASs)

• Understand the nature and purpose of a MAS

• Understand how MAS’s support the management of the

elements of an organisation

• Understand how MAS’s influence behaviour

2
Objectives cont.

• Understand the different levels of strategy

• Understand the elements of business strategy

– Business planning
– Competitive advantage

• Understand that MAS’s must be designed to suit different

missions and competitive advantage options
– Types of information
– Emphasis on different tools/techniques
– Performance measures and rewards
– “one size does NOT fit all”

3
What is an MAS?

MAS - The formal procedures and routines an

organisation puts in place to collect and communicate
information in order to support the implementation of
business strategy. This information is used to assist:
o effective planning and monitoring
o effective management control
o quality decision-making

• Some examples of these procedures and routines?

– Taught in ACCT1060 Management Accounting and Business and
ACCT1064 Cost Analysis and Applications
– Most of what you were taught in these courses results in the
provision of information and would form part of an MAS
4
What is an MAS?

MAS’s provide information to assist the following functions

• Effective planning and monitoring

– Planning: the development of plans that support the strategic
objectives of a business
– Monitoring: the checking of performance to ensure plans are being
met

• Effective management control

– the means by which managers influence other members of the
organisation to perform in ways that support the organisation’s
strategies

• Quality decision making

– Decisions are made that support achievement of strategic objectives
5
Why do organisations need MAS’s?

• Because the elements that make up organisations need to

be managed and organised
– Very few organisations will be able to achieve strategic
objectives without some formal process to manage the
complex and diverse elements it comprises

– The MAS provides relevant, timely information essential for

successful INTERNAL management

– Internal reporting systems are MAS

6
Examples of internal and external reports

MAS - Our focus

7
What is an MAS?

• The common theme in all definitions of MAS is:

“Supporting Strategy”
• The fundamental role of an MAS is to provide
information to support strategy implementation and
achievement
• MAS support the management and coordination
(control) of people, activities and associated resources

• The 3 elements are not independent of each other

– i.e. Individuals use resources to carry out the activities
that make up their job

8
MAS to manage and coordinate

1. Individual Personnel
– with different skills
– with different motivations for being part of the organisation
– with different values

2. Scarce Resources
– inputs of production: land (natural resources) labour & capital
– Organisations must make choices between different items
because the resources necessary to fulfil their strategies are
limited.

3. Complex and Diverse Activities

9
MAS to manage and coordinate

Planning
o Plans should indicate how individuals, resources and activities
will be coordinated

o An example of an MAS procedure that supports the planning

function?
– Preparation of a Production Cost Budget

Monitoring
o Will check whether individuals used resources effectively to
carry out the activities they were meant to

o An example of an MAS procedure that would support the

monitoring function?
– Variance Analysis based on the Production Cost Budget
10
MAS to manage and coordinate

Management Control
o Individuals should be influenced to use resources to carry out
activities in ways that support strategy achievement
o An example of an MAS procedure which supports this function?
– Performance Measurement

Decision Making
o Individuals make quality decisions about how to use resources
and which activities to carry out
– CVP Analysis

11
Why MAS’s in addition to FAS’s?

• Why can't businesses use Financial Accounting

System (FAS) information for internal management?

• Financial Accounting information has a different

purpose
o Used in the preparation of Financial Reports for business
governance NOT internal management
o Financial Accounting information is too aggregated, not
timely, often not relevant for internal management

• Therefore internal management requires it’s own

Accounting System - the MAS
12
The role of MAS’s in influencing behaviour

• Influencing the behaviour of individuals is one of the most

important but difficult tasks in an organisation

• How can behaviour be influenced?

– In two broad ways
o Directional influence on behaviour
o Motivational influence on behaviour

13
Directional influence

Directional influence on behaviour

• MAS’s can direct individuals to towards behaviours valued by
the organisation (and away from behaviours not valued) by:
– Successfully communicating organisational
goals/objectives

– Providing performance targets that reflect valued

behaviours

– Providing information to support decision making and

target achievement

– Providing feedback on behaviour

14
Motivational influence

• Motivational influence
– MAS’s can motivate individuals to actually undertake
valued behaviours by:
▫ Providing performance targets that are easily understood
and challenging but achievable
▫ Rewarding target achievement

Creating “GOAL CONGRUENCE”

• Thus, MAS design is very important

15
 Mapping MAS design

Business Strategy
(Business planning and competitive advantage)

Key Success Strategic Performance

Factors Objectives

Design of Management
Accounting System

These concepts are detailed in turn over the next few slides
01/06/2022RMIT University©2012
School of Accounting/College of Business 16
Business Strategy

• A number of different concepts of “Strategy” exist.

• For instance
– Corporate strategy
o Concerned with where to compete
o Which industry/ies should we be in

– Business (unit) strategy

o Concerned with how to compete to gain competitive
advantage in chosen industry/ies

17
Business (unit) strategy

Two elements of business strategy that are useful

when designing MAS’s

Business (unit) planning

– The approach by which a business intends to achieve its
strategic objectives
o Hold, Build, Harvest, Divest (Boston Consulting Group)

Basis of competitive advantage

Cost leadership Differentiation

18
Business planning

• Build
– Objective is to increase market share

• Hold
– Objective is to protect market share

• Harvest
– Objective is to maximise short-term profit

• Divest
– Objective is to withdraw from the business

19
Business planning

Relative Market Share

(cash source)
High Low
Market growth rate

High
“Star” “Question mark”
(cash user)

Plan = Hold Plan = Build

“Cash cow” “Dog”

Low Plan = Harvest Plan = Divest

Boston Consulting Group Model

20
Different business plans and MAS design

Business Planning (build, hold, harvest, divest) differ

on a number of dimensions (in addition to KSF’s and
performance objectives and goals), influence MAS design
• For example:
– Degree of environmental uncertainty
– Market share expectations
– Significance of externalities (factors outside the control of
the organisation
– Time span focus for performance measurement
– Importance of capital investment decisions
– Importance of resource allocation decisions

21
Business competitive advantage

• The way in which a business intends to achieve its plans

• Generic Competitive Advantage options

– Cost Leadership

– Differentiation

– Niche Market

22
Cost leadership for competitive advantage

• Cost leadership
– achieving low costs relative to competitors

• How does a company achieve low costs?

– Economies of scale
– Productivity and efficiency improvements
– Elimination of waste
– Tight cost control

• Examples of cost leaders?

23
Differentiation for competitive advantage

• Differentiation
– offering products and services that are perceived by
customers as being superior and unique relative to those
of its competitors

• Could differentiate based on -

– Brand loyalty
– Function
– Image
– Customer service
– Quality

• Examples of product differentiators?

24
Niche market for competitive advantage

• Niche markets

– smaller, targeted customer group

• May have differentiation or cost leadership strategy

• Examples of niche marketers?

25
Competitive advantage and MAS design

Porter’s Five Forces model (see next slide) highlight the

key influences on company strategies
Thus, Cost Leaders and Differentiators differ on a
number of dimensions which influence MAS design. i.e.:

– Importance of cost management vs other factors (e.g. quality)

– Degree of environmental uncertainty
o Product innovation
o Breadth of products

– Importance of marketing

– Importance of customer perceptions

26
SWOT analysis

27
PESTEL analysis

28
Porters competitive forces model

29
Business competitive advantage

Superior
(High differentiation) Differentiation Cost-cum-
Advantage Differentiation
Relative Advantage
Differentiation
Position
“Stuck-in-the Low-cost-
Inferior -middle” Advantage
(Low differentiation)
Inferior Superior
(High costs) (Low costs)
Relative Cost
Position
30
Differences in Business Strategies

Different Business Strategies may vary along several

dimensions, which influence MAS design

Two fundamental dimensions are:

• Key Success Factors (KSF’s)
– the factors that each organisation in an industry must be
able to perform successfully in order to compete and
achieve strategy

• Strategic Performance Objectives

– ends/results that management desires to achieve in
implementing business strategy

31
 KSF’s for Cost Leaders and Differentiators

Note Differentiator in this example differentiates on product quality

Cost Leader Differentiator

Strategic Performance Strategic Performance
KSF’s KSF’s
Objectives Objectives
Continuous cost
Cost control Product quality Zero defect rates
improvement
Selling price lower than Premium selling price
Selling price Selling price
competitors (high profit margin)
Ability to Customer perceives
maintain high Increasing market share Marketing product quality
sales volume uniqueness
Optimised value Minimal waste, exploitation Maximise repeat
Buyer loyalty
chain of economies of scale customers

01/06/2022RMIT University©2012
School of Accounting/College of Business 32
Key success factors and MAS design
• KSF’s represent the most important areas on which an
MAS should focus its procedures/routines/techniques
for:
– Planning
– Monitoring plans
– Evaluating performance
– Comparing performance against competitors
– Directing/motivating behaviour
– Providing feedback
– Rewarding performance
• Can’t measure everything! MAS design should to be
directed and contained to key activities reflected by
KSF’s
33
 The importance of understanding
business strategy for MAS design

Remember
• An MAS should be unique and specific to its
organisation’s business strategy.
• Different Business Strategies have different KSF’s and
Strategic performance objectives

Therefore we cannot design one MAS to suit

ALL businesses

A business’s MAS needs to be custom-designed

to suit its business strategy
01/06/2022RMIT University©2012
School of Accounting/College of Business 34