MANAGEMENT AND COST ACCOUNTING

SIXTH EDITION

COLIN DRURY

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

Part Four: Information for planning, control & performance Chapter Sixteen: Management control systems

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury

6th edition.1a Different types of controls • Action (or behavioural) controls • Personnel and cultural (or clan and social) controls • Results (or output controls) Action (or behavioural) controls • Consist of: • Behavioural constraints • Preaction reviews • Action accountability • Focus should be on prevention rather than detection controls. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . Management and Cost Accounting.16.

personnel and cultural controls • Social controls involve selection of people who have been socialized into adopting particular norms of behaviour. • In recent years there has been a greater emphasis on cultural controls in the form of employee empowerment. training and job design). social norms and beliefs that are shared by members of an organization and that influence their actions. • Cultural controls represent a set of values. • Personnel controls build on employees natural tendencies to control themselves (Emphasis is on selection. 6th edition.16.1b Social. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . Management and Cost Accounting.

2. 6th edition. Management and Cost Accounting. Providing rewards or punishments. Measuring performance.16. • Cybernetic systems involve feedback controls (actions after the events) but ideally control should be based on control actions before the events. Cybernetic control systems (see above diagram) • Results controls resemble a cybernetic (mechanical) control system.2 Results or output controls • The focus is on reporting information about the outcomes of work effort. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . 4. Establishing performance targets. Establishing performance measures that minimize undesirable behaviour. 3. • Results controls involve the following stages: 1.

3 Harmful side-effects of controls 1. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .Cultural controls: • Lack of goal congruence where group goals do not coincide with firm goals Management and Cost Accounting.e. Occurs when controls motivate employees to engage in behaviour that is not organizationally desirable (i.16. • Subject to data manipulation. 2.4) • Focuses mainly on quantifiable and easily measurable items. Results controls: • Encourages individuals to focus only on what is measured.system leads to a lack of goal congruence). Action controls: • May discourage creativity 4.regardless of whether it is organizationally desirable (see sheet 16. • Can lead to negative attitudes towards the control system. 3. 6th edition.

4 Fig.16.16. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .2 The measurement reward process with imperfect measures (Source: Otley (1987) Management and Cost Accounting. 6th edition.

16. • Measurement problems do not apply.3. Results controls • Can be applied where knowledge of what actions are desirable is lacking. • Focus is on outcomes (individual autonomy is not restricted).5 Advantages and disadvantages of different types of controls Personnel/cultural controls • Few harmful side-effects • Inexpensive to operate • Appropriate only in certain circumstances Action controls • Direct link between control mechanism and the action. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . Management and Cost Accounting. 6th edition. • Not feasible where cause-and-effect relationships are not well understood or easily observable. • Subject to limitations described on sheet 16. • Best suited to stable situations.

Investment centres Management and Cost Accounting. Revenue centres 3. Profitability and liquidity are essential for company survival. Cost or expense centres (Two types:standard cost centres and discretionary cost centres). 3. Profit centres 4. • Four types of responsibility centres: 1.6 Management accounting control systems (MACS) • Tend to be the predominant controls in most organizations because: 1 Monetary measure provides a means of aggregating results from dissimilar activities. 4. Measuring results in financial terms enables managers to be given more autonomy. 2. Responsibility accounting • Responsibility accounting is a fundamental part of the MACS. 6th edition. Financial measures enable a common decision rule to be applied. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .16. 2.

6th edition.budgeting and long-term planning) for establishing performance expectations.g. Responsibility accounting • Responsibility accounting assigns differences from the performance target to the individual who is accountable for the responsibility centre. Formal planning processes (e. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .7 MANAGEMENT CONTROL SYSTEMS The nature MACS • Two core elements: 1. 2.16. Management and Cost Accounting.

4. Determining how much influence managers should have in the setting of targets.7b • MACS process involves: 1. Measuring performance.the controllability principle). 3. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . • Issues that must be addressed by responsibility accounting include: 1. 6th edition. Management and Cost Accounting. 3. • Responsibility accounting is implemented by issuing performance reports similar to that on sheet 16. 2. 2. Analysing variances and taking remedial actions. Determining how challenging the targets should be.8.e. Comparing performance against target. Setting performance targets.16. Distinguishing between controllable and non-controllable items (i.

16. 6th edition.8 A typical performance report Use overhead as transparency Management and Cost Accounting. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .

Acts of nature (Managers normally protected from them). Economic and competitive factors (Because managers can respond to some of these changes most MACS do not shield managers completely from them). 2. Interdependencies where outcomes are affected by other units within the organization: • Pooled interdependencies • Sequential interdependencies • Reciprocal interdependencies Management and Cost Accounting. 3.16. • Implemented by either eliminating uncontrollables or reporting controllable and uncontrollable items separately.9a The controllability principle • Principle advocates that it is appropriate to charge to a responsibility centre only those costs that can be influenced by the manager of the responsibility centre. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . • Types of uncontrollable factors: 1. 6th edition.

Variance analysis 2.9b • Adjustments for the distorting effects of uncontrollables can be made either before or after the measurement period. Flexible performance standards (e. • Adjustments before the measurement period: 1.16. Insurance • Adjustments after the measurement period: 1. Specify which budget line items are uncontrollable (eliminate or report separately in performance report).g. 6th edition. Relative performance evaluations 4. Subjective performance evaluations Management and Cost Accounting. 2.flexible budgeting and ex post budget adjustments) 3. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .

10 An example of flexible budgeting Budgeted activity = 20.000F • Ensures that managers are accountable for the conditions applying during the period and not those envisaged when the budget was set.000 × £5 =£120.16.000 units Budgeted unit variable cost =£5 Actual activity = 24.000 units Actual variable costs = £105. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .000 × £5 =£100.000 Reported variance £15.000 Flexible budget 24. 6th edition.000 Actual cost £105. Management and Cost Accounting.000 Original fixed budget 20.

16. Management and Cost Accounting. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .11a Guidelines for applying the controllability principle • Price and quantity of service controllable = Controllable expense • Quantity controllable but not price = Manager accountable for difference between (actual quantity × budgeted price) and (budgeted quantity × budgeted price) • Quantity and price not controllable = Non-controllable expense • General principle = Hold managers accountable for performance areas you want them to pay attention to. 6th edition.

ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . • Hypothesized relationships suggest that budget level that motivates best performance is unlikely to be achieved most of the time ( do not adopt punitive approach for adverse variances) Management and Cost Accounting. • Level of budget difficulty should be related to task uncertainty. • Literature identifies a theoretical relationship between budget difficulty. aspiration levels and performance (see slide 16.11b Determining how challenging the targets should be • A clearly defined quantitative goal is likely to motivate higher levels of performance.12).16. 6th edition. • Targets must be accepted to motivate managers to achieve higher levels of performance.

16. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . 6th edition.12 The effect of budget difficulty on performance (Otley 1987) The effect of budget levels on aspiration and performance (Source: Hofstede 1968) Management and Cost Accounting.

Determining how much influence managers should have in setting standards • Advantages of participation in the setting of performance standards: 1.16.achievement and self-esteem). ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . 6th edition. Targets more likely to be accepted 2. • Shields managers from adverse impact of environmental changes. • Alleviates harmful side-effects of controls. • Psychological benefits (e.13a Arguments in favour of setting highly achievable budgets • Conflict between planning and motivational purposes. Reduces negative attitudes and dysfunctional behaviour Management and Cost Accounting. Reduces the information asymmetry gap 3.g.

3. Budgetee has the opportunity to negotiate lower targets. 6th edition. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . 2. A top down approach may be preferable where a large number of similar units exist. Personality variables: • Authoritarianism • Locus of control 2. Depends on personality traits and work situation.16. • Factors influencing the effectiveness of participation: 1. Work situation 3. Management and Cost Accounting. Job difficulty • Limitations on the positive effects of participation: 1.13b • Empirical studies provide conflicting evidence on the effectiveness of participation.

A non-accounting style • Hopwood ’s findings Style of evaluation BudgetProfitconstrained conscious Involvement with costs Job-related tension Manipulation of accounting information Relations with superior Relations with colleagues High High Extensive Poor Poor High Medium Little Good Good Nonaccounting Low Medium Little Good Good Management and Cost Accounting.16. A profit-conscious style 3. A budget-constrained style 2. 6th edition.14a Side-effects arising from using accounting information for performance evaluation • Hopwood observed three different styles of managerial use of accounting information for performance evaluation: 1. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury .

Management and Cost Accounting.14b • Otley replicated Hopwood ’s study and found no significant differences in terms of budget-constrained and profit-conscious styles in terms of undesirable behaviour. ISBN 1-84480-028-8 © 2000 Colin Drury © 2004 Colin Drury . 6th edition.16. • Conflict in findings attributed to differences in managerial interdependency and task uncertainty.