Chapt

er5:Fi
nanci
alRepor
ti
ngandManagementRepor
ti
ngSy
stems

5.1. Dat aCodingSchemes

Firmsprocesslargev olumesoft r
ansact
ionst hataresi
milarinthei
rbasicattr
ibutes.Forinst
ance,
af i
rm’
saccount sr eceivable(
AR)f i
l
emaycont ai
naccountsforseveraldi
fferentcustomer swith
thesamenameandsi milaraddr
esses.Topr ocesstr
ansactionsaccurat
elyagai nstthecorrect
accounts,thef i
rm mustbeabl etodistinguishonecust omer’saccountt oot herscustomers’
account.Thus,thist askbecomespar t
icular
lydiffi
cul
tast henumberofsi mi l
arattri
butesand
i
temsi ntheclassincrease.

Uncodedaccounttakesagr eatdealofr ecor

dingspace,istimeconsumi ngt orecord, andi s
obvi
ouslypr
onetomanyt ypesoferr
ors.Theseproblemscanbesol ved,
oratleastgreat
lyreduced,
byusingcodest
orepresenteachit
em intheinventoryandsuppl
ier
,customer,employeeandot her
account
s.Usesofdatacodingi
nAccount i
ngInformationSy
stems(AIS)areto:

a.Concisel
yr epresentl arge amountsofcompl exi nfor
mation t
hatwoul d ot
her
wise be
unmanageabl e.
b.Provi
deameansofaccount abi
l
ityoverthecompl et
enessofthetransact
ionspr
ocessed.
c.I
denti
f yuni
quet ransactionsandaccount swi
thinafile.
d.Supporttheauditfunct i
onbyprov i
dinganeffecti
veaudittr
ail
.

Thefoll
owingdi scussi
onexaminessomeoft hemor ecommonl
yusedcodi
ngt
echni
quesand
expl
oresthei
rrespectiv
eadv
antagesanddi
sadv
antages.

5.
1.1.Sequenti
alCodes
Sequenti
alcodesrepresenti
temsi nsomesequent i
alorder(ascendingordescending).Acommon
appli
cati
onofnumer i
csequentialcodesistheprenumberingofsourcedocument s.Duringprint
ing,
eachhard-copydocument sgivenauni quesequentialcodenumber .Thisnumberbecomest he
tr
ansacti
onnumbert hatall
owst hesystem totr
ackeacht ransact
ionprocessedandt oidenti
fyany
l
ostorout -
of-
sequencedocument s.Digit
aldocumentsaresi mil
arl
yassignedasequent ialnumber
bythecomput erwhentheyarecreated.

Adv antages:Ift
het r
ansact
ionpr ocessi
ngsy st
em detectsanygapsi nthesequenceoft ransaction
number s,i
tal
ert
smanagementt ot hepossibil
i
tyofami ssingormi spl
acedtransact
ion.Byt racing
thet ransacti
onnumberbackt hrought hestagesi nthepr ocess,managementcanev entuall
y
determi nethecauseandef fectoftheer r
or.Withoutsequent
ial
lynumber eddocument s,problems
ofthissor tar
ediff
icul
ttodetectandr esolv
e.

Disadvantages:Sequenti
alcodescarrynoinf
ormat
ioncontentbeyondtheirorderi
nthesequence.
Also,sequenti
alcodingschemesar edif
fi
cul
ttochange.Insert
inganew i t
em atsomemi dpoint
requir
esrenumber i
ngt hesubsequentit
emsintheclassaccordi
ngly.I
napplicati
onswhererecord
typesmustbegr oupedt oget
herlogi
call
yandwhereadditi
onsanddel et
ionsoccurregul
arl
y ,t
his
codingschemei sinappropri
ate.

5.
1.2.BlockCodes
Anumer i
cblockcodeisav ar
iat
iononsequenti
alcodi
ngthatinpartr
emedi
esthedisadvant
ages
j
ustdescri
bed.Thi
sapproachcanbeusedt orepr
esentwholecl
assesofi
temsbyrestri
cti
ngeach
Page1of1
cl
asstoaspecifi
crangewi t
hinthecodi
ngscheme.Acommonappl
i
cat
ionofbl
ockcodi
ngi
sthe
const
ruct
ionofachartofaccounts.

Awel l
-designedandcompr ehensiv
echar tofaccount
sisthebasi
sforthegener
alledgerandis
thuscri
ticaltoafi
rm’sfi
nancialandmanagementr epor
ti
ngsyst
ems.Thefol
l
owingtablepresent
s
anexampl eofaccountsusi
ngbl ockcodes.

AccountRanges: Char
tofAccount
s

100 Curr
entAssets Cur
rentAssets
200 Fi
xedAsset s 110 PettyCash
300 Li
abil
it
ies 120 CashinBank
400 Owner'sEquit
y 130 AccountsRecei
vabl
e
500 Revenue 140 Invent
ory
600 Operati
ngExpense 150 Suppli
es
700 CostofSales
Fi
xedAssets
Sequent
ial
Code 210 Land
220 Buil
dings
Bl
ocki
ngCode 230 PlantandEqui
pment

Li
abi
li
ti
es
310 Account
sPayabl
e
320 NotesPayabl
e

Owner
'sEquit
y
410 Capit
alStock
420 Retai
nedEarnings
● ● ●
● ● ●

Advantages:Blockcodi ngal
lowsf ortheinser
ti
onofnewcodeswi thinablockwithouthavi
ngt o
reor
ganizetheent i
recodingstr
ucture.Forexample,i
fadver
ti
singexpenseisaccountnumber626,
thefir
stdigi
tindicatesthatt
hisaccountisanoper ati
ngexpense.Asnewt ypesofexpenseit ems
areincurr
edandhav etobespeci f
ical
lyaccountedfor,t
heymaybeaddedsequent ial
l
ywithi
nt he
600accountclassifi
cati
on.Thisthree-
digi
tcodeaccommodat es100i ndi
vi
dualit
ems( X00through
X99)wi t
hineachbl ock.Obvi
ously,themor edi
gitsinthecoderange,themor eit
emst hatcanbe
repr
esented.

Disadvant
ages:Aswi ththesequent ialcodes,theinfor
mat
ioncont
entofthebl
ockcodeisnot
readi
lyappar
ent.Fori
nstance,accountnumber626meansnot hi
ngunt
ilmat
chedagai
nstt
hechar
t
ofaccounts,
whichidenti
fi
esitasadv erti
singexpense.

5.1.3.Alphabet
icCodes
Alphabeti
c codes ar
e used formanyoft he same purposes as numer
ic codes.Alphabeti
c
character
smaybeassi gnedsequent
ial
l
y(i
nal
phabeti
calor
der)ormaybeusedinbl ockt
echnique.

Advantages:Thecapacit
ytorepresentl
argenumber
sofitemsisincr
easeddramatical
lythr
ough
theuseofpur ealphabeti
ccodesoral phabet
icchar
acter
sembedded within numericcodes
(al
phanumericcodes)
.Theearli
erexampleofachartofaccount
susingathree-
digitcodewitha
Page2of2
singlebl
ockingdi gitli
mitsdatar epresentati
ont oonly10bl ocks ofaccounts—0t hrough9.Using
alphabet
icchar actersforblocking,howev er
,increasesthenumberofpossi bleblockst o26— A
throughZ.Fur t
her more,whereast het wo-digitsequent
ialportionofthatcodehast hecapacit
yof
2 2
only100i t
ems( 10) ,atwo-posi
tional phabeticcodecanr epresent676items( 26) .Thusbyusing
alphabet
iccodesi nt hesamet hree-digitcodingspace,weseeageomet r
icincr
easei nthepotenti
al
fordatarepresentation(10blocks×100i t
emseach)=1, 000i temsto (
26bl ocks×676i tems
each)=17, 576items.

Disadv
ant
ages:Thepr i
marydrawbackswit
halphabet
iccodingare(1)aswi t
hnumeri
ccodes,
therei
sdi
ffi
cul
tyrat
ionali
zingt
hemeaningofcodesthathavebeensequent
ial
l
yassi
gnedand(2)
userst
endtohavediff
icult
ysor
ti
ngrecordst
hatar
ecodedalphabet
ical
l
y.
5.2. TheGener alLedgerSy stem ( GLS)
Transacti
oncy clesprocessi ndi
vidualevent
st hatar erecordedi
nspeci
alj
ournalsandsubsi di
ary
accounts.Summar i
esoft hesetransacti
onsflowi nt
ot heGLSandbecomesour cesofinputforthe
managementr eport
ingsystem (MRS)andf i
nancialreport
ingsyst
em.Thebul
koft hefl
owsi ntothe
GLScomef r
om t hetransactionprocessingsubsy stems.GLSkeyelementsar ejour
nalvoucher,
GLSdat abase,andGLSpr ocedur es.

5.2.
1.TheJour nalVoucher
Thesour ceofinputtothegeneralledgeristhejournalvoucher.Ajournalvoucher,whichcanbe
usedtor epr
esentsummar iesofsimilart
ransact
ionsorasi ngleuniquetransact
ion,ident
if
iesthe
fi
nancialamountsandaf f
ectedGLaccount s.Rout i
net r
ansacti
ons,adjusti
ngentri
es,andcl osi
ng
entr
iesareallent
eredint
othegeneral l
edgervi
ajournalvouchers.

5.2.
2.TheGLSDat abase
TheGLS databaseincludesav ari
etyoff
il
es.Wher
east
hesewi
l
lvar
yfr
om f
ir
mtof
ir
m,t
he
fol
l
owingexamplesarerepresent
ati
ve.

 Thegener alledgermast erfi

lei
sthepr i
ncipalfi
leintheGLSdat abase.Thisfileisbasedon
theor gani
zation’schar
tofaccount s.Eachr ecordinthegener alledgermast eriseithera
separateGLaccount( f
orexample,sales)orthecont r
olaccount( suchasAR—cont r
ol)fora
subsidiar
yledgeri nt
hetransact
ionprocessingsy st
em.Fi gure1i l
lustr
atesthestruct
ureofa
typi
calGLmast erfi
l
e.TheFRSdr awsupont heGLmast ertopr oducethef ir
m’sfinancial
stat
ement s.TheMRSal sousesthisfi
letosuppor ti
nternal i
nfor
mat ionreport
ing.

Account Account AcctCl

ass Nor mal Beginni
ng Total Total Current
Number Descr i
pti
on A=Asset Balance Balance Debit
s Credi
ts Bal
ance
L=Liab D=Debi t Thi
s This
R=Rev C=Cr edit Peri
od Peri
od
E=Expense
OE=Equit
y
Fi
gure1:RecordLayoutf
oraGeneralLedgerMasterFil
e

 Thegener
alledgerhi
stor
yfil
ehasthesamefor
matastheGLmaster
.It
spr
imar
ypur
posei
s
topr
ovi
dehistori
cfi
nanci
aldataf
orcompar
ati
vefi
nanci
alr
epor
ts.
 Thejournalvoucherfi
leisthet
otalcoll
ect
ionofthejournalvouchersprocessedi nt
he
cur
rentperi
od.Thisf
il
eprovi
desarecor
dofallgener
all
edgertransact
ionsandreplacest
he
Page3of3
 t
radi
ti
onal
gener
alj
our
nal
.
 Thej ournalvoucherhistoryfi
lecontainsjournalvouchersforpastper i
ods.Thishistori
c
i
nformat i
onsuppor t
smanagement ’
sst ewar
dshipr esponsi
bil
it
yt oaccountf orresource
uti
l
izati
on.Botht hecurr
entandhi st
ori
cjournalvoucherfi
lesareimportantl
inksint
hef i
rm’s
audittr
ail.
 The responsibil
itycenterfil
e contai
nst her evenues,expendit
ures,and otherresource
uti
l
izati
ondat aforeachresponsibil
i
tycenteri
nt heorgani
zati
on.TheMRSdr awsupont hese
dataforinputinthepreparat
ionofresponsibi
l
ityreport
sformanagement .
 Final
ly,t
hebudgetmast erfi
lecontainsbudgetedamountsforrevenues,expendi
tur
es,and
otherresourcesforr
esponsi
bil
it
ycent er
s.Thesedata,i
nconjunct
ionwiththeresponsi
bil
it
y
centerfi
le,aret
hebasisforr
esponsibil
it
yaccount
ing.

5.2.3.GLSPr ocedures
Cert
ainaspect sofGLSupdat eproceduresperf
ormedaseitherasepar at
eoper at
ionorint
egrat
ed
wit
hint ransacti
on processi
ng systems.Howev er
,the i
nterr
elati
onship bet
ween the GLS and
fi
nancialreporti
nginvolvesaddit
ionalupdatesintheform ofr ever
sing,adjust
ing,andclosi
ng
entr
ies.

5.3.TheFi nanci alReporti

ngSy st
em
Thel aw di
ctatesmanagement ’
sr esponsibi
li
tyforprov
idi
ngst ewardshi
pinf
ormat i
ontoexter
nal
par t
ies.Thisr eport
ingobligati
oni smetv i
at hefi
nanci
alreporti
ngsy st
em (FRS).Muchoft he
i
nf ormationpr ovi
dedtakest heform ofstandardfi
nanci
alstat
ement s,t
axret
urns,anddocuments
requiredbyot herregulat
oryagencies.

5.3.1.FinancialReporti
ngProcedures
Fi
nancialrepor
tingisthefinalstepi
ntheov eral
laccount
ingprocesst
hatbegi
nsint
het
ransact
ion
cy
cles.Figure2presentstheFRSi nrel
ati
ont otheotheri
nfor
mat i
onsubsy
stems.

Page4of4
Fi
gur
e2:Fi
nanci
alRepor
ti
ngPr
ocess
Thestepsil
lustr
atedandnumberedint hefi
gurearediscussedasfol
lows.Thepr
ocessbeginswi
th
acleanslateatthest ar
tofanew fiscalyear.Onlythebalancesheet(per
manent)account
sare
car
riedfor
war dfr
om theprev
iousy
ear .From t
hispoint
,thefol
lowi
ngstepsoccur
:

1.Captur et het ransact ion:Wi t

hineacht r
ansact ioncy cle,transactionsar er ecordedi nt he
appropr i
at et ransactionf ile.
2.Recor dinspeci aljour nal:Eacht ransact i
oni sent er
edi ntothej ournal.Recal lthatf requentl
y
occur r
ingcl assesoft ransact i
ons, suchassal es,arecapt uredinspeci aljournal s.Thoset hat
occurinf requent l
yarer ecordedi nt hegener aljournalordi rectlyonaj ournal v oucher .
3.Postt o subsi diaryl edger :Thedet ai
lsofeacht ransact ionar epost edt ot heaf f
ected
subsidiaryaccount s.
4.Postt ogener alledger :Peri
odically ,j
ournalv ouchers,summar i
zingt heent ri
esmadet othe
specialj our nalsandsubsi diaryl edgers,ar epr epar edandpost edt ot hegener alledger
account s.Thef requencyofupdat est othegener alledgerwi l
lbedet er minedbyt hedegr ee
ofsy stem i ntegration.
5.Prepar etheunadj ustedt ri
albalance:Att heendoft heaccount i
ngper i
od, theendi ng
balanceofeachaccounti nt heGLi splacedi nawor ksheetandev aluat edint otal f
or
debit–credi tequal ity
.
6.Makeadj ust i
ngent ries:Adj ustingent ri
esar emadet ot hewor ksheett ocor recter r
or sandt o
ref
lectunr ecor dedt r
ansact i
onsdur ingtheper iod,suchasdepr eciation.

Page5of5
 7.Journali
ze and postadj ust i
ng ent r
ies:Jour nalv oucher sf ort he adjusti
ng entr
ies are
preparedandpost edt ot heappr opriat
eaccount sinthegener all
edger .
8.Preparetheadj ust edt ri
albal ance:Fr om theadj ustedbal ances,at ri
albalanceispre-pared
thatcontai
nsall t
heent r
iest hatshouldber ef
lectedint hef inancialstatements.
9.Preparethefinanci alstatement s:Thebal ancesheet ,incomest atement ,andstatementof
cashflowsarepr epar edusi ngtheadj ustedt r
ialbalance.
10.
Journali
zeandpostt hecl osingent ri
es:Jour nalv oucher sar epreparedf orentri
est hat
closeoutthei ncomest at
ement( tempor ary)account sandt r
ansferthei ncomeorl osst o
retai
nedearni
ngs.Fi nall
y,theseent ri
esar epost edtot hegener alledger.
11.
Preparethepost -closi ngtrialbalance: Atri
al balancewor ksheetcont aini
ngonl yt
hebal ance
sheetaccountsmaynowbepr eparedt oindicat ethebal ancesbei ngcar ri
edforwardtot he
nextaccounti
ngper iod.

Theperiodi
cnatur
eoff i
nancialr
eport
ingi
nmostor ganizat
ionsestabl
ishesitasabatchprocess,
asill
ustr
atedinFi
gur e2.Howev er
,manyor ganizat
ionshav emov edt oreal
-ti
megeneralledger
updatesandfi
nancialreport
ingsystemsthatproducef i
nancialst
atementsonshortnoti
ce.Figure
3presentsanFRSusingacombi nat
ionofbatchandr eal
-ti
mecomput ertechnol
ogy.

Fi
gur
e3:GL/
FRSUsi
ngDat
abaseTechnol
ogy
5.
4.Controlli
ngtheFRS
Or
ganizat
ion’smanagementdesi gnandimplementcont
rol
sov ert
heFRS.Howev
er,t
hesy
stem
mighthav
et hepotent
ial
risks.Thepot
ent
ial
riskst
otheFRSincl
ude:

Page6of6
 a.Adefectiveaudittr
ail.
b.Unauthorizedaccesst ot
hegeneral
ledger.
c.Generalledgeraccountsthatar
eoutofbalancewit
hsubsi
diar
yaccount
s.
d.I
ncorrectgener alledgeraccountbalancesbecauseofunauthor
izedori
ncor
rectj
our
nal
vouchers.

Howev er
,ifnotcontr
oll
ed,t
heseri
sksmayresul
tinmisst
atedf
inanci
alstat
ementsandother
repor
ts,thusmisl
eadi
ngusersoft
hisi
nfor
mati
on.Thef
oll
owingi
st hei
nter
nalcont
rolel
ements
overFRS:

a)Tr ansact
ionAuthorizat
ion
Thejournalvoucheristhedocumentthataut
hori
zesanentr
ytothegener
all
edger.I
tisv
italt
othe
i
ntegri
ty oft he accounti
ng recor
ds thatthe j
our
nalvoucher
s be pr
operl
y aut
hori
zed by a
responsi
blemanageratt hesourcedepart
ment.

b)Segr egat
ionofDut ies
Thet askofupdatingthegener alledgermustbesepar atefrom allaccounti
ngandassetcust ody
responsi
bil
itywi
thintheor gani
zati
on.Ther efor
e,i
ndi
vidualswit
haccessaut hori
tytogenerall
edger
accountsshouldnot:
i
. Hav erecord-
keepingr esponsibi
li
tyf
orspecialj
ournal
sorsubsidiar
yledgers.
ii
. Pr eparejournalvoucher s.
i
ii
. Hav ecustodyofphy sicalassets.

c)AccessCont r
ols
Unauthorized access to the general ledger accounts can r
esul
tin error
s,f r
aud,and
misrepresentat
ionsinfinanci
alstatements.Thus,or gani
zat
ionsi
mplementcontr
olsthatl
i
mit
databaseaccesst oonl
yauthori
zedindiv
iduals.

d)Account i
ngRecor ds
Theaudi ttrailisar ecordoft hepat ht hatat ransactiont akest hrought hei nput,processing,and
outputphasesoft ransactionpr ocessing.Thi sinv ol
vesanet wor kofdocument s,journals,and
l
edger sdesi gnedt oensur ethatat r
ansactioncanbeaccur atel
yt racedt hrought hesy st
em f rom
i
niti
ati
ont of i
naldisposit
ion.Audi ttrai
lfacili
tat
eser rorpr eventionandcor recti
onwhent hedat a
fi
les ar e conv enientl
yand l ogicallyor ganized.Al so,t he gener alledgerand ot herfiles that
consti
t utet heaudi ttrai
lshoul dbedet ail
edandr ichenought o( 1)pr ovi
det heabi li
tytoanswer
i
nquiri
es,f orex ampl e,from cust omer sorv endors;( 2)beabl et or econstructf i
lesift heyar e
compl etelyorpar ti
all
ydest royed;( 3)pr ovide historicaldat ar equired byaudi tors;(4)f ulf
il
l
governmentr egulat
ions;and(5)pr ovideameansf orprev enti
ng,det ecti
ng, andcor r
ectingerrors.

e)Super
visi
on
Superv
isi
ngt
hediff
erentf
unct
ionsofi
ndi
vi
dual
sthatar
eassi
gnedi
ntheGLSoft
heor
gani
zat
ion.

f)IndependentVer i
fi
cation
TheFRSpr oducest wooperati
onalreports—jour
nalvoucherli
sti
ngandt hegeneralledgerchange
report—thatprov i
deproofoft heaccuracyoft hisprocess.Thejournalvoucherli
sti
ngpr ovi
des
rel
evantdet ai
l
sabouteachj ournalvoucherpostedtot heGL.Thegener alledgerchanger epor
t
present
st heeffect
sofjournalvoucherpostingstothegenerall
edgeraccounts.
Page7of7
5.5.TheManagementRepor ti
ngSyst
em (MRS)
Managementr eportingisoft
encal
leddiscr
etionar
yreport
ingbecausei tisnotmandat or
yasi s
fi
nancialr
eport
ing.Howev er
,anMRSthatdirectsmanagement’
sattent
iont oproblemsonat i
mely
basispromoteseffecti
vemanagementandthussupportst
heorganizat
ion’sbusinessobj
ect
ives.

5.5.
1.FactorsthatInf
luencet heMRS
Desi
gninganeffect
iveMRSr equiresanunderstandi
ngoft heinformat
ionthatmanager sneedto
dealwiththeproblemst heyf ace.Factor
st hatinf
luencemanagementi nfor
mationneedsare:
managementpri
nciples;managementf unct
ion,lev
el,
anddeci si
ontype;
problem st
ruct
ure;t
ypesof
managementreport
s; r
esponsibil
it
yaccounti
ng;andbehav i
oralconsi
der
ati
ons.

a.ManagementPr inci
ples
Managementprincipl
esprov i
dei
nsi
ghtint
omanagementi nf
ormationneeds.Thepri
nci
plest
hat
mostdirect
lyi
nfluencetheMRSar efor
malizat
ionoft
asks,responsi
bil
i
tyandauthor
it
y,spanof
contr
ol,
andmanagementbyexcept i
on.

For mali
zationofTasks:Thef ormal izat
ionoft askspr inci
plesuggest
st hatmanagementshoul d
structur
et hef i
rm ar
oundt het asksi tperformsr atherthanaroundindiv
idualswi t
huni queski
ll
s.
The pur pose off or
malizati
on oft asksi st o av oi
d an organi
zati
onalstructurein which t
he
organizati
on’sperfor
mance,st abili
ty,andcont i
nuedexi stencedependonspecificindiv
idual
s.This
i
mpl iesthatf ormalspecif
icat
ionoft heinformationneededt osupportt hetasks.Thuswhena
personnelchangeoccur s,thei nformat i
ont henewempl oyeewil
lneedisessent i
all
ythesameas
forhisorherpr edecessor.

Responsi bi
lityandAut hori
ty:Thepr incipleofr esponsi bi
li
tyreferst oani ndi vi
dual’sobli
gati
ont o
achievedesi redr esult
s.Responsi bil
i
t yiscl oselyrelatedtot hepr inci
pleofaut horit
y.I
famanager
delegatesr esponsi bi
li
tytoasubor dinate,heorshemustal sogr antthesubor dinatetheauthorit
y
tomakedeci sionswi thi
nt hel i
mi t
soft hatresponsi bi
lit
y.Inabusi nessor ganizati
on,manager s
delegateresponsi bi
li
tyandaut horit
ydownwar dt hrought heor ganizati
onalhi erarchyfrom superi
or
tosubor dinates.Thus,t hi
si mpl i
est hatv erti
calr eporti
ngchannel soft hef i
rmt hroughwhi ch
i
nformat i
onf l
ows.Themanager ’slocat i
oni nther epor t
ingchanneli nfluencest hescopeanddet ail
oft he informat ion report
ed. Manager s athi gherl evels usual l
yr equi re mor e summar ized
i
nformat i
on.Manager satl owerl evelsr eceivei nformat i
ont hati smor edet ail
ed.Indesigninga
report
ingst ructure,theanalystmustconsi derthemanager ’spositionint her epor t
ingchannel.

SpanofCont rol:Amanager ’sspanofcont rolreferstothenumberofsubor dinatesdirectl

yunder
hisorhercont r
ol.Thesizeoft hespanhasani mpactont heorganizat
ion’
sphy sicalstructur
e.A
fi
rm withanar r
owspanofcont r
olhasf ewersubor dinatesrepor
tingdirect
lytomanager s.These
fi
rmst endtohav etall
,narrow structureswi thsev erall
ayersofmanagement .Fir
mswi thbroad
spansofcontrol(moresubor di
natesr eporti
ngt oeachmanager )t
endt ohavewi dest r
uctures,with
fewerlevel
sofmanagement .Thus,manager swi t
hnar rowspansofcont r
ol r
equiredetail
edr eports,
whereas,manager swit
hbr oadcont rolresponsi bil
i
tiesoperatemostef fect
ivelywithsummar ized
i
nformation.

ManagementbyExcepti
on:Theprincipleofmanagementbyexcept
ionsuggeststhatmanagers
shoul
dli
mitthei
rattent
iontopotentialprobl
em areas(
thati
s,excepti
ons)ratherthanbeing
i
nvolv
ed wit
h ever
y act i
vi
ty or decisi
on.Managersthus maintai
n contr
olwi thout bei
ng
Page8of8
overwhel
medbythedetai
l
s.Thisi
mpliest
hatmanagersneedinfor
mat i
onthati
dent
if
iesoper
ati
ons
orresour
cesatri
skofgoingoutofcontr
ol.Report
sshoul
dsuppor tmanagementbyexcept
ionby
focusi
ngonchangesi
nkeyfactor
sthataresymptomati
cofpotent
ialpr
oblems.

b.ManagementFunct i
on, Level,andDeci sionTy pe
Themanagementf unctionsofpl anningandcont rolhaveapr ofoundeffectont hemanagement
reporti
ngsy st
em.Thepl anningf uncti
oni sconcer nedwithmaki ngdecisionsaboutthef ut
ure
activ
iti
esoft heorganizati
on.Pl anningcanbel ongr angeorshor trange. Long-r
angepl anning
usuallyencompassesaper i
odofbet weenoneandf i
veyears,butthisv ari
esamongi ndust r
ies.
Long- r
angepl anni
nginv ol
vesav ar i
etyoft asks,incl
udingsetti
ngt hegoalsandobj ect
ivesoft he
fi
rm,pl anning the growt h and opt i
mum si ze oft he f
ir
m,and deci ding on t
he degr ee of
diversi
ficat
ionamongt hef i
rm’spr oduct s.

Short-
term pl
anninginvol
vestheimplementati
onofspecif
icplanst
hatar
eneededtoachi
evethe
object
ivesoft helong-
rangeplan.Ef
fect
ivecontr
oltakesplaceint
hepresentti
mefr
ameandi s
tr
iggeredbyf eedbackinfor
mat i
onthatadvisesthemanageraboutthestatusoft
heoperat
ion
beingcontrol
l
ed.

c.Probl
em Structure
Thest r
uct
ureofapr obl
em ref
lect
show wel
lthedeci
sion makerunder
standst
hepr
obl
em.
Str
uctur
ehasthreeelements:

1.Data—thev al
uesusedtorepresentf
actor
st hatarerel
evantt
otheprobl
em.
2.Procedures—thesequenceofstepsordecisionrul
esusedinsolv
ingthepr
oblem.
3.Object
ives—theresul
tsthedecisi
onmakerdesi r
estoattai
nbysolvi
ngtheprobl
em.

When allthree el
ements ar
e known wi
th cer
tai
nty
,the pr
obl
em i
s st
ruct
ured,ot
her
wise
unst
ruct
uredprobl
em exi
st.

d.ManagementReports
Report
saretheformalv
ehiclesforconveyi
nginformat
iontomanagers.Thetermr eportt
endsto
i
mpl yawrit
tenmessagepresentedonsheet sofpaper.Infact,amanagementr eportmaybea
paperdocumentoradigit
ali magedisplay
edonacomput ertermi
nal
.Ther eportmayexpress
i
nformati
oninver
bal,
numeric,orgr
aphicform,oranycombinat
ionoft
hese.

Tobeusef ul
,repor
tsmusthav einf
ormat i
oncont ent.Theirvalueist heeffecttheyhaveonuser s.
Thisisexpressed int wo gener alreporti
ng objecti
ves:( 1)t or educet helevelofuncer tai
nty
associat
edwithapr oblem facingt hedeci si
onmakerand( 2)toi nfl
uencethedeci si
onmaker ’s
behaviorinapositi
veway . Repor tsthatf ai
ltoaccompl isht heseobj ect
iveslacki nf
ormati
on
contentandhav enov alue.Inf act
,rel
ianceonsuchr eportsmayl eadtody sfunct
ionalbehavi
or.
Managementr epor
tsfallint
ot wobr oadclasses:programmedr epor t
sandadhocr eports.

ProgrammedRepor ti
ng:Programmedr eport
sprovi
dei nf
ormati
ont osolveproblemsthatusers
hav eant
ici
pat
ed.Therearet wosubclassesofprogrammedr eport
s:scheduledrepor
tsandon-
demandr epor
ts.TheMRSpr oducesschedul
edreportsaccor
dingtoanest abli
shedti
mef rame.
Thiscouldbedaily
,weekly
,quar t
erl
y,andsoon.Exampl esofsuchr epor
tsar eadail
yli
sti
ngof
sales,aweeklypayrol
lacti
onr eport
,andannualfinanci
alstatements.On-
demandr eport
sare
Page9of9
tri
ggeredbyev ents,notbythepassageoft i
me.Forexampl e,wheni nvent
oriesfal
ltothei
rpre-
establi
shedreorderpoint
s,t
hesy stem sendsani nvent
oryreorderreporttothepurchasi
ngagent.
Anotherexampl eisanaccountsr ecei
vablemanagerr espondingtoacust omerpr obl
em overt
he
tel
ephone.Themanagercan,ondemand,di splaythecustomer’saccounthistoryonthecomputer
screen.Notethatthi
squerycapabili
tyi
sthepr oductofanantici
patedneed.

AdHocRepor t
ing:Manager scannotalwaysanti
cipatethei
rinformati
onneeds.Thi sisparti
cularl
y
truefort opandmi ddl
emanagement .Inthedynami cbusinesswor l
d,problemsarisethatr equi
re
newi nformati
ononshor tnot i
ce,andther
emaybei nsuff
ici
enttimetowr i
tecomput erprogramst o
producet herequiredinformat i
on.Inthepast,t
heseneedsof t
enwentunsat i
sfi
ed.Nowdat abase
technologypr ovi
des directi nquir
yand r epor
tgener ati
on capabil
it
ies.Manager s withl i
mited
comput erbackgr oundcanqui cklyproduceadhocr eportsfrom at erminalorPC,wi t
houtt he
assistanceofdatapr ocessingprofessi
onals.

e.Responsi bili
tyAccounting
Al argepartofmanagementr eporti
ngi nvolvesr esponsibil
it
yaccount i
ng.Thisconcepti mpl i
est hat
ever yeconomi cev entthataff
ectstheor gani zationisther esponsi bili
tyofandcanbet racedt oan
i
ndi vidualmanager .Ther esponsi
bili
tyaccount ingsystem per sonalizesper f
or mancebysay i
ngt o
themanager ,“Thisi syouror i
ginalbudget ,andt hisi show y ourper formancef ort heper iod
compar estoy ourbudget .
”Mostor ganizationsst ructuret heirr esponsibil
ityreporti
ngsy stem
around ar eas ofr esponsi
bil
it
yi nt he firm.A f undament alpr inciple oft his conceptist hat
responsi bi
li
tyareamanager sareaccount ableonl yf oritems( cost s,revenues,andi nvestment s)
thatt heycontrol.

Thef l
ow ofi nformati
oni nr esponsi bil
itysystemsi sbothdownwar dandupwar dt hrought he
i
nformat i
onchannels.Theset op-downandbot tom- upinfor
mat i
onflowsrepr esentthet wophases
ofresponsibil
i
tyaccounting:(1)cr eatingasetoff inanci
alperformancegoal s( budgets)per t
inent
tot he manager ’
sr esponsibil
iti
es and ( 2)repor ti
ng and measur ing actualper for mance as
compar edtot hesegoals.Toachi ev
eaccount abil
ity,busi
nessent it
iesfrequent l
yor ganizet hei
r
operat
ionsi nt
ouni t
scal ledr esponsi bil
it
ycent ers.Themostcommonf ormsofr esponsibi l
it
y
center
sar ecostcenters,
pr of
itcent er
s, andinvestmentcent er
s.

CostCent ers:A costcent erisanorganizati

onalunitwi thresponsibi
li
tyforcostmanagement
withi
nbudget aryli
mits.Forexample,aproductiondepartmentmayber esponsibl
eformeeti
ngits
producti
onobl igat
ionwhi l
ekeepingproducti
oncost s(labor,material
s,andov er
head)wi
thi
nt he
budgetedamount .Theper for
mancer epor
tfort hecostcent ermanagerr efl
ectsit
scontr
oll
able
costbehav i
orby f ocusing on budgeted costs,actualcost s,and v ari
ances fr
om budget.
Perfor
mancemeasur ement sshouldnotconsidercostst hatareoutsideofthemanager’
scontrol
,
suchasi nvestmentsinplantequi
pmentordepr eciat
ionont hebuil
ding.

Profi
tCent ers:A pr of
itcentermanagerhasr esponsibil
i
tyforbothcostcontrolandr evenue
generat
ion.Forexampl e,thebranchmanagerofAmbessaShoeCompanymayber esponsiblef
or
deci
sionsabout :Whi chit
emsofshoet ost ockinthest ore.Whatpr
icestocharge.Theki ndof
promotionalactiv
iti
esforproducts.Thelevelofadvert
isi
ng.Thesizeofthest
affandthehir i
ngof
employees.Buildi
ngmai nt
enanceandl i
mi t
edcapitali
mpr ovement
s.

Theper
for
mancer
epor
tfort
hepr
ofi
tcent
ermanageri
sdi
ff
erentf
rom t
hatoft
hecostcenter
.
Page10of10
Nevertheless,thereport
ingemphasi sforbothshoul
dbeoncont r
oll
abl
eit
ems.Whereasonly
contr
ollableitemsar eused to assessthemanager’sper
for
mance,thepr
ofi
tcent
eritsel
fis
assessedbyi tscontr
ibut
ionaf
ternon-cont
rol
l
ablecost
s.

InvestmentCent er
s:Themanagerofani nvestmentcenterhast hegeneralauthori
tytomake
decisionsthatprofoundlyaff
ectt heor ganizati
on.Assumet hatadivi
sionofacor por
ationisan
i
nvest mentcenterwi t
ht heobjecti
veofmaxi mizingt heretur
noni tsinvest
mentasset s.The
div
isionmanager ’sr angeofr esponsibil
it
iesi ncl
udescostmanagement ,productdevelopment
,
mar keti
ng,dist
ri
but i
on,and capitaldisposi t
ion through i
nvestment
soff undsi n pr
ojectsand
venturesthatear
nadesi r
edrat
eofr eturn.

f. Behavior
alConsiderati
ons
GoalCongr uence:Whenmanagementpr incipl
esofauthori
ty,r
esponsibil
i
ty,andthef ormali
zation
oftasksproperl
yappliedwithinanor gani
zation,
thesepri
nci
plespromot egoalcongruence.Lower -
l
evelmanager spursui
ngt heirownobj ect
ivescontri
but
einaposi t
ivewayt otheobjectivesoftheir
superi
ors.Forexampl e,bycont rol
li
ngcost s,aproducti
onsupervisorcontri
butestot hedi vi
sion
manager ’
sgoalofpr ofi
tabil
ity
.Thusasi ndivi
dualmanagersservet hei
rownbesti nterest
st hey
al
soser vethebestint
erestsoft heorgani
zation.

Acareful
l
yst r
ucturedMRSpl aysanimport
antrol
einpromotingandpreservi
nggoalcongruence.
Ontheotherhand, abadlydesignedMRScancausedy sf
uncti
onalact
ionsthatar
einoppositi
onto
t
he organiz
ation’
s objectives.Two pit
fal
lsthatcause managerst o actdysfunct
ional
ly ar
e
i
nfor
mat i
onov erl
oadandi nappropr
iat
eperf
ormancemeasures.

Informat i
onOv erl
oad:I nf
or mationoverl
oadoccur swhenamanagerr ecei
vesmor einfor mation
thanheorshecanassi mi l
ate.Thishappenswhendesi gnersofther eport
ingsy st
em donot
proper l
ycon- siderthemanager ’sor
ganizati
onallev
elandspanofcontrol.Forexample,consi der
the informat i
on v olume t hatwouldf l
ow tot he pr
esi
dentifthe reports were notpr oper l
y
summar ized.Thedet ai
l
sr equiredbylower-l
evelmanager
swouldquicklyoverl
oadt hepr esi
dent ’
s
decision-maki ng process.Al t
hough t he r
eportmayhav e manyoft he i
nformation attr
ibutes
discussedear li
er( complete,accurate,ti
mely,andconcise)
,itmaybeusel essifnotpr oper l
y
summar ized.

Informati
onov er
loadcausesmanager st
odisregar
dtheirfor
malinformationandr el
yoninf
ormal
cuest ohelpthem makedeci si
ons.Thustheformali
nformati
onsy stem i
sreplacedbyheuri
sti
cs
(rulesofthumb),t i
ps,hunches,andguesses.Theresult
ingdecisionsrunahi ghr i
skofbeing
suboptimalanddy sf
uncti
onal.

Inappropri
atePerf
ormanceMeasur es:Recal
lthatonepurposeofar epor
tist
ost
imul
atebehav
ior
consistentwit
htheobject
ivesofthef i
rm.Wheni nappr
opri
ateperf
ormancemeasur
esareused,
howev er,t
herepor
tcanhavet heopposit
eeffect.Let’
sseehowt hi
scanhappenusi
ngacommon
performancemeasure-ret
urnoninvestment(ROI).

Assume thatthe cor

por at
e managementofan organi
zat
ion eval
uatesdiv
isi
on management
perf
ormancesolel
yont hebasisofROI.Eachmanager’
sobject
iveistomaximizeROI.Nat
ural
ly
,
theorgani
zat
ionwantst histohappent
hroughpr
udentcost managementandi ncr
easedprofi
t
margins.However
,whenROIi susedast hesi
ngl
ecr i
ter
ionformeasuringperf
ormance,the
Page11of11
cr
it
eri
oni
tsel
fbecomest
hef
ocusofat
tent
ionandobj
ectofmani
pul
ati
on.

Perf
ormancemeasur esshouldconsi derallrelev
antaspectsofamanager ’sresponsi
bil
i
t y
.In
addi
ti
ontomeasur esofgeneralperf
ormance( suchasROI ),managementshoul dmeasuretrends
i
n keyv ariabl
es such as sal
es,costofgoods sol d,oper at
ing expenses,and assetlev el
s.
Nonfi
nancialmeasuressuchaspr oductleadershi
p,personneldevelopment,employeeatt
itudes,
andpubli
cr esponsi
bil
it
ymayal soberelevanti
nassessingmanagementper f
ormance.

Page12of12