SMA Notes
SMA Notes
SMA Notes
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Strategic Management Accounting
3rd edition, 2020
Part A: Value 26
Shareholder value 27
Customer value 27
Stakeholder value 27
Which viewpoint should be taken when determining ‘value’? 27
Part B: The strategic management process 30
Strategic management 30
Operational management 32
Part C: The role of management accountants in strategic management 38
Analyst, business adviser, partner 39
Contemporary skills and techniques 40
Part D: The key challenges facing management accountants 43
Challenges 43
Causes of change in the business environment 46
The global economy 47
Technology 54
Sustainability 58
Part E: Analytical techniques available to management accountants 67
Value analysis 68
Strengths, weaknesses, opportunities and threats 70
Internal analysis 71
External analysis 76
Porter’s five forces model 77
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Value is a broad concept. It can be described as combining resources together in a manner that creates
desirable outcomes.
Customer value: create an output that has customer value (need to produce at a price lower than the price the
customer is willing to pay, which leads to profitability)
To create products or services, an organisation will require community permission to operate, infrastructure,
customers and employees—who will only supply their effort if the wages and conditions are adequate. That is,
the organisation must provide suitable value to its stakeholders.
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Defines strategic management accounting and examined the contemporary environment and its impact
on organisations and management accountants
Evolution of management accounting to a strategically focused role.
Creating sustainable value by:
• supporting the formation, selection, implementation and evaluation of organisational strategy; and
• providing information that captures financial and non-financial perspectives for both the internal and
external environments to enable effective resource allocation.
Strategic management accounting – supporting managers p30
Strategic management
Strategic analysis Through scanning the internal and external organisational environment
Organisations must continuously analyse the external environment to
understand trends and changes that affect the industry and the economy.
Organisations must also analyse their own resources and capabilities to
understand how they might react to changes in the environment.
Strategy planning and Strategy formulation is the next step in the strategic management process.
choice This includes developing specific strategies, actions and measures.
Strategy implementation Entails crafting an effective organisational structure, organisational processes
and culture.
Strategy evaluation This involves measuring performance, providing feedback and undertaking
continuous review for improvement.
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Flatter hierarchies have resulted in greater authority and decision making delegated to lower level employees.
Management accountants are required to provide support and training to line managers to enable them to
prepare the information required for the MA to analyse
The same approaches and tools are used to analyse services, but the main characteristics of services can make
this analysis more difficult. Services differ from products in the following ways:
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- Once a service is provided, it cannot be consumed or used again in the same way as a product. This
means there is no ability to store a service as inventory, which makes it more difficult to manage
supply and demand levels.
- A service is more of a unique offering than a product. So providing it in a systematic and identical way
is much more difficult.
- Unused capacity is lost forever. It cannot be used to create something that is stored for later (i.e.
inventory cannot be created).
- economy—the extent to which resources of a given quality were acquired at the lowest cost;
- efficiency—the maximisation of outputs for a given set of inputs; and
- effectiveness—the extent to which an organisation achieved its objectives
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Management accountants are seen as information providers for business processes, organisational
planning and control, resource management and utilisation, and creation of value through effective use of
financial and non-financial resources.
Trusted business partners
The role of management accountants p38
Target costing: determines the selling price being charged by competitors, deducts the required margin to
calculate a target cost for producing the product
- Adviser role can result in a loss of independence (if too closely involved in setting strategy & making
decisions)
- Instead needs to provide oversight, set effective controls etc
- Note that increased pressure and perceived or actual loss of objectivity are some of the biggest issues
facing accountants as they become more heavily involved in the decision making process (CIMA 2010)
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A matrix of skills has been prepared by the International Accounting Education Standards Board (IAESB 2004).
It details what is required of today’s professional accountant in business. The main categories include:
Intellectual skills: Research and organise information
Critical analysis and logical reasoning
Solve unstructured problems
Monitor internal financial performance
Designing performance management tools
Technical skills: Numeracy (mathematical and statistical)
IT and software ability (spreadsheets and databases)
Compliance requirements Cost analysis and control;
Personal and Self-management and initiative Influence and assess priorities
interpersonal skills:
Meet deadlines and adapt to change
Work in teams and interact with a diverse range of people
Negotiate and listen effectively
Communication Deliver and defend opinions
skills:
Use formal and informal approaches
Listen, read and speak effectively
Written communication
Cultural sensitivity;
Organisational or Organise and delegate tasks
business
Lead and motivate people
management skills:
Project evaluation
Information for planning and decision making.
A report by IFAC (2011) looked at how management accountants drive sustainable organisational success. It
identified four specific ways in which management accountants support an organisation:
1. Creators of value—developing the plans and strategies that set the direction of the organisation
2. Enablers of value—by supporting management decision-making and implementation
3. Preservers of value—protecting value through effective risk management, controls and compliance
4. Reporters of value—clear and detailed reporting.
Some of the key challenges facing management accountants include:
- using technology effectively while guiding others to effectively use management accounting systems;
- managing resources; and
- promoting innovation.
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Example question
Management accounting has traditionally supported the different levels of internal decision-making of
organisations. In its early history, the emphasis of the management accounting role was on planning and
control with a particular focus on budgeting and cost management. Organisations and their environments
were typically stable and decisions were made under conditions of relative certainty. However, strategic
management accounting goes beyond this and helps to create and manage value.
– supporting the formation, selection, implementation and evaluation of organisational strategy; and
– providing information that captures financial and non-financial perspectives for both the internal
and external environments to enable effective resource allocation.
Strategic management accounting provides a wide range of tools and techniques that support these decisions,
including:
• BSCs for supporting the analysis of organisational performance and guiding strategy choice;
• activity-based costing and activity analysis to identify and cost non-value adding activities that may be
eliminated or reduced;
• capital budgeting tools, such as discounted cash flows, that enable project evaluation;
• project management tools to consider both the time and cost of implementation; and
• customer profitability analysis to identify which segments the organisation should be focusing on.
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Challenges p43
In response to the significant changes that are happening with internal structures and externally, there has
been significant development in how management reporting occurs.
The management reporting role has also expanded from just producing the numbers, to analysing and
interpreting the numbers that are generated from the information systems.
Beyond this, the opportunity to have ongoing access to real-time data means that it is possible to report on
critical performance indicators in real-time. Weekly summaries and constant monitoring have replaced
monthly meetings, leading to rapid identification of issues and opportunities, as well as faster response times.
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Technology (p55)
Capital equipment Advancement in technology, higher productivity (e.g. in manufacturing)
Note that technology costs are much higher and become obsolete at a much
faster rate
Often requires significant capital investment
Information and Cloud computing: reduced costs on capital items, reduced need for in-house
communication knowledge, can deploy employees globally. Privacy / info security concerns
technologies Employee owned devices: flexible working environment, but risk to privacy / info
security
Big data: record a lot of data, but key is ability to analyse and interpret the data
to improve performance
Sustainability (p58)
Corporate social Organisations are accountable to a range of stakeholders (rather than the usual
responsibility shareholder / profit model) – which emphasises qualitative and non-financial
factors
Environmental MA Increased level of scrutiny associated with use and disposal of resources
EMA: capture, analyse and report on environmental information
Can use:
- Input/output analysis (what goes in must go out or be stored)
- Flow cost accounting (aims to reduce the quantities of materials – may
lead to ecological efficiency)
- ABC (distinguishes between environment related costs and environment
driven costs
- Life cycle costing
Ethics Incorporate ethical implications in decision-making e.g. safeguards for employees
(OHS)
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In response to change with internal structures and externally, there have been significant changes in how
management reporting occurs – look to compress time to complete month end processes (need access to real
time data)
- Leading indicators that are causing or driving results (e.g. economic factors such as GDP or FX,
customer satisfaction, commodity price changes)
- Competitor activity such as estimates of competitor cost structures / pricing, analysis of competitor
strategies and potential responses
- Industry analysis such as growth and profitability including life cycle / business cycle, regulations
- Non-financial performance such as physical volume / flows, employee performance, efficiency / quality
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Strategic analysis underpins the strategic management framework. Strategic analysis is concerned with
understanding the internal and external environments of an organisation.
Value analysis is the systematic and critical assessment by an organization of every feature of a product to
ensure that its cost is no greater than is necessary to carry out its functions.
Value analysis looks at the material composition of a product and production design so that modifications and
improvements can be made which do not reduce the value of the product to the customer or user
Value chain: a network of interrelated activities that provides value to customers and other stakeholders
Organisation value chains: competitive advantage arises from the way an organisation organises and
performs the activities that comprise its value chain.
• identifying primary or support activities that either do not add value or actually destroy value. Such
non value adding activities (ie. that a customer will not pay for, e.g storage of inventory, inspection of
materials) should be minimised or, if possible, eliminated;
• using substitute (less costly) inputs for activities;
• conceiving new ways to conduct activities, (new processes or implementing new technologies);
• linking the activities within its value chain in a more effective way than competitors.
Industry value chain: Each role in the industry value chain contributes value to the industry’s end product
Must consider the implications for the industry value chain before introducing any performance enhancing
initiative at the organisational level – if it simply pushes costs to suppliers or customers, it will not change the
overall value of the industry value chain and customers will shift to alternative industry value chains.
Organisations will also need to consider developing and displaying its value add via reputation / branding
The organisation’s strategy should be developed by using the results of the SWOT analysis – using its strengths
to exploit opportunities while simultaneously managing the risks arising from internal weakness and external
threats.
SW: internal environment – e.g. market share, experience of team, internal expectations,
OT: external environment – e.g. customers, competitors, system related factors, political climate
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Resource based theory: each organisation has a set of capabilities – with only distinctive capabilities (e.g.
patents, brand, supplier relationships, government licence) leading to a competitive advantage (as compared
to reproducible capabilities)
Also consider products and markets – two theories (product life cycle and BCG matrix)
Portfolio theory: companies invest in a portfolio of products to reduce the risk associated with relying on a
single product
Product related risks arise from uncertainties about: demand, sales volume, prices, investment requirements,
competitor offerings, obsolescence.
Lifecycle
Introduction: risky stage where prices tend to be high and prices are low
First mover advantage: where barriers restrict immediate entry of competitors to the new market
Temporary monopoly may enable a high price to be charged or build dominant market position via low
prices (market penetration)
Growth: price drop due to increased competition and lower costs in manufacturing from economies of
scale and learning
Requires investment in new manufacturing capacity and new marketing and distribution capacity
Generates the highest level of profit in this phase
Maturity: sales volume may grow, but will do so at a lower rate
New investment is low and profits start to decline
As growth slows, competition increases and seek to maintain market share through price reductions
Decline: market is saturated and sales decline due to technological obsolescence and substitute products
Cash flows may be negative due to warranty, parts supply or other ongoing service commitments
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Price Skimming: sets an initially high price. This restricts sales volume but can produce good returns quickly. It
is only feasible when the new product is sufficiently differentiated that competition is significantly restricted
The purpose of the external part of SWOT analysis is to identify opportunities and threats.
First, understand where you are situated in an industry – be aware of competitors’ strengths and weaknesses
so as to identify threats to own position as well as opportunities for growth and profitability
The aim of industry analysis is to understand how the competitive forces create profitability (the prices, costs
and investments) of the industry.
Industry analysis should start by defining the industry (ensure focus on correct industry and that definitions
aren’t too broad or too narrow). Consider the industry’s suppliers, buyers, competitors, barriers to entry.
The second factor is to determine the relevant timeframe. Should not be concerned with temporary
fluctuations but focus on the industry’s business cycle, whether short (mobile phones) or long (mining).
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New entrants Increased (both domestically and internationally) due to: globalisation,
ongoing deregulation, elimination of global trade barriers
New entrant may drive down price by adding supply (production capability
and product volume is added) or setting prices low to compete. Inputs will
increase in price due to scarcity of resources
Economic disincentives to new entrants include legal constraints (licences),
technological barriers, financial resources available, customer loyalty
Alternative or substitute A product that performs a similar function will reduce demand for your
products product and drive down prices
Customers Relative power between customers and organisation. If you have power
over your customers, this is a strategic advantage. Compare to Walmart
who is a powerful buyer and can demand pricing from its suppliers
Supplier Relative power between supplier and organisation
Existing competitors Business strategy should be developed in relation to the competitive
strategy of your competitors e.g. consider airline discounting to protect
market share
See page 221 for application to not for profit – higher education sector
Examples:
• Economic: effect of unemployment on demand, volatility in interest rates
• Social: change in leisure pursuits
• Legal: change in safety legislation
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• Business cycle (economic): GDP, inflation, interest rates, unemployment etc. Cycle comprised of
boom, recession, depression, recovery. Think about long term decision making – through the cycle
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External stakeholders
Internal stakeholders
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A typology of stakeholders based on their power was developed by Mitchell et al. (1997). According to this
typology, stakeholder power is based on three factors:
1. the extent to which a stakeholder can influence an organisation
2. how legitimate the stakeholder is seen to be by the organisation
3. how time critical the stakeholder’s support is to the organisation.
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The management accountant needs to draw information from multiple sources, such as:
The current design and scope of the information system in use can affect the support that the management
accountant can provide to management for strategy formulation and implementation.
The specific impacts of information on the organisation are its costs and benefits. There are four main
information costs:
• gathering
• storing and protecting from unauthorised access
• analysing and interpreting the information—often the most difficult and time consuming aspect
• presenting the information to users in a clear and concise way
Due to these costs, information gathered and analysed should always be directly related to the decisions for
which it is used.
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The functions performed and the reports produced depend upon the type of information system.
A transaction processing system (TPS) creates and records the routine primary activities or business functions
(e.g. sales or service) and may perform support functions (e.g. procurement, payroll).
The major limitation of a TPS is that it is focused on historical transactions and so is incapable of providing little
more than trend analysis to managers.
Management Accounting System: the organised process or system that identifies, collects, processes and
communicates financial (and relevant non-financial) information. The MAS is a small part of the MIS.
A MAS should help managers create, manage and protect value by capturing data relating to activities and
assist in identifying whether those activities are adding value. This should include costs, revenues, efficiency,
quality, benchmarks and satisfaction
Examples:
Management Information System: integrated system that combines all of the organisational areas, including
sales and marketing, production, accounting, human resources, logistics and other parts of an organisation.
It is important that the MAS is properly integrated into the overall MIS so that data and information are easily
accessible and useful (Gelinas & Sutton 2002).
Management accounting systems should clearly distinguish between two types of information:
1. strategic profitability (costing) information (ID the strategic variables that create profitability over the
long term)
2. administrative control information (relevant information for controlling operational activities and
processes).
In a manufacturing business, there will be a production planning and control system that determines
production arrangements—availability of raw materials, production scheduling and job sequencing, and labour
allocation.
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Production planning and control systems can provide powerful data to support decision-making and strategy
formulation and implementation by providing accurate information about, for example, standard cost
revisions, waste and rework of products, and employee unproductive time.
‘Customer relationship management (CRM) refers to the practices, strategies and technologies used to
manage and analyse customer interactions and data throughout the customer lifecycle’ (Tech Target 2018).
This helps the organisation to improve and deepen customer relationships, promote customer retention and
maximise the value of the customer to the entity.
CRM systems synthesise customer related information from many different sources to inform the organisation
about, for example:
Modern CRM systems extend ‘customer’ data to include sales leads and prospects. CRM systems like
Salesforce facilitate sales forecasting, centralise contact management information, track sales history and help
a business focus on targeting new customers and increasing sales to existing customers.
To overcome the limitations of MASs, and to incorporate developments in standalone systems, software
package vendors have attempted to integrate TPSs, production planning and control systems and CRM
systems into a single system—or ERP system.
ERP systems take a whole-of-business approach. They help to integrate data flow and access to information
across the whole range of business activities.
Decision support systems (DSSs) are information systems that possess an interactive capability and are able to
answer ad hoc questions.
DSSs can access not only data from within the ERP (or equivalent) system, but also external databases
containing economic or industry
DSSs are the most powerful system for supporting strategy formulation and implementation because they
provide not only a wide variety of the organisation’s data and externally available data, but also remove
human biases by finding patterns and projections that support senior management decision-making.
Knowledge management is important because it encompasses technology-based systems, formal systems and
procedures, and the informal ‘way we do things here’ that is often embedded in an organisation’s history and
culture.
Knowledge management systems (KMSs) enable the acquisition, capture, distribution and application of
knowledge and expertise gained by an organisation. KMSs are at times referred to as ‘corporate memory’; they
assist with the retention of vital knowledge from key employees and often contain information about lessons
learned.
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The management accountant would be expected to find information from many sources, including information
that is external to and internal to the organisation,
Internal
Internal data will be needed across a range of categories, including financial performance, customer
satisfaction, employee efficiency, operational effectiveness and environmental impact. This information will
also need to be able to be segregated easily by customer, route and aircraft type to support detailed analysis.
External
One of the important aspects of strategic management accounting is its focus on areas that are external to the
organisation—especially competitors and customers. Data on competitor performance, market share,
customer demographics and preferences, cost structures and approaches to things such as fuel-cost
management and selection of aircraft will be very useful when developing strategic plans.
Broader economic data will also be essential in terms of Australian economic growth rates, consumer
sentiment, and the performance of the mining industry, which drives a lot of the fly-in/fly-out customer
segment.
Used by various external groups to evaluate the Used by management and employees to make
organisation’s performance, position and future decisions about running the organisation
outlook
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The purpose of aggregating or integrating information is to compile and present it in a way that delivers
greater value than its components possess individually.
Aggregating to get the This may occur where totals Imported volumes may be added to internal
‘bigger picture’ are lacking or are unreliable. production volume and estimated competitor
volume to estimate market size.
Estimates may be formed
from proxy data.
Triangulating This uses multiple sources of Unexpectedly low Christmas sales may be
information to ‘fill in the gaps’ explained by external factors such as low
or make sense of phenomena. consumer confidence and interest rate
increases— so customers have less disposable
income.
Combining existing This may use existing data or A company that decides to use the DuPont
information to create be the prelude for advanced return on equity measure will assemble
new measures statistical analysis. information for its three different
dimensions—operating efficiency, asset use
efficiency and financial leverage.
Aggregating to produce Typically these are averages, The average customer order value in dollars or
new, high-level summary indexes or ratios. the gross sales per employee.
measures
Aggregating where Many summary reports For example, Kaplan and Norton (2001)
different information is contain line items that do not suggest that the BSC should be connected with
presented together have an arithmetic strategic objectives in a cause and effect
relationship but are simply relationship. This leads to a hierarchical BSC
presented together for that is cascaded down through the levels of
convenience and ease of the organisation so that managers are all being
review. measured in relation to the highest level
strategic objectives
Dimensions of information
Non-financial information is expressed in non-dollar terms (can include measures of customer satisfaction such
as NPS and customer retention.)
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Data collected externally (and in some cases, internally) often has three limitations:
1. It may use non-uniform measures and bases for collecting data resulting in information that is not
comparable.
2. The data may be incomplete or only available for limited periods of time.
3. The data may have been originally collected for other purposes, which may affect its quality.
Considering these various limitations, it is important to remember that there may be risks when comparing or
aggregating information.
Consider:
Important to take into consideration the limitations of information – with a key focus on reliability and validity.
Characteristics Description
Validity Validity, sometimes called accuracy, is how well information describes what it is
meant to describe.
Reliability Reliability is about consistency, or whether information from different sources tells
the same story; in other words, whether we can rely on or trust that information.
Comparability Examines how two or more pieces of information resemble each other. For
example, the information may be from different years (to identify trends) or from
another company (to juxtapose performance).
Any use of similar information should be checked to ensure that the accounting
methods are similar—e.g. they use the same depreciation method.
Verifiability Refers to independent observers reaching consensus (but not necessarily 100%)
without simplifying the information.
Two methods of verification are used:
1. direct observation—e.g. stocktake
2. indirect checking of models, formulas or techniques—e.g. checking the input
quantities and costs for inventory.
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Timeliness The degree to which older information ceases to be relevant. This encourages
efficient capture/collection and preparation. Decisions should be based on up-to-
date information but what is meant by the latest information is dependent upon
the specific task.
Understandability Refers to the interpretation of the information by a proficient user: that is,
someone who has reasonable knowledge of business and economic activities.
Understandability begins with classifying, characterising and presenting information
clearly and concisely. Excluding information to make it less complex may potentially
mislead.
Quality of information
Wang and Strong (1996) propose four elements for analysing information quality, as outlined below.
This classification requires accuracy to be weighed up against the other dimensions. It allows a user to describe
information relevant to a particular task as good or poor by making judgments about each of the dimensions.
Technology is constantly evolving so there are always emerging platforms for creating and disseminating
information.
Data warehousing refers to both the system to analyse historical data derived from transactional sources and
the data model that stores data.
- The data warehouse may have redundant information—for example, former addresses of customers
that were current at the time the data was collected.
- Once accepted into the data warehouse, the information is not updated. The data warehouse is
therefore programmed to aggregate data over a period of time—usually in predefined structures.
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Big data
Big data is a large dataset that can comprise both structured (e.g. spreadsheet information) and unstructured
data (e.g. a collection of web pages).
- building predictive models—for example, market success or performance failure, which can be tested
- managing the data (to ensure that what has to be kept complies with regulations, is held for the
required period) and undertaking analysis of data to improve current business processes for
competitive advantage.
Issues with ‘big data’ and personal data used for profiling
Legal and ethical issues associated with data collected without the individual’s knowledge – often used for
advertising (e.g. Facebook, Google)
Management accountants should be mindful of the legal and ethical issues associated with the use of big data.
Misuse of data, or even the perception of misuse, can lead to a loss of reputation and may have a significant
financial impact on an organisation
Business intelligence
BI is a combination of the strategies and technologies used by organisations to analyse their information to
improve their operational and strategic decision-making.
BI may use the same statistical methods (correlation, cause and effect analysis, prediction) but with the aim of
developing computer-aided models for decision-making.
- Data discovery (features visual tools—e.g. pivot tables, geographical maps, heat maps. It aims to
make patterns or specific items immediately visible)
- Executive information systems (EISs) (combine internal and external information and present it in an
easy-to-use, convenient format )
- Online analytical processing (OLAP) (analytical operations including consolidation, drill-down and
slicing and dicing).
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PART C: The role of management accounting in influencing stakeholder decision making P135
Time, for management accountants, is a scarce resource, so they need to balance stakeholder expectations for
information with their ability to search for or produce the expected information to an acceptable quality.
Impact of Immediate or near term Deliver tangible and visible beneficial information
information Clear message regarding the action Follow up with stakeholders to determine whether
to be taken they find the information useful and track that back
to the systems to ensure they are useful and usable
for stakeholders
As well as understanding the information needs of various stakeholders, the management accountant should
be aware of some information behaviours of stakeholders.
- prefer to rely on a single piece of paper that encompasses all the issues rather than have to compile
and reconcile information from different sources
- ask others for their opinion—for example, the person next to them—instead of using the systems
provided
- resist when their complex set of needs and problems is converted into simple solutions
- be sceptical when vendors offer ‘silver bullet’ technology solutions—a ‘silver bullet’ is a simple yet
complete solution
- spend differing amounts of time preparing for meetings and evaluating recommendations
- refer to target the urgent issues or business needs that they derive from the organisational strategy.
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One issue that arises from considering information for stakeholders is the ‘level’ at which the information is
needed—some will be operational and some strategic.
Strategic information
Strategic information is forward looking and assists the organisation with planning. Typically, the planning
horizon is three to five or more years, depending on the industry and technology.
Strategy is mainly about opportunities and it is necessary to have information about opportunities that are:
Tactical information
Tactical information has a shorter time horizon than strategic information. Tactical information is more
focused on day-to-day operations and aims to assist management with effective execution of strategy. Its role
is informed by the guidelines set by the strategic plan.
Operational information
Operational information is produced from, or used by, the day-to-day transactions of an organisation. For
example, the information may relate to the following functions:
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Effective strategy formulation requires good quality information that meets as many of the characteristics
described earlier as possible. Strategy implementation requires cascading plans down to the tactical and
operational levels.
Linking information to strategy requires a clear understanding of the strategic goals and objectives to be
achieved at the tactical and operational levels, and the projects or tasks that are necessary to deliver these
goals and objectives.
Financial approach The financial approach involves framing budgets that extend down through
the organisation.
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The information systems discussed earlier may be classified as strategic planning systems if they focus on
information to support future decision-making.
Management accountants must consider the way they interact with organisations and stakeholders not only in
terms of technical skill, but also in terms of ‘soft skills’—such as interpreting information, communication and
influencing decision-making.
Maister et al. (2001) suggest that becoming a trusted business partner can be expressed in the following
equation: Trustworthiness = (Credibility + Reliability + Empathy) / (Self-orientation).
The management accountant may have difficulty with some of these guidelines when evaluating strategy,
providing information associated with strategy, or being the recipient of sensitive information.
• make highly technical or complex information available to senior management in a short time frame
• respond in a highly competitive work environment where other managers are hostile
• overcome a culture where expertise and mastery are dominant
• reduce boundaries between the job and their personal life to be transparent
• put at risk their own bonus and job.
Maister et al. (2001) suggest working through the following five-step process:
• Engage
• Listen
• Frame
• Envision
• Commit to improve communication.
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Another important role for the management accountant is as a custodian of information. This role should not
be confused with the governance roles of either data steward or data custodian.
A data steward is responsible for the information content, context and application of business rules. They
achieve this through good systems design that validates input data and provides output for verification.
Data custodians are responsible for the authorised access and acceptable integrity of the stored data, including
its transport or communication.
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The stimulus to initiate a review or propose a new or replacement system often originates with general
observations about the system, such as:
• The functions performed by the current system are no longer suited to the goals the organisation has
for it.
• The technology used with the current system appears out of date.
• The current system appears too inflexible compared to current or future needs.
• The current system is expensive to maintain compared with alternatives.
Once stakeholders become convinced something needs to be done, it becomes necessary to conduct a formal
investigation into the adequacy of the current system.
It is necessary to understand the features of the current system to make a judgment about whether the
existing systems offer a sound foundation for improvement or are unsuitable for purpose and should be
replaced.
If the system is judged to produce some useful outputs then those outputs can be kept as a benchmark for
improvements to the system or be used in a replacement system. This avoids introducing a new system that
lacks some essential functionality.
The preliminary assessment uses interviews with staff members and observation of business processes and
asks three simple questions:
The results of these interviews and observations are compiled and cross-checked for consistency.
Inconsistencies are investigated and resolved. The output from this assessment is an independent assessment
of current arrangements that can be referred to after obtaining information from managers about their
information needs.
The ‘what’ can be considered by starting with the senior managers (top down) or first-line supervisors (bottom
up). The advantage of a top-down approach is that senior managers should know what they expect lower
managers to be doing and can identify their own needs as well as those of subordinate managers.
This issue that inevitably arises with the top-down method is its lack of detail. Senior managers will use key
performance indicators (KPIs) or critical success factors (CSFs), and the subordinate managers will say they
make many more decisions—and hence need more detailed information— than those envisaged by the CSFs.
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Lack of information
A lack of information suggests the need for data analysis. A proven method that management accountants can
use is a data flow diagram (DFD) (DeMarco 1979), which highlights processes and visually illustrates what data
is the input to and output from a particular system or process.
A DFD starts with an overview that contains a single process (the entire system) that is then broken down into
components.
Where reports are inadequate or the system does not produce suitable reports, it is necessary to meet with
managers to identify their needs. Two approaches are common and each has its merits.
The CSF approach (Bullen and Rockart 1981) uses interviews to explore the role and responsibilities of the
managers with questions such as:
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The other approach is to identify and analyse decisions. This depends on separating three types of decisions.
Studying decisions requires attention. Some decisions are made consciously, deliberately and at slow pace.
These are often linked to organisational activities such as strategic planning. Or they may be initiated when
external forces (e.g. government regulators) force the organisation to act in certain ways or respond to an
issue.
Note Kahneman and inherent bias in decision making.
A systematic approach is to ask each manager when making a decision to answer the following introductory
questions:
1. What information do I need?
2. Why do I need this information?
3. Where do I obtain this information?
4. Do I need to obtain the information from one or more other systems?
5. Are those other systems manual, semi-automated or computer-based information systems?
6. Who else uses the same information?
7. How do I rate the information I am provided with in terms of content, volume and quality?
8. Who do I send the information I produce to (one or many recipients)?
9. How does the information I produce support any individual, team/group and company goals?
10. Is the flow of information disrupted by inadequate tools, processes and procedures?
11. What changes in workflow, tools, processes, policies or procedures are desirable to improve the
quality of information I receive or provide?
Because of the limitations of the Critical Success Factors approach and the fact that the decision analysis
method is intensive and can be cumbersome, other methods of assessing information needs may be used.
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Ask the decision- Detailed interviews Focuses on a single issue, task or Huysmans
maker about their decision assuming it is major and 1970
needs repetitive Ross and
Schoman
1977
Analyse the existing Derive requirements from the May specify information that does Valusek 1985
information system existing information system not relate to any specific decisions
Strategic goals and Investigate goals top down The decision-makers’ personal Checkland
concerns goals may be inconsistent with the 1981
organisational goals
Process analysis of Detailed systems analysis Observes users’ behaviour without Lundeberg
inputs and outputs seeking their insight or helping 1979
them examine their expertise to
assess needs more creatively
Use an expert panel Panel identifies strategic The experts also classify the Gustafson et
issues that the organisation information into essential, periodic al. 1992
will face within the next 2–5 and low value, and then discard the
years. The related low value so it is still possible to
information is then sought for miss a future information need
high priority issues
The systems development life cycle (SDLC) identifies a sequence of phases beginning with the need for a new
system and ending with the commissioning and operation of that new system.
One important benefit of the SDLC approach is that it allows the management accountant to estimate how
long it will take to introduce a new or updated information system and to estimate the costs of each phase of
software development or software package implementation.
Prior to investing significant resources in a new or updated information system, the organisation needs to
make an assessment of its life expectancy and whether an investment should be made in a system
approaching obsolescence.
The management accountant will always make enquiries about the original implementation date of a system
or software package and the extent to which it has been updated previously. This gives an indication of where
the system or software is in terms of its whole-of-life expectancy.
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There are frequently disagreements among stakeholders about their information needs. To establish the
information needs, the management accountant will consider:
Stakeholder needs can be ascertained by survey questionnaire, by interview or by focus groups. Reviewing
existing documentation and reports can help triangulate this data. In any case, as a trusted adviser, the
management accountant should meet with key stakeholders for relationship building purposes.
Some of the problems that management accountants should be aware of in considering stakeholder requests
for information are:
A business may decide that to support its future strategy it needs an information system that will provide the
information to support its strategy implementation. Consider the example of a business that has decided to
implement an ERP system (see earlier in this module).
1. its feasibility
2. the criteria required for a new system.
Test of feasibility
Test name Key question
Technical Is this application possible within the limits of available technology and our resources?
Economic Will this application return more in monetary benefits than it will cost to develop?
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Adaptability As new business needs arise or changes to business processes occur, will it be
adaptable to change?
Fit Is the system specific to the business situation or problem? Or will the business
need to change its processes to fit the new system?
Operational skills How many people are required to support the operations and what level of skill and
experience do they need?
Big data capability Is there a capability to extract and analyse internal and externally sourced data for
strategy formulation, implementation and control?
The criteria selected by an organisation would need to be ranked in order of importance. Inexperienced
organisations tend to place price and ease of implementation highest, whereas experienced organisations tend
to consider vendor support and track record the highest (Deloitte & Touche, cited in Byard 2018).
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Since the 1980s, total quality management (TQM) has advocated making improvements to accounting systems
by promoting improved performance measures (Kanatsu 1990). It offers a holistic approach by beginning with
information capture and considering the adequacy of information in reports. In this way it is possible to
discover whether reports are inadequate because of:
Management accountants can consider stakeholder views on monthly budget reports; these can often
overwhelm managers by providing intricate detail that makes detecting trends and patterns difficult. As a
result, managers spend their time looking for unfavourable variances and decomposing them. This is desirable
if the organisation is pursuing a major cost reduction program, but not a wise use of time if the priority is
attention to products.
Can seek to tailor a solution around the current system and justify this to stakeholders in one of two ways:
• They can show that the investment to retain and modify the existing system is modest at a time
where there are budget constraints.
• They can show that making limited changes to the existing system is preferred over making a major
change now.
The benefits of an information solution to address management information and reporting needs fall into two
categories:
The issue with tangible benefits is the method of measurement. There is no agreement on the best method
and there are a considerable number of reasonable alternatives:
Derived value method: It considers how a system is intended to be used – judged on its actual achievement of
the objectives or goals for which it was implemented.
Decision pay-off: a wholly economic measure – consider the proposal and agreement between stakeholders
on the tangible costs and benefits.
Numeric index: weights with ratings to produce an index that indicates the total business value of the
proposed system
So, the management accountant not only has to choose the method they will use to evaluate benefits, but also
whether they will include intangible benefits.
The management accountant has an important role in helping to justify a decision about whether to invest in a
new information system, or modify or retain an existing information system. This is because the management
accountant has the ability to:
• evaluate the tangible and intangible benefits of a new or modified information system
• estimate all the costs associated with a new or modified system
• understand the information needs of stakeholders
• judge the value of the information solution in terms of achieving the organisational goals and
objectives.
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As far as possible, tangible benefits will need to be quantified for comparison with costs. Quantifying the
benefits is far more problematic than estimating costs, and so the assumptions behind the dollar values
allocated to benefits will need to be clearly explained by the management accountant.
Tangible Intangible
Ability to deliver the business strategy, which may Easier communication—e.g. managers, department
be expansion of sales revenue and/or cost heads and employees are all sharing common
reduction, entering a new market or introducing a information
new product or service
Ability to take advantage of market opportunities as Better customer information—e.g. customer service
they arise as a result of more and better integrated can be improved and more effective marketing and
information promotional campaigns designed based on
customer information
Improved output at reduced cost—e.g. faster Higher productivity—e.g. employees avoid wasting
customer service and order fulfilment, improved time gathering information for management
quality
Analysing costs and benefits also requires an analysis of the risks involved in any change to information
systems. These risks may include, for example:
• poor design of the new system (or changes to an existing system) due to inadequate consultation with
users
• availability and cost of resources to complete the project
• failure of project management to ensure delivery of the new/changed system within time and budget
constraints
• failure to recognise emerging technological or legal changes such as cloud computing developments
and privacy legislation
• poor changeover planning leading to loss of data
• poor implementation training.
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Strategic planning focuses on long-term planning and involves senior managers planning and setting the
direction for future activities to meet the organisation’s goals as set out in its strategy. A strategic plan is
typically divided into long-term and short-term objectives.
A strategy helps organisations to think about where they are now, where they want to go, and how they are
going to get there.
Budgets represent short-term expressions of the long-term horizon of an organisation’s strategic plan.
A master budget is a comprehensive initial plan of what the whole organisation intends to accomplish in the
budget period. In preparing a master budget, managers make decisions about:
• how best to use the limited financial and non-financial resources in the operating activities
• how to obtain funds to acquire those resources.
These decisions are formalised in the operating budget and the financial budget.
Operating budget: associated with the operating activities or income-producing activities of an organisation
and always precedes the financial budget. The end result (outcome) of the operating budget is a budgeted
income statement, although the latter is part of the financial budget.
Financial budget: a set of budgeted financial statements, providing forecasts about the organisation’s income
statement, balance sheet and cash budget for the next financial year. Includes the capital expenditure budget.
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According to Roosli and Kaduthanam (2018, p. 21), ‘a budget represents a financial plan and a financial target
at the same time’. Budgets are used to:
• implement strategy by allocating limited resources among competing uses
• coordinate activities
• assist in communication between sub-units of the organisation
• motivate managers and employees with bonuses based on meeting or exceeding planned objectives
• provide definite objectives for judging and evaluating managers’ performance at each level of
responsibility
• facilitate learning
• raise management awareness on the organisation’s overall operations
• guide decentralised decision-making
• anticipate potential problems
• show early warning signs to enable management to prepare solutions
• assess performance, goal achievement and hence a basis for rewards.
A responsibility centre is a unit in an organisation (e.g. a department or a division) where the manager ‘has the
authority to make the day-to-day decisions’ (Weygandt et al. 2012b, pp. 1109–10) about their unit’s activities
and performance.
Revenue centre The manager is only responsible for activities generating revenue (e.g. sales).
Cost centre Costs and expenses are incurred but the centre does not directly generate revenues.
Since managers in cost centres have the ‘authority to incur costs’, they are responsible
and accountable for meeting the budget targets.
Profit centre In addition to incurring costs and expenses, a profit centre generates revenues. Here
managers are judged on the profitability of their centres.
Investment In addition to being responsible for generating revenues and incurring costs and
centre expenses, the manager of an investment centre has the responsibility and control over
the centre’s available assets.
They are therefore ‘evaluated on both the profitability of the centre and on the rate of
return’
Responsibility accounting
‘Responsibility accounting can be used at every level of management’ (Weygandt et al. 2012b, p. 1109).
However, it is important that when responsibility accounting is used in performance evaluation, that only
revenue and costs that meet the following conditions are included:
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- those that can be directly associated with the specific level of management responsibility
- those that can be controlled by management at the level of responsibility with which they are
associated.
To ensure this, costs are split between controllable and non-controllable, separating direct cost from indirect
cost in budgets. This is important due to the potential impact on the behaviour of managers during both the
preparation of and assessment against budgets.
Budgets are a useful tool helping managers and owners to plan for the organisation’s future – however due to
uncertainty, often multiple budgets will be prepared (best, worst, most likely scenarios).
Consequently, multiple budgets are sometimes prepared that identify best, worst and most likely scenarios.
Once the optimal course of action is selected, the final budget is adopted which will guide the organisation’s
activities.
Budgets set standards and benchmarks in order to monitor and control the use of an organisation’s resources
and measure its performance.
Can use variance analysis to determine how successful managers have been in the execution of the
operational plan.
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A master budget is a comprehensive set of interrelated budgets for an upcoming financial period.
Master budgets reflect an organisation’s plan for its future operating activities (in the operating budgets) and
financing actions (in the financial budgets) resulting from management’s predictions and decisions about the
future. Ideally, these plans should be the result of careful consideration of the following:
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Operating budgets for manufacturing organisations are prepared in a specific order, because some figures in
budgets are based on figures calculated in previous budgets.
Step 1: Sales budget Since the sales forecast is the foundation of operational budgets, a great deal of
effort generally goes into developing the sales budget.
Step 2: Production Preparing the production budget is normally the responsibility of the
budget manufacturing or production manager. In this budget, the number of finished
good units that need to be manufactured is determined (driven by sales)
Step 3: Direct In this budget, two sets of quantities and costs of raw materials used directly in
materials cost budget the manufacturing of the finished goods are determined:
Step 5: Manufacturing The production manager is also responsible for preparing this budget. The
overhead costs budget manufacturing overhead costs are separated based on their behaviour—namely if
the costs are variable or fixed.
Step 6: Finished goods The management accountant prepares the finished goods inventory budget. To
inventory budget calculate the cost of finished goods, the number of units in inventory at the end
of a period is multiplied by the cost of goods manufactured.
Step 7: Cost of goods The COGS budget is also linked to several budgets prepared earlier. To calculate
sold budget the budgeted COGS, the budgeted costs of manufacturing need to be determined.
This is the sum of the total cost of direct materials used, plus the direct labour
costs plus the total manufacturing overhead costs.
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The budgeted opening finished goods inventory is added to the budgeted cost of
manufacturing to get the cost of goods available for sale.
Step 8: Period costs Period costs budgets can either be prepared as separate budgets for each cost
budgets component such as research and development, marketing, distribution, and
administration costs.
Alternatively, this can be combined into one budget. The costs and expenses
included in this budget are all the non-manufacturing overhead costs or the costs
of the non-manufacturing activities of the organisation.
Retail and wholesale organisations: do not manufacture goods, so instead of preparing a production budget,
will prepare a purchase budget.
Service organisations: will only prepare budgets to forecast the revenue, and the costs and expenses relevant
to their activities in rendering the services.
The budgeted income statement is the outcome of the operational budgets. This budget sets out the expected
financial performance for the budgeted period.
Cash budget
Cash management is essential for the success of any business, which makes the cash budget the most
important financial budget (Weygandt et al. 2012a).
Enables management to plan when to raise capital / repay loans / pay dividends etc.
The budgeted balance sheet sets out the expected financial position at the end of the budget period. This
budget is linked to a few other budgets:
- the projected profit (or loss) for the budgeted financial year as projected in the budgeted income
statement
- the ending inventory figures for raw material, work in progress and finished goods in the operating
budget
- the cash balance projected in the cash budget.
The capital expenditure budget is the organisation’s plan for the acquisition of long-term assets such as
property, plant and equipment. Acquisitions for the next financial year are considered as well as acquisitions
beyond 12 months.
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The process of preparing master budgets for decentralised organisations is the same as preparing a master
budget for an organisation that is centralised. Preparing budgets for decentralised organisations is simply a
bigger and more time-consuming process.
Normally, in preparing budgets for decentralised organisations, the sales managers and representatives of a
specific unit or region or town (in short referred to as a department) prepare the sales budget. Thus the
bottom-up approach is applied.
- In the planning phase, the term is used to reflect a range of activity levels
- In the controlling phase, the term is used to describe the flexing of the static budget as a means to
evaluate the variance between actual results and budgeted forecasts
For planning purposes, flexible budgets are used to study the sensitivity of budgeted revenues and costs for
various activity levels.
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Differences between budget forecasts and actual results are called budget variances. Because budgets are
based on forecasts about the future, variances are inevitable.
The approved and adopted master budget is based on forecasts of planned sales and production volumes
determined on one level of activity.
Static budget: ‘When used in budgetary control, each budget in the master budget is static’
Flexible budget: common in a complex business environment, where planned activity rarely equals actual.
Often used in manufacturing industries.
When using variance analysis to monitor and control the organisation’s and managers’ performance, two
aspects are analysed to investigate the underlying causes:
Any differences between the static and the flexible budget are due to variances in sales and production
volumes.
In performing variance analyses, the static budget is the same as the flexible budget for fixed costs. Therefore,
to determine the profit-related variance (known as the sales volume variance), the contribution margin is used
(and not the bottom-line, i.e. profit).
This formula is abbreviated as follows: Sales volume variance = (AQ – BQ) × Bcm†
† cm = contribution margin
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Flexible budgets are further subdivided to show the price variance separate to the efficiency variance.
Price and efficiency variances are determined with reference to all variable cost components: direct material,
direct labour, and variable manufacturing overhead costs.
Similar to analysing the price and efficiency variances of direct material, the price and efficiency variances of
direct labour are useful in evaluating the performance of the production manager.
Although variable manufacturing costs is part of the costs to manufacture goods, variable manufacturing costs
are often not within the direct control of the line manager. Variable manufacturing overhead cost is an indirect
cost that cannot be traced directly but is allocated to the products and departments instead.
- indirect material
- indirect labour
- utilities—for example, energy and water consumption
- engineering support
- machine maintenance.
Further, to simplify record keeping, many organisations use standard costing to allocate overhead costs to the
various manufacturing departments. These standards may be derived from either actual or budgeted costs.
- labour hours
- machine hours
- floor space
- kilometres driven
- number of employees.
The standard overhead-cost allocation rate is determined as follows: total costs for the cost pool / the driver
(also known as the cost-allocation base) of the cost.
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The fixed manufacturing overhead costs variances are determined in ways slightly different as to how the
variable cost analyses are determined. This is because sales and production volumes do not affect fixed
manufacturing overhead costs within a relevant range, so no efficiency variance is calculated. Instead, a
production volume variance is calculated.
Actual fixed overhead costs are also accumulated to cost pools with the same cost driver to determine a
predetermined allocation rate—Total fixed costs / cost driver.
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A budget affects virtually everyone in an organisation: those who prepare the budget, those who use the
budget to facilitate decision making, and those whose performance is evaluated using the budget (Langfield-
Smith et al. 2018).
In the top-down approach, senior managers impose budgets on junior or lower level managers (who have very
little say and participation in the budget-setting process).
Advantages: less time consuming than the bottom-up approach and more cost effective
Disadvantages: senior managers may have less knowledge of the local business environment, junior managers
may not be committed to delivering.
Conclusion: research has shown that the top-down approach to planning and control is not the best way to
create order in complex adaptive systems. Will frustrate and demotivate and may result in poorer
performance.
In the bottom-up approach, lower-level managers and operational staff participate in the budgeting process.
The decision-making is delegated down to the front line much as is practical. The theory is that people will be
more committed to a budget and try harder to achieve it when they have been consulted during the target-
setting process. It is more likely that targets will be achieved if employees are held responsible for activities
that they believe are within their control and this results in greater motivation to improve performance. In the
bottom-up approach, budgets are developed at the lowest responsibility centres and fed up to senior
managers to make the final decisions.
Advantages: encourages coordination and communication between managers, gives people individual
freedom to make decisions and team autonomy creates a sense of responsibility and fosters creativity. Leads
to increased alignment of goals.
Disadvantages: can lead to dysfunctional behaviour (politics, power struggle, empire building). Also risk of
‘pseudo participation’ (i.e. superficial involvement of lower management) and ‘budgetary slack’ (i.e. padding
the budget).
To mitigate the negative behaviour and practices of setting unrealistic budgets and to enhance goal
congruence, the challenge is to set realistic budgets. This can be achieved in a few ways.
- One way is to avoid using the budget as a means to rigidly evaluate performance, but instead to allow
some discretion when comparing actual performance with the expectations set out in the budget.
- Since incentives for achieving the budget have the potential to lead to negative behaviour and
practice, another way is to give rewards for consistently providing accurate budget estimates.
- To ensure that everyone makes decisions in the interest of meeting organisation-wide targets, align
goals and incentives giving everyone who achieves their goals an incentive.
The core of nearly every organisation’s management control system is budgetary control (Kleiner & Wilhelmi
1995).
Providing regular feedback to managers on their performance is essential to exercise budgetary control. It is
more likely that targets and budgets will be achieved if managers receive frequent feedback and if the
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achievement of targets is accompanied by rewards that are valued. Consequently, both monetary and non-
monetary incentive schemes are used as a means to encourage goal-congruent behaviour.
Setting goals
To achieve goal congruence, budgets should be based on realistic conditions and expectations. Setting realistic
budgets requires coordination, transparency, communication, cooperation and commitment on all levels of
management.
It requires an attitude of ‘us’ and not one of ‘us and them’ or ‘what’s in it for me’. This is closely related to
human behaviour and psychological issues—controlling issues such as greed, ego and fear is clearly outside the
scope of the accounting discipline. No budget will ever be able to completely prevent this negative behaviour.
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Practitioners argue that budgets impede the allocation of an organisation’s resources to their best uses
(Hansen et al. 2003). Further, that it encourages myopic decision-making. ‘By the time budgets are used, their
assumptions are outdated’ (Hansen et al. 2003, p. 97).
Criticism of traditional budgets are that they impose centralised planning and decision-making that is a costly
method, stifle initiative, impede empowered employees from making the best decisions for the organisation,
and restrict organisations’ ability to act and react.
Further, traditional budgets are not focused on value creation but merely on reducing costs. Research has
found that responsibility-centre-focused budgets are not compatible with value-chain-based organisations. ‘
Hansen et al. list the following most cited weaknesses of budgetary control:
Neely et al. (2003) also identify 12 significant weaknesses of traditional planning and budgeting practices,
which they categorise into three principal categories:
- competitive strategy
- business process
- organisational capability
Overall, they state, traditional planning and budgeting processes are failing to deliver results, as ‘they tend to
promote an inward-looking, short-termist culture that focuses on achieving a budget figure rather than on
implementing business strategy and creating shareholder value over the medium to long term’ (Neely et al.
2003, p. 25).
Despite the shortcomings of traditional budgets, the vast majority of organisations around the world are still
using them in planning and control. Three principal approaches and techniques that have been proposed to
improve budgeting and planning processes are discussed next.
Incremental budgeting: projecting next year’s budget by adding an adjustment (e.g. a percentage increase due
to inflation) to either the actual results or the previous budget.
Advantages:
Disadvantages:
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Recommendation: the organisation use an incremental budget simply as the starting point and, in addition,
consider the internal and external factors that may affect the organisation in future.
Zero-based budgeting was developed and used widely in the 1970s and 1980s (Langfield-Smith 2018, p. 441).
Method: set every activity is set to zero (i.e. do not use previous budgets as a starting point). Then managers
are required to justify each activity and budgeted figure in order for them to receive an allocation of resources.
Advantages:
- Forces managers to think about each component, and the effects of internal and external factors
Disadvantages:
Activity-based budgeting (ABB) was developed by consultants Coopers and Lybrand Deloitte (Kleiner &
Wilhelm 1995).
Method: uses a wide range of cost drivers to build an operation model of activity based costing.
Advantages:
Disadvantages:
- Time consuming
- Requires strong operational understanding
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The BB approach primarily focuses on the problems with using traditional budgets as a performance
evaluation tool. It was developed in the late 1990s (Heupel & Schmitz 2015).
BB is a contemporary management model where organisations are managed without budgets. This model
introduces a system that has two interlinked key dimensions: decentralised leadership and adaptive
management processes (Roosli & Kaduthanam 2018). In the BB approach, decision-making is in the hands of
empowered local managers, having responsibility for their units.
To avoid the dysfunctional behaviour of traditional budgeting when used as a tool to evaluate performance, BB
uses ‘relative performance contracts with hindsight’ (Hansen et al. 2003, p. 101).
Although budgets are still developed in the BB approach, these budgets will not be used as targets that must
be achieved in performance evaluation. Thus, the planning and the performance evaluation functions of
budgets are separated
BB relies on managers to make more strategy-focused planning and control decisions, but without budgets.
BB approach has not been widely implemented across the world because it requires a a coaching management
style, which is a radical change in mindset or a new management philosophy.
All budgets Prepared using an adaptive process, taking account of the different aspiration levels of
the budget managers responsible for its achievement
A budget that is prepared through coordination of all the subsidiary functional
budgets, each function adapting to the requirements of other functions affected by
their activities – this is the adaptive process applied to all budgets
Goal congruence is more likely to be achieved if managers’ aspiration levels are
considered in the budgetary planning process
Fixed budgets Budgets for a single level of activity. The master budget based on the expected level of
activity during the budget period
Criticisms: based on a set of assumptions that may be overly simplistic
Zero based Each item of expenditure has to be justified in its entirety in order to included in the
budget next year’s budget
Rolling budgets A budget which is continually extended and updated to allow for changes in costs and
revenues which have rendered the original budget out of date
Benefits: they reduce the element of uncertainty in the budget, there is always a
budget that extends several months ahead, they are more realistic, new goals are
incorporated more quickly, the original budget loses significance
Disadvantage: take more time, effort and money to prepare
Flexible budgets One that is designed to enable variable and fixed costs to be identified separately, so
that the budget can change if there are fluctuations in output, revenue or other activity
related factors.
Different cost behaviour patterns are identified so that the budget can be changed to
reflect the effect of different output levels
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There are four stages of project management: project selection, planning, implementation control &
monitoring and completion & review
A project can be distinguished from the day-to-day operations of an organisation based on the following:
1. Projects are novel or unique—they will not usually be repeated in the same way again.
2. They often have high levels of uncertainty, which may be a result of their unique nature.
3. They are usually focused on providing a solution for some underlying problem.
4. They have a defined start and finish time.
5. Projects typically consist of activities that are related and often have operationally specific
relationships (i.e. a particular activity has to be performed before the next one can be started).
6. Finally, they usually have multiple resources which need coordination, and this can be particularly
challenging.
The Project Management Institute (PMI 2013, p. 6) defines project management as ‘the application of
knowledge, skills, tools and techniques to project activities to meet project requirements’
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Project Project organisations are those that have projects as their core operating activity. E.g.
Organisations construction companies, software companies or professional service organisations.
Internal Where a project exists within an organisation whose main business is some other form of
projects product or service provision e.g. new product development, cost-reduction programs
Joint Ventures When two or more organisations contribute equity in the form of capital or technology
and undertake a project where the revenue and expenses are also shared.
Collaborations Collaborations are like JVs in that two or more parties contribute towards the
achievement of a project outcome. Do not always have a commercial motive.
PPP Formed when the government and private sector organisations agree to undertake
projects together; often in the public interest.
Virtual When project team members are located in different places and the dominant method of
projects communication and operations is via communications technology such as the internet.
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An international project is one that is based in a different country (or at times, multiple countries) to the
‘home’ country of the organisation.
Strategic cultural fluency—This is an understanding of the strategic relationships across cultures, how
business is structured, cultural behaviour at a senior level and how this forms a context for projects.
Workgroup cultural fluency—Work teams that are either formed within a different culture or contain multi-
cultures have their own issues and processes that project managers need to understand.
Personal cultural fluency—Individuals have their own social etiquette, language, skills and knowledge. Good
project managers understand this and operate within these parameters.
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The project sponsor is a senior executive who should ensure the project’s business case is realised and its goals
are met. Need to strike a balance between open and visible support and micro-managing the project.
Working closely with the project manager, the sponsor provides guidance to the project team in the following
three ways:
1. Establishes the objectives for the project, the priority the project will have, the political environment
of the organisation, and the make-up of the project team.
2. The project sponsor will also have the responsibility of managing the high-level stakeholder
relationships (internal and external). These stakeholders may be external or internal to the
organisation.
3. If the project encounters serious problems, the project sponsor may need to become involved in
discussions and actions to resolve the problems.
Project manager P276
A project manager has functional responsibility for the project and has to perform a range of roles:
- define the project, including specifications, scope, budget and cost;
- organise and then manage the team for the project;
- take responsibility for meeting the targets and deliverables (ongoing and final);
- manage problems as they arise.
The nature of projects presents a range of significant challenges for project managers:
- Uncertainty—(due to the unique nature of projects)
- Schedules and budgets—(will require frequent readjustment of targets)
- Authority—(may have authority to deliver project but not enough to command resources)
See page 278 for examples of technical and interpersonal skills required by project managers
Project Leadership and the Management Accountant
Traditionally, a MA has focused on the financial aspects of projects.
However, today, the line between the management accountant’s and the project manager’s responsibilities
have become increasingly ambiguous.
Challenges to MA:
- Preparation of timely and accurate information (particularly given uncertainty in a project
environment)
- Due to reliance on MA information, MAs need to demonstrate a high level of ethical behaviour and
political sensitivity in communicating information
- Obtaining accurate data can lead to politically sensitive information
Leadership – a leader is someone who can inspire people to deliver, although they may not have formal
authority
Pinto (2010) outlines four key ways that a project manager exercises leadership.
- Acquiring project resources—These are the staff, materials and other support required to meet the
project requirements. Often, the main reason for project failure is inadequate resources.
- Motivating and building teams—A project manager has to take a diverse group and form them into a
working team in a short period of time. They then have to ensure that the team delivers in the face of
considerable challenges and competing organisational pressures.
- Having a vision and solving problems—needs to be able to articulate the vision of the project clearly,
maintain focus on this and, at the same time, deal with the inevitable crises that occur.
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- Communicating—formal or informal and needs to be from the project manager to the team, as well
as within the team itself.
The project team P280
Advantages Advantages
Team members focus solely on completing the Individuals have a constant employment path, as
project. they work in a stable functional department.
Team members operate autonomously. A range of specialist skills can be tapped into,
Team members have their own resources. providing the project manager with flexibility.
Team members get to work in cross-functional During project downtimes staff can be used on other
teams, potentially making their job more interesting tasks in their department.
and gaining additional experience outside their
primary discipline or area of expertise.
Disadvantages Disadvantages
Unless the project is of sufficient size, team Individuals have multiple responsibilities that can
members potentially may not be consistently busy. create role uncertainty.
Unlike in a matrix team, if team members are The project manager may not have sufficient
unavailable, it may be more difficult to cover authority to ensure that staff do what is required for
absences. the project when competing priorities surface for
Some functional staff might resist working in a cross team members.
functional team as compared to working in their
own departments.
As functions (like that of the management
accountant) change, a lack of day-to-day
involvement may reduce staff members’ exposure
to the latest thinking.
If correction is required with some aspect of the
project after completion, obtaining prompt action to
rectify the problem can be difficult, as the team will
have been dispersed.
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Lientz and Rea (2003) outline a number of ways that international project teams are different from the
standard project team:
- Collaboration—The need for collaboration between individuals and tasks is greater due to the
dispersed nature of these projects.
- Parallelism—Tasks in the project may be undertaken in parallel in multiple locations.
- Changing requirements—The turnover of staff is greater, as the variation in skills tends to be greater
over the life of the project. This is often compounded by greater variation in project direction.
- Semi-autonomous work—Many parts of the project may be beyond the direct supervision of
managers, making the supervision of staff and tasks difficult.
Page 283 for the individual characteristics that will help an international project team deliver successfully
Sponsor: clarifying objectives even more important (due to complex political environment), managing
stakeholders more challenging due to lovation spread
Manager: defining budget / team over multiple locations is harder, need to have the skill to be proactive and
see potential problems before they arise
MA: information will need to be collected across multiple locations / may need to rely on team members to
collect info. Need to communicate more broadly, so political landscape is widened.
A virtual project team is one in which the internet, teleconferencing, videoconferencing and other forms of
electronic connection are used to facilitate a project.
- goodwill trust—which is established when an individual or organisation delivers what they say they
will deliver (they ‘keep their word’); and
- competence trust—which is based on the perception of whether someone has the ability to deliver
what they say they will deliver.
1. Ensure the project team members have enough demonstrated experience to reduce the risk of
competence failure
2. Ensure roles and responsibilities are clearly defined
3. Per Pinto:
a. Include face to face communication wherever possible
b. Maintain constant communication
c. Create communication protocols / codes of conduct
d. Keep all team members informed
e. Decide on a protocol to resolve interpersonal conflict
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- strategic analysis/fit;
- stakeholder analysis (stakeholder identification and assessment);
- risk assessment; and
- financial analysis.
The first project selection criterion is the strategic fit between the proposed project and the organisation’s
objective and strategy.
The strategic fit assessment can be conducted by reviewing strategy documents or assessing how the project
supports the initiatives presented in the strategy map
The first task is to clarify the business strategy by addressing five questions:
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1. What is the likely long-term impact of this project on key measures used to evaluate business success
(and presented in the strategy map, if one exists) ?
2. Is this project in line with the objectives and actions listed in the organisation’s strategy document?
3. Does this project address an emerging or existing risk, and/or a new opportunity?
Stakeholders are key individuals, groups or functions that have a stake or interest in the project
Internal stakeholders
Functional management: project team members are supplied by functional managers (either on loan in task
force or still working in the functional area in the matrix structure)
Project team members: interest in the success of the project and have loyalty to their functional area
External stakeholders
Clients: focused on project being completed on time, within budget and to specification. Could be a client
within the organisation but external to the project.
End users: the client entity that requires output from the project (i.e. customers)
Regulators: local, state or federal government, as well as govt agencies and statutory bodies
Competitors: could respond unfavourably to the project (introducing a competing product or legal action)
When management accountants undertake stakeholder identification and assessment, they need to think
critically about what the interests of the stakeholders are and what kinds of data and KPIs could be accurately
captured and tracked over time to ensure that stakeholder satisfaction is maintained.
1. Sufficient ethical frameworks are established to address / respond to the unique nature of projects
2. The long term effects of decision making are taken into account even though projects are short term.
To evaluate whether a decision is ethical or not, consider the points below by Drellinger (citied in Turner 2003,
p. 170).
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3. What are the consequences (in terms of benefit or harm) and ramifications (effect of time and
outside influences) for each of the stakeholders?
4. What qualms would the decision-maker have about the disclosure of a favourable decision to this
solution to the CEO, board of directors, family, the public?
5. What is the positive or negative symbolic potential of this solution if understood— or
misunderstood—by others? Will it contribute to building and maintaining an ethical environment?
Project risk assessment is an integral part of project selection and involves risk identification, classification,
prevention and monitoring. At the project selection stage, major sources of risk are identified, evaluated and
classified. Typical sources of risk include:
What? What is the outcome of the project, and will it work (e.g. technical functionality)? What skills will be
required?
Who? Who are the stakeholders? Who will be involved, and are suitable personnel available? Who will be
responsible for what? To whom is the project a threat?
Why? Why are they involved? The purpose here is to identify the aims of different stakeholders involved in the
project (e.g. subcontractors, partners, local government).
How? How do we ensure that the required actions are undertaken and required resources are available?
Where? Where is the project located, or where will the project have an impact? The purpose here is to identify
the risk associated with project location (e.g. environmental, political).
When? When will the project take place, and what is the schedule? What are the main threats to timelines?
What is the impact of missing the deadlines?
How much? How much is the project likely to cost? What is the level of uncertainty in project costs? Can
reliable maximum and minimum cost estimates be made?
Risk classification
The purpose of classification is to assist in deciding whether a project should be abandoned because it is too
risky, or in identifying specific risks that need to be reduced or transferred before starting a viable project.
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Techniques include:
ROI and RI are accounting-based measures and are therefore poor reflections of economic reality. Three core
issues exist with accounting-based measures.
1. Accounting profits include accruals such as depreciation which are not economic measures, but are
based on assumptions about limited asset lives, conservatism in accounting estimates, and an
inevitable decline in value.
2. The second issue is linked to the first. If accruals are unreliable or economically invalid, then the asset
values with which they are associated are equally so.
3. Asset values do not take inflation, or the decline in value of the currency, into account.
Sensitivity analysis is where changes in key project assumptions are evaluated against financial returns, such
as the effect of a 1 per cent increase in sales growth or cost increases.
Scenario analysis is where the effect of changing a group of assumptions is evaluated, and it usually involves
best versus worst case scenarios
Equivalent annual cash flow (EAC) is a technique which has been devised to compare the financial returns of
projects with different lives and different risk profiles.
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1. Describe the various activities or tasks that need to be undertaken to achieve project objectives. This
description should be as detailed as possible and include all required resources and responsibilities.
2. Derive a project budget and schedule from the detailed work plans.
3. Decide on how to monitor the project (i.e. when and how often, what form of reports and to whom
the reports are distributed).
4. Plan for the project’s completion.
At the planning stage, the management accountant should assume a leading role in project budgeting and
scheduling, and in consideration of a range of cost-optimisation options.
Gantt charts
A Gantt chart shows planned and actual progress for project tasks against a horizontal time scale
List activities in the approximate order of execution, include start and end dates.
Particularly helpful when expediting, sequencing and reallocating resources among different tasks.
Can describe task interdependencies, identify critical paths, highlight changes in the project schedule and
identify slack time available for project completion
It also enables analysis of what the shortest completion time is and then provides opportunity for analysis of
how completion times can be shortened.
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Expected time (ET) = (O + 4ML + P)/6 (note: division by six is due to beta distribution of SDs)
Step 3: Define the critical path (see page 323 for example)
Project Critical Time = the longest path through the PERT diagram and the shortest length of time to complete
CPM is a network scheduling technique based on PERT that provides an additional dimension: the analysis of
cost / time trade offs in meeting or expediting project schedules
Crash time reflects the reduction in the duration of an activity that can be achieved by adding resources, e.g:
- Overtime hours
- Additional staff or machinery
- Special equipment
- Expediting subcontractors
- Paying extra for fast delivery
Crash cost is the normal cost together with all the extra costs that are related to expediting the activity
- May expedite cash inflows, thus reducing the time that a project employs capital.
- May lower interest expenses and increased project ROI.
- May help to avoid late completion penalties
- May free up resources in a multi-project environment.
Project duration can only be reduced by crashing activities on the critical path
Calculate the cost-time slope of an activity. The lowest slope is the first one to crash.
Cost time slope = (crash cost – normal cost) / (normal time – crash time)
Cost optimising
When we are seeking a cost optimum for a project, we continue crashing critical path activities until the
additional cost of crashing an activity equals the incremental savings
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The project budget provides cost estimates on a weekly, monthly or quarterly basis
Budgets will need to respond to changes – a revised budget provides a fairer benchmark to evaluate project
management if changes are due to uncontrollable factors. If changes were controllable, the original budget
provides a valid benchmark.
Software enables construction of approaches such as Gantt charts, PERT and CPM, along with project budging
and cost control
The project contract with the client and the activity contract with individual suppliers can be designed in many
ways.
Fixed price contracts provide certainty and pass profit risk back to the supplier.
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PART E: The management accountant’s role in project monitoring and control P330
Important for the management accountant to collect, record and report cost, time and quality related
information during the progress of the project.
Given the unique and uncertain nature of projects, it is difficult to predict future costs and activities – and as
such, significant variances will inevitably arise.
Keep a separate record of committed costs will ensure that timely and useful information is in project reports.
A committed cost is when a contract is concluded or a purchase order is issued.
Regular project-cost reports should contain incurred costs, committed costs and an estimate of costs still
required to complete an activity
The simplest approach to project cost reporting involves comparing actual expenditures against budget – one
major shortcoming of such an approach is that it does not account for the amount of work accomplished
relative to costs incurred.
A method called earned value (EV) has been developed to assess cost and time performance simultaneously.
The key factor in this breakdown is the EV or the expected cost of project work completing to date.
This method of calculation is most appropriate when activity costs are incurred evenly throughout the activity
Spending variance = Earned value – Actual Cost (negative means over budget)
Schedule variance = Earned value – Budget Cost (negative means behind schedule)
Ratios
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Challenge with estimating project completion – works best on projects with reasonable accuracy (such as
building a highway (km) or dredging a shipping channel (tonnes))
Quality is defined as ‘fitness for use’ meaning that it does what it is required to do or fulfils its intended
purpose for the customer.
• Quality planning—At the beginning of the project, the project scope and specifications will be
established (as are project budget and timelines)
• Quality monitoring—A critical task for the management accountant will be to establish performance
measures to reflect the planned specifications.
• Quality assurance—This is about ensuring that all the outcomes of the project are in accord with the
planned specifications and, if they are not, that this is dealt with appropriately
Often, specification is traded off against cost or timeliness (note that C&T are easy to recognise and monitor,
and also, problems with quality may not be evident until the end of the project)
Quality costs
• Prevention costs are incurred in the design of an organisation’s processes and activities so as to
prevent quality failure. This is through a focus on quality inputs and systems, staff training and
equipment maintenance.
• Appraisal costs are incurred when incoming supplies and materials are received, and when products
are inspected during, and at the completion of, the production process.
• Internal failure costs are incurred when quality failure is identified in either the quality control or
assurance process, and rework is able to be completed before the customer takes control of the
project.
• External failure costs are incurred when the customer finds that the project does not meet
specifications and the project organisation has to cover the expense of reworking the project. This is
the most expensive type of quality cost. Not only are there costs involved in reworking already
completed work, but there are reputational costs for project organisations.
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Analysing performance against the project budget and schedule provides basic control over a project for the
project manager. Other performance measures are required to ensure that the project achieves its
deliverables and to ensure project quality.
1. Projects are cross functional and reporting / resources follow functional lines
2. Difficult to design appropriate reward schemes for project members
3. Need to ensure all employees keep their skills up to date (but hard to spare project people to training
courses)
Probity fundamentals:
• Best value for money– ensuring suppliers do not charge unreasonable prices at the expense of a
project or organisation
• Impartiality—Individuals and organisations should expect impartial treatment in their involvement
with a project.
• Conflict of interest—Management accountants need to ensure that there is no conflict of interest,
such as when individuals may have other private interests that conflict with the interest of the project
• Accountability and transparency—Accountability means ensuring that resources are used effectively
and that responsibility is taken for performance.
• Confidentiality—While activities in the project need to be accountable and transparent, some
information needs to be kept confidential, at least for a particular period of time.
Risk management happens when the project commences, while risk assessment happens prior to project
commencement
• Having the right project team: having the right technical skills and experience and keeping them!
• Monitor known risks: diagnostic approach to monitoring identified risks and implementing action
when variances arise (remedial action)
• Monitor unknown risk: stay alert in the ongoing process of risk assessment and management
• Establish contingency responses: contain a buffer of both time and resources and an action plan for
delivering the project on time, even if something goes wrong.
The risk return trade off – monitoring and managing risks needs to be balanced against the outcome of the risk
eventuating.
Identify the stakeholders—A good starting point is to establish a stakeholder register. This should be
established at the project selection stage, and be constantly updated while the project is being undertaken.
Identify their interests—Establish what the interests of the stakeholders are. Are they supportive of the
project or are they against it? Why? If they are against it, is there anything that you can do to accommodate
their interests?
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Assess your capability to satisfy their interests—The interests of different stakeholders may conflict and your
role may be to balance the interests of competing stakeholders. If you are not able to satisfy their interests, or
if it is prohibitive for you to do so, what kind of ethical responsibilities do you have to these stakeholders?
To satisfy stakeholders:
Note that signalling approaches need to be carefully managed as they can create opportunities for
stakeholders to increase functionality or renegotiate the parameters of the project (scope creep – i.e. change
in the project’s scope)
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PART F: The management accountant’s role in project completion and review P343
Many activities require the assistance and expertise of the management accountant at the project completion
stage. These activities include:
- monitoring the project to ensure that completion is the preferred option to abandonment;
- managing the activities required to complete the project;
- ensuring stakeholder consensus on project deliverables;
- financial closure of the project;
- dispersal of project assets;
- post-implementation review;
- preparation of the final project report; and
- knowledge management.
Important to consider whether it is beneficial to walk away from an incomplete project – rather than invest
further resources to complete the project
Checklist P343
List of deliverables comparing the original project plan with the objectives achieved to date. List activities
required to complete the project and then to produce a schedule for those activities as assign responsibilities
for their completion
A project completion meeting should be held with the relevant stakeholders to ensure that consensus is
reached on the extent to which the project has met its original or adjusted objectives.
Management accountants need to ensure that there is constant interaction between organisational strategy
and project delivery so that alignment is maintained.
Questions to ask:
What was the underlying problem or opportunity that the project was dealing with and did it deliver against
this?
- Need to document the underlying reason or problem that triggered the need for a project
Did the project deliver against the strategy it was intended to support?
- Consideration of the extent to which the project was able to support the organisation’s strategy and
objectives to this analysis.
Did the project deliver against its objectives and associated performance measures and targets?
- The objectives / measurements are usually grouped as budget, time and specification related
- The key questions to ask when undertaking an analysis at the completion of the project are:
o What were the objectives and targets in each of these three areas?
o What was the actual performance in each of the three areas (budget, time and
specification)?
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- The strategies of the organisation may change during the life of the project
- Project outcomes are not always clear and quantifiable / may be qualitative rather than quantitative
Stakeholder satisfaction assessment: document each stakeholder’s requirements, issues that have arisen or
successes.
Final budget
The calculation of the project’s final cost and the final budget-variance analysis are undertaken at the end of
the project
Post-project expenditure
Even when the project is complete, there may still be some further costs incurred
Management accountants can be involved in the disposal of excess supplies and capital equipment at the end
of the project. Some ways of dealing with these include:
The MA can provide value by ensuring that organisational learning occurs, particularly about cost and budget
data, but about non-financial performance data that might have been collected.
Questions that the management accountant might ask to enhance organisational learning in this area include:
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The organisation could set up a database or archive of the lessons learned from the project.
Much of the knowledge is held by the staff – need to ensure there is a sufficient redeployment plan and
central database for tracking skills and knowledge
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Covers the role of performance management (both financial and non-financial) in value creation and
sustainability
Implications of performance management for accountants and the links with governance and signalling
Performance measurement: scientific technique involving comparison to a specific scale, specific in nature.
Performance indicator: less specific in nature—it is more like a signal indicating a general direction or trend
rather than an exact comparison against a scale.
Performance can be seen as a method of value creation (‘If we aren’t creating value what are we doing?’) in
terms of process or the results of a process. Performance is usually interpreted relative to a target, a trend
over time, or by comparison to a benchmark.
• provides comparisons to budgets and standard costs, and enables variance analysis, etc
• links the information in the general ledger with other sources of data such as inventory records,
labour routings, bills of materials, and standard costs.
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• organisation to assess the whole supply chain (industry value chain) of which the organisation is a
part, and to provide comparisons with competitor organisations and competitor supply chains.
Non-financial information can come from a range of sources, such as statistical data, external surveys, from
non-accounting systems (such as on-time delivery etc), stock exchange data.
Information needs to be interpreted in the context of the industry, the organisation’s competitive strategy and
business model.
Unfortunately, organisations tend to measure what is easy to measure, rather than what is important to
measure (Denton 2005). This raises the issue of whether all performance is measurable.
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• for managers to aid in planning, decision-making and control in pursuit of value creation;
• on environmental and social sustainability for integrated reporting purposes; and
• for signalling to investors and other stakeholders.
Performance: a Performance measurement can be viewed in terms of the value creation process.
process of value
Value creation can come from innovation (Apple) or more convention business
creation
operations (Woolworths)
Can look at value creation from the perspective of the shareholder or the internal
business (these are interrelated).
Performance and Time: Important that performance is sustained (and even improved over time) –
sustainability don’t focus on single year profits / single customer survey.
(p400) Sustainability: meet needs of today without compromising future generations
How to convert long term benefits of sustainability into current period measures
Reputational issues driving sustainability compliance
Need to factor environmental impacts into capital investment assessments to
accurately price / manage future cost structures
GRI (Global Reporting Index): sustainability reporting guidelines
Integrated Gives financial capital providers an integrated representation of the key factors that
reporting are relevant to the organisation’s present and future value creation
It is one report that covers shorter term financial and longer term sustainability
reporting and their connection
(p403)
Types of capital: financial, manufactured (machines), natural, human, intellectual,
social and relationship capital
XBRL: eXtensible Business Reporting Language (the language of electronic
communication of business and financial data). Computers can treat XBRL data
intelligently
Signalling Signalling occurs when a measure is used to communicate information (either a
forward goal or actual achievement)
Being given sufficient information to understand and assess investment risk is crucial
to the ability of investors to make informed investment decisions (ASX CGC 2014).
Signalling will be insufficient unless investors understand the risks the company faces
and the extent to which future performance may be impacted by those risks.
Signalling occurs between:
- organisations and outside stakeholders (IR, financial statements)
- Managers within the business
- Organisations to employees etc
HIH is an example of the failure of CG and the failure to provide appropriate
signalling to investors.
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Corporate governance is defined as the framework of rules, relationships, systems and processes within and by
which authority is exercised and controlled within corporations. It encompasses the mechanisms by which
companies, and those in control, are held to account.
Good corporate governance will promote investor confidence which is crucial to the ability of entities listed on
the ASX to compete for capital (ASX 2014, p3).
- Set objectives, and monitor performance in terms of achieving those objectives and to report to
shareholders
- When determining strategy is to articulate the risk/return trade-off and the organisation’s risk
appetite.
- Defining the corporate strategy, the management controls and the performance measures necessary
to manage risks and achieve organisational objectives.
- Balance short-term and long-term expectations about performance—the notion of sustainability and
also to some extent to balance the needs of shareholders and other stakeholders.
- Actual performance needs to be monitored against performance expectations (good governance).
COSO’s Enterprise Risk Management—Integrated Framework (COSO 2004) defined enterprise risk
management as a process, effected by an entity’s board of directors, management and other personnel.
Five components: control environment, risk assessment, information and communication, control activities
and monitoring activities. 2013 update adds 17 principles related to these five components that are essential
for effective internal control.
CPA Australia members must comply with APES 110 Code of Ethics for Professional Accountants (the Code).
The standard is based on the Code of Ethics for Professional Accountants issued by the International
Federation of Accountants.
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(c) Professional competence and due care—to ‘maintain professional knowledge and skill at the level
required to ensure that clients or employers receive competent professional service’ based on
current developments in practice, legislation and techniques and ‘act diligently in accordance
with applicable technical and professional standards’ (s. 130.1).
(d) Confidentiality—to respect the confidentiality of ‘information acquired as a result of professional
and business relationships’ and, therefore, not disclose any such information to third parties
‘without proper and specific authority, unless there is a legal’ or professional right or ‘duty to
disclose’, nor use the information for the personal advantage of the member or third parties (s.
140.1).
(e) Professional behaviour—‘to comply with relevant laws and regulations and avoid any action’ that
discredits the profession (s. 150.1).
The circumstances in which members operate may create specific threats to compliance with the fundamental
principles. When a relationship or circumstance creates a threat, such a threat could compromise, or could be
perceived to compromise, a member’s compliance with the fundamental principles of the Code (s. 110.10).
Threats fall into one or more of the following categories:
Accountants may feel under pressure to manipulate or report performance information as a result of any of
the threats identified in the Code (some of these behaviours are described below).
The examples of HIH in Australia and WorldCom and Enron in the US highlight the role of accountants in
measuring and reporting performance with integrity, objectivity, competence and due care.
Control systems and performance measurement are used by principals to monitor the actions of their agents
Contingency: there is no universal best way to measure performance. Each organisation will need to develop
an appropriate performance measurement system that is relevant to its needs.
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Covers the role of strategy in performance measurement and how performance management can be seen as
an important element of management control
Strategy must be implemented once it is formulated, and this is why performance measurement is important.
Ansoff established a hierarchy of objectives that were centred on performance measures such as ROI
Galbraith & Nathanson argued that ‘variation in strategy should be matched with variation in processes and
systems as well as in structure, in order for organisations to implement strategies successfully’
Mintzberg and Waters (1985) defined strategy as a pattern in a stream of decisions (distinguishing intended
and emerged strategies, as not all intended strategies are realised.)
Intended strategies: formulation of objectives and goals, internal appraisal (SWOT), choice from various
strategic options (Ansoff 1988)
Performance management requires processes for measuring, monitoring, managing, improving and reporting
performance to ensure that goals and strategies are achieved. Metrics / targets will be different for different
strategies
Decision-making:
• Making choices from alternative courses of actions. Often based on imperfect information
• Can have conflicting objectives (ST / LT) or non-financial objectives
• Needs to consider the current circumstances rather than being overly focused on an objective that
was set at a time when conditions were different.
Management control: critical element of strategy implementation, process of establishing targets, measuring
actual performance and taking corrective action where actual performance differs from the target
A management control system implies an integrated set of individual controls that is intended to help
accomplish strategy by controlling resource inputs, influencing the production process and monitoring outputs
(Daft & Macintosh 1984)
Otley (1999) argued that performance management provides an important integrating framework for the
different elements of management control systems, containing both formal and informal kinds of control.
A further framework for performance management systems (PMSs), developed by Ferreira and Otley (2009),
contains eight core elements:
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• PMS change;
• PMS use;
• strength and coherence of the core elements; and
• information flows, systems and networks.
The PMS exists within a set of broader contextual and cultural influences.
Chenhall (2003) writes that the definition of management control systems has evolved from formal, financially
quantifiable information to include:
Management control (i.e. controls exercised by mgmt outside the day-to-day routine of the system):
Personnel controls:
Financial controls:
Planning controls:
- annual planning process that is consistent with the organisation’s strategic plan;
- identifying key success factors with the chief executive officer (CEO); and
- developing a service level agreement with internal customers.
Process controls:
Performance measures:
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Return on investment (ROI), for example, is often used to measure financial performance, but it has long been
argued that ROI has significant limitations. There are substantial questions around:
• the level of investment that should be used: total capital employed or net assets;
• whether assets should include non-current, current or both; and
• whether assets should be valued at cost or book value (Solomons 1965).
• whether a high rate of return on a small capital investment was better or worse than a lower return
on a larger capital, and
• that managers could increase their reported ROI by rejecting investments that yielded returns in
excess of their organisation’s (or division’s) cost of capital, but that were below their current average
ROI.
Beyond Budgeting:
As global competition expects managers to be more responsive and innovative, a new way of thinking should
not rely on the command and control budgeting model.
Instead the budgeting process should give them the information and time required to think, reflect, share,
learn and improve.
Budgets should be replaced with a range of financial and non-financial measures, with performance being
judged against world class benchmarks
Lean accounting:
Lean thinking focused on customer value and the use of fewer resources – seeks to only do activities that add
value and eliminating those that do not.
Lean accounting focuses on simplifying processes, reducing waste and speeding up the accounting function to
improve decision making, reduce errors and add greater value to the organisations. This involves a detailed
review of the work done by accountants and a search for ways to reduce errors and speed up processes.
For example – would adopt the ‘backflushing’ approach to costing – where you wait until a product is finished
and then assign standard costs for material and labour to the product.
Backflushing is a method of costing associated with a JIT production system, which applies cost to the output
of a process
Transfer pricing
Transfer prices should be set at the marginal cost of the supplying division plus the opportunity cost to the
group.
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If the company is using its entire production capacity, the contribution that it earns from external sales is the
opportunity cost foregone if it transfers internally.
Need the following information to make the correct decision on transfer pricing: unit variable costs, external
selling prices, capacity levels, availability of external products
Transfer pricing allows divisional profit performance to be measured. It should prevent dysfunctional
behaviour by ensuring all managers make decisions with the wider company in mind.
Operational performance:
- Need to deliver on the short term financial performance requirements for shareholders
- Each business unit contributes to whole-of-organisation performance – meet corporate targets
- Balance with sustainability over the longer term
- advertising spend;
- research and development spend;
- market research spend;
- number of sales visits to retail stores;
- orders taken by sales team in each region;
- number of new product launches;
- wastage in production;
- quality problems and production faults;
- productivity; and
- time from order to delivery.
Strategic performance:
- Sustainable performance over time at the whole organisation level (multiple periods, considering
strategic goals, economic conditions and the competitive environment)
- Considers product life cycles, supply chains, market share through competitive strategy (cost
leadership, differentiation, focus strategies)
- Risk management / risk appetite as set by board / risk return trade off
Examples:
- sales volume and value for each product bar over the whole product life cycle;
- profitability of each product over the whole product life cycle (after deducting research and
development, market research, and advertising costs);
- on-time deliveries of imported cocoa from Brazil;
- on-time deliveries of milk from dairy farms;
- on-time deliveries by logistics supplier;
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Strategic measures: provide integrated information to help managers deliver positive strategic outcomes:
1. strategic and operational linkages: these capture the overall extent of integration between strategy
and operations and across elements of the value chain;
2. customer orientation: linkages to customers including financial and customer measures; and
3. supplier orientation: linkages to suppliers and includes business process and innovation measures
(Chenhall 2005).
- Often more focused on short term performance, sometimes at the expense of longer-term
performance
- Lagging rather than leading measures of performance. A leading measure is likely to predict the result
of a lagging measure
Performance pyramid The pyramid has descending objectives and ascending measures beginning
Lynch and Cross (1991) with corporate vision, cascading through successive layers of business
units, core business processes, departments, work groups and individuals.
One side of the performance pyramid is concerned with market
Shareholder focus
performance (customer satisfaction, flexibility, quality and delivery) and
the other side to financial performance (flexibility, productivity, cycle time
and waste).
Results & Determinants Developed for service industries
Framework In this framework, results (competitiveness and financial performance)
(Fitzgerald, Johnston, et al. were distinguished from the determinants of results (quality, flexibility,
1991) resource utilisation, innovation).
Shareholder focus
European Foundation for Separates five enablers (leadership, people, policy and strategy,
Quality Management (EFQM) partnerships and resources, and processes) and four result areas (people,
Excellence Model customer, society, and key performance), all underscored by innovation
and learning, with performance measures identified for each enabler and
result area
Multi stakeholder focus
The EFQM model is used widely in the public and not-for-profit sectors as
well as in many business organisations.
‘Six Sigma’ Designed to reduce variability in manufacturing and business processes.
Originally developed by It recognises the cost and impact of failure in any single process on the
Motorola overall yield using a methodology known as DMAIC: define, measure,
analyse, improve, control. Six Sigma relies extensively on statistical
techniques. The Six Sigma Business Scorecard has seven elements covering
Shareholder focus
all of the functional business areas:
1. leadership and profitability;
2. management and improvement;
3. employees and innovation;
4. purchasing and supplier management;
5. operational execution;
6. sales and distribution; and
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The balanced scorecard (or BSC) was developed by Harvard academic Robert Kaplan and consultant David
Norton based on their work with US organisations
Organisations use performance measures and targets linked to their objectives (contingency approach),
affirming the clear link between strategy and performance measures. The BSC ‘translates a company’s
strategic objectives into a coherent set of performance measures’ (Kaplan & Norton 1993, p. 134).
Business Leading Quality pass rate, on-time delivery, Efficiency of process reduces
process cycle time (from order to delivery) and costs and satisfies the
productivity customer
Innovation Leading Employee retention and satisfaction, Leads to continuous
and learning investment in training, research and improvement
development expenditure, and new
patent registrations.
Balance:
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• Difficult of finding a true balance between different measures, especially when measured in different
terms
• Assumption of cause-effect relationships: cannot assume that changes to the leading measure will
have a cause-effect change on the lagging measure.
o One difficulty is the ‘predictive model’ set by the organisation (the set of assumptions that
lay behind the strategy implementation) – these models assume agreement amongst
organisational participants on cause-effect
o Goals are often ambiguous (different goals are held by different organisational participants)
• Limited capacity of organisational participants to effect change (budgetary constraints,
organisational policies or other management controls – may lack the tools for learning and
continuous improvement)
• Difficult to set up and administer
• Setting goals can take longer as more stakeholders are involved
• Much of the required measurement information may be difficult to obtain
Other criticism of the predictive model (per Otley & Berry): different participants have different objectives so
what to predict is unclear, lack of agreement about cause-effect relationships, there may be little value as
effecting change is often difficult.
Step 1: Consider stakeholders, strategy, objectives and develop measures for each of the four BSC perspectives
Part of the strategy will be to identify the relevant performance measures, which will determine the most
important areas of success for the organisation’s predictive model (e.g. patents at Apple, sales per m2 at
Woolworths)
Step 2: Balance strategic and operational measures, leading and lagging measures, financial and non-financial
measures and the perspectives on performance that are relevant to the organisation
- Multiple stakeholders
- Multiple objectives
- Non-financial measures are often more important than financial ones
- Funding tied to specific outcomes
Performance measures need to be developed contingent on the outcomes for specific projects.
Strategy mapping (Kaplan & Norton 2001) is a development of the BSC. It is driven by strategy and goals. The
strategy map for an organisation reflects the assumptions of its predictive model.
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It is a visual approach that helps identify assumed cause-effect relationship s and where critical areas of
performance need to be measured.
Strategy maps are developed through workshops at several levels, e.g. with customers to identify what is
important, then with employees / internal management to determine how to deliver
Where performance needs to be improved, the strategy mapping process allows for resource reallocations
through changing budgets.
Strategy mapping is a continual learning process, which should lead to changes to the assumed cause-effect
relationship and the resultant performance measures and targets. Should continually re-evaluate and modify
the assumptions in the relationship between strategy, performance measurement and budget.
Performance at the whole of organisation level can only be achieved if individual business unit and products
and services contribute to that performance.
Performance measures should cascade so that, at each successive organisational level, the measures are
different, but lower-level performance on one measure contributes to higher level performance at the next
level.
Typically, lower level employees have fewer financial targets, but more non-financial ones (leading measures)
Important to ensure integration of performance targets so that no business unit will be disadvantaged by
another achieving its target.
Need to avoid the tenancy of a business unit to pursue achievement of performance measures for itself at the
expense of the organisation as a whole
Ways cascading can be more effective: by cascading organisational goals, measures and targets to functional
departments, to cross-functional teams, or to particular initiatives or projects.
• Accounting information system: capture, store, process and report accounting transactions (as well
as a range of related non-financial information)
• EPOS: electronic point of sale: range of transaction information, inventory requirements and
customer data.
• ERP: enterprise resource planning: integrate data flow and access to information over the whole
range of a company’s activities – SAP / Oracle
• Cloud computing: store larger sources of data and make it easier to analyse
• Big data: large volumes of data available from public sources. McKinsey argue that big data will
become a key basis of competition, underpinning new waves of productivity growth and innovation
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Key thing for organisations is to determine what performance information is important from the volume and
variety of information that is now available. May require specialist technology / software to process
Market research by Oracle – primary emphasis on revenue growth rather than profit
The lack of reliable, accurate and timely data is compounded by a turbulent business environment, which is
caused by:
• economic uncertainty;
• changing technology;
• the rapid introduction of new products;
• changing customer demand; and
• increased regulation and competition.
Performance Management for Turbulent Environments PM4TE (Barrows & Neely): in a turbulent
environment, the need for timely information grows significantly
- a performance management cycle (PM should be used for learning rather than control);
- an execution management cycle that explicitly links projects to performance (as it is through projects
that most organisations drive change and improvement); and
- model enablers such as leadership and strategic intelligence.
Barriers to implementation of performance measurement systems in relation to strategy (Kaplan and Norton)
- Failure by the senior management team to achieve consensus leading to different groups pursuing
different agendas not linked to strategy in an integrated way.
- Strategy that is not linked to department, team and individual goals.
- Strategy that is not linked to resource allocation decisions (i.e. where budgetary allocations are
historical and not linked to strategy).
- Feedback to managers that focuses on short-term financial performance rather than on a review of
measures of strategy implementation and success.
The keys to successful integration of strategy with performance measurement can be summarised as:
- top management commitment to a unified strategic vision, including synthesising the performance
expectations of multiple stakeholders;
- developing performance measures that are consistent with the vision and that enable attention to
be drawn to whether the strategy is being implemented and is successful. This involves balancing the
attention on short-term/operational and long-term/strategic aspects of performance;
- ensuring that resource allocations are consistent with strategic priorities;
- ensuring that individual and team performance measures are linked to organisational performance
measures;
- integrating all available sources of information into a single suite of cascaded performance
measures that all accountable managers in the organisation have access to and use; and
- using performance measures as a learning tool, not just as a means of control. Learning facilitates
modifications to strategy, resource allocations and what (and how) performance is measured.
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How to design and set meaningful performance measures and how to establish reasonable performance
targets. Role of power and culture
Improving performance through targets, trends and benchmarking, continuous improvement through L&D
The design of a performance measurement system will be linked to the organisational strategy and will be
contingent on an organisation’s competitive environment.
The cascading of performance measures reflects the agency relationship between higher and lower level
managers (an extension of the principal-agent relationship).
Some measures may be used for signalling and others for planning, decision making and control.
One consideration in designing performance measures is to balance the measures between those concerned
with efficiency, effectiveness, and equity:
- Efficiency is concerned with the conversion of inputs or resources (physical, human and financial) into
outputs (products and services). This is a focus on improving productivity and reducing cost, of ‘doing
more with less’ and of ‘doing things right’.
- Effectiveness is a focus on the end result of production, on quality and customer satisfaction. It is
concerned with whether the outputs achieve what was intended, or ‘doing the right thing’.
Effectiveness is particularly important in the public and not-for-profit sectors.
- Equity is concerned with fairness and equal treatment. It is concerned with managing differences
such that the costs and benefits of economic activity are spread equally amongst different customer
or other stakeholder groups.
One way of looking at performance measures and targets is through the acronym SMART— which stands for:
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- R—relevant. Performance measures and targets should be relevant to the strategies in the business
model.
- T—time-based and timely. Performance targets should be established to cover a defined time period
to determine whether the performer has achieved the target. Performance measures also need to be
produced on a timely basis (i.e. so that corrective action can be taken).
Validity Validity (or accuracy) refers to how well a measure helps evaluate the issue or item of
performance being considered. If a measure does not accurately describe what it is
supposed to, all other attributes are meaningless.
Reliability Reliability means that whatever is being monitored can be measured in an objective and
specific manner. Reliability is concerned with consistency, or the extent to which the
reported performance is the same over repeated measurement attempts
A measure can be highly reliable but completely invalid for decision-making purposes
Clarity If a measure is to be meaningful, it should be easy to understand with little or no
ambiguity in interpreting the results
Timeliness To be useful, performance measures need to provide information early enough to allow
corrective action to be taken
Accessibility Performance measures should be able to be accessed by all authorised organisational
participants who need the information.
Accessibility refers not only to the measure, but also to the information that drives the
measure
Controllability In order to be effective in motivating behaviour, what is measured must be controllable
by those whose performance is being measured.
Controllability refers to the ability to influence the quantity or value of the measure
through action
Cost and benefits of performance measurement (p467)
Performance measures need to be cost efficient – adopt a cost-benefit analysis (compares outcomes with
costs to produce).
IT is important that the design of a performance measurement system recognise the cost of measuring
performance and compare this cost with the benefits that are likely to accrue from it.
Cultural elements can be seen as part of the control package, but cultural factors also influence the design of
performance measurement systems. Cultural norms should be the basis for guiding long-term behaviour
Control systems are related to intra-organisational power ‘because they are used to change the performance
of individuals and the outcomes of organisational processes’.
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‘Different systems are often introduced by different interest groups at different times’ and so control systems,
including performance measurement, will be implemented when they are consistent with:
Targets
Targets need to be set for each performance measure and that performance measure cascades down the
organisational hierarchy
Can’t continually increase the target and expect the target to be achieved because:
- there is a cost benefit trade off in continually achieving more stretching targets
- impact of some targets on other targets (need to keep targets balanced)
- the accuracy of assumptions in the predictive model (the predictive model suggests that if particular
actions are taken, they are likely to lead to defined levels of performance)
Trends
Trends determine improving or worsening performance over time and are more reliable measures of
performance than comparing to targets which may be set subjectively.
Benchmarking (p476)
Requires other organisations’ data to benchmark against, and sometimes access to this data can be difficult.
Note for industry benchmarks could even set up a benchmarking consortium
Types of benchmarks:
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• obtaining the participation of benchmarking partners, all of whom must see some value in the
process;
• determining why performance is different compared to a benchmark;
• the sometimes widely different contexts of organisations (e.g. regulatory, technological and historical
legacies);
• non-standardised data—that is, data is measured differently or has a different meaning between
organisations (e.g. gross profit may be measured differently); and
• the historical nature of the data itself (which may not reflect more recent changes).
Organisational learning processes enhance or impede the acquisition, sharing and utilisation of individual
knowledge within organisations (see Nonaka 1991). It is concerned with assumption sharing (e.g. in the
predictive model) and the construction of mental maps, as well as unlearning redundant information.
Knowledge management has been described as the process of creating, capturing and using knowledge to
enhance organisational performance at the level of the whole organisation rather than at the individual level
Performance improvement:
• Requires a learning process that makes performance comparisons using targets, trends and
benchmarks;
• Identifies changes needed to the assumptions about cause–effect relationships in the mental models
held by individuals and the business models of organisations; and
• Changes any or all of behaviour; performance measures; and targets, where necessary.
Performance measures focus on what is important for the organisation, based on what is learned about its
business model.
- Diagnostic controls use feedback to monitor performance and correct deviations from the plan
- Interactive controls: used by managers to involve themselves more directly in the decision activities of
the employee
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Group vs individual performance: the choice of an individual or group award depends to an extent on the
interdependencies that exist within the organisation. High levels of interdependencies make it hard to identify
individual performance.
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Each stakeholder group has its own interests and desires and therefore its own definition of the value that it
wishes to receive from the organisation
Porter’s generic value chain diagram is reconfigured to include the important supplier, channel and customer
value chains. These upstream and downstream parts of the industry value chain are those of most concern to
an organisation.
An organisation must have an in-depth understanding of the activities carried out in its distribution channels,
so that its own activities can be integrated with those of distributors in the most efficient and effective way.
The downstream channel and customer value chains inform all of the organisation’s strategic revenue
management initiatives.
An understanding of upstream suppliers’ value chains is similarly important. By understanding its supplier’s
activities, an organisation can organise its own activities in the most efficient way and so reduce supply chain
costs.
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Product Costing
Organisations need to have accurate costs for the goods or services they supply so they can ensure that prices
are high enough to generate profits.
Inaccurate costing systems have led organisations to set prices that are not profitable (i.e. too low) or are not
attractive to customers (i.e. too high).
ABC is a technique designed to assist organisations to classify and allocate indirect costs properly.
Value engineering
VE improves the value of products by examining a product’s functions to ensure only functions of value to the
customer—its basic functions—are included in the product offering, and that the cost of these basic functions
is minimised.
Cost drivers
Activities consume resources and incur costs, so it is necessary to identify what drives these costs. Traditional
volume-based allocation methods usually rely on a small number of cost drivers, such as direct labour hours,
direct labour cost or machine hours – may not actually ‘drive’ all the costs.
ABC separates different types of costs into different cost groups or pools. These groupings are based on what
activity actually causes or drives this cost to be incurred.
Activity based costing provides a more meaningful and accurate classification and analysis of most indirect
costs incurred by an organisation
- Where there are multiple products which consume different resources at different rates (product
diversity)
- Where different indirect manufacturing costs are related to different underlying factors (drivers),
many of which are not related to volume measures
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- Identify the nature and significance of resource-consuming activities and the products making up
those activities
- Identify the costs of non-value adding activities and help to prioritise the elimination of non-value
adding activities
- Develop performance measures which focus on activities that must be controlled in order to reduce
costs
Performance measures for ABC should relate to volume, quality, time and cost. Activity volume measures
provide an indication of the throughput and capacity utilisation of activities. To increase customer satisfaction,
organisations must provide a speedy response to customer requests and reduce the time taken to develop and
bring a new product to the market. Organisations must therefore focus on the time taken to complete an
activity or sequence of activities.
Traditional costing will misallocate costs – usually under costing high complexity, low volume products and
over costing low-complexity, high volume products.
Throughput accounting: a simplified accounting system based on Theory of Constraints (ToC) principles. It
seeks to maximise profits. TA makes growth-driven management and decision making simpler and
understandable even for people not familiar with traditional accounting.
Kaplan and Anderson (2007) suggest that the technical complexity and the cost of implementing and
maintaining an ABC product costing system are among the primary reasons for the low adoption rate.
The key message from TDABC is that it only allocates used time, and separates out unused capacity such that
management can take appropriate action.
TDABC can be extended to account for more complex settings or changes in operating conditions. Many
activities may be performed in a variety of ways, depending on the circumstances.
TDABC uses time equations to accommodate these types of variations (Kaplan & Anderson 2007). For such
complex activities, the time equation is:
Standard activity unit time + Variation activity unit time = Complex activity unit time
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Strategic revenue management is an approach to managing the revenue, expense and investment areas of a
business with a focus on revenue initiatives.
Hard functions: the technical and economic use of the product such as operational performance (e.g.
economic life, production capacity and cost of operation) and ease of use (e.g. training to use product)
Soft functions: the image of the produce such as appearance, aesthetics, prestige and effect
Customer will have a range of values they are willing to pay for an item
Important to understand the upper bound of customer value, as it represents the maximum profit that could
be achieved from a sale. The closer the selling price to the upper bound, the lower the likelihood of a sale
Customers purchase value, which they assess by comparing an organisation’s products and services with
similar offerings from competitors. The organisation creates value by carrying out its activities either more
efficiently than its rivals, or by combining activities in such a way as to provide a unique product or service.
Price is the amount a customer is willing to pay for a product or service. There are products for which a
customer will pay a premium—a high price—while for other products, the customer will be price sensitive and
pay a low price.
Rapid skimming When the price is high (such as the latest release of an iPhone), the strategy used is
called ‘rapid skimming’.
Customers are willing to pay a premium for the new product.
Rapid penetration Co-creation of value with customers.
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Works when customers are price sensitive, there is strong potential competition (i.e.
rival cheaper phones) and the business enjoys economies of scale.
Slow skimming For a slow skimming strategy, the launch of a product is done at a high price with low
promotion.
Low promotion expenditure makes sense if the market size is limited and most of the
market is aware of the product.
Slow penetration For a slow penetration strategy, the product is launched at a low price with low levels
of promotion.
Works if the market is price sensitive and not promotion sensitive.
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Many organisations find it necessary to achieve significant reductions in operating costs, boost operational
efficiency, and rationalise investment budgets.
Increasing efficiency without reducing costs: the spare capacity dilemma (p573)
Where efficiency gains are made, the use of fixed resources are often reduced – and it isn’t possible to reduce
or eliminate spare fixed capacity in the short term
- Decisions about the organisation’s structure, investments and mode of operations (e.g. invest in
manufacturing equipment to reduce wastage / labour costs)
- Executional cost drivers i.e. how economically and efficiently the organisation executes its strategy
(enter into a long term procurement contract, additional on the job training for staff)
Often will focus initiatives on structural cost drivers and once successfully shifting the manner of production,
try to obtain further reductions by examining executional cost drivers.
1. Does the cost relate to activities that are not value adding?
2. Can the resource employed to carry out value-adding activities be acquired at a lower cost?
3. Can the time and effort devoted to carrying out the value-adding be reduced, thereby resulting in a
reduction in costs?
4. Does the cost relate to a resource that is under-utilised?
5. Can the services provided by a resource be shared with other products or functions?
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Lifecycle looks at the introduction, growth, maturity and decline phases of a product’s life
Target costing deals with the pre-production stages of the product life cycle and promises the greatest
opportunity for improving product cost performance.
Kaizen costing is primarily associated with the manufacturing and distribution stages (maturity) of the product.
Lifecycle management views any new product as an investment which, over its entire economic lifetime,
should recover the initial and subsequent cash costs of investment and generate sufficient returns to justify
the risk taken in developing that product.
As a cost management toll, it seeks to reduce the overall cost of a product over its entire life cycle, with the
help of production engineering, research, design, marketing and accounting departments
Introduction Can enter the market with high price (price skimming) or low price (price
penetration)
Costs are higher in the introduction phase because of R&D and marketing costs
Aim of marketing is to establish a market and build demand
Seeking to build brand awareness
Growth New competitors, customer feedback received, new distribution outlets being found,
product quality improvements being made
Although marketing costs are high in the growth phase, production and distribution
economies of scale can reduce costs overall.
Seeking to build brand preference
Maturity Aim of marketing is to maintain market share and extend the product’s life cycle
Decline Advertising expenditure decreases and focuses on reinforcing the brand image of
remaining products in the product line
Target costing initially focuses on what the market is prepared to pay for the product (i.e. identifies the likely
target price). Knowing the accepted market price enables the organisation to determine the cost that can be
incurred in manufacturing the product after allowing for the desired (or target) profit.
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Usually applied to products that have clearly defined inputs (raw materials and labour) and outputs that can be
more carefully analysed, managed and changed.
The target selling price is the price the market is prepared to pay for a product and is determined by the:
Steps to apply:
Step 3: Determine the target cost by subtracting profit margin from the selling price
Step 4: Determine whether the product can be produced at or below the target cost
Step 5: If the production cost is at or below the target cost, commence production. If not, look at ways to
reduce costs or consider reducing the profit margin
Achieving incremental reductions in product costs through a continuous program of small improvements
Focuses on cost reduction during the production stage of a product’s life cycle.
- better utilisation of existing technologies and resources (e.g. a telephony service provider increasing
the customer load that can be carried on its mobile telephone system);
- elimination of waste (e.g. idle employee time, material scrap, material handling and excessive
inventory levels);
- increased productivity from operational personnel (e.g. from staff development and technical
training) or having multi-skilled employees who can perform different roles (e.g. where employee
headcount is kept to a minimum); or
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- reducing business activities and costs by outsourcing services that can be provided at the desired
standard at a lower cost by an outside supplier.
Summary
Recovery of the product from customers at the end of its economic life:
Business Process Management focuses on the definition, direction and improvement of processes (activities
that turn inputs into outputs) for the delivery of superior customer value.
ABC—establishes relationships between both manufacturing and non-manufacturing overhead costs and
activities so that overhead costs can be better allocated. The aim of ABC is to provide an accurate cost of
products or other cost objects of interest to management, mainly for operational decision-making.
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ABM—focuses on managing activities along the organisation’s value chain to reduce costs. ABM is focused on
strategic decision-making and aims to improve customer value through business process improvements. It is
focused on strategic planning and performance.
Activity based analysis recognised the complexities of modern business, it is concerned with all types of
overhead cost – however, some measure of arbitrary cost apportionment will still be required.
ABM focuses on outputs – activities that do not produce valued outputs are called non-value adding activities
and need to be eliminated or reduced as much as possible.
The most complex aspect of ABM is analysing groups of interrelated activities in the activity map to see if they
can be reorganised in a more efficient or strategically relevant manner.
To determine the cost savings that may be realised from ABM, it is necessary to understand the factors that
determine the economics of the organisation’s value chain. Factors to be analysed include:
Scale—the extent to which the organisation has sufficient production capacity and volume of output to
achieve economies of scale and with it, a significant market share.
Scope—the extent of vertical integration influences control over the industry value chain. Highly integrated
organisations have more control over the prices paid for inputs and revenues received for outputs.
Experience—the benefit of that experience should be reflected in higher levels of productivity and lower
wastage and rework rates.
Complexity—a highly complex product or service portfolio has costs which are likely to be significantly higher
than an organisation with a relatively simple range of products or services. This additional cost must be
balanced against the desirability of offering a full product range.
Channels—the channels used to distribute products can have a significant effect on value chain costs and
benefits.
ABM includes – cost reduction, product design decisions, operational control and performance evaluation
Whilst significant revisions to the organisation’s activity map, like those in BPM, are important aspects of ABM,
ABM can also involve less radical process improvements. Elimination or reduction of non-value adding
activities is a secondary focus of ABM.
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Warranties: may find that non-value adding activity like a warranty costs less than making changes and fixing
activities in the value chain to ensure there are zero defects. This is an example where the cost outweighs the
benefit of eliminating a non-value additive activity.
CI is focused on existing activities and aims to engage all personnel involved in that activity in an ongoing
improvement process.
The management accountant can support CI by providing management with information in relation to
efficiency or productivity ratios
Units of product / activity cost = any increase in ratio can be interpreted as a positive outcome.
Consider social and environmental responsibilities in order to define a broader notion of value
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Understanding supplier related costs in order to identify and evaluate different strategic for obtaining
required inputs at an overall lower cost
Customer profitability analysis to assess each customer segment and customer related activities that have
an impact on the net margin of each sale
Supplier management
Benefit Disadvantage
Single Build relationship / partnership Greater risk of supply chain disruption
supplier
May result in higher quality goods / reduced Sharing information may reduce negotiating
costs power
Can work together to increase efficiency in
supply chain (e.g. reduce checking of
deliveries etc)
Global Suppliers
May look for suppliers that comply with the voluntary standards – International Organisation for Standards
(ISO)
Organisations may wish to regulate the work practices of their suppliers to manage the risk of using low-cost
overseas labour
Important to monitor the suppliers’ actual compliance with the terms of the code
May need to supplement with local third-party experts
Factors to consider in selecting a supplier:
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Behavioural compliance: where the terms of the procurement contract dictate the interactions between the
supplier and the organisation when resolving a supply problem
Attitudinal compliance: where both parties willingly collaborate to resolve a supply problem jointly
JIT – minimising inventory levels to reduce the required space for storage, fewer people to manage physical
inventory, reduce waste by avoiding obsolete stock, lower working capital requirement.
Features of JIT
- Pull scheduling: buying or producing at each stage of the supply chain only when the next stage in the
chain wants the output
- Kanban control: using a system of signalling work flow requirements using cards or other signalling
devices
- Greater visibility of what is going on, such as open plan work place layouts and coloured lights to
indicate stoppages.
VMI – vendor managed inventory arrangements where suppliers take full responsibility for ensuring the raw
materials and components are delivered exactly where and when they are required by the production process.
Whether sourcing globally, domestically or both, every supply chain strategy is exposed to supply chain
disruption. Disruption to supply can occur for many reasons, including:
- supplier failure (e.g. the supplier cannot deliver because their manufacturing facilities have been
damaged or they have been liquidated);
- logistics failure (e.g. workers at the inbound port take industrial action over a safety issue and the
freight cannot be unloaded);
- natural disasters (e.g. earthquakes, tsunamis and cyclones may affect the functioning of the supply
chain); or
- geopolitical events (e.g. trade sanctions).
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Usually the most important reason or factor for choosing a supplier or vendor is the cost of the item being
purchased. Other factors, such as quality, reliability and environmental credentials, are also important, but are
often much harder to measure.
Address supply chain risks – single vs multiple suppliers (deeper relationship vs backup options)
Aim is to eliminate everything other than the minimum essential amount of equipment, materials, space and
employees’ time
Juran (1962), a quality cost pioneer, separated the costs of controlling quality (e.g. prevention and appraisal)
from the costs of failing to control quality (e.g. internal and external failure)
Implementing TQM initiatives may result in higher raw materials and labour costs, but may reduce costs in the
following areas:
- quality control
- rework
- repair and maintenance
- hazardous waste disposal
- marketing campaigns
- warranty claims
- customer complaints.
Financial measures: spending as planned, lower costs to eventuate, whether higher selling prices are achieved
Non-financial measures: suppliers meeting quality assurance standards, number of defective parts returned to
suppliers, customer complaints / warranty claims.
Divide into monitoring work done as it proceeds, measuring customer satisfaction and measuring the quality
of incoming supplies.
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Customer profitability analysis focuses on the profits generated by each customer or class of customer (e.g.
differentiated by location, demographics, or purchasing behaviour)
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Pre-sales interaction High-level, pre-sales support via Low-level, pre-sales support with
marketing effort, technical standard pricing and simple
support and sales resources specifications for each order
Analysing the relationship between the net margin earned from sales and customer-service costs enables the
organisation to obtain an understanding of the profitability of customers and to identify strategies for
increasing the level of profits made.
1. new and growing customers who are currently loss-making may be retained as they could provide
profitable business in the future, or they currently help enter new but eventually lucrative markets;
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2. customers who provide qualitative rather than financial benefits may be worthy of being retained. An
unprofitable customer may possess strengths (e.g. being at the leading edge of technology or
marketing). By maintaining the relationship with the unprofitable customer, an organisation may draw
on these strengths to the benefit of its relationships with other customers who are profitable; and
3. association with highly reputable but unprofitable customers provides the credibility to do business
with other profitable customers.
Benefits
Disadvantages:
- the allocation of common costs (e.g. advertising) is arbitrary. While an advertising campaign might be
intended to attract new customers, it may also have a positive impact on the amount of business that
existing customers do with the organisation. To allocate all advertising campaign costs to new
customers would appear unreasonable; and
- the treatment of unavoidable or committed costs (e.g. a sales manager’s salary) as not being
attributable to any particular customer ignores the need for these costs to be recovered from all sales
made.
Customer Relationship Management (CRM): seeks to develop and foster long-term customer commitment by
ensuring that the customer’s needs are identified and satisfied.
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Question 6
There are many behavioural implications of budgeting. In this context, which of the following
statements is true?
A Additional pay for achieving budgets is always a good motivator.
B Formal budgets discourage rigidity and encourage flexibility.
C Short-term planning in a budget can draw attention away from the longer-term
consequences of decisions.
D It is generally easier for people to be motivated to achieve targets when they do not set the
targets themselves.
Question 7
Which of the following is unlikely to be a consequence of an organisation's pursuit of a strategy of
globalisation?
A increased exposure to political risk
B taller vertical organisation structures
C increased merger and acquisition activity
D greater costs associated with natural disasters
Question 8
Which of economic, environmental and social activity can sustainability relate to?
A environmental activity only
B environmental and social activity only
C economic and environmental activity only
D all three of economic, environmental and social activity
Question 9
What type of stakeholder has high power and high interest?
A Small suppliers
B CEO
C Government regulators
D Lobby groups
Question 10
Which of the following is a role for the management accounting system?
A Perform support functions such as procurement and payroll
B Provide a quote for key customers
C Provide a source of information for stakeholders to support decision making
D Generate financial accounting reports for shareholders
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Question 11
What are the key characteristics of information?
A Valid & reliable
B Influential & measurable
C Valid & accurate
D Influential & relevant
Question 12
Which of the following describes strategic information?
A Information that is forward looking and assists the organisation with planning
B Information that is functionally oriented with specific goals and performance targets
C Information that focuses on day-to-day operations in order to execute strategy
D Information that is produces from the day to day transactions of the company
Question 13
Which of the following is not included in the test for feasibility?
A Technical
B Operational
C Economic
D Regulatory
Question 14
Which of the following is not a typical purpose for a budget?
A Facilitate learning
B Raise management’s awareness of the organisation’s overall operations
C Assist in communication between sub-units of the organisation
D Summarise financial outcomes in the worst case scenario only
Question 15
An operational budget for a manufacturing organisation should include:
A Direct materials cost budget
B Finished goods and inventory budget
C Cost of Research and Development budget
D Cost of Goods Sold budget
Question 16
Which of the following are examples of variable overhead costs?
A Indirect material
B Indirect labour
C Floor space
D Engineering support
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Question 17
The key advantage of bottom up budgeting is
A That the person approving the budget, developed the budget ensuring consistency
B It encourages coordination and communication between managers
C It reduces political problems such as ‘padding the budget’
D It minimises the business impact by limiting involvement to 2-3 senior managers
Question 18
Which of the following is a role of the project manager?
A provides resources
B initiates the project
C approves the project plan
D provides leadership for the project team
Question 19
A company has two divisions X and Y which are each considering new projects costing $100 000.
The company's cost of capital is 12%. The project being considered by X will produce a net annual
return of $15 000, that being considered by Y will produce a net annual return of $11 000.
Currently, the divisions are appraised by Return on Investment (ROI); X is achieving 17% and Y 9%.
The company as a whole will benefit if
A both projects are done.
B neither project is done.
C only X's project is done.
D only Y's project is done.
Question 20
The higher risk of a project can be recognised by decreasing
A the internal rate of return of the project.
B the required rate of return of the project.
C the cost of the initial investment of the project.
D the estimates of future cash inflows from the project.
Question 21
The company that Stuart works for is constantly developing new products and he is surprised that
product research ensures that every proposed new product goes through an extensive screening
process. This is where the idea is assessed for certain criteria.
Which of the following would the assessment not cover?
A technical feasibility
B financial performance targets
C attractiveness to enough customers
D conformance to the organisation's strategic objectives
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Question 22
Which of the following would typically not be included as part of project selection?
A financial analysis
B risk assessment
C progress reporting
D stakeholder analysis
Question 23
A division of a company which is achieving ROI of 17% is considering a project which costs
$100 000 and is expected to produce a net annual return of $15 000. The company's cost of capital,
which is used as the imputed interest rate in calculating RI, is 12%.
Would this project be considered worthwhile under ROI and RI?
A ROI: worthwhile; RI: worthwhile
B ROI: worthwhile; RI: not worthwhile
C ROI: not worthwhile; RI: worthwhile
D ROI: not worthwhile; RI: not worthwhile
Question 24
What are the three major considerations when monitoring a project?
A project team, time, cost
B time, cost, quality/specification
C cost, project team, management accountant
D time, critical path length, quality/specification
Question 25
Which of the following is not a key area of project planning?
A approval
B budgeting
C scheduling
D performance measurement
Question 26
Which is an example of financial performance management?
A Labour hours worked
B Gearing ratio
C External survey results
D Market capitalisation
Question 27
Which of the following is true in relation to the International Integrated Reporting Framework?
A It is focused on environmental sustainability
B It considers all tangible sources of capital to the company
C It takes a principles based approach rather than prescribing a specific criteria
D It is focused on shareholder returns
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Question 28
Australian Securities and Investments Commission (ASIC) is responsible for
A Administering and enforcing the Corporations Act
B Ensuring Financial Institutions have adequate capital
C Protecting consumers from misleading and deceptive conduct
D Ensuring companies report and pay the correct amount of tax
Question 29
Steve is a junior management accountant and has been asked to write a review of his company's
financial performance for the last year. The senior accountant, Sarah, was responsible for producing
the financial statements that Steve will use as a basis of his review. Due to Sarah's seniority, Steve
has decided not to question the accuracy of her work and not to perform his own checks on it before
starting his review.
Which threat to CPA Australia's fundamental principles has occurred?
A Self-interest
B Self-review
C Intimidation
D Familiarity
Question 30
Which of the following is not a perspective taken by the balanced scorecard?
A Financial
B Customer
C Supplier
D Innovation and learning
Question 31
In the traditional approach to quality, one of the types of quality cost is that of prevention. This is the
cost of any action taken to investigate or reduce defects and failures.
Which of the following is not a prevention cost?
A quality engineering
B inspection of finished goods
C administration of quality control
D maintenance of quality control equipment and inspection equipment
Question 32
Which of the following is regarded as a cost of operating a quality management system?
A product recalls
B supplier surveys
C warranty claims
D re-inspection cost
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Question 33
Which of the following definitions of activity-based management (ABM) is correct?
A ABM involves tracing resource consumption and costing final outputs.
B ABM is based on an activity framework and utilises cost driver data in the budget-setting
and variances feedback processes.
C ABM uses marginal cost information for a variety of purposes including cost reduction, cost
modelling and customer profitability analysis.
D ABM involves the identification and evaluation of the activity drivers used to trace the cost
of activities to cost objects, and also selection of activity drivers with potential to contribute to
cost management, and especially cost reduction.
Question 34
In activity based costing, resource cost drivers are used to allocate overheads to
A resources.
B cost objects.
C primary and support activities.
D production and service costs centres.
Question 35
What can be defined as the process of applying a zero defect philosophy to the management of
resources and relationships within an organisation as a means of developing and sustaining a culture
of continuous improvement focusing on meeting a customer's expectations?
A throughput
B isomorphism
C target management
D total quality management
Question 36
When deciding whether to continue or cease production of an unprofitable product, which of the
following factors would you not want to consider?
A allocation of fixed overhead
B existence of complementary products
C contribution per unit of limiting factor
D strategic value of remaining in the market
Question 37
If a company has to subcontract work to make up a shortfall in its own in-house capabilities, how will
its total costs be minimised?
A if those units produced in house are the most expensive to produce
B if those units bought from the subcontractor are the cheapest to buy
C if those units bought from the subcontractor have the highest extra variable cost per unit of
scarce resource saved
D if those units bought from the subcontractor have the lowest extra variable cost per unit of
scarce resource saved
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Prepared for Poonam Kaur Ranjit Singh
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Strategic Management Accounting
3rd edition, 2020
Question 38
WX manufactures and sells two products, the J and the K. The J sells for $18 per unit and the K sells
for $20 per unit. The total variable cost for a unit of J is $12 and K's total variable cost per unit is $14.
For every four units of J sold, only one unit of K is sold. This sales mix is expected to remain the same
for the foreseeable future. Fixed costs total $200 000.
What is the revenue required to reach a target profit of $400 000?
A $613 364
B $1 840 000
C $5 837 587
D $9 200 000
Question 39
During which stage of its life cycle is a product's return on capital not important, as it is expected to be
a net user of cash and show growth but not profit?
A decline
B maturity
C introduction
D abandonment
Question 40
Which of the following statements does not relate to Kaizen costing?
A It is used for cost reduction.
B Targets are set and applied monthly.
C It assumes continuous improvement.
D Employees are often viewed as the cause of problems.
Copyright: calan1122
Prepared for Poonam Kaur Ranjit Singh
poohsekhon@yahoo.com
Strategic Management Accounting
3rd edition, 2020
Answers
1 A Taking longer to pay suppliers will increase payables days and so reduce the cash
operating cycle. Moving away from Just In Time is likely to increase inventory levels and
therefore the length of the cash operating cycle. Reducing the rate of inventory turnover
implies holding on to it for longer, thus increasing the length of the cash operating cycle.
2 D The correct answer is: $2 802 000
When sales revenue is $1.5 million, total contribution is 45% × $1.5 million = $675 000.
This leaves a further $625 000 of fixed costs to cover. To achieve breakeven, sales in
excess of $1.5 million need to be $625 000/0.48 = $1.302 million.
Total sales to achieve breakeven = $1.5 million + $1.302 million = $2.802 million.
3 D An ERP system helps to identify and plan the enterprise-wide resources needed to
record, produce, distribute and account for customer orders. The other statements do
cover elements of the likely benefits achieved through the introduction of an ERP system.
The main advantage of these types of system is that they are integrated throughout the
whole organisation and can therefore cover the whole value chain.
4 D Ranking by contribution per unit of limited resource maximises contribution overall and
hence profit.
5 D D Sustained losses over the long term may be a result of poor governance but is not
necessarily a feature.
6 C Pay can be a good motivator; however it can be a demotivator if rewards are set for
achieving unrealistic budgets. It can be hard to motivate people to achieve targets set by
someone else. Formal budgets actually encourage rigidity and discourage flexibility.
7 B As an organisation becomes more global, particularly through the use of the Internet,
then the organisation structure tends to flatten. Power in global firms tends to be diffused
to local operations.
8 D The Global Reporting Initiative (GRI) guidelines on sustainability require organisations to
report under the three headings of economic, environmental and social activity. Examples
of
unsustainable activity in each area include:
• environment: raw materials become depleted or pollution occurs
• social: 'sweat shops' become unacceptable and consumers boycott products
• economic: lenders make bad decisions and then fail.
9 B The CEO has high interest in the performance of the company and substantial power to
influence / direct outcomes
10 C The MAS performs two roles: 1. To identify, analyse, classify and record accounting
transactions and 2. To provide source of information for stakeholders to support decision-
making.
11 A The two most important characteristics of information are validity and reliability.
Other important characteristics include clarity, timeliness, accessibility and controllability.
12 A B & C are tactical information, D is operational information
13 D Regulatory is not one of the tests specified by the McKinsey Consulting Organisation
report.
14 D A, B & C are listed purposes of a budget on page 190 (Module 3)
15 C A manufacturing company does not typically engage in R&D
16 C Floor space is a cost driver
17 B Bottom up budgeting ensures all interested parties are involved and invested in the
budget process. It reduces the risk of budget padding.
18 D The correct answers is: provides leadership for the project team
The project plan is approved by the project sponsor who also provides the necessary
resources. The project owner initiates the project.
19 C The company as a whole will benefit if projects returning more than the cost of capital
(12%) are done. Thus X's project should be done, Y's should not.
20 D The internal rate of return (A) and the cost of the initial investment (C) are independent of
the risk of the project. The higher the risk of the project, the greater (not less) is the
required rate of return (B).
Copyright: calan1122
Prepared for Poonam Kaur Ranjit Singh
poohsekhon@yahoo.com
Strategic Management Accounting
3rd edition, 2020
21 B This question looks at the process of developing innovative ideas and creating these into
products within the organisation. The financial performance targets will not be set until the
go ahead is given for the idea to be developed even further.
22 C Progress reporting would be relevant at the execution/implementation stage
23 C Under ROI, the project is not worthwhile (its return of 15% is less than the 17% currently
being achieved), but under RI it is worthwhile (its return of $15 000 exceeds the imputed
interest charge of $12 000).
24 B Project control is focused on the project budget, project schedule and other measures
used to establish the achievement of quality and specification.
25 A Scheduling, budgeting, and performance measurement are three of the five key areas of
project planning. Project approval occurs once the five key areas have been completed.
26 B All others are examples of non-financial performance management
27 C The framework considers intangible sources of capital (such as intellectual property) and
more than just environmental sustainability or shareholder returns
28 A ASIC’s power is via the Corporations Act
29 B A self-review threat is created where an accountant does not appropriately re-evaluate
their own, or a colleague's work, when relying on it to perform a current service.
30 C The missing option is the “Business Process” perspective
31 B This would be classed as an appraisal cost – the cost of assessing the quality achieved.
32 B The remaining options are regarded as 'costs of quality failure'.
33 A ABM involves tracing resource consumption and costing final outputs.
34 C Allocation and apportionment is used in traditional absorption costing to allocate
overheads to production and service cost centres. In ABC activity cost drivers are used to
allocate overheads to cost objects. Finally, in no costing system are overheads allocated
to resources.
35 D This is a definition of TQM.
36 A A high contribution per unit of limiting factor, potential damage to the production or sale of
complementary products and strategic value of staying in the market are all key
considerations. Fixed overheads are not decision-relevant costs and should be excluded
unless specifically associated with the product.
37 D For example, if machine hours are a scarce resource, a company should minimise the
extra variable cost of subcontracting per machine hour saved
38 B This is calculated as follows:
(1) Contribution per unit for J is $6 and for K is $6.
(2) Contribution per mix = ($6 × 4) + ($6 × 1) = $30
(3) Required no. of mixes = (400 000 + 200 000)/30 = 20 000
(4) Required in number of product units: (20 000 × 4) = 80 000 Js, (20 000 × 1)
= 20 000 Ks
(5) Required in terms of revenue: (80 000 × $18) + (20 000 × $20) = $1 840 000.
39 C If a product is in its introductory or growth stages it cannot be expected to be a net
generator of cash as all the cash it generates should be used in expansion through
increased sales and so on.
40 D Employees are often viewed as the cause of problems when standard costing, which is
used for cost control, is applied.
Copyright: calan1122