700820 Accounting, Organisations and
Control
Lecture 1: Introduction to the Module and
Accounting, organisations and Control
Dr Hadiza Sa’id
At the end of this lecture you will:
• Appreciate the role of accounting in organisations and
differentiate management accounting from financial
accounting
• Identify five broad purposes of accounting systems
• Outline the relevant development of Management
Accounting
• Describe evolving themes that are shaping management
accounting systems
• Be familiar with the criticisms of traditional management
accounting
• Understand the concept of Strategic Management
Accounting
• Appreciate the importance of management controls in
organisations
Accounting
– Is concerned with collecting, analysing
and communicating financial
information to permit users of the
information to make informed
judgement and decisions.
For example, a business manager may
needs accounting information to
decide whether to
Develop new products or services
Increase or decrease the price of
existing product
What is accounting?
It is concerned with collecting, analysing and
communicating financial information to
permit users of the information to make
informed judgement and decisions.
Environment
Identify
INPUT
(Data)
Measure
ACCOUNTS
PROCESSING
Communicate
OUTPUT
(Information)
Users
Control
Hull University Business School 4
What is accounting? (cont’d)
• For example, a business manager may needs accounting
information to decide whether to
 Develop new products or services
 Increase or decrease the price of existing product
• The information provided should help in identifying and
accessing the financial consequences of the decision
 The users of accounting information can be divided
into two categories:
(i) internal users within the organisation
(management accounting);
(ii) external parties outside the organisation
(financial accounting).
Management Accounting versus
Financial Accounting
• Management Accounting is concerned with providing
information to managers (people inside an
organisation who direct and control its operations)
• Financial Accounting is concerned with providing
information to shareholders, creditors and other
individuals outside an organisation
• Management Accounting provides essential data to
managers to allow them to actually run their
organisations
• Financial Accounting provides the scorecard by which
company’s past performance is judged
Management Accounting versus Financial Accounting
Key Differences
Financial Accounting
Managerial Accounting
External persons who
make financial decisions
Managers who plan for
and control an organization
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
objectivity and verifiability
Emphasis on
relevance
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject
Primary focus is on
companywide reports
Focus on
segment reports
6. Rules
Must follow GAAP / IFRS
and prescribed formats
Not bound by GAAP / IFRS
or any prescribed format
Mandatory for
external reports
Not
Mandatory
1. Users
2. Time focus
7. Requirement
Source: Managerial Accounting for Managers, 5th edtn. Noreen, Brewer & Garrison (2017), McGrawHill Education
Major Purposes of Accounting
Systems
1 Formulating overall strategies and long-range
plans – internal non-routine reporting
2 Resource allocation decisions, e.g. product
and customer emphasis and pricing – internal
routine reporting
3 Cost planning and cost control of operations
and activities – internal routine reporting
Major Purposes of Accounting
Systems (Cont’d)
4 Performance measurement and evaluation of
people – internal non-routine reporting
5 Meeting external regulatory and legal
reporting requirements – external reporting
Origin of Management Accounting
• https://www.youtube.com/watch?v=uuEPnns
YMeI
Changing Focus
• Early 19th century – systems to measure the cost
of producing individual products
• Middle of the 19th century
– Railroads first to develop and use financial statistics
to assess and monitor performance
– Andrew Carnegie developed detailed cost systems
that gave him a competitive advantage
• Early 20th century – DuPont and General Motors
expanded the focus to planning and control
• 1970’s – Japanese manufacturers developed
new tools to report on quality, service,
customer, and employee performance
The modern business environment
– Global competition
– Deregulation and privatization
– Advances in manufacturing technologies
– Automation
– Increasing overheads
– Decreasing direct labour cost
– The impact of information technology
– More customer focused
– Emphasis on quality
– Changing product life cycles
– Environmental and sustainability issues
– Pressures to adopt higher standards of ethical behaviour
– Digitalisation
12
Lost Relevance?
H Thomas Johnson and Robert S Kaplan (J&K)
conclude:
“Today’s management accounting information,
driven by the procedures and cycle of the
organisation’s financial reporting system, is too late,
too aggregated and too distorted to be relevant for
managers’ planning and control decisions. With
increased emphasis on meeting quarterly or annual
earnings targets, internal accounting systems focus
narrowly on producing a monthly earnings report.”
(J&K 1987).
In particular, the J&K criticisms are that:
• External reporting conventions encourage a financial
accounting mentality in many corporate executives and this
has resulted in management accounting practices following,
and becoming subservient to, financial accounting practices.
• Monthly performance reports using practices mandated for
external reporting have encouraged managers to focus
excessively on achieving short-term financial performance
even if this leads to the long-term health of the company
being compromised.
•There is an over-emphasis on the control of direct labour.
In particular, the J&K criticisms are that:
• Management accountants use inappropriate methods for
assigning overhead to products.
•MA systems fail to provide the relevant set of measures to
today’s environment.
• MA reports are of little help to managers as they attempt to
reduce costs and improve productivity.
Failure of Traditional Management Accounting
• Driven by external financial reporting requirements
• Tends to be too technical
– Largely ignores qualitative factors in decision evaluation
• Most companies still use single (mostly direct labour)
overhead allocation base
• Unable to provide timely information for decision
making
• Tends to focus on internal organizational performance
with little emphasis on external and social issues.
Strategic Management Accounting
 The criticisms led to advocation of new techniques
which are more in tune with today’s competitive and
business environment.
 SMA was suggested as a way forward.
 There is no single comprehensive framework as to
what constitutes SMA
 Some scholars have adopted definitions that
emphasise SMA is internally and externally focused,
while others had adopted a definitions that
emphasise SMA is externally focused.
 SMA will be covered in subsequent weeks
17
Strategic Management Accounting techniques include:
•
•
•
•
•
•
•
ABM
Customer Profitability Analysis
Target costing
Quality costing
JIT
Value Chain
Balanced scorecard
Management control
• The process by which management
– … ensures that people in the organisation carry out organizational
objectives and strategies
– … encourages, enables, or, sometimes “forces”
employees to act in the organization’s best interests
• Management control includes all the devices/mechanisms managers use
to ensure that the behavior of employees is consistent with the
organization’s objectives and strategies
Function and benefit
• Purpose/function
– Get done what management wants done
– Influence behavior in desirable ways
• Benefit
– Increased probability that the organization’s
objectives will be achieved
Management and its components
Objective Setting
Strategy Formulation
Management Control
Objective setting
• Objectives are a necessary prerequisite for any
purposeful activities
• Without objectives, it is impossible …
• to assess whether the employees’ actions are purposive
• to make claims about an organization’s success
• Objectives can be:
• financial vs. non-financial
• quantified, explicit vs. implicit
• economic, social, environmental, or societal
Strategy formulation
• An organization must select any of innumerable
ways of seeking to attain its objectives
• Strategies define how organisations should use
their resources to meet their objectives
• Hence, strategies put constraints on employees
to focus activities on what the organisation does
best or areas where it has an advantage over
competitors
The basic control problem
• Management control is about encouraging
PEOPLE to take desirable actions
• That is, it guards against the possibilities that employees
will do something the organisation does not want them to
do, or, fail to do something they should do
• Hence, management control has a ...
… BEHAVIORAL ORIENTATION
• If all personnel could always be relied on to do what is
best for the organization, there would be no need for a
management control system
Basic control issues
• Three issues
– Do they understand what we expect of them?
 Lack of direction
– Will they work consistently hard and try to
do what is expected of them?
 Lack of motivation
– Are they capable of doing what is expected of
them?
 Personal limitations
Lack of direction
• Employees do not know what the organization
wants from them
• When this lack of direction occurs, the
likelihood of the desired behaviors occurring is
small
COMMUNICATION + REINFORCEMENT
Motivational problems
• When employees ‘choose’ not to perform as their
organization would have them perform
– Lack of goal congruence
• Individual goals do not coincide with organizational
goals
– Self-interested behavior
• Generally, individuals are prone to being “lazy” ...
–
For example, take long lunches, overspend on things
that make life more pleasant, use of sick leaves when
not sick, etc.
• More extreme examples of motivational problems:
–
Employee crime (fraud and theft)
Personal limitations
• Sometimes, people are “unable” to do a good job
because of certain personal limitations they have
• Some examples / causes:
– lack of requisite knowledge, training, experience
– employees are promoted above their level of
competence
– some jobs are not designed properly etc.
TRAINING
JOB ASSIGNMENT / PROMOTION
JOB DESIGN
However,
• Management controls do not always involve a simple
cybernetic system like a thermostat
• Detector  measure performance
• Assessor  compare with pre-set standard
• Effector  take corrective action
• Many controls don’t focus on measured
performance
• For example, direct supervision, employee hiring standards,
codes of conduct
• Many controls are proactive rather than reactive
• That is, they are designed to prevent control problems
before the organization suffers any adverse effects on
performance
Control alternatives
• Control Problem Avoidance
• Management Control Systems
•
Action Controls
•
Results Controls
•
People Controls
Control problem avoidance
• Activity elimination
• For example, subcontracts, licensing agreements,
divestment
• Automation
• Computers/robots eliminate the human problems of
inaccuracy, inconsistency, and lack of motivation
• Only applicable for “programmable” decision
situations
• Centralization
• Superiors reserve the most critical decisions for
themselves
Control alternatives
• Controls can focus on:
– the actions taken
ACTION CONTROLS
– the results produced
RESULTS CONTROLS
– the types of people
employed and their
shared values and
norms
PEOPLE CONTROLS
Or any combination
Depending on ...
Excellent
Poor
Action Control
and/or
Action Control
Results Control
(e.g., large projects)
Results Control
People Control
(e.g., movie director,
entity manager)
High
(e.g., research lab)
Low
Knowledge of which specific actions are desirable
Ability to measure results on important performance dimensions
Overview
Can people be avoided?
(e.g., automation, centralization)
Yes
No
Can you rely on people involved?
No
Can you make people reliable?
Control-problem
avoidance
Yes
Yes
People controls
No
Have knowledge about what Yes Able to assess whether
specific actions are desirable? specific action was taken?
No
Yes
Action controls
Have knowledge about what Yes
Able to measure results?
results are desirable?
No
Yes
Results controls
?
Lecture Summary
• Appreciate the role of accounting in organisations
and differentiate management accounting
from financial accounting
• The evolving themes that shaped
management accounting systems
• Criticisms of traditional management
accounting
• Strategic Management Accounting
• The importance of management controls in
organisations
Reading
• Merchant, K. & Van der Stede, W. (2017)
Management Control Systems: Performance
Measurement, Evaluation and Incentives; Chapters
1 and 3 E book available via the library site
• Drury and Tayles (2021) Management and Cost
Accounting, 11th Edition(or older edition), Chapter 1
• Articles supplied on canvas