Planing and control and the role of management accounting

Unit 1: the role and context of
management accounting
Session 1-4
What is an organization?
• Organization is a group of individuals working
together to achieve one or more objectives.
• Organization has common features:
▫ composed of individuals and groups of
▫ Oriented to achieving collective goals.
▫ Consist of different functions
▫ Functions need to be coordinated
▫ Exist independently form it members
Mintzberg’s generic model (five
component of an organization)
Strategic apex: ensure the organization follows its
mission and managers, and it relationship with the
environment (CEO/ long term organization
Middle line: group of managers who are concerned
with converting the objectives and broad plan of the
strategic apex.(responsible of translating plans into
actions/ monitor efficiency and effectiveness of
Techno structure: group of people who are
concerned with the best way of doing a job and
ensure that personal have the required skills
Support staff: other administrative function
(mailroom, cafeteria)
Operating core: people who are doing basic work of
producing product or making a delivery.
Mintzberg’s generic structure is based on the
separation of direction and management.
Why organization exist
• A group of people working together achieve
more than sum of achievement
• Reduce transaction cost
Type of organization
• Organization can be classified using different
ways, most common is the purpose or objective:
▫ Profit entity
▫ Non-profit entity
• Maximizing shareholder wealth and continue
existence is were the primarily objective
organisational structure
• it refers to the repationship between the various
functios and positions in an organization.
• it determine the authority and resoinsiblity for
particular task in the organization.
• management accounting is important as it
provide information to carry out the activities an
insure that the organization achieve their
principles of organization structure
• specialization
▫ work is divided into separate activities
▫ to increase efficiency and effectiveness
• coordination
▫ coordinate with each other to work torward the
same objective
tall vs. flat organization
• reasons that helped in making the organization move to flat
• information technology
• empowerment: lower level worker have been delegated
advantages of delayering
reduction of cost
faster communication
• disadvantage of delayeing
▫ loss of control
▫ unablitity to understand goals of higher management
forms of organization structure
functional structure
product or service structure
geographic structure
matrix structure
projet team
hyird structure
decentralisation vs. centeralisation
• centerlizatio is when decision making authority
is held predominanty by a senior managers
within an organization.
• decenterlization is when the authoity of decision
making is delegated to people at lower level in
the organization
advantage and disadvantage of
loss of control
increase cost of
responsibilty centers
cost center
What is management
• Management is often consisting of planning control and
decision making.
• Planning is essentially rational process, rational
planning consist of:
▫ establishing objectives and
▫ developing plans to achieve those objective
• Control is making sure that the organization in on track
to achieve the objective, by taking corrective actions
• Decision making consist of choosing between different
possible courses of action based on a careful weighting
up of the relative costs and benefits of each.
• P.38
Strategic management
• Is undertaken by senior managers and is
concern with the implementation of formulation
of strategy.
• Strategy can be defined as:
▫ The determination of basic long term goals and
objective of the enterprise and the adoption course
of action necessarily for carrying out those goals
(example of strategy product or price
• When developing strategy it is important to
undertake SWOT analysis.
• SWOT is an analysis for the external ( politics ,
economy, technology) and internal factors(
capability and resources).
• SWOT help manager in choosing the required
▫ New product/ market
▫ Reduce scope of operation
▫ Sell off unprofitable part of business
Level of strategy
• Company usually consist of:
▫ Head office
▫ Number of separate operating division
• There are three level of strategy:
▫ Cooperate strategy:
 It is concerned with how the head office manage the portfolio
of individual unit division (which to close/ invest in)
▫ Business strategy
 It deals with how individual units compete in particular
product market in order to achieve sustainable competitor
advantage (by reducing cost of unit or producing product
superior to competitor)
▫ Functional strategy
 It is concern with the main individual function with the
organization will have its own.( production strategy, marketing
strategy, marketing strategy, financial strategy, HR strategy)
The competition environment
• Managers have to analyze the competitive
environment for the company.
• Several analytical tools were developed
▫ Porters competitive environment (1985)
▫ Value chain model (1985)
Porter 5 forces model
• Can help managers to understand the nature and
intensity of competition in particular industry/ product/
• It indicate the industry attractiveness thus formulate
 Porters model of industry attractiveness is relevant
for both cooperate and business strategy
• The five forces are:
Entry : new/ cross /potential
Buyers: distribution channel / customers
Porter 5 forces model
Value chain
• It helps the organization develop competitive advantage
by better understanding of the activities through which
they create value.
• Business profitability depends on its ability to perform
their activities efficiently and effectively.
• Competitive advantage can be gained:
▫ Reducing cost (by knowing what drive the cost and
reducing it)
▫ Product differentiation (adding and performing activity
better than competitor, which include better distribution
system, high customer service, better input quality )
• Value chain can be reconfigured by:
▫ Outsourcing
▫ Vertical integration ( acquiring supplier and customers)
Value chain
• Globalization is a major development in the
competitive environment
• It have integrated national economics into
international economics.
• It has removed trade barriers between countries
and allow free flow of goods services capital and
• Globalization effect:
▫ Emergence of worldwide market for goods and
▫ Emergence of worldwide production facilities
▫ Emergence of worldwide financial market
▫ Movement towards world government via institutes
such as world bank
▫ Increase of information lows between geographically
dispersed location
▫ Increase of competition
▫ Development of global communication infrastructure
Tactical management
• Is usually the province of middle managers and
is concerned with conveying necessarily board
business unit strategies into more details action
plans allocating resources and responsibility to
particular areas in order to translate strategies
plans into specific action.
Operational management
• Concern with the implementation of tactical
management plans
• It is concern in carrying out day to day task
Type of information required at each
• Strategic level( senior manager)
External information
Market information
Competitor information
Information concerning general business requirement
Used for long term planning
• Tactical level (middle manager)
▫ Information more historical and internal oriented.
▫ Budget
▫ Short term planning
• Operational level (front line managers)
▫ Information regarding specific task
▫ Purchase order
▫ Inventory control
Difference between financial
accounting and management
Governed by
Data, information knowledge and
• Knowledge management is collection of
processes that govern the creation
dissemination and utilization of knowledge to
fulfill organization objective
• Data is a set of discrete, objective fact about
• Organization store data in some sort of
information system, and they are heavily
depended on
• Organization sometimes pile up data because
they are factual and therefore create an
impression of scientific accuracy.
• What do you think?
• Information is data which have relative and purpose.
• Adding value (meaning) to data will transform it in to
information. It can be added by :
▫ Contextualization
 We know why the data is gathered
▫ Categorization
 We know key component of the data
▫ Calculation
 Data may be analysis mathematically
▫ Correction
 Error have been removed from data
▫ Condensation
 The data may be summarized in a more concise form
• Knowledge is a fluid mix of experience values contextual
information and expert insight that provides a framework for
evaluating and incorporating new experience and information.
• We drive knowledge from information as we drive information from
• Information is transformed to knowledge by:
▫ Comparison
 How does information of this situation compared to situation we have
▫ Consequences
 What implication does information have on decision of action
▫ Connections
 How does this relate to others
▫ Conversation
 What people think about this information
• Wisdom comes from having correct
understanding of the knowledge you have and
being aware of limitation of that understanding
The data to wisdom hierarchy
Data collection method
• Choosing among the data collection method will
depend on:
▫ The nature of the task
▫ The relative efficiency and cost
• Some of the data collection methods:
Magnetic inc character recognition
Optical mark reading
Scanners and optical recognition
Bar coding
Electronic fund transfer at the point of sale
Smart cards
Characteristic of good quality
• Relevant:
▫ Information is relevant when it helps user in the
decision making.
▫ It should be provided by a certain timeline
• Reliable
▫ Information of free from material error and bias
• Comparability
▫ It should be comparable with the information
provided earlier
• Understandability
▫ It should be express as clear as possible and made in a
form that anticipated user can understand
Information cost benefits
• The benefit form information provided should
justify the cost
Critical success factors
• No manager wants information which does not
provide them with value addition
• CSFs can be thought of as what you need to be
good at in order to achieve your ultimate aim
• Managers need to identify the CSF related to
their job and be provided with information that
would assess them whether thy are able to
achieve their CSF
Critical success factors
• To derive to the CSF in an organization:
▫ We start from the objective (what does we want to
▫ Decides what it needs to be good at in order to achieve
these objective
▫ Performance indicator to tell whether managers are
going to achieve the objective
• Approaches used:
Null approach
By product approach
The total study approach
The key indicator approach
Sources can inform the determination
of CSF
• The industry in which the business operates
• The firm itself and its position within the
• Organization wider economic and social
• Organization factors which are current
managers concern (ex. High inventory level)
Information system
• Information system traditionally concerned with
producing historical information.
• Now its also concern with providing useful
information for decision making,
Characteristic of information
Operational system (transaction
process system)
• Transaction process system has increased the speed
and accuracy of the transaction.
• It is inflexible for particular or specific transaction
presented on ad hoc basis.
• Transaction processing system use:
▫ Batch processing system
 Transaction are stored on batches and processed together
on later date (large volume transaction, salaries)
▫ Online processing
 The users update the system directly and the effect are
direct (airline tickets)
Decision support systems (DSS)
• This system is used for any of the three levels:
▫ Operational level (ex. Inventory reordering)
▫ Tactical level (buy or make decision)
▫ Strategic level (capital investment appraisal)
• They do complex mathematical modeling to
stimulate the organization behavior at
unexpected situations.
• It is based on sensitivity analysis
Executive information system (EIS)
• It provide information to strategic level.
• Managers need to view the organization and carrying out
long term planning
• The information needed in this level is different that the
tactical and operation level.
• The key features of EIS:
Is organized around CSF
Provide information at different level of details
Include sophisticated user friendly graphical user interface
Has fast time and accessible from many location
Is designed for each manager style
Shows trend and ratios
Office automation system (OAS)
• Are networked computer system for local area
networks (LANs) that support office work for
handling and managing documents and
facilitating communication
Knowledge work system (KWS)
• Are computer applications that support
knowledge workers nu helping in creating
Source of information
• Lower level management use internal
information, while senior level management use
external information.
• Environmental scanning is often used to
describe the process of gathering external
Electronic data interchange(EDI)
• Is a form of computer to computer data interchange
• It is developed in industries where large volume of
paper transaction is being sent between
• Organization are becoming aware of the supply
chain and its relationship to the notion of a value
• It links the supplier to the purchaser which increase
the efficiency of both purchasing and selling
• Ex. Online ordering.
Information management and
information technology
• Data base:
▫ Is a store of data
▫ Is a collection or file of data structured in such way
that it may serve a number of software application
without its structure being dictated by any one of those
• Data based management system (DBMS)
• Manages the interface between the data and the
application programs such that the data can be
made available to other users , in their own tailored
Data management system
Enterprise resource planning
• Computerized ERP systems facilitate the
integration of all the various functions of an
organization by interlinking information
• In the ERP system there is a central data based
feeds data into modular application relating
each function of the organization
Advantage of data based system
• Avoid unnecessary duplication of data
• Avoid data conflict, as data is stored only once
• Data stored are independent from the
Disadvantage of data based system
relating security and control
• There are possibility of access of unauthorized to
the data
• As the data is only held once at one place the
impact of system failure will be high
• Inaccurate of data, as data is only held at once
• Cost of setting data based is very high
Information system security
• Information is a precious recourse, it is important for
data not only reliable and accurate but also secured
• Secured means protection of data form unauthorized
change, user and destruction
• Type of measurement that the organization use in
protecting the data
▫ Security control
 Protect the data form unauthorized modification, disclosure or
destruction and from unavailability of service to users
▫ Integrity controls
 Maintain the completeness and correctness of data
▫ Contingency control “disaster recovery plan”
 Deals with unscheduled interruption to information system
Data warehoused and data mining
• Data warehoused:
Used by large organization
Contain high volume of data
Utilize data from transaction system
Are driven by information need
Information markets and the internet
• Information markets reflects the view that
information is a commodity that can be bought,
sold or exchange according to the terms and
condition agreed by the buyer and the seller.
• Information market have emerged with the
growth of the internet
• Is a global information network that allows any
computer with a telecommunication link send
and receive information from any other suitable
equipped computer
• The growth of the use of internet started with the
time of development of graphical user interface
and browser software.
• Users tend to use the web site that is regularly
Commercial use of the internet
• Marketing
• Sales
• Distribution
Internal communication: intranets
• An intranet is a network using internet
technology within the organization to support its
work that is accessible only within the
• Some of Intranet uses :
▫ Daily company news paper
▫ financials
Knowledge work
• Depends upon the knowledge possessed by the
worker not on the ability to perform physical
• Key attributes of knowledge work are that:
▫ Involve thinking processing information and
formulation analysis recommendation and
▫ It may use written or verbal input and output
• The level of knowledge needed depends on the
level of work requirement
Types of knowledge work
Diagnosis and problem finding
Planning and decision making
Monitoring and control
Authoring and presentation
Information preference
• Manager prefer live information they:
▫ Prefer up to date information even if it is not
thoroughly verified
▫ Tend to favor verbal communication
• Which will effect the decision making
Technology and decision making
• Programmed decision
▫ Routine and structure procedure
• Non- programmed decision
▫ Non routine procedure
▫ Use of Decision support system (expert system
“knowledge based system”)