BSB6401 Management Accounting
GROUP ASSESSMENT
Subject: Management Accounting
Group Members:
Ali Sarhan
Salman Ismaeel
Husain Alasmakh
Ali Yusuf
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201101119
201100106
201201783
201201237
Class: 01
Tutor: Hammad Mohiyuddin
Word Count: 3289
Table of Contents
1.0-Budgeting Developments, Criticism & Roles .......................................................................................... 2
1.1-Key Development in Budgeting Practices ........................................................................................... 2
1.2-Reasons for Criticizing Budgeting ....................................................................................................... 6
1.2.1-Criticism on Traditional budgeting .............................................................................................. 6
1.2.2-Criticism on ABB........................................................................................................................... 8
1.2.3-Criticism on BB: ............................................................................................................................ 8
1.2.3-Criticism on ZBB ........................................................................................................................... 9
1.2.4-Criticism on Rolling budget .......................................................................................................... 9
1.3-Roles of Budgeting in Organizations ................................................................................................. 12
2.0-Management Accounting Changes & Practices .................................................................................... 13
2.1-Achievement of Burns & Scapens Framework for Studying Management Accounting Change ...... 13
2.1.1-Basis to study change and stability ............................................................................................ 13
2.1.2-Effect of change within the organization without considering the existing institution ............ 14
2.2-Processes Shaping the Management Accounting Practices ............................................................. 15
2.3-Future Challenges to Management Accounting Practices................................................................ 16
3.0-Performance Indicators ........................................................................................................................ 18
3.1-Financial Performance Indicators (FPIs) ........................................................................................... 18
3.2-Non-Financial Performance Indicators (NFPIs) ................................................................................. 19
3.3-KPIs in Organizations ........................................................................................................................ 19
3.4-Other Performance Measurements ................................................................................................. 20
4.0-Uses of Management Accounting Information for Strategic Decision Making .................................... 21
4.1-Manufacturing Industries ................................................................................................................. 22
4.2-Service Industries.............................................................................................................................. 22
4.3-Bottom-line ....................................................................................................................................... 23
5.0-References ............................................................................................................................................ 24
6.0-Appendices ........................................................................................................................................... 29
Appendix 1: ABB Approach ..................................................................................................................... 29
Appendix 2: Benefits of ABB ................................................................................................................... 30
Appendix 3: Other Researches................................................................................................................ 31
Appendix 4: Balanced Scorecards ........................................................................................................... 32
Appendix 5: Building Block Model .......................................................................................................... 32
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1.0-Budgeting Developments, Criticism & Roles
1.1-Key Development in Budgeting Practices
Budgeting is one of management accounting plan tools that recognizes the expected inflows and
outflows of the business during an upcoming period. Budgeting practices went through development
process over the years and they are:
Lindsay& Libby
The main question to be answered in this research is whether to abandon or improve budgeting?
The research, carried as a web survey showed the following:
1) Most companies used budgets for control system, while most of them were not planning to
abandon budgets. Control is illustrated in managerial motivation and standard performance
evaluation.
2) Respondents agreed that the budgets are time consuming and sometimes costly but at the same
time a value added which is useful for the business.
3) Budget gaming which is manipulating budget or using it inefficiently was found occurring in
businesses and on noticeable basis.
4) To the contrary of what critics say, fixed performance contracts were found less used and
subjectivity and unpredictable environment were accounted for in budget creation.
5) A real life example, is Johnson & Johnson firm that has been using budgets for a long time as a
successful planning and performance management tool.
In conclusion, this research showed another view that critics want it to show as it showed the need
for budgeting and that it has some flaws but just needs some improvement. A 2007 research, by the
same researchers, highlighted how managers perceived budget as important tool for communicating,
planning and controlling and how they viewed it as an essential tool in the management. Process
despite some valid criticism. (Libby & Lindsay, 2010) (Libby & Lindsay, 2007)
ABB and BB: Practice development in Budgeting. By Hansen, Otley, and Van der
Stede
This is an important research as it talks about two main developments that are occurring in the
budgeting practices, activity based budgeting (ABB) and the beyond budgeting (BB) (Hansen, Otley, &
Stede, 2003).
ABB
The activity based budgeting is a new budgeting practice in which budgets are created according to
activities rather than departments, products or other cost centers. It assumes that the traditional
budgeting is financially oriented at higher level budgeting process therefore not relating the budgets to
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the operational activities well. The underlying conceptual framework, Closed Loop Model, has two
elements: Operational (created the operational budget first) and then financial (follow up by creating
financial budgets). This is in order to have a balanced and achievable financial plans. (See appendix 1 for
further information about ABB). There are many benefits of ABB such as ensuring all objectives are met
and they are explained in depth in appendix (2)
BB
The BB seeks to eliminate the dysfunctional behavior of annual performance trap that evaluates
managers’ performance based on budgets goals solely by evaluating performance based on performance
contracts with consideration of external events. In beyond budgeting, this issue and any budget
manipulation such as manipulating budgeted figures before year starts to get easy figures can be
highlighted.
Performance measurements in BB set budget goals against a benchmarked performance which is either
internally (e.g. different number of units produced in same organization) or externally (e.g. seeing
performance of competitors), this gives flexibility in adjusting for contingencies and factors beyond
control. These performance evaluations are found to be more accurate and reliable; leading to less budget
gaming and motivate managers (by creating a challenge). Nevertheless, issues can be born due to conflict
between desires of upper management and feasibility noted by the lower level management. BB states
that subjective performance evaluation and rewards based on it should be made on basis of group and
team work rather than individually which increases focus on business goals rather than personal
achievements. It also encourages the use of non-financial performance measurements; similar the ABB
concept of balanced scorecard. These financial & non-financial measures should be in respect with
changes (with hindsight) in order to eliminate any fixed performance issues.
An important point in the BB prospective, is that budgets constructed will not be used to evaluate
performance against set targets but to create plans with hindsight. This will help add more flexibility and
reliability as no outdated targets are looked at and only updated plans to work on. The BB moreover aims
to reach greater decentralization and better decision making which includes lower-level management in
it in order to avoid the assumed. The traditional budgeting failure in creating competitive achievements
due to fixed goals that management aims at just meeting. One major point that BB thinks it overcomes
traditional budgeting in is the resources capacity which is provided which keeps constrains on
decentralization, productivity and initiative while it is not there in the BB but resources are made available
as per current needs. Regarding this the BB encourages controls, such as employees’ selection and
training, to be kept in order that resources are used efficiently and not wasted. All of this helps address
budget gaming issues. (Hansen, Otley, & Stede, 2003) (Bogsnes, 2009)
Better budgeting or beyond? By Nelly, Bourne & Adams
In this research, beyond budgeting was mentioned with details similar to one in previous researchers
along with 3 main techniques to improve budgeting are mentioned as developments in the budgeting
practices, these are:
1. ABB: The research did not bring any additional information regarding ABB, the previous
researches above explains it in nearly the same manner.
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2. Zero-based budgeting (ZBB): Here ZBB was mentioned and talked about and also an article was
used to emphasis more on the author’s points (Cheong,n.d.).
ZBB aims for better resources allocation as all items is allocated with zero resources and only when
activity is approved necessary it will be included in the budget. This forces justification to all items in the
budget thus increasing efficiencies. A common approach is to answer these questions:
-Is the activity necessary?
-Will business be affected if this activity was not carried?
-What are the benefits and costs included with this activity?
Cost benefit analysis can also be used to determine the most profitable and needed activities and costs.
Later the activities and costs are ranked to now the priority of each when spending and budgeting.
ZBB Benefits:
3. Rolling Forecast/Budgets: Also an article was used to explain the authors ideas more.
It is when the assumptions and economic forecasts related to business and its environment are
made into financial estimates of future outcomes. This demands proactive management to
respond to changes quickly and adjust them. Here, business information is gathered and analyzed
based on forecasts and budgets are best done monthly or at least quarterly as long term forecasts
might not be so accurate. Rolling forecasts are not budgets but only forecasts that help in
improving and adjusting budgets.
In conclusion of research, it is inefficient to use traditional budgeting. However, the implementation of
BB is a hard thing at this time as less companies use it and it is not trusted a lot. Therefore, adjusting and
improving traditional budgeting should be done. It furthermore adds on these success factors occurring
when changing from traditional (Neely, Bourne, & Adams, 2003):
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Other researches (See appendix 3)
Other developments
Other types of budgeting was found as development like Static, flexible and Performance based
budgeting and much more (Bragg, 2012).
Analysis
Looking at these developments it can be determined that all of them are valid valuable ones. Therefore,
budgets should not be used that benefits are omitted or reached with other budgets type. According to
the researches stated above there is no budgeting practice which can abandon another one because every
budgeting technique and system brings in a unique feature which drives in huge benefits to its user,
regardless of its drawbacks.
Accordingly, in agreement with Lindsay and Libby findings, that it is hard to abandon the traditional
budgeting as there is no budgeting practice which will cover its overall benefits. Nevertheless, the other
developments hold huge benefits which can be of great value to a business. Thus, the only solution is to
combine them together in a way that improves the traditional budgeting practice. This will not be possible
without looking at the criticism and drawbacks of each budget and therefore the improvements will be
chosen in the next part after discussing and analyzing the criticism.
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1.2-Reasons for Criticizing Budgeting
As mentioned in the previous part the developments occurred because of budgeting practices criticism.
Therefore, this part will include criticism according to each budgeting.
1.2.1-Criticism on Traditional budgeting
According to Lindsay & Libby (2010)- Beyond budgeting or budgeting reconsidered?
Problems with traditional budgeting are as follows:
This lead to Criticism which are illustrated below (Libby &Lindsay, 2010):
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Better budgeting or beyond? By Nelly, Bourne & Adams
Assumes that a large number of companies are dissatisfied with their budgeting system even though
they adjusted them. The criticism did not add much than previous researches and was divided into three
categories as shown in the table below (Neely, Bourne, & Adams, 2003):
Practice development in Budgeting. By Hansen, Otley, and Van der Stede
In this research criticism were similar as previous ones but added were illustrated altogether as shown
below and most of them are adapted from Hoper & Fraser points of view (Hansen, Otley, & Stede,
2003).
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1.2.2-Criticism on ABB
Practice development in Budgeting. By Hansen, Otley, and Van der Stede (Hansen, Otley, &
Stede, 2003)
1.2.3-Criticism on BB:
Practice development in Budgeting. By Hansen, Otley, and Van der Stede (Hansen, Otley, &
Stede, 2003)
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1.2.3-Criticism on ZBB
(Computing Budgeting Techniques, n.d.)
1.2.4-Criticism on Rolling budget
(Zeller & Metzger, 2013)
Budgeting and innovation. By Ogden, Frow & Marginson
This research criticizes budgets (especially the traditional) for the decrease in innovation sometimes as it
keeps constrains on employees and managers which should be avoided. Non-financial targets are
increased and less financial ones along with targets set relatively as whole business to increase
innovation. Greater flexibility should also be added in the process to help increase creativity and
innovation. Employees can be sent on training sessions for innovation. Research & development should
never be stopped no matter what budget says (Balanced scorecard can be used). (Marginson, Ogden
& Frow, 2006)
Analysis
In relation looking at the results found from Lindsay and Libby previous research in 2007, it is clear that
the criticism is found in many areas as follows (Libby & Lindsay, 2007):
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Therefore, due to the wide criticizing of the traditional budgeting shown first solutions for these issues
should be kept. This is illustrated in the table below (Horvath & Sauter, 2004):
Looking at the solutions which are needed to improve the traditional budgeting it will be ideal to
combine good points from all budgeting systems to reach to a suitable budgeting system for the
company. Respecting the basis budgeting practices that are carried in the traditional budgeting the
following table illustrates improvements chosen from other budgeting practices:
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In conclusion, all budget practices help business in a certain and companies should combine the methods
based on their needs and environment and operational stability. For any normal business applying the
traditional budgeting practice in which the above improvements are implemented will help them generate
a good budget plan for their overall management control system.
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1.3-Roles of Budgeting in Organizations
A budget is basically a plan, supported with quantifications, that proposes actions for an accounting
period. The following are the main roles that the budget plan plays to help the organization achieve their
objectives:
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2.0-Management Accounting Changes & Practices
2.1-Achievement of Burns & Scapens Framework for Studying Management Accounting
Change
The Burns and Scapens framework (Burns and Scapens, 2000) is based on understanding how
organizational actions, based on organizational rules and routines, are changed in responses to the activity
behaviors within the organization. Actions are created in alignment with the organizational rules, but over
time, the actions of individuals within the entity will detect the organizational rules as well and force
change on them (Negishi, 2014). Based on that, this model became an effective management
accounting change study tools due to many reasons:
2.1.1-Basis to study change and stability
According to the framework (Scapens, 2006), management accounting is a continued process of change in
which the change of an organization is managed and processed. The major achievement of the framework
is it recognizes that change is inevitable in management accounting. Thus, it is important to understand
that it is not just the actual change that matters but also how the changed is managed. According to the
framework, even in stations of organizational changes, there is a level of stability in the form of specific
rules and regulations. Based on that, it is vital that organizational consider their stability when dealing with
management accounting change and this must reflect in their actions as with it, change will be poorly
managed.
A proof that stability and change can co-exist is the case of Southlake, an international heavy processing
equipment company, which had issues of having large inventory, many small operations which resulted in
a complex and tiresome management accounting system and yet they still were willing to maintain such
system and structure suggestion a case of stability dominance. Using the framework, researchers were
able to understand why company was able to deal with such problem (Lukka, 2007). While the
management accounting process is not organized, it did not paralyze the company, as the managers were
able to cope with the system and found new method to manage inventory and easier management
accounting processes. This case shows how within stability, change is possible and at the same time it
proved how managers’ actions eventually altered the rules of the organization (represented in the new
costing system) as suggested by the framework.
Recognition of internal and external factors: the framework focuses on how internal institutes affect the
process of change. However, the framework also recognizes that there is mixture of both internal and
external factors affecting the change in management accounting (Scapens, 2006). For example, if a
company undergoes changes in the form of new costing system, they must how employees will perceive
the change. At the same time, they must consider the governmental reporting requirements. Thus, this
mixture will impact how the new costing system will be implemented.
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2.1.2-Effect of change within the organization without considering the existing institution
Another achievement of this framework is that it recognizes the importance of internal rules and
structure on change. This is known as internal institutes and includes factors such as the norms, values,
environment and culture. It indicates that changing management accounting practices without carefully
considering the reaction of employees and internal stakeholders will lead to resistance if the change
goes against the internal institutes or is perceived to do so. (Scapens, 2006). For example, if employees
were not informed of the benefit of a new costing system, they might feel that it aims to identify
weaknesses and inefficiencies in their work and thus they will take a negative reaction to the new
change and they will likely not that requires extra hours they might feel discouraged and will resist
transitioning to the new system. At the same time, resistance can develop so far that the institution will
be able to dictate the changes and altering the behaviors, actions and outcomes initially sought by the
company, and thus limiting and locking the organization to follow the actions and behaviors of these
institutions (Negishi, 2014). Thus, the framework highlighted the importance of carefully managing
these institutions and ensures that they agree on the change before implanting it.
This concept was extremely beneficial in understanding the success of change in management
accounting. A prime example of that was a study on a Brazilian Bank, called “Sigma Bank” for research
and privacy sakes. ("Development of a Conceptual Cost System Model", n.d). The bank took initiative
to introduce a new costing system, which was implemented with great successes. Using the framework
to study this change, it was found that the success is attributed to the management taking into
consideration the internal norms and values the management made the decision to identify and ensure
that all affected parties are willing to support the change by taking into consideration the stakeholders’
belief and best interest when implementing the system. They made sure the change did not conflict
with the internal institutions, and that is why they were successful. Thus, as a conclusion, the
framework can be used to identify why a change was or was not successful which helps entities
improve their change management.
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2.2-Processes Shaping the Management Accounting Practices
In regards to the processes that are shaping/forming the management accounting practices, several
processes were identified. Starting with the ones extracted from Scapens research 'Understanding
management accounting practices: A personal journey', there is the process of institutionalization and
routinisation. The process of institutionalization refers to the rules and routines that exist in an
organization which shows the institutionalized ways that are in a position of affecting decision-making in
an organization. With such process being able to effect on the decision-making of an organization
emphasizes on why it is useful in shaping/developing existing and new management accounting practices
(Scapens, 2006).
As for routinisation, this is referred to by being the process of change that occurs between the
introduction of a new rule and the utilization of a new routine. Moreover, this institutionalized or
routinized behavior affects the role of management tools in an organization.
Nevertheless, the interaction between the internal and external institutions comes in as part of the
processes that are shaping the management accounting practices, in which a conflict between the internal
and external institutions affects the development of the practices (Scapens, 2006). To illustrate more on
the internal and external institutions, in his research, John Scapens, spoke about one of his PhD students,
Nor Aziah Abu Kasim, who had studied a public utility which is located in Malaysia. The public utility was
going through an organization change (Scapens, 2006). The public utility was under the pressure of
government in which it was led to be commercialized, then corporatized, and then it had experienced an
internal tension created as a result of the conflict between internal and external institutions. The external
pressures thereafter where inevitable in which it led to serious internal conflicts within the organization
and resulted with a lack of trust in the organization’s accountants. The lack of trust in the accountants by
the public utility managers represents a reason for the affects in developing management accounting
practices for the utility. With lack of trust being mentioned, power and agency are also other vital issues
that are to be considered and taken into consideration because in terms of power, it possess within it a
vital force that contributes in shaping management accounting practices. This is achieved in the sense that
rules and routines are easily influenced and effected by the level of authority a person possess which in
turn can effect changes or resist them. As for agency, it is mainly concerned with the way that
organizations recognize the need for a change in their rules and routines and the underlying taken-for
granted. Recognizing the need for change is achieved through mobilizing wider institutional logics, notions
and meanings in order to create awareness of institutional contradiction (Scapens, 2006).
As for processes identified other than that are found in John Scapens research, they include:

Academic researchers or to be more extensive, the professional education system can be easily
determined as effective and vital contributors to the shaping of management practices in the past,
present and future. This can be explained due to the interaction that occurs between the
management accountants and the professional education system in which the latter utilizes such
interaction to establish and introduce new practices into management accounting. As an example,
Activity-based costing system which is developed and published by Kaplan is one of the well-known
management accounting practices that was developed as a result of such interaction (Shields, 1998).
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
In addition, technology also has had a reserved seat for it amongst the processes that are shaping
the management accounting practices. This is mainly due to the fact that whenever a new
management accounting practice is developed and not yet published, it will have to be compatible
with the existing and latest trends of technology (BPP Learning Media, 2014B).
Nevertheless, government interventions and regulations is also amongst the processes that are shaping
the management accounting practices, as government interventions and regulations have control over
cost-based pricing and profits in order to make sure that the desired type and level of competition is
achieved which is viewed to minimize the supply and demand imbalances in national economies. Thus,
when a new management accounting practice is underdevelopment, considering government
interventions and regulations is a must before introducing the developed practice (BPP Learning Media,
2014B).
2.3-Future Challenges to Management Accounting Practices
Management accounting practices are vulnerable for various challenges in the future and one of those
challenges, according to John Scapens, is minimizing the gap between theoretical management
accounting techniques and their application in order to gain relevant and useful guidance for
management accounting practitioners while exercising their profession as well as to breed sufficient
management accountants who possess the required knowledge, understanding and skills both in service
and in practice. (Scapens, 2006). This is a huge challenge for practitioners that prevent them from taking
advantage of management accounting information. To overcome this, they need to possess management
accounting skills to apply the theory into business situations. Thus, this also emphasize on the necessity
of why management accounting practitioners need to have the required knowledge, understanding and
guidance to exercise their profession efficiently and make the best use of the management accounting
practices. In addition to the application of the theoretically knowledge, there are many challenges that
may encounter management accounting practices in the future, challenges such as:
1) Adapting to changes in the business environment and in the skills sets Management
accounting practitioners need
Changes in technology, management accountant’s responsibility, business environment (such as
economical conditions), globalization and liberalization of markets, change in organizational structure, and
the new developed practices create a challenge for practitioners to adapt to these changes as the type of
information gathered and analyzed change rapidly with the stated changes. To face this, practitioners will
need to enhance their current skill set through acquiring new skills such as personal skills, interpersonal
skills, analytic/constructive skills, ability to be intuitive, synthetic, proactive, innovative, and creative
thinking (Waweru, 2010). In other words, management accounting practitioners are required to obtain
more diverse set of skills to face future challenges (Forsaith, Tilt & Xydias-Lobo, n.d.).
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2) Technological development.
To keep up with the rapid increase of development in business world and information technology, it
became necessary to adopt technology in management accounting practices. Keeping the focus on the
accounting field alone, factors such as improved communication (video-conferencing through Skype), timesaving (fast data-processing software), mobility (smart-devices and laptops), and ease of access to
information (via internet and smart-devices). Thus, these factors illustrate the reasons for such increase
(Karehka, 2013). Focusing solely on management accounting practices, adapting to technological
developments in management accounting practices may act as a challenge in the future. (Attolini, 2014)
Technological developments are a challenge because on one hand, companies will be required to make
sure that their management accounting practitioners improve their practical understanding, knowledge
and skills because such developments and improvements in technology leads to efficiency in processes
used by management accounting practitioners. Moreover, management accounting practitioners are
susceptible to encounter new forms of manufacturing processes (Forsaith, Tilt & Xydias-Lobo, n.d.). Thus,
practitioners will need to improve their practical understanding, knowledge and set of skills to cope with
the development and the new routines and tools in order to overcome such challenge (Attolini, 2014).
Furthermore and on the other hand, the support of developed technologies to management accounting
practices represents another possible challenge especially for under-development management
accounting practices. To illustrate more, much of the management accounting practices that are being
used nowadays from traditional to activity based practices were introduced by academic researchers.
However, in order for the practices to be introduced to practitioners, management usually considers a
number of factors. Among these factors is the ability of being supported by technology (BPP Learning
Media, 2014B). Therefore, for management accounting practices that are under development, researchers
must consider the compatibility of current and future technologies on those under development practices
in order to overcome this challenge in the future.
3) Reliance on traditional management accounting practices more than recently developed
practices
Majority of the companies in the GCC and countries like India are seen to be heavily relying on traditional
management accounting practices rather than shifting to recently developed practices (Mclellan &
Moustafa, 2013). Reasons behind this vary such as:
A) Perceived and actual cost of using advanced techniques.
B) Lack of training, expertise, resources, software support and the anticipated complexity in these
areas (Fadzil & Rababah, 2012).
C) Many SMEs, which are unable to use new developed practices (ABC) due to the nature and size
of business, complexity and cost (Joshi, 2001).
The reliance on traditional management practices rather than recently developed practices is a challenge
that faced and will continue to face management accounting practices and the academic researchers who
are studying and developing new management accounting practices in which the latter is used by
organizations to ensure best management accounting practices are carried out. Therefore, the
development of new management accounting practices is related to whether companies are willing to
employ new management accounting practices or not. The encouragement of companies to use the new
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developed practices through illustrating to them the benefits of those practices both on the short and
long run as well as encouraging them to invest in training on those practices may be valid ways to
overcome such challenge.
4) Accounting diversity
Accounting diversity in here refers to the use of different accounting methods in a company that operates
in more than one country where different accounting methods are employed in each country. This is a
challenge because even if a problem of the same nature is faced in two countries (in which different
accounting methods are used) by the company, then the solution used in one country is not sufficient and
utilizable to solve the problem in the second country. Thus, the company must carry two sets of analysis
and make different decisions with put burden on the management accounting function. (Chiemelie, 2014).
Thus, the management accounting practitioners will need to be aware and familiar with the accounting
practices of the company at both countries in order to overcome the accounting diversity challenge.
3.0-Performance Indicators
Performance measurements are used to compare the actual work with the planned on and to identify how
well the company is performing in that aspect. Companies always aim for survivability and growth by time
which need to be identified through different indicators called “Key Performance Indicators (KPIs)”
(Investopedia, n.d.). These indicators are either Financial Performance Indicators (FPIs) or Non-Financial
Performance Indicators (NFPIs), as followed:
3.1-Financial Performance Indicators (FPIs)
These indicators are concerned with the financial aspect of the company. Shareholders are often more
concerned with these indicators because they relate to the financial health and stability of the company’s
operations. FPIs are only used by profitable organizations where financial information are available. These
indicators are usually a comparison between the actual performance and the budgeted ones. They include
the Profitability of the company, Revenue and sales figures, Return on investment (ROI) and Cash flows
(Kaplan, n.d.A).
Advantages:
1) These indicators are the main concern of shareholders, meaning that they could attract new investors to
the company. Shareholders usually focus on the profitability of the company in order to increase their
gains (Knowledge Wharton, 2000).
2) Provides comparable information the company can use to measure its growth in comparison to previous
years or other competitors.
Disadvantages:
1) Solely concerned with the figures and does not deal with other important aspects, such as customer
satisfaction and competitors’ analysis which are necessary for the company to remain profitable (Kaplan,
n.d.B).
2) These indicators need to be measured on a regular basis which could be costly for some companies due
to the limitation of employees or time (Knowledge Wharton, 2000).
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3.2-Non-Financial Performance Indicators (NFPIs)
Unlike the FPIs, these indicators do not have any financial or monetary substance but rather relate to
efficiency and effectiveness (Lexicon, n.d.). Despite these indicators not evidencing directly how well or
healthy the company, it still has an impact on showing their strengths in the market. These indicators are
used by profitable or non-profitable organizations and include Product Quality, Employee/Customer
Satisfaction, Speed of Performance and Market Share Analysis.
Advantages: (Knowledge Wharton, 2000)
1) It is often difficult to quantify or measure the value or effect of the intangible assets of a company,
though NFPIs do provide an indirect measure of them. An example is being able to identify the position of
the brand among others in market share analysis.
2) These measures can be better indicators of future financial performance than FPIs due to achieving the
organizational strategy in the long run. These could be exemplified in Product Quality analysis because
providing higher quality will attract more customers.
Disadvantages: (Knowledge Wharton, 2000)
1) There is no common denominator to compare the measures to. This might be a reason for management
to make different performance-related decisions that could be faulty or harmful.
2) These indicators also include the possibility of incorrect measurements or lack of statistical reliability as
the information they provide may not always be representative of what is actually happening.
3.3-KPIs in Organizations
Standard Chartered Bank: A famous profitable organization that provide these KPIs to their investors
clearly through their Annual Report while detailing the aim and analysis for each one of them (Standard
Chartered, 2014).
The following are two examples of the FPIs where the company show the decrease in their Earnings per
Share as well as Return on Equity during 2014.
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Besides the FPIs, they also provide NFPIs to their investors such as Net Promoter Score and Average
Product per Client. NPS witnessed a decrease in 2014 while having a slight increase in the average
products per client.
3.4-Other Performance Measurements
Besides the FPIs and NPIs, there are other measures that are widely used by organizations whether profitmaking or not that help them measure their performance. Their main purpose is to align the performance
with the organizational vision and objectives in order to achieve them. These measures include Balanced
Scorecards and Building Block Model which are further explained in Appendix 4 and 5 respectively.
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4.0-Uses of Management Accounting Information for Strategic Decision
Making
Management accounting is the process of using and analyzing various quantitative (such as financial
information) and qualitative (such as market conditions) for planning, controlling and decision making
purposes. (Vintez, n.d). As for decision making, (MA) can be used to analyze options regarding variety of
options such as:
1) Insourcing or Outsourcing a production or a service (this is a form of whether to make the product/part
of it or to buy it from suppliers).
2) Pricing products or services (which pricing strategy is most suitable?)
3) Product Mix decisions (what combination of product should be provided to customers).
That said, using management accounting practices has its benefits and limitation when used for decision
making (Parker, 2012) (Shanker, 2014).
To make these decisions, managers use variety of management accounting techniques. The most
prominent one is to focus on relevant cash flows (future inflows and outflows that will be created as a
result of taking the decision) and ignores any cost/revenue that will created regardless if the decision is
taken or not. This created many short-term decision making tools such as cost-volume-benefit analysis and
break-even analysis. Furthermore, the effectiveness of management accounting techniques depends on
the sophistication of accounting systems and the business context:
Page 21 of 32
4.1-Manufacturing Industries
In the manufacturing industries, costs and expenses are identified in the designing stage and thus
management accounting can be utilized to decide on the best cost structure with ease as the costs are
easily identifiable. This makes management accounting tools easier to apply, because as management
accounting depends on the reliability of accounting information (CIMA, 2010). For example,
companies can use relevant cash analysis to decide whether to make a parts of the product or buy it
from suppliers. Other decisions that can be made easily in this context are pricing decisions. Since
manufacturing companies are focused on covering their expenses. Since costs are easily traceable,
management accounting can be used to calculate prices using the management accounting strategy
(Cost-Plus pricing) (Smirit, n.d) in combination with qualitative factors such as customers’ preferences,
price sensitivities and substitute products. At the same time, pricing strategies can be easily set in the
designing phase, where management can choose from different pricing strategies based on
management accounting analysis such as break-even point and considering qualitative factors such
customers type and competitions (Vintez, n.d). For example, Apple, using management accounting
technique of market skimming, set prices at high level for their IPhone 5 and despite competitors
offering lower prices apple was more successful. (Hitshen, n.d). This is because, the strategy is based
on analysis of cost and customers price sensitivity and loyalty. Meaning through management
accounting technique, Apple is able to generate more profit and take significant market shares from
competitors.
Apple was successful in this because of their sophisticated management accounting function and this
sophistication will usually make or break manufacturing companies’ decisions (CIMA, 2010).
For
example, the multinational aircraft maker Boeing, made the decision to outsource the product of some
of the aircraft initial parts (787) using a supplier to reduce the cost by 4 billion dollars. This however,
backfired as the supplier could not offer products with the advanced innovation required. The costs
ended up being going over budget and over the deadline by three years (Denning, 2013).
All this can be attributable to bad management accounting practices, because a well-established MA
function can easily analyze the suppliers’ competency and innovation demand and avoid the company
making this bad strategic outsourcing decision. Therefore, while management accounting is useful and
relatively easy to apply in this industry, however, the more complex the situation the more complex
the management accounting function must be to help make informed decisions.
4.2-Service Industries
As stated, management accounting is based on financial accounting information. Comparing with the
manufacturing industry, the service industry has different types of cost and different accounting systems.
An example would be that the cost of each units of service provided are not easily traceable (they are not
simply labor hours spent providing the services). As such, the type of information available is different
and a result the objective and usage of management accounting differ from other industries. (Cinquini
and Tenucci, 2011). A prime example of that is pricing decisions. Many studies have concluded that while
using cost based pricing is possible in the service industry, it is not the most favorable option as most
companies prefer pricing products using marketing information based pricing such as value based pricing
(charging prices based on customers’ perception of the service’s value received). (Cinquini and Tenucci,
2011). This is because the service companies aim to increase revenues or gain customers satisfaction and
thus their choice of pricing strategy is one that allows them to change prices. Example of that would be
in the UK hotel sector where companies started moving towards value based pricing (Lina and Durden,
n.d). This was extremely beneficial as it guides service development (need to differentiate the services
from customers) and gain customers loyalty as customers will be paying a fair amount in their opinion.
Page 22 of 32
While this might work in some cases, at the end companies need to cover their costs and thus a form of
management accounting is needed. A technique of costing such as Activity based costing can help in cost
allocation for services companies and thus will help in decision making, however it is still a challenge to
implement such system due to cost and time constrains. This is different depending on each company as
a restaurant for example can easily determine the costs needed for each service and thus they can use
tools such as break-even analysis with relative easiness (Vintez, n.d). This easiness is better for small
business as well. Therefore, it depends on the complexity of the business.
4.3-Bottom-line
Professionals around the world agree that management accounting tools are becoming essential in any
business success. The above analysis was conducted on service and manufacturing industries as they are
the two ends of the spectrum and will help understand management accounting usefulness in different
context. Generally speaking, management accounting is useful in almost all companies and industries,
however, Management accounting at the end depends on information about revenues and costs. Thus,
management accounting is easier for manufacturing companies because the accounting information and
costs are easily allocated comparing to service companies. However, as highlighted, management
accounting is still feasible for service companies albeit complicated. Thus, the question is not if
management accounting is useful for decision making or not, but rather is it efficient and possible establish
a sophisticated management accounting function. SMEs for example, the cost of establishing such system
is too high even though it will lead to better decisions. Thus owners carry analysis that often lead to less
informed decisions due to lack of management accounting knowledge in order to be cost efficient.
Page 23 of 32
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6.0-Appendices
Appendix 1: ABB Approach
According to research explanation:
"Stage 1, the operational loop, uses activity-based concepts to convert the estimated demand for
products and services into activity requirements using activity consumption rates, and then translates
activity requirements into resource requirements using resource consumption rates. Once the activity
and resource consumption requirements are known, the ABBapproach works to achieve an operational
balance between the resources required to fulfill demand and the resources available (capacity). If the
initial plan leads to an imbalance, the organization can adjust the quantity of demand, resource capacity,
resource consumption rates, or activity consumption rates. In contrast, organizations using traditional
budgeting can balance the budget only by changing the quantity of demand or resources available
(capacity).
Stage 2, the financial loop, develops a financial plan based on the operational plan. Financial balance is
achieved when the financial plan meets a predetermined financial target. Once the organization knows
the demands, activities, and resources, it determines the cost of resources, traces them to activities, and
then to products/services. The projected financial results can be viewed in the aggregate, or can be
broken down into information by resources, activities, processes, products, or other cost objects."
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Appendix 2: Benefits of ABB
Benefit
Explanation
Greater
operational
balance
Having the operational loop at first stage and balancing operational
requirements there will be no need to calculate financial impact of infeasible
operational plans. Moreover, having a budget generated according to
activities and using cost drivers like batches, facility etc. which is not available
in the traditional budgeting helps in getting greater balance between
operation, strategic goals and financial which drives in more efficiency in
business operation as a whole. Thus, better products, process, decisions &
allocation of resources is available in the business.
Combining all
objectives
Unlike traditional budgeting which is vertically oriented the ABB is
horizontally oriented. This helps taking in view all business objectives and
departmental goals also as budgets can now be connected to management
initiatives, like performance evaluations which concentrate on lead-lag
relationships and cause-effect ones (e.g. balanced scorecard).
Flexibility in
balancing
financial
plans
Involvement
of lower level
Solve
consumption
/capacity
issues
A good notice about this budgeting system is its flexibility in adjustment as
financial plan could be balanced in many different ways. The possible ways
are; changing activity & resources consumption rate, changing capacity,
costs, demand quantity or price. Thus, it overcomes traditional budgeting in
this area, especially that traditional never collect data of rates previously
mentioned. This helps managers to make better decisions especially urgent
contingent ones.
Helps lower level management and employees to understand budgeting and
communicate it as it is not only in financial terms but also in operational
terms. The increase amount of operational budget details and relating it to
goals leads to better performance measurement and employees & managers
can do a better job as they can relate the budgets and resource to activities
they are operating or working on.
The ABB makes it clear what resource capacity is available and how it's
consumed and in this way any consumption and capacity issue is easily
tracked and solved.
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Appendix 3: Other Researches
Research
Budgeting.
By Dugdale
& Stephan
Traditional
vs beyond
budgeting.
By Reka,
Stefan &
Daniel
Details
Conducted surveys and interviews regarding budgets. It agrees on uses of budget for control
and with some aspects of BB like decentralizing and brings evidence from research that it is
important. It mentions how the BB approach had it principles through Svenska Handelsbanken
business which first implemented the BB and believed in it which influenced Hope & Fraser to
start researching on the BB more. The main reason behind this as Handelsbanken says is the
decentralization wanted to achieve, taking an example as in Transamerica Finance Corporation
where branch managers are experiencing more freedom to run the operations which helps in
better performance. This lead to recommendations by Hope & Fraser for decentralization
increase in relationship between corporate centre and operating units for better performance.
This happened with the Swedish wholesaler Ahlsell who has more than 200 decentralized profit
centres. (Dugdale & Stephan, 2006)
This research Agrees with the advantages and disadvantages of ZBB, traditional and BB and
mentions all researches while concluding that BB needs more research and at this stage
budgets are important and cannot be abandoned.
(Reka, Stefan & Daniel)
Budgeting practices has developed a lot as needed through the time. Dysfunctional behaviors
Budgeting
first started to occur and this lead to gaming and manipulation, thus participative budgeting
and beyond
was encouraged were employees are more involved in putting goals and targets and budget
: Carsten
preparation. Thus, this research encourages the use of participative budgeting more.
(Rohde)
Better
budgeting.
By CIMA
Budgets are done once and then forecasted till some period at least. Non-financial
measurements were found important but problematic due to difficulty in proving the cause and
effect of it with financial or other measures. Technology helped in development as budgets
became more reliable, accurate and are easier faster to create.
Culture and incentives also played a big role as culture & organization environment shapes and
helps generate budget and the system of it. While rewards and incentives worked as a
motivation in order to achieve budget and targets so budgets are kept in a way to motivate
along with good rewards. City and City analysts can be an influencing factor which affects both
positively as a motivator of high expectations or a negative influence due to negative
expectations and analysis formed. ("Better budgeting",2004)
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Appendix 4: Balanced Scorecards
As shown in the figure, the model includes 4 main
elements, Finance, Customer, Internal Business
and Innovation. Finance is concerned with the
financial performance, customer focuses on the
satisfaction of customers in the market, Internal
Business emphasizes on the efficiency of the
business process within the company while
Innovation is about the knowledge and skills in the
company and their ability to continue competing in
the market. All these 4 elements must be
measured and linked to the Vision and Strategy of
the company, which will then help in achieving the
strategic organizational objectives.
Figure 1: Balanced Scorecards (BSI, n.d.)
Appendix 5: Building Block Model
Dimensions



Quality
Flexibility
Innovation



Competitive Performance
Financial Performance
Resource Utilization
Standards



Equity
Achievability
Ownership
Rewards



Clarity
Motivation
Controllability
This model, developed by Fitzgerald and Moon, is widely used because it measure both financial and nonfinancial performances for business services while linking them to the corporate strategy. It also provides
information about both external and internal measures. The model is assessed through linking the
dimensions (also referred to as Critical Success Factors (CSFs)) to a standard (KPI) which will then lead to
the reward. For example, in case of Financial Performance as CSF, the company can set the profitability of
its operations as the KPI and allowing for relevant rewards through bonuses (Kaplan, n.d.C).
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