© 2012 Pearson Prentice Hall. All rights reserved. Behavioral and Organizational Issues in Management Accounting and Control Systems Chapter 9

© 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values Employees may observe management, even senior management, engaging in unethical behavior This type of conflict is the most difficult because the organization is misrepresenting its ethical system The employee is in a position of drawing attention to the problem by being a whistle-blower

© 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values Experts who have studied this problem advise that the individual should determine: – That the facts are correct and that a conflict exists between the organization’s stated ethical policy and the actions of its employees in practice – Whether this conflict is institutional or reflects the decisions and actions of only a small minority of employees Most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics

© 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values Other potential courses of action include: – Point out the discrepancy to a superior and refuse to act unethically – Point out the discrepancy to a superior and act unethically – Take the discrepancy to a mediator in the organization, if one exists – Work with respected leaders in the organization to change the discrepancy

© 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values – Go outside the organization to publicly resolve the issue – Go outside the organization anonymously to resolve the issue – Resign and go public to resolve the issue – Resign and remain silent – Do nothing, hoping that the problem vanishes

© 2012 Pearson Prentice Hall. All rights reserved. Effective Ethical Control To promote ethical decision making, an ethical control system should include the following: – A statement of the organization’s values and code of ethics written in practical terms, with examples that the employees can relate to their individual jobs – A clear statement of the employee’s ethical responsibilities for every job description and a specific review of the employee’s ethical performance as part of every performance review – Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face

© 2012 Pearson Prentice Hall. All rights reserved. Effective Ethical Control – Evidence that senior management expects members to adhere to its code of ethics, meaning that management must: Provide a statement of the consequences of violating the organization’s code of ethics Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently according to the statement of consequences Provide visible support of ethical decision making at every opportunity Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else on the board of directors

© 2012 Pearson Prentice Hall. All rights reserved. Effective Ethical Control – Evidence that employees can make ethical decisions or report violations of the organization’s stated ethics (be the whistle-blower) without fear of reprisals from superiors, subordinates, or peers Formal training is part of the process of promoting ethical decision making

Motivation and Behaviour Congruence The idea is to align the interests of the individual with those of the organization. As individuals pursue their own goals inside the organization they should be contributing to achieving the organization’s goals. One way of doing this is a well-designed incentive compensation system. 9

© 2012 Pearson Prentice Hall. All rights reserved. Interactive Control Systems If there is a large degree of strategic uncertainty, managers spend much more time monitoring the decisions and actions of their subordinates At the core of both systems are two common methods of control: – task control (finding ways to control behavior so that a job is completed in a pre-specified manner) Preventative control (limited discretion) Monitoring (inspecting work) – results control (measuring employee performance against stated objectives)

Multiple and Balanced Performance Measures Should focus on both short term and long term objectives Should cover all aspects of the person’s job 11

Participation in Decision Making Authoritative budgeting – Superior advises the subordinate what the budget will be Participative budgeting – The budget is a result of joint decision making between the superior and the subordinate Consultative budgeting – The superior asks for the subordinate’s input but the decision making is not joint 12

Rewards Extrinsic Provided by the organization to the employee Examples – Cash bonus – Stock options – Public recognition Intrinsic Self-provided by individuals Examples – Satisfaction for a job well done – Satisfaction provided by the scope of the job – Satisfaction provided by the opportunity for advancement 13

Effective Reward Systems An effective reward system motivates an employee to act in the organization's best interests If the reward system is based on extrinsic rewards the employee must – Understand clearly what is rewarded – Have the authority to affect what is rewarded – Value what is rewarded 14

© 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10

© 2012 Pearson Prentice Hall. All rights reserved. Capacity-Related and Flexible Resources In the short run: – Capacity-related costs are fixed – The only relevant costs are controllable costs, which are variable costs The Budgeting Process determines the planned level of most variable costs

© 2012 Pearson Prentice Hall. All rights reserved. The Role of Budgets and Budgeting Budgets serve as a control for managers within the business units of an organization Budgets play a central role in the relationship between planning and control Budgets reflect in quantitative terms how to allocate financial resources to each part of an organization, based on the planned activities and short-run objectives of that part of the organization

© 2012 Pearson Prentice Hall. All rights reserved. Budget Components Two major types of budgets comprise the Master Budget: – Operating budgets—summarize the level of activities such as sales, purchasing, and production – Financial budgets—identify the expected financial consequences of the activities summarized in the operating budgets

© 2012 Pearson Prentice Hall. All rights reserved. Operating Budgets Sales plan—identifies the planned level of sales for each product Capital spending plan—specifies the long-term capital investments that must be paid in the current budget period to meet activity objectives Production plan—schedules required production Materials purchasing plan—schedules required purchasing activities

© 2012 Pearson Prentice Hall. All rights reserved. Operating Budgets Labor hiring and training plan—specifies the number of people the organization must hire or release to achieve its activity objectives Administrative and discretionary spending plan— includes administration, staffing, research and development, and advertising

© 2012 Pearson Prentice Hall. All rights reserved. Operating Budgets Operations personnel use the operating budget to guide and coordinate the level of various activities during the budget period Operations personnel also record data from current operations that can be used to develop future budgets

© 2012 Pearson Prentice Hall. All rights reserved. Financial Budgets Planners prepare the projected balance sheet and projected income statement to estimate the financial consequences of investment, production, and sales plans Planners use the projected statement of cash flows in two ways: – To plan when excess cash will be generated – To plan how to meet any cash shortages

© 2012 Pearson Prentice Hall. All rights reserved. Demand Forecast (Sales Plan) An estimate of the sales demand at a specific selling price Provides the basis for production plans: – Labor – Materials – Production capacity – Cash

© 2012 Pearson Prentice Hall. All rights reserved. The Production Plan Planners determine a production plan by matching the completed sales plan with the organization’s inventory policy and capacity level The plan identifies the intended production during each of the interim periods comprising the annual budget period

© 2012 Pearson Prentice Hall. All rights reserved. The Spending Plans Based on the production plan – Materials purchasing plan, by the purchasing group – Labor hiring and production plan, by the personnel and production groups – Discretionary spending plan, by other decision makers – Capital spending plan, by appropriate authority

© 2012 Pearson Prentice Hall. All rights reserved. Choosing Capacity Levels Three types of resources determine capacity: – Short term flexible resources Ability to use existing capacity Raw materials, supplies, casual labor – Intermediate term capacity resources General capacity transferable among organizations Employees, general purpose equipment – Long term capacity resources Special purpose capacity customized for the organization Buildings, special-purpose equipment

© 2012 Pearson Prentice Hall. All rights reserved. The Cash Flow Statement The cash flow statement has three sections: – Cash inflows from cash sales and collections of receivables – Cash outflows For flexible resources that are acquired and consumed in the short term For capacity resources that are acquired and consumed in the intermediate and long term – Results of financing operations

© 2012 Pearson Prentice Hall. All rights reserved. Financing Operations Summarizes the effects on cash of transactions that are not a part of the normal operating activities Includes the effects of: – Issuing or retiring stock or debt – Buying or selling capital assets – Short-term financing

© 2012 Pearson Prentice Hall. All rights reserved. Using the Financial Plans Cash flow forecast – Identify if and when external financing is required – Determine if any projected cash shortage will be: Temporary or cyclical Permanent Projected income statement and balance sheet – General assessment of operating efficiencies

Using the Projected Results Budget information is used to: – Identify broad resource requirements – Identify potential problems – Compare projected operating and financing results © 2012 Pearson Prentice Hall. All rights reserved.