1. MANAGEMENT ACCOUNTING
Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

2. Management Accounting Managing organizations (Strategy and control)
Chapter 6
Management Accounting McWatters, Zimmerman, Morse

3. Objectives
Balance the assignment of responsibilities, the choice of performance measures and compensation based on performance
Link responsibilities with individuals who have the specific knowledge to make the decision
Recognize self-interest in motivating individuals within organizations
Identify the costs and benefits of monitoring members of the organization
Choose performance measures that reveal actions of members of an organization
Create a balanced scorecard to articulate the strategy of the organization
Design compensation contracts based on performance measures and responsibilities assigned
Design internal control systems by separating the planning process from the control process
Identify control issues within an organization
Management Accounting McWatters, Zimmerman, Morse

4. Framework for Organizational Change Revisited
Control systems within an organization:
1. Assign responsibilities
2. Measure performance
and
3. Provide compensation for performance
Management Accounting McWatters, Zimmerman, Morse

5. Framework for Organizational Change
Technological Change
Customer Preferences
Globalization
Strategy for Customer Value Product/Service Innovation Quality, Low Cost
Control Decisions Responsibilities Performance Measures Compensation
Planning Decisions Product/Service Design Production and Delivery Customer Services
Customer Value
Organizational Value
Management Accounting McWatters, Zimmerman, Morse

6. Control Within an Organization
Control is the process of getting members of the organization to work toward the goals of the organization
An organization is economically viable only if the benefits of having the organization are greater than the costs of control within the organization
Management Accounting plays an important role in control
Management Accounting McWatters, Zimmerman, Morse

7. Knowledge and Decision Making Within an Organization
The distribution of knowledge throughout the organization is an important issue in the assignment of responsibilities. Knowledge is costly to acquire, store, and process
Transfer of knowledge (through use of accounting numbers and documents
Knowledgeable individual
Manager
The manager retains responsibility
Management Accounting McWatters, Zimmerman, Morse

8. Knowledge and Decision Making Within an Organization
Delegation of responsibility
Knowledgeable individual
Manager
Control (including accounting performance measures)
The manager transfers responsibility but creates a control system
Management Accounting McWatters, Zimmerman, Morse

9. Motivating Individuals to Support Organizational Goals
Concepts that underlie organizational-control
self-interested behaviour of individuals
The monitoring costs to reduce
self-interested behaviour
through
Measurement of individual performance
Rewarding individual performance
Management Accounting McWatters, Zimmerman, Morse

10. Self-Interested Behaviour/Monitoring Costs
In accepting a new member, an organization must recognize that the individual is influenced by self-interest and devise a mechanism that motivates them to act in the best interest of the organization
When an individual joins an organization, the individual perceives that the benefits of joining the organization are greater than the cost. The individual is motivated by self-interest
Monitoring costs are a drain on the organization, but are necessary to encourage appropriate behaviour
Management Accounting McWatters, Zimmerman, Morse

11. Performance Measurement
Performance measures describe how well an individual has performed a task
A good performance measure reveals the actions of the individual being evaluated
Motivates individuals to act in the organization’s best interest
and
Cultural differences influence performance measurement
Management Accounting McWatters, Zimmerman, Morse

12. Performance Measurement
Certain aspects of financial accounting systems exist today because of the demand for performance measures
Multiple performance measures generally will reveal an individual’s actions more accurately than a single measure
Management Accounting McWatters, Zimmerman, Morse

13. The Balanced Scorecard
Financial Perspective creating organizational value for owners/shareholders
Customer perspective
process adding value for customers
Internal business
process ensuring efficiency and quality in the value chain
Strategy
Learning and growth investing in organizational infrastructure
Management Accounting McWatters, Zimmerman, Morse

14. The Balanced Scorecard
Each organizational objective has driver performance measures and outcome performance measures
Driver
performance measures measures of input activities to achieve the objective
Outcome
performance measures measures to determine whether the objective has been realized
e.g. the number of employee training sessions is a driver performance measure for the objective of increasing employee skills to serve customers
e.g. the number different services that an employee can offer a customer
Management Accounting McWatters, Zimmerman, Morse

15. Example Balanced Scorecard
Objectives
Initiatives
Performance measure
Target
Financial Perspective
Increase shareholder wealth
Develop new products
Return on assets
25%
Growth
Increase online sales
% growth in sales
30%
Customer Perspective
Increase market share
Increased advertising
% market share
10%
Customer satisfaction
Increase post-sales service
% satisfied through survey
99%
Internal business perspective
Reduce throughput time
Reduce non-value-added activities
Average throughput time
4 hours
On-time delivery
Streamline delivery process
% pm-time delivery
90%
Reduce defects
Quality teams
% defects
0.01%
Learning and growth perspective
Multi-skilled workforce
Employee training
% of employees with multiple skills
80%
Improve information systems
Hire new employees in computing
Number of employees in computing 20
Reduce employee turnover
Pay higher salaries
% annual turnover
Management Accounting McWatters, Zimmerman, Morse

16. Limitations of the Balanced Scorecard
It is difficult to optimize performance across the 4 perspectives while making the appropriate trade-offs necessary to do so
The addition of too many measures leads to a unwieldy scorecard where managers are left to determine the relative importance of measures subjectively
Over reliance on the financial perspective leads to an unbalanced scorecard which focuses on the short term
Management Accounting McWatters, Zimmerman, Morse

17. Rewarding Performance Through Compensation Contracts
An organization can be viewed as a set of contracts that identify the assignment of responsibilities, the performance measures to evaluate the members, and how the benefits generated by the organization are shared
Compensation is often used as a motivational tool
Management Accounting McWatters, Zimmerman, Morse

18. Separating Steps of Decision Process
Decision planning process
Decision control process
1. Initiation
2. Ratification
3. Implementation
4. Monitoring
Management Accounting McWatters, Zimmerman, Morse

19. Management Accounting Managing organizations (Strategy and control)
End of Chapter 6
Management Accounting McWatters, Zimmerman, Morse