For the given assignment regarding Management Accounting and Performance Evaluation, you have to respond to the following questions in approximately 5 pages (1,250 words).
CEO's notebook SPREAD THE GOSPEL Charles Tilley reports on his bid to encourage the International Federation of Accountants to do more to promote the value of management accounting. If there's one lesson I have drawn from the financial crisis, it's about the value of proactive management accountants in shaping their businesses and creating sustainable success. All organisations need to be clear about how they create value and what the main risks to them are. They also have to understand how performance incentives and indicators drive the right - or wrong - behaviour. The crisis showed that some failed to grasp these issues fully and it's something that our profession must address if we are to restore public trust in commercial competence and ethical standards. Accountants in business, with their command of management information, support good governance by enabling evidence-based decision-making. In effect, they are business navigators - planning the route and providing the key performance indicators to ensure that the desired destination is reached. With a solid foundation of robust information, preparing the annual report (and satisfying the auditors) is a straightforward task. So a good management accountant has a powerful impact on the entire reporting supply chain. But I am preaching to the converted here, of course. That wasn't quite the case when I spoke at the chief executives' strategic forum of the International Federation of Accountants (IFAC) in New York two months ago. IFAC, with its 159 member bodies, represents 2.5 million accountants around the world. At least a million of these work in business and the public and not-for-profit sectors. Despite their numbers and potential influence, IFAC has tended to emphasise the auditing side of the profession and pay much less regard to those whom it calls professional accountants in business. This risks giving the impression that they are outside the mainstream, rather than integral members of the world community of accountants. So I put it to my fellow chief executives that, if IFAC really wants to "enhance the relevance of the profession" and be an "influential voice for the global accountancy profession", it should truly communicate the value of accountants in business. IFAC should regard them as part of its DNA. The federation has an amazingly valuable asset, but one that it is not yet realising fully. The professional accountants in business committee at IFAC has proposed focusing on two key objectives to raise awareness of the role of management accountants and to support 48 financial management IFAC has tended to emphasise the auditing side of the profession and pay much less regard to professional accountants in business. This risks giving the impression that they are outside the mainstream • • their member bodies, but it is the quality of IFAC's overall communications plan that will be crucial here. It will have to reach all of the key stakeholders, including regulators, and give a clear and incisive message about how all members of the profession - wherever they work and whatever their specialism - are helping to build sustainable value for their organisations. That has to be something worth shouting about. Fortunately, my audience was receptive and keen to take up the challenge. How will we know when we have succeeded? Maybe it will be when the answer to the question of whether all CFOs should be professionally qualified is: "Yes - definitely" Copyright of Financial Management (14719185) is the property of Caspian Publishing and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use
Assignment:
The following information applies to the budgeted operations of the Bilbo division of the Baggins Company.
£
Sales revenue (50,000 units at £8) 400,000
Variable costs (50,000 units at £6) (300,000)
Fixed costs (75,000)
Divisional profit 25,000
Divisional investment 150,000
The minimum desired return on investment is the cost of capital of 20% a year.
Required:
Calculate:
a. ROI
b. NRI
Assignment:
(A) Read the paper by Scapens (2006). How has management accounting research informed, or been informed by management accounting and the development of strategic management accounting?
Scapens, R.W. (2006) ‘Understanding management accounting practices: a personal journey’, The British Accounting Review, 38 (1), pp.1-30.
(B) Scapens (2006) notes a very broad trend of the development of management accounting techniques that are a reflection of internal and external factors that affect organisations, such as economic and societal influences.
A conclusion is offered that management accounting research has tended to follow, rather than lead management accounting practice. There has been a shift in this position in recent times: this may explain, at least in part, the development of some strategic management accounting techniques.
Assignment:
Activity Based Costing:
Orange Furniture Inc. (OFI) manufactures bedroom furniture in sets (a set includes a dressing table, two beds, one bedside table) for use in hotels.
OFI has three customer groups: value, quality and luxury. The value products are targeted at budget prices hotels that are looking for simple furniture, while the luxury furniture is targeted at the very best hotels. The value line is attractive to a variety of hotels that appreciate the combination of quality and value.
Currently, there has been a small increase in the low-cost and value lines and a strong increase in demand for the luxury line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demand for business travel, while a few years ago, the value segment was the most popular for business travellers.
OFI wants to be able to respond to the increased demand with increased production but is concerned about the increased production cost and about price setting as its mix of customers and production change. OFI has used a volume based overhead recovery rate on direct labour hours for some time. Direct labour cost is £12 per hour.
The following production data has been collated by the Director of Operations. The Director of Finance has identified the cost drivers.
Budget Cost (£) Cost Driver
Materials handling 349,600 No. of parts
Product scheduling 160,000 No. of production orders
Set up labour 216,000 No. of set ups
Automated machinery 1,750,000 Machine hours
Finishing 619,500 Direct labour hours
Packaging and delivery 290,400 No. of orders delivered
3,385,500
The Director of Operations has also provided the following production data for each of the three product lines:
Product Line Value Quality Luxury
Units produced 15,000 5,000 500
Selling price £650 £900 £1,200
Direct materials cost per unit £80 £50 £110
Number of parts per unit 30 50 120
Direct labour hours per unit 4 5 7
Machine hours per unit 3 7 15
Production orders 50 70 200
Production set ups 20 50 50
Orders delivered 1,000 2,000 300
Required:
a. Determine the cost per bedroom furniture set (unit) and the total production cost of each of the three customer groups using activity based costing.
Assignment:
The Role of Management Accounting in Employee Motivation
The success of performance measures and approaches to employee reward depends on the design and operation of systems that are congruent to both each other and, importantly, to organisational objectives.
Consider the work of Campbell (2008) and Banker, Potter & Srinivasan (2000). What role do non-financial measures have to play in performance measurement and systems of reward? How might non-financial measures be superior to financial measures in this context?
Campbell, D. (2008) ‘Nonfinancial performance measures and promotion-based incentives’. Journal of Accounting Research, 46(2), pp. 297-332.
Banker, R., Potter, G. & Srinivasan, D. (2000) ‘An empirical investigation of an incentive plan that includes nonfinancial performance measures’, The Accounting Review, 75(1), pp. 65-92
Findings indicate that after controlling for financial performance, these promotion and demotion decisions are sensitive to non-financial measures such as service quality and employee retention. There is empirical evidence that supports a body of literature that suggests that non-financial measures are better predictors of long-term financial performance than current financial measures.
Assignment:
Motivation and Employee Reward Systems
Read the paper by Jensen (2004). This is a controversial paper on the topic of behavioural aspects of budgeting and, in particular, the effects of linking pay to performance evaluation using budgets. This paper analyzes the counterproductive effects associated with using budgets or targets in an organisation's performance measurement and compensation systems. How does the linking of pay to performance as compared to budget cause value to be destroyed?
Jensen, M. (2004) Paying people to lie: the truth about the budgeting process, European Financial Management, 9 (3), pp. 379-406.
Jensen (2004) suggests that the linking of pay to performance evaluation using budgets causes managers and employees to game or ‘play’ the system. This destroys value by reducing the levels of co-ordination in the organisation and the manipulation of data that is used to evaluate performance against the budgets or targets.
Assignment:
Management accounting in a wider context: Total Quality Management (TQM), Manufacturing Resource Planning (MRP) and Enterprise Resource Planning (ERP)
Consider the paper by Gupta &Zeithamel (2006). How might ERP contribute to the understanding of the relationship between customer relationships and profitability?
Gupta, S. &Zeithamel, V. (2006) ‘Customer metrics and their impact on financial performance’, Marketing Science 25th Anniversary Issue, 25 (6), pp.718-739.
The need to understand the relationships among customer metrics and profitability has never been more critical. These relationships are pivotal to tracking and justifying firms' marketing expenditures, which have come under increasing pressure. The objective of this paper is to integrate existing knowledge and research about the impact of customer metrics on firms' financial performance.
We investigate both unobservable or perceptual customer metrics (e.g. customer satisfaction) and observable or behavioural metrics (e.g. customer retention and lifetime value).
We begin with an overview of unobservable and observable metrics, showing how they have been measured and modelled in research.
We next offer nine empirical generalizations about the linkages between perceptual and behavioural metrics and their impact on financial performance.
Assignment:
Relationships with Customers and Future Profitability
Consider the paper by Leung, Lam & Cao (2006). How does the inclusion of non-financial measures in the Balanced Scorecard help in the management and evaluation of performance?
Leung, L., Lam, K. & Cao, D. (2006) ‘Implementing the balanced scorecard using the analytic hierarchy process and the analytic network process’, The Journal of the Operational Research Society, 57 (6), pp.682-691.
The Balanced Scorecard (BSC) is a multi-attribute evaluation concept that highlights the importance of non-financial attributes. By incorporating a wider set of non-financial attributes into the measurement system of a firm, the BSC captures not only a firm's current performance, but also the drivers of its future performance.
Assignment:
Non-financial Performance Measures
Consider the following paper. How important do non-financial performance measures appear to be in this context? How might management accounting systems need to be adapted to reflect the importance of these non-financial performance measures?
Campbell, D. (2008) Nonfinancial performance measures and promotion-based incentives, Journal of Accounting Research, 46(2), pp. 297-332.
This article examines the sensitivity of promotion and demotion decisions for lower level managers within a major US-based fast-food retailer to financial and non-financial measure of their performance.
Findings indicate that after controlling for financial performance, these promotion and demotion decisions are sensitive to non-financial measures such as service quality and employee retention.
Management accounting systems might need to be adapted to collect data and report information against these non-financial measures. There may also be scope for these non-financial measures to be integrated with more traditional financial metrics.