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managerial accounting

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Bruce Everitt

BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013 CHAPTER 9 – BEHAVIOURL AND ORGANIZATIONAL ISSUES  A cost mgmt. system is the central performance measurement system at the core of the larger entity called mgmt. accounting and control system (MACS): goal is to motivate employee behaviour congruent with the desires of the organization  Control: procedures, tools, measures that guide & motivate all workers to achieve goals  4 management control types = results, action/task, personnel, cultural controls  A system is in control if it is on the path to achieving its strategic objectives  Company must have knowledge and ability to correct situations that are out of control 1) Plan: objectives, activities to achieve goals, measures to determine how well the goals were met 2) Do: implement the plan 3) Check: monitor by evaluating the system’s current level of performance; compare feedback 4) Act: return the system to an in-control state CHARACTERISTICS OF WELL-DESIGNED MACS Technical Considerations  Technical factors fall into 2 categories 1) Relevance of the info generated: measured by 4 characteristics 1. Accurate: inaccurate info is not relevant or useful for decision making because it is misleading. Thus, designers should develop a system that leads to the most accurate info possible  use systems that trace costs more directly from support activities to products 2. Timely: Results must be fed to appropriate units in fastest way possible  high-speed computers 3. Consistent: provide consistent framework applied globally across the entity. The language used and technical methods of producing info do not conflict within various parts of the company.  ex: one division uses ABC and another division uses volume-based overhead allocation method 4. Flexible: allow employees to use the system’s info in a flexible manner so that they can customize its application for local decisions. Inflexibility means worker motivation to make the best decision may be lessened for the decision at hand, especially if different units engage in different types of activities. Well-designed MACS must accommodate the local needs of each division. 2) Scope of the system must include all activities across the entire value chain of the organization  Assessing performance in only the actual production process means that the performance of suppliers, the design activities, and the postproduction activities are ignored. Without a comprehensive set of information, managers can make only limited decisions. Behavioural Considerations  Because human interests and motivation can vary significantly, a major role for control systems is to motivate behavior congruent with the desires of the organization.  Four major behavioral characteristics should be considered when designing a MACS: 1. Embedding the organization’s ethical code of conduct into MACS design. 2. Using a mix of ST & LT qualitative and quantitative performance measures (or BSC Approach) 3. Empowering employees to be involved in decision making and MACS design. 4. Developing an appropriate incentive system to reward performance: implement new systems considering the behavioral implications to promote goal congruence, motivation, &ethics THE HR MGMT MODEL OF MOTIVATION  Earliest attempt at understanding mgmt. = scientific mgmt. school. People found work objectionable, cared little for making decisions or creativity, and money was the driving force  Management believed that employees should follow highly detailed, prescribed procedures and that behavior should be monitored and controlled very carefully through time-and-motion studies. 1 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013  The human relations movement: people had needs beyond performing a simple repetitive task at work. Financial compensation was only one aspect of what workers desired. Employees want respect, discretion over their jobs, and a feeling that they contributed  Most contemporary mgmt. view of motivation = HR model of motivation (HRMM). o Based on initiatives to improve the quality of working life and Japanese practices, HRMM introduces a high level of employee responsibility and participation in decisions o The central assumptions = people find work enjoyable; and people want to participate o Individuals are motivated by both financial and nonfinancial means of compensation. o Assumes that employees have knowledge about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole. o Individuals are assumed to be highly creative, ethical, and responsible, and participative  The HR model = basis of the presentation of the 4 behavioral considerations in MACS design: ORGAZNIZATION’S ETHICAL CODE OF CONDUCT & MACS DESIGN  Boundary system: standards of acceptable behavior ethical principles  The ethical framework embedded in system design will influence the behavior of all users.  The key user group—managers—interacts a great deal with the MACS. Often managers are subject to intense pressures from their job circumstances to suspend their ethical judgment: 1) Requests to tailor information to favor particular individuals or groups. 2) Pleas to falsify reports or test results. 3) Solicitations for confidential information. 4) Pressures to ignore a questionable or unethical practice.  To incorporate ethical principles into the design, system designers might attempt to ensure: 1) That the organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics  through the organization’s beliefs system. 2) That all employees understand the organization’s code of ethics and the boundary systems 3) That a trustworthy system exists to detect and report violations of the code of ethics.  Fraud triangle: 1) Pressure/incentive: pressure on workers to misappropriate cash or other organizational assets 2) Rationalization: frame of mind or ethical character that allows workers to intentionally misappropriate cash or other assets and justify their dishonest actions 3) Opportunity: circumstances that allow an employee to misappropriate cash / other assets Avoiding Ethical Dilemmas  Although no universal hierarchy exists, 5 categories capture ethical considerations: legal rules, societal norms, professional memberships, organizational or group norms, and personal norms.  This hierarchy is listed in descending order of authority.  For example, an action that is prohibited by law should be unacceptable by society, by one’s profession, by the organization, and then by each individual.  any hierarchy of this sort has a number of gray areas, but it provides general guidelines  Ethical conflicts occur when one system of values diverges from a more fundamental system.  Ex: suppose that the company’s code of ethics commits it to meeting only the law regarding disclosure of a product defect in one of its goods that could prove hazardous. However, societal expectation is that organizations should be disclosing more potential product defects. A decision maker may face an ethical conflict when code of ethics implies doing nothing about the defect since there is no definitive evidence of a product problem. 2 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013 Dealing with Ethical Conflicts  Specific and unambiguous ethical codes can create an environment that will reduce ethical conflicts.  One step in avoiding ambiguity is to maintain a hierarchical ordering of authority, which means that the code of ethics should not allow any behavior that is either legally or socially unacceptable  Because most professional codes of ethics reflect broad moral imperatives, such as loyalty, an organization would create public relations problems if its code conflicted with a professional code  Another variable to reduce ethical conflicts is the behaviour of the chief executive. Organizations whose leaders exhibit unethical behavior cannot expect their employees to behave ethically.  There’s potential for explicit ethical conflicts with the code itself, like conflicts between: 1) the law and the organization’s code of ethics 2) the organization’s practiced code of ethics and common societal expectations 3) the individual’s set of personal/professional ethics and the organization’s practiced code o If organization’s code of ethics is more stringent than an individual’s code, conflicts may arise. o However, if adherence to the organization’s ethical code is required, it is possible to diminish ethical conflicts if, as part of contract, the individual is expected to pursue a stringent code o Another outcome is that individuals may raise their own ethical standards without conflict. o Issue = when personal code of ethics prohibits certain types of behavior that are legal, socially acceptable, professionally acceptable, and acceptable (or even desirable) to the organization. o Ex: a worker may have deep religious objections to working on a holy day. o As a practical matter, employees faced with ethical conflicts must make sure to document the events and discussions and list the parties involved so that a case can be made  Any other conflicts relate to personal values that were acceptable prior to the new code of ethics Conflicts between the Organization’s Stated and Practiced Values  When senior management engage in unethical behavior, it’s the most difficult conflict because the organization is misrepresenting its ethical system, forcing the employee to make a choice between going public with the information or keeping it quiet.  Most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics  Whistle-blower: a unenviable position. Most choose personal integrity over their loyalty.  Individual should first ensure that the facts are correct. Second, by speaking with superiors, determine whether this conflict is institutional or whether it reflects a small minority of employees.  individual has several choices, including the following: 1) Point out the discrepancy to a superior and refuse to act unethically: may lead to dismissal 2) Point out the discrepancy to a superior and act unethically: rationale is that the employee believes that this affords protection from legal sanctions. 3) Take the discrepancy to a mediator in the organization if one exists. 4) Work with respected leaders in the organization to change the discrepancy  recommended! 5) Go outside the organization to publicly resolve the issue. 6) Go outside the organization anonymously to resolve the issue. 7) Resign and go public to resolve the issue. 8) Resign and remain silent. 9) Do nothing and hope that the problem will dissolve.  have an effective ethical control system to ensure and provide evidence that the stated and practiced ethics are the same  means to point out inconsistencies without fear of retribution. 3 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013 The Elements of an Effective Ethical Control System 1) A statement of the organization’s values and code of ethics written in practical terms, along with examples so that the organization’s employees can relate the statement to their individual jobs. 2) 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. 3) Adequate training to help employees identify ethical dilemmas and learn how to deal with them 4) Evidence that senior management expects adherence to its code of ethics. Mgmt. must: A. Provide a statement of the consequences of violating the organization’s code of ethics. B. Establish a means of dealing with violations promptly, ruthlessly, and consistently C. Provide visible support of ethical decision making at every opportunity. D. Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of HR management, etc. 5) Evidence that employees can make ethical decisions or report violations without fear of reprisals. Mediator who has authority to investigate complaints & preserve privacy of people who report. 6) An ongoing internal audit of the efficacy of the organization’s ethical control system Steps in Making an Ethical Decision  Formal training promotes ethical decisions. After gathering the facts of a particular decision and evaluating the alternative courses, the decision maker can eliminate possible unethical choices  The decision model is one approach to eliminating unacceptable alternatives. 1) Determine the Facts–What, Who, Where, When, How: What do we know or need to know 2) Define the Ethical Issue: List significant stakeholders; Define ethical issues; Identify the issue 3) Identify Major Principles, Rules, Values: integrity, quality, respect for persons, societal benefits, 4) Specify the Alternatives: including compromise or simply doing or not doing something. 5) Compare Values and Alternatives: Determine if there is one clear alternative with this value 6) Assess the Consequences: Identify S& LT positive/negative consequences for major alternatives. The common ST focus on gains or losses needs to be measured against LR considerations. 7) Make Your Decision: Balance the consequences against your primary principles or values MOTIVATION AND CONGRUENCE  When designing jobs, consider the following three dimensions of motivation: 1) Direction: tasks on which an employee focuses attention. 2) Intensity: level of effort the employee expends. 3) Persistence: duration of time that an employee will stay with a task or job.  goal congruence: organization and its employees to align their goals  key is motivation  In a frictionless world, employers could simply rely on the concept of employee self-control, in which employees monitor and regulate their own behavior and perform to their highest levels.  Even if goals are aligned, different tasks require different levels of skill, responsibility, &uncertainty.  Diagnostic control systems: feedback systems that monitor organizational outcomes and correct any deviations from predetermined performance standards. The hope is that if these systems are well designed, the manager has more time to attend to other concerns.  Interactive control system: force a dialogue among all organizational participants about the data coming out of the system and what action to take.  If a large degree of strategic uncertainty offers threats and opportunities that could alter the operating assumptions of a business, managers must monitoring subordinates more. RANDOM: WATCH LAN’S VIDEO: http://www.youtube.com/watch?v=x2MjKe6X5nE 4 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013 Task (Action) and Results Control Methods  At the core of diagnostic and interactive systems are 2 common methods of control: task & results  Task control: finding ways to control behavior so job is completed in pre-specified manner. a) Preventive control: like locks, requiring approval… much discretion is taken out of performing a task if there’s precision required. Ex: tasks that require very careful handling are controlled carefully or are performed by machines. Naturally, as the task requires increasingly greater judgment, the building of preventive control systems becomes more difficult b) Monitoring: inspecting the work or behavior of employees while they are performing a task using listening devices or through surveillance. However, this sometimes causes them unnecessary stress, and it undermines the level of trust between employers and employees.  Task control is most appropriate in the following situations: 1) When there are legal requirements to follow specific rules or procedures to protect public safety 2) When employees handle liquid/precious assets to reduce the chance for temptation and fraud 3) When the organization can control its environment and eliminate uncertainty and the need for judgment. The organization can develop specific rules and procedures that employees must follow  Results control: focus on measuring employee performance against stated objectives. To be effective, the organization must have clearly defined its objectives, communicated them, and designed performance measures consistent with the objectives; set targets, have rewards  Results control is most effective in the following situations: 1) Members understand the organization’s objectives and their contribution to those objectives. 2) members have knowledge and skill to respond to changing situations (controllability) 3) Performance measurement system is designed to assess individual contributions so that an individual can be motivated to make decisions that reflect his & organization’s best interests.  ***According to lecture, results control works best under the following 3 conditions: 1) Organization can determine what results are desired 2) Employee have the ability to influence desired results (controllability) 3) Organization can measure the results effectively USING A MIX OF PERFORMANCE MEASURES: BSC APPROACH The Need for Multiple Measures of Performance: Non–Goal-Congruent Behavior  “What gets measured gets done”  signals what the organization considers as its priorities.  If organizations choose performance measures without careful consideration, non–goal-congruent behavior can occur.  Ex: when salespeople are compensated using sales quotas, their attention is focused on selling as much expensive merchandise as possible. Sales volume is increasing, but as the competition develops, the work environment may become hostile as salespeople dispute about customers or sales. Also, customers may return merchandise that has been oversold to them Dysfunctional Behavior  Employees are so motivated to achieve a goal that they engage in dysfunctional behavior: knowingly manipulating/falsifying performance measures.  Gaming the performance indicator: If an employee is worried about being fired and if there are no other ways to demonstrate good performance, the employee might alter his actions specifically in an attempt to manipulate a performance indicator through job-related acts.  Ex: salesperson may have his friends come into the store, buy stuff, and return it 30 days later.  Data falsification: knowingly altering sales booking records in his favor  illegal  Smoothing, a form of earnings management: individuals accelerate or delay the preplanned flow of data without altering the organization’s activities. 5 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013  Ex: a manager, close to meeting a performance target, may decide to defer expenses incurred in the current period to a future period. OR, book future revenues into current period to increase income.  Over the long term, such behavior will lead to the same bottom-line financial outcomes, but the cost to the organization is that it does not have a clear picture of performance for a defined time period.  Excessive amounts of smoothing suggest inappropriate standards or a bad reward system.  Use multiple performance measures that reflect complexities of work and the variety of contributions of employees  cause employees to recognize the various dimensions of their work and be less intent on trying to maximize performance on a single target at expense of other aspects  In many of today’s environments, employees are being cross-trained to perform a variety of tasks. Thus, measures assess the work that is actually being done. Using the BSC to Align Employees to Corporate Goals and Business Unit Objectives  MACS designers have to expand their views of the kinds of performance measures to use.  For example, only fairly recently have managers become aware of the need for measures of quality, speed to market, cycle time, flexibility, complexity, innovation, and productivity.  With increasing competition, organizations move away from traditional hierarchical organizations with many layers of management (tall organizations) to fewer layers (flat organizations.)  Business process reengineering: designers begin with a vision of what organizational participants would like their process/product to look like or how it should function and then radically redesign it  different from starting with an existing product or process and then making slight changes.  reengineering design changes led to new info requirements & measures related to costs/benefits of innovation new performance measures must consider group-level performance measures and cross-functional process measures, not just departmental efficiency and spending measures.  The focus of performance measures in mgmt. accounting has been on quantitative financial measures (cost and profit) rather than quantitative nonfinancial and qualitative measures.  Examples of quantitative nonfinancial: yield, cycle time, number of defects, customer retention.  Examples of qualitative: image of a product, the level of caring of the staff, or the reputation  measures such as customer satisfaction and employee morale are crucial for success Change Management  MACS sometimes have to be redesigned to be congruent with an organization’s new strategy.  In particular, a firm may develop a new Balanced Scorecard strategy map to for the new strategy.  Research has shown that the most important factor in making major changes is having top management support. The change process often relies on a champion who spearheads the process.  Entrepreneurial and communications skills, great respect and have resources.  The champion usually forms implementation team composed of employees with different skills who represent key parts such as systems, accounting, finance, marketing, human resources, and strategy.  threats is the potential loss of jobs or being reassigned to a new job, increases in the amount of work or responsibility in an existing job, changes in the workplace environment, changes in compensation, or just the threat of uncertainty and anxiety TWO ESSENTIAL ELEMENTS of EMPOWEING EMPLOYEES TO BE INVOLVED IN MACS DESIGN ONE---Participation in Decision Making: Greatest asset is your workers. 2 benefits of participation: 1) Employees who participate have better morale and job satisfaction translate into increased productivity as they feel that they have some ownership and control over what they do at work. 2) Except in highly automated industries, people (not machines) still perform the major portion of work and understand how work is best accomplished and how to improve products and processes. 6 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. July 18 2013 Communication between local and central offices and between superiors and subordinates result in the transmission of critical info that can only be accessed like this. TWO---Education to Understand Information  Employees at all levels must understand organization’s performance measures and the way they are computed in order to lead to superior performance. For example, if employees do not understand how their actions affect a variable, they will not know how to change to improve that variable.  Consider an airline whose intent is to improve its public image. Some airlines do customer satisfaction surveys. If flight attendants have not been educated regarding how each of their actions (such as being rude or slow service) directly affects customer satisfaction, the airline has failed to do its part to ensure satisfactory performance of one of its key indicators for flight attendants.  Customer may become irritated with bad experience and vow never to shop at that store again.  Unless managers educate their employees about how their actions affect customer perceptions of service quality, the energy devoted to improving customer satisfaction is wasted.  On average, 5x as many customers who are dissatisfied tell other people about their experience than do customers who are satisfied with a product or service.  In general, poor or nonresponsive service by employees who have direct contact with customers is usually evidence of poor mgmt., training, and education rather than bad employees  For MACS, employees must be constantly re-educated as the system and its performance measures change. Otherwise, companies cannot be leaders/players in international markets.  U.S. employees receive only one-tenth the training of Japanese employees.  Concept of continuous education should become so ingrained in employees that continually mastering new skills becomes a job requirement  learning organizations have this B EHAVIORAL A SPECTS OF MACS D ESIGN : AN EXAMPLE FROM BUDGETING  One area of MACS design that has been well studied from a behavioral POV is the budgeting process.  Most organizations use budgets as a financial representation of their strategy. Because of the human factor in the entire process, budgets often do not develop in a smooth, frictionless manner.  The ways in which people interact with budgets are essentially the same regardless of what kind of budget it is. 2 related behavioral issues in budgeting: ONE - Designing the budget process  How should budgets be determined, who should be involved in the process, and at what level of difficulty should the budget be set to positively influence on people’s motivation and performance?  Where do the data that planners use to prepare the master budget and supporting plans come from?  3 common methods of settle budgets: authoritative, participative, and consultative. 1) Authoritative: superior informs subordinates what their budget will be without requesting input. o The benefit = straightforward and efficient—promotes overall coordination from a single perspective. Managers who want to impose a budget in a top-down manner often want control. o One disadvantage: supers usually have less info about the process than the subordinate. Subordinates who have high aspirations for the coming year regarding new goals become frustrated. o A second problem is the lack of motivation and commitment to the budgeted goals because of the lack of employee participation in establishing the budget. o Most motivating types of budgets are those that are tight: those with targets that are perceived as ambitious but attainable. o Stretch targets: exceed previous targets by a significant amount. The organization will try to reach much higher goals with the current budget push an organization to its limits. Companies completely re-evaluate the ways in which they develop and produce. While some employees thrive in this environment, the pace of work can frustrate many. Further, whereas employees may be able 7 |S O Y B E A N P A R K BU247 Lecture 17-19 Thursday, July 11 – Thurs. Ju
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