Appunti di Management control

Management control

The Nature of management accounting

Financial accounting ≠ management accounting (focused on the internal environment, internal decision-

making processes)

Financial accounting

It collects and elaborates mainly quantitative and monetary data that are usually reported in the Balance

Sheet, Income Statement, and Statement of Cash Flows.

Financial Accounting is the result of a single process that adopts a set of Generally Accepted Accounting

Principles and considers the basic equation:

Assets = Liabilities + Owners’ Equity

The Financial Statement discloses information regarding the economic business development and results of a

firm related to a certain period primarily for external stakeholders (i.e., shareholders, debtholders, and

investors).

However, such financial information is also useful for internal managerial purposes.

Notably, the management system needs this set of data but also more detailed information that is not reported

in a typical Financial Statement

The internal decision-making processes could use not only monetary data, but also judgment, decisions and

so on.

Management accounting

It is system, a set of processes that could be useful for all the organisation to control, to program some

activities, to monitor the implementations of certain strategies and goals and then these goals are translated in

terms of objectives.

The responsible who manages the MA system in a firm is so-called “Management Accountants” (or simply

Controller).

Activities of the MA are planning (management accountants or controllers, plan strategies), measure, collet,

identify, prepares and repots data useful to efficiently support the overall management functions.

*N.B. In large firms the Controller interacts with the Chief Financial Officer (CFO),

while in the smaller ones he/she cooperate directly with the President.

MA and controllers manage financial and nonfinancial, accounting and nonaccounting information, as well

as quantitative and nonquantitative data related to several topics (e.g., product/service quality, operations

effectiveness, customer satisfaction, environmental, social and governance sustainability issues, etc.).

Which is the general role played by MA in an organization?

MA provides to managers synthesis of information about facts, data, observations, forecasts or perceptions

useful to:

1. Improve specific decisions (e.g., better setting prices, cutting costs, optimizing the resources

allocation) supporting the decision-facilitating; Collections of facts, data also observations, forecasts

or perceptions that could be useful to decision-facilitating

2. Positively affect the behaviour, motivations and decisions of employees for the best interest of the

organization (i.e., supporting the decision-influencing). Our community is composed by people, so

positively affect employees’ behaviour, motivations and decisions for the organization’s best interest.

The so-called decision-influencing.

Also to influence the behaviour of manager in order that he continues to do his best.

Main MA Systems Activities

1. Planning

The top management identify strategic mid-term/long-run goals, resources and actions to elaborate corporate

strategies in medium-long term (3-5 yrs). This activity leads the definition of corporate plans, such as

Economic (Income Statement, costs, revenues, profit/losses), Capital Structure (Assets, Liabilities, Owners’

Equity), Investment (e.g. dynamics in Fixed Assets), Financial (Cash Flows).

2. Controlling

The process activities aimed at ensuring that resources allocated are used effectively and efficiently in order

to achieve the planned goals. Such activities are usually implemented in the following phases:

a) Programming

The process activity which defines short-term objectives, which are generally aligned with the strategic ones,

and translates such goals into operational quantitative information and data management programs so-called

budgets.

b) Execution

The process activity which implements managerial actions in order to operationalize what is defined in the

programming activities (such as in budgets).

c) Monitoring

The process activity which compares the actual (or real) results with the expected (standard) performance

reported in a certain budget, carrying out a “variation analysis”. This activity running in background and

highlights possible problems or opportunities.

 The strategy is an activity for which the manager is responsible according to what he has

programmed before, and he has to monitor and execute.

Similarities between FR and MA

Differences between FR and MA

Types of MA information and their uses

MA uses information to support the decision-making process in:

1. Measuring of Revenues, Costs and Assets;

 Support the financial reporting process

 Useful to define the full costs as the sum between direct and undirect costs to produce a

product o a service (full cost accounting)

 Useful to analyse costs of each responsibility center (a firm’s unit ahead by a manager who

is responsible for its operations and performance (responsibility accounting)

 Are useful to calculate the prices defined by transaction contracts.

Future estimates: useful to take pricing decisions.

2. Controlling activities;

 Are suitable to analyse possible misalignment between objectives set and results achieved.

 Are useful to motivate and reward managers.

Future estimates: useful to supports strategic planning and budgeting

3. Making decisions after the analysis of possible alternative courses of action:

 None: the information used for alternative choice consists of estimates mainly future-

oriented that are relevant to the specific alternatives being considered. Moreover, these

estimates cannot be obtained directly from the management accounting system.

Future estimates: are useful to define differential costs (different costs for different alternatives),

take short-run decisions , support capital budgeting (taking LT decisions)

Typical MA tools

Spreadsheets and Database as main MA collecting data & information tools

• Spreadsheets manage data in matrix format organized in two dimensions: rows (identified by

numbers), and columns (defined by letters).

• A database collects a large n. of data for several dimensions and it produce reports tailored to

specific decisions that must be made by a manager of a responsibility center.

N.B. The increasing digitalization MA processes enhanced the use of database and the Enterprise Resource

Planning (ERP), boosting the interaction between Business Intelligence managers and the management

accountants actions.

Concluding remarks

1. MA is optional rather than required (it is a means to an end rather than an end in itself).

2. MA is used by a relatively small group of known individuals with known information needs rather

than by outside parties whose needs must be presumed.

3. MA has three sets of constructs rather than one, but it is not governed by GAAP.

4. MA has more emphasis on the future, and it includes more nonmonetary information, as well as it

has less emphasis on precision.

5. MA involves more frequent reports, which are issued on a more timely basis; and does not expose

the company to lawsuits by users of the reports.

6. A MA system provides historical and estimated information on full costs (and components of full

cost) structured by responsibility centers to support the measurement and control purposes of

management accounting information.

7. In solving management accounting problems, principally cost, are defined differently depending on

the managerial purpose (i.e., measuring, control, and alternative decisions choice for a problem).

8. MA elaborates accounting numbers that are approximations that rarely provide exactly the

information needed. Accordingly, remember that much more than accounting information is needed

in the solution of a problem.

9. In MA people, and not numbers, get things done

The management control environment

Management literature includes many definitions of Management.

All of these are related to the processes of organizing resources and directing activities for the purpose of

achieving organizational objectives.

Accordingly, we can highlight different functions, resources and processes of management:

Functions:

a. Product/service development

b. Operations

c. Marketing/ sales

d. Finance

Resources:

a. People

b. Money

c. Tangible/intangible assets

d. Information

Processes:

a. Goals setting

b. Strategy formulation

c. Management control

Focusing on the Processes side we must distinguish the concepts:

“Strategy formulation” and “Goals setting”.

The formulation of a Strategy defines how an organization should use its resources to meet its Goals

operationalizing its Mission (or Purpose) in order to follow its Vision.

Business participants and employees must have some understanding of what the organization is trying to

accomplish in the light of its Vision and Mission.



Vision Big picture of a company wants to go (WHY)

It clarifies the aspirations of the organization and define the direction it’s heading in.



Mission General statement of WHAT and HOW a company

will do to achieve its Vision.

It defines what an organization does and includes tangible goals which the organization strives to

accomplish.

Vision Examples

(WHY?)

Tesla: “To accelerate the world’s transition to sustainable energy”.

Nike: “Bring inspiration and innovation to every athlete* in the world (*if you have a body, you are an athlete)”.

Amazon: “to be Earth’s most customer-centric company; to build a place where people can come to find and discover

anything they might want to buy online”.

IKEA: “To create a better everyday life for many people”.

Southwest Airlines: “To become the world’s most loved, most efficient, and most profitable airline”.

Kellogg’s: “A good and just world where people are not just fed but fulfilled”.

Mission Examples

(WHAT? and HOW?)

Tesla: “To create the most compelling car company of the 21st century by driving the world’s transition to electric

vehicles”.

Nike: “Create groundbreaking sports innovations, make our products sustainably, build a creative and diverse global

team, and make a positive impact in communities where we live and work”.

Amazon: “We strive to offer our customers the lowest possible prices, the best available selection, and the utmost

convenience”.

IKEA: “Offer a wide range of well-designed, functional home furnishing products at prices so low that as many people

as possible will be able to afford them”.

Southwest Airlines: “Dedication to the highest quality of customer service delivered with a sense of warmth,

friendliness, individual pride, and company spirit”.

Kellogg’s: “Creating better days and a place at the table for everyone through our trusted food brands”.

1. A Strategy could be formally specified or largely unspecified. It could also be intended or emergent.

During the strategy definition, the interaction between management and employees is important.

2. Generally, Goals are not properly quantitative and financial (e.g., Increase profit margin; Increase

efficiency; Achieve a bigger market share; Provide better customer service; Improve employee

training; Reduce carbon emissions; etc.).

3. The Goals are focused on the critical aspects of implementing the Strategy.

In defining a Goal, the Top Management must ensure that it should be:

Understandable: Is it stated simply and easy to understand?

Suitable: Does it assist in implementing a strategy of how the mission will achieve the

vision?

Acceptable: Does it fit with the values of the organization and its members/employees?

Flexible: Can it be adapted and changed as needed?



Goals Objectives

An Objective turns a Goal’s general statement of what is to be accomplished into a specific, quantifiable,

time-sensitive statement of:

 What is going to be achieved,

 When it will be achieved.

Some examples of business Objectives:

• Earn at least a 20% after-tax rate of return on our investment during the next fiscal year;

• Increase market share by 10% over the next three years;

• Lower operating costs by 15% over the next two years through improvement in the efficiency of the

manufacturing process;

• Reduce the call-back time of customer inquiries and questions to no more than four hours.

Objectives should meet the following requirements:

Measurable: What specifically will be achieved and When will it be achieved?

Suitable: Does it fit as a measurement for achieving a Goal?

Feasible: Is it possible to achieve?

Commitment: Are people committed to achieving the objective?

Ownership: Are the people responsible for achieving the objective included in the objective-setting

process Actions

Goals Objectives Plan

Action Plans are statements of specific actions or activities that will be used to achieve a Goal within the

constraints of the Objective/s.

Examples of actions plans: An Action plan may be simple statements or a detailed business Plan

where Goals and Objectives are also included.

Actions Plans may also be used to implement an entire strategy (so-

called Strategic Planning).

Control systems have two basic functions:

1. Strategic Control

the process of monitoring as to whether to various Strategies adopted by the organization are helping its

internal environment to be matched with the external environment. It allows managers to evaluate a

company’s strategic plan from a critical long-term perspective (external focus).

2. Management Control:

it includes processes for programming, organizing, directing, and controlling program operations. It allows

managers to evaluate a company’s program from a critical short-term perspective (internal focus).

Management Controls are also necessary to minimise that people will do something the organization does

not want them to do or fail to do something they should do (behavioural orientation).

Management Control: The Evolution of Definitions

In literature, it is hard finding studies on Management Accounting before the 20th century, although the

actual managerial practices go back much further.

Some initial evidence from the past …

 In 1875 Thomas Sutherland, a British business executive, in one of his memorandums

claimed the need for a Management Accounting system:

“[…]The present system of bookkeeping…is admirably suited for… ascertaining once a year or oftener the

profits upon the company’s transactions; but it is evident that in a business of this kind much detailed

information is necessary regarding the working of the company, and this information should be obtainable in

such a practical form as to enable the managers to see readily and clearly the causes at work in favour of or

against the success of the company’s operations. […]”

 In North America, for example, early Management Accounting systems were developed in

the latter half of the 19th century firstly by textile, mills and railroads.

Afterwards, producers of steel, detergents, photographic film, automobiles, tobacco products, and flour

adapted the railroads’ systems to their own organizations’ needs.

By 1925 most aspects of today’s Management Accounting systems had been developed.

What can we know instead about Management Control?

The rational approach to Management control

 Anthony (1965, p. 17) defined management control as:

“the processes by which managers assure that resources are obtained and used effectively and efficiently in

the accomplishment of the organization’s objectives”.

 This definition opened the way to the study of management control.

It is based on the rational assumption that management control refers to the efficient use of resources.

Anthony’s (1965) approach emphasises bureaucracy, hierarchical levels, centralised planning and formal

structures and rules but neglects any other organizational and contextual factors such as people, culture,

environment, etc.

Antony (1965) distinguished thus Management Control ≠from Strategic Control and Operational Control

Anthony (1965)

Planning and control systems

Strategic Planning Operational Control

the process of deciding on the long-term concerned with ensuring that immediate

goals of the organization and the strategies tasks are carried out

for attaining these goals. As a means of

formulating strategies Management control

Beyond the efficiency of resource allocation

- Ouchi & Maguire (1975), overcoming the issue of management control as a procedure inherent

only to the allocation of resources, introducing two forms of control:

1. Behaviour control

Behavior control is based on personal surveillance, and it is exerted when means-ends relations

are known and thus appropriate instruction possible

2. Output control

Output control is based on the measurement of outputs, and it occurs in response to a manager's

need to provide legitimate evidence of performance.

- Hopwood (1974) distinguishes among:

1. Administrative controls: include formal rules and procedures found in plans, budgets, operating

manuals and formal patterns of the organization. Administrative control is designed to provide

structure to decision making process, specifying and limiting alternatives thus guiding managers

and employees’ actions

2. Social controls, and: it refers to the shared values, norms and commitments of organizational

actors. Social controls develop trough two forms of socializations: a) the formal system of

beliefs and meaning designed by managers, and b) the spontaneous social interaction

3. Self-control: it is constituted by the personal motives of individuals members. Self-controls are

based on the internalizations of the norms embodied in “administrative” and “social” controls

The contingency approach to management control

- According to Otley & Berry (1980), till then, very little research had been performed on why

organisations end up with the control systems they have. The management control literature of that

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