Ensuring goal congruence
The system should encourage managers to make the effort to reach common goals, which (a) should be consistent with organization’s objectives and (b) should be specific, objective and verifiable.
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Critical requirements
Classification
Cost centres
• Responsible for current expenses only
• Performance measures: standard costs, variance reports, efficiency measures o Efficiency = Productivity = [Output : Input]
o Support/service centres are common examples of cost centres
Revenue centres
• Responsible for revenues, but not current expenses other than marketing expenses
Profit centres
• Responsible for revenues and current expenses
• Performance measures: revenues, costs, output levels, profit
Investment centres
• Responsible for revenues, current expenses and capital expenditure Responsibility
Cost Centres Revenue Centres Profit Centres Investment Centres
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• Performance measures (refer to sub-section III.6. for more details): ROI, RI, EVA o ROI = ROCE = [Profit / Capital Employed]
o RI = PBIT – Capital Employed * Imputed Interest Cost
o EVA = Adjusted NOPAT – Adjusted Capital Employed Weighted Average Capital Cost
Behavioral aspects of system design
Management accounting systems must be designed to take into account the natural
tendency of people to “game” the system, i.e. manipulate it so that they can extract results which are most favourable to themselves in terms of recognition, bonuses and career development.
Controllable vs. Uncontrollable costs
The distinction above between “controllable” and “uncontrollable” costs is critical insofar as it relates to the idea of “responsibility accounting”, i.e. expecting people who have delegated authority to take responsibility for decisions within their area of control.
Changes in business structure and management accounting
Management accounting systems must be appropriate to the structure of the businesses they serve.
We have seen that that “beyond budgeting” is based on a recognition of the limitations of traditional management accounting techniques, particularly in rapidly changing business environments.
The way in which a business is organized – e.g. a functional, divisional or network form – has implications for the way in which performance is managed and measured.
Functional structures
The traditional form of company follows functional lines, these being generally production, marketing, human resources, etc. Specific skills are located within relevant departments and reporting lines and responsibilities rather straightforward. At the same time, this gives rise to
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inflexibility of structure and therefore limited ability to respond and adapt to external circumstances that require inter-disciplinary skills and responses.
Divisional organizations
Companies reaching a certain size, with a diversity of product lines and geographic coverage, often find that breaking themselves up along divisional lines enhances their ability to cope with changes in the market. This is because the divisions themselves replicate the original company, this time on a more decentralized basis and with specialization by product or region (meaning domestic regions for a national company, or supra-national regions in the case of a multi-national).
The divisional structure motivates division managers to practice more autonomy in decision-making across the range of functions located within their business unit.
Naturally, a division structure may lose some of the benefits provided by centralization, as for example, global purchasing (and the negotiation power it makes possible). Some organizations decentralize their treasury functions, while others maintain it at the parent company (corporate level).
Networks
In an effort to keep fixed costs low, some firms deliberately out-source most of their non-core functions, and even some that are vital to the functioning of their business. A training company, for example, may rely on free-lance tutors so as to minimize the impact of seasonal downswings in demand. In this way, companies may work in alliance with other professionals who can be mobilized according to specialist skill sets and specific client demand when periods of intense activity arise.
Virtual organizations are an extreme firm of networks possessing a kind of flexibility that was not possible before the advent of modern communications and transportation.
Modern approaches to business structure are “integrative” in nature, as they explicitly take into account the linkages between people, operations, strategy and technology.
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Strategic management accounting in the multinational company context
A multi-national company is one that operates in a number of countries, deriving a significant portion of its revenues from abroad (outside its home country).
The strategy-making process takes on additional complexity as it must integrate specific factors relating to:
• Products
• Processes, and
• Markets
in the various countries of operation, along with their political, economic and fiscal regimes.
To achieve strategic coherence across the multinational, important elements of the planning process must essentially be “top-down”, even if the company works on a decentralized basis.
Typical conflicts arising between the “group” and the local levels:
• Local management may focus on short-term profits while the group emphasizes the building of market share (long-term);
• The local company opportunistically wishes to pursue a product/service line which is not supported at group level for a variety of reasons (image/values, lack of strategic fit, technologies or skill sets at variance between the local and international levels;
• Local decision-making autonomy vs. “across-the-board: hiring freezes or salary cuts;
• Over time, a divergence in corporate cultures at the local and group levels, particularly when local management is dominated by local staff;
• To complicate matters, individuals seeking to develop their careers (including the prospect of foreign assignments) may clash with local interests.
Divisional-level Performance measures