© 2012 Pearson Prentice Hall. All rights reserved. Behavioral and Organizational Issues in Management Accounting and Control Systems Chapter 9

© 2012 Pearson Prentice Hall. All rights reserved.

Behavioral and Organizational Behavioral and Organizational Issues in Management Issues in Management Accounting and Control Accounting and Control

Systems Systems

Chapter 9


Conflict with Stated Values Conflict with Stated Values Employees may observe management, even senior

management, engaging in unethical behavior

This type of conflict is the most difficult because the organization is misrepresenting its ethical system

The employee is in a position of drawing attention to the problem by being a whistle-blower


Conflict with Stated ValuesConflict with Stated Values Experts who have studied this problem advise that

the individual should determine:– That the facts are correct and that a conflict exists

between the organization’s stated ethical policy and the actions of its employees in practice

– Whether this conflict is institutional or reflects the decisions and actions of only a small minority of employees

Most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics


Conflict with Stated Values Conflict with Stated Values Other potential courses of action include:

– Point out the discrepancy to a superior and refuse to act unethically

– Point out the discrepancy to a superior and act unethically

– Take the discrepancy to a mediator in the organization, if one exists

– Work with respected leaders in the organization to change the discrepancy


Conflict with Stated ValuesConflict with Stated Values– Go outside the organization to publicly resolve the

issue– Go outside the organization anonymously to

resolve the issue– Resign and go public to resolve the issue– Resign and remain silent– Do nothing, hoping that the problem vanishes


Effective Ethical ControlEffective Ethical Control To promote ethical decision making, an ethical

control system should include the following:– A statement of the organization’s values and code of

ethics written in practical terms, with examples that the employees can relate to their individual jobs

– 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

– Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face


Effective Ethical ControlEffective Ethical Control– Evidence that senior management expects members

to adhere to its code of ethics, meaning that management must:

Provide a statement of the consequences of violating the organization’s code of ethics

Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently according to the statement of consequences

Provide visible support of ethical decision making at every opportunity

Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else on the board of directors


Effective Ethical Control Effective Ethical Control – Evidence that employees can make ethical

decisions or report violations of the organization’s stated ethics (be the whistle-blower) without fear of reprisals from superiors, subordinates, or peers

Formal training is part of the process of promoting ethical decision making

Motivation and Behaviour Motivation and Behaviour CongruenceCongruence

The idea is to align the interests of the individual with those of the organization.

As individuals pursue their own goals inside the organization they should be contributing to achieving the organization’s goals.

One way of doing this is a well-designed incentive compensation system.

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Interactive Control SystemsInteractive Control Systems If there is a large degree of strategic uncertainty,

managers spend much more time monitoring the decisions and actions of their subordinates

At the core of both systems are two common methods of control: – task control (finding ways to control behavior so that

a job is completed in a pre-specified manner) Preventative control (limited discretion) Monitoring (inspecting work)

– results control (measuring employee performance against stated objectives)

Multiple and Balanced Multiple and Balanced Performance MeasuresPerformance Measures

Should focus on both short term and long term objectives

Should cover all aspects of the person’s job

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Participation in Decision Participation in Decision MakingMaking

Authoritative budgeting– Superior advises the subordinate what the budget

will be Participative budgeting

– The budget is a result of joint decision making between the superior and the subordinate

Consultative budgeting– The superior asks for the subordinate’s input but

the decision making is not joint

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RewardsRewards

Extrinsic Provided by the

organization to the employee

Examples– Cash bonus– Stock options– Public recognition

Intrinsic Self-provided by individuals Examples

– Satisfaction for a job well done

– Satisfaction provided by the scope of the job

– Satisfaction provided by the opportunity for advancement

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Effective Reward SystemsEffective Reward Systems An effective reward system motivates an

employee to act in the organization's best interests If the reward system is based on extrinsic rewards

the employee must– Understand clearly what is rewarded– Have the authority to affect what is rewarded– Value what is rewarded

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Using Budgets for Planning Using Budgets for Planning and Coordinationand Coordination

Chapter 10


Capacity-Related andCapacity-Related andFlexible ResourcesFlexible Resources

In the short run:– Capacity-related costs are fixed– The only relevant costs are controllable costs,

which are variable costs

The Budgeting Process determines the planned level of most variable costs


The Role of BudgetsThe Role of Budgetsand Budgetingand Budgeting

Budgets serve as a control for managers within the business units of an organization

Budgets play a central role in the relationship between planning and control

Budgets reflect in quantitative terms how to allocate financial resources to each part of an organization, based on the planned activities and short-run objectives of that part of the organization


Budget ComponentsBudget Components Two major types of budgets comprise the Master

Budget:

– Operating budgets—summarize the level of activities such as sales, purchasing, and production

– Financial budgets—identify the expected financial consequences of the activities summarized in the operating budgets


Operating Budgets Operating Budgets Sales plan—identifies the planned level of sales

for each product Capital spending plan—specifies the long-term

capital investments that must be paid in the current budget period to meet activity objectives

Production plan—schedules required production Materials purchasing plan—schedules required

purchasing activities


Operating BudgetsOperating Budgets Labor hiring and training plan—specifies the

number of people the organization must hire or release to achieve its activity objectives

Administrative and discretionary spending plan—includes administration, staffing, research and development, and advertising


Operating Budgets Operating Budgets Operations personnel use the operating budget to

guide and coordinate the level of various activities during the budget period

Operations personnel also record data from current operations that can be used to develop future budgets


Financial BudgetsFinancial Budgets Planners prepare the projected balance sheet and

projected income statement to estimate the financial consequences of investment, production, and sales plans

Planners use the projected statement of cash flows in two ways:– To plan when excess cash will be generated – To plan how to meet any cash shortages


Demand ForecastDemand Forecast(Sales Plan)(Sales Plan)

An estimate of the sales demand at a specific selling price

Provides the basis for production plans:– Labor– Materials– Production capacity– Cash


The Production PlanThe Production Plan Planners determine a production plan by matching

the completed sales plan with the organization’s inventory policy and capacity level

The plan identifies the intended production during each of the interim periods comprising the annual budget period


The Spending PlansThe Spending Plans Based on the production plan

– Materials purchasing plan, by the purchasing group– Labor hiring and production plan, by the personnel

and production groups – Discretionary spending plan, by other decision

makers – Capital spending plan, by appropriate authority


Choosing Capacity Levels Choosing Capacity Levels Three types of resources determine capacity:

– Short term flexible resources Ability to use existing capacity Raw materials, supplies, casual labor

– Intermediate term capacity resources General capacity transferable among organizations Employees, general purpose equipment

– Long term capacity resources Special purpose capacity customized for the

organization Buildings, special-purpose equipment


The Cash Flow StatementThe Cash Flow Statement The cash flow statement has three sections:

– Cash inflows from cash sales and collections of receivables

– Cash outflows For flexible resources that are acquired and

consumed in the short term For capacity resources that are acquired and

consumed in the intermediate and long term

– Results of financing operations


Financing OperationsFinancing Operations Summarizes the effects on cash of transactions

that are not a part of the normal operating activities

Includes the effects of:– Issuing or retiring stock or debt– Buying or selling capital assets– Short-term financing


Using the Financial Plans Using the Financial Plans Cash flow forecast

– Identify if and when external financing is required– Determine if any projected cash shortage will be:

Temporary or cyclical Permanent

Projected income statement and balance sheet– General assessment of operating efficiencies

Using the Projected ResultsUsing the Projected Results Budget information is used to:

– Identify broad resource requirements

– Identify potential problems

– Compare projected operating and financing results


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© 2012 Pearson Prentice Hall. All rights reserved. Behavioral and Organizational Issues in Management Accounting and Control Systems Chapter 9