«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»
able to present an external image of ‘success’... and hence conceals the possibility of the damaging strategic consequences for individual business units of Conglom’s exclusive preoccupation with ﬁnancial returns. (p. 124) In adopting a critical perspective, Miller and O’Leary (1987) described the construction of theories of standard costing in the period 1900–30, which they viewed as ‘an important calculative practice which is part of a much wider modern apparatus of power’ aimed at ‘the construction of the individual person as a more manageable and efﬁcient entity’ (p. 235). The contribution of standard costing was to show how ‘the life of the person comes to be viewed in relation to standards and norms of behaviour’ (p. 262).
Laughlin (1996) played on ‘principal and agent’ theory to question the legitimacy of the principal’s economic right to deﬁne the activities of the agent. He coined ‘higher principals’ to refer to the values held, particularly in the caring professions (education, health and social services), which could, he argued, overrule the rights of economic principals. These higher principals could be derived from religion, professional bodies or personal conscience.
Broadbent and Laughlin (1998) studied schools and GP (medical) practices and identiﬁed ﬁnancial reforms as ‘an unwelcome intrusion into the deﬁnition of professional activities’ (p. 404), which lead to resistance in the creation of ‘informal and formal ‘‘absorption’’ processes to counteract and ‘‘mute’’ the changes’ (p. 405).
Similarly, Covaleski et al. (1998) studied the ‘Big Six’ accounting ﬁrms, where management by objectives and mentoring were used as techniques of control, revealing that the ‘discourse of professional autonomy’ fuelled resistance to these changes.
Finally, the limitations of formal accounting have been identiﬁed in academic research. For example, Preston (1986) explained how ‘the process of informing was fundamentally different to the formal or ofﬁcial documented information systems’ (p. 523). In Preston’s study, managers arranged to inform each other, predominantly through interaction, observation and keeping personal records but to a lesser extent through meetings. It was through these interactions that managers found out what was going on. They found ‘the ofﬁcial documented information to be untimely, lacking in detail and sometimes inaccurate’ (p. 535).
The overhead allocation problem is illustrated in the next case study.
ACCOUNTING FOR MANAGERSCase study: Quality Bank – the overhead allocation problem Quality Bank has three branches and a head ofﬁce. Table 11.9 shows how the accounting system, based on absorption costing, has calculated the costs for each branch. Direct costs of £104,000 are traceable based on staff working in each location. Overhead costs of £400,000 for the bank have been allocated as a percentage of the direct labour cost.
The bank used its internal staff to study the effects of introducing an activitybased costing system. Table 11.10 shows the cost pools and cost drivers that were identiﬁed.
The bank calculated costs for each cost driver as shown in Table 11.11. It then analysed the transaction volume for each of its branches and head ofﬁce. These ﬁgures are shown in Table 11.12.
Table 11.9 Quality Bank – direct costs and allocated overheads by branch
The bank was then able to apply the cost per cost driver against the actual transaction volume for each branch and head ofﬁce. This resulted in the cost analysis shown in Table 11.13. A comparison of the costs allocated to each branch under absorption and activity-based costing is shown in Table 11.14.
The ABC approach revealed that many of the costs charged to head ofﬁce under absorption costing should be charged to branches based on transaction volumes.
This had a signiﬁcant impact on the measurement of branch proﬁtability and Table 11.13 Quality Bank – cost analysis using ABC
the proﬁtability of different business segments (e.g. new accounts, lending, ATM transactions etc.).
Conclusion In Chapters 8, 9 and 10, various accounting techniques were identiﬁed that can be used by non-ﬁnancial managers as part of the decision-making process. With the shift in most western economies to service industries and high-technology manufacture, overheads have increased as a proportion of total business costs.
This chapter has shown the importance to decision-making of the methods used by accountants to allocate overheads to products/services. Understanding the methods used, and their limitations, is essential if informed decisions are to be made by non-ﬁnancial managers.
This chapter has also shown that we need to consider the underlying assumptions behind the management accounting techniques that are in use. Other countries adopt different approaches and we have something to learn from the success or failure of those practices. We also need to consider the behavioural consequences of the choices made in relation to accounting systems.
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Strategic Investment Decisions We introduced strategy in Chapter 2 to explain its link with achieving shareholder value. In this chapter we are more concerned with strategy implementation through capital investment decisions and the tools used to evaluate those decisions.
Strategy Ansoff (1988) provided a typical description of strategy formulation: objectives and goals were established; then an internal appraisal of strengths and weaknesses and an external appraisal of opportunities and threats led to strategic decisions such as diversiﬁcation or the formulation of competitive strategy. He established a hierarchy of objectives that were centred on performance measures such as return on investment (see Chapter 7, later in this chapter and Chapter 13).
A contrasting approach was developed by Quinn (1980), which he called logical incrementalism. Quinn argued against formal planning systems, which he believed had become ‘costly paper-shufﬂing exercises’, observing that ‘most major strategic decisions seemed to be made outside the formal planning structure’ (p. 2). Quinn
further argued that:
the real strategy tends to evolve as internal decisions and external events ﬂow together to create a new, widely shared consensus for action among key members of the top management team. (p. 15) Logical incrementalism is similar to work by Mintzberg and Waters (1985), which deﬁned strategy as a pattern in a stream of decisions. Mintzberg and Waters separated the intended from the realized strategy, arguing that deliberate strategies provided only a partial explanation, as some intended strategies were unable to be realized while other strategies emerged over time.
The difﬁculty for businesses in the twenty-ﬁrst century is that they must continually adapt to technological and market change, making long-term strategy problematic. However, to give the external appearance of being well managed they need to develop strategies, even if only to legitimize what senior managers are doing. Nevertheless, strategy can be crucial in enabling a business to be proactive in increasingly competitive and turbulent business conditions. The absence of strategy can lead to reactivity and a steady erosion of market share.
ACCOUNTING FOR MANAGERSAs we saw in Chapter 8, Porter (1980) developed his ‘ﬁve forces’ model for analysing an industry. This focused on the effects of rivalry among existing ﬁrms, the threat of new entrants, the bargaining power of suppliers and customers, and the threat of substitute products and services. Porter also identiﬁed three ‘generic strategies’ for competitive advantage: cost leadership, differentiation and focus. Cost leadership requires efﬁciency, tight cost control and the avoidance of unproﬁtable work, with low cost a defence against competition. Differentiation can be achieved through, for example, brand image, technology or a unique distribution channel. These factors insulate against price competition because of brand loyalty and lower customer sensitivity to pricing differences. Focus emphasizes servicing a particular market segment (whether customer, territory or product/service) better than competitors who may be competing more broadly. In his second book, Porter (1985) introduced the ‘value chain’ as a tool to help create and sustain competitive advantage (see Chapter 9).
However, the formulation of strategy is frequently divorced from the annual budgeting cycle (see Chapter 14), as organizations produce strategic planning documents separately from the annual budget based on last year plus or minus a percentage in order to achieve short-term ﬁnancial targets. Consequently, the issue of translating strategy formulation into implementation is problematic unless resource allocations follow strategy.
In their most recent addition to the strategy literature, Kaplan and Norton (2001) built on the success of their Balanced Scorecard approach (see Chapter 4) to emphasize the ‘strategy-focused organization’ that links ﬁnancial performance with non-ﬁnancial measures. Non-ﬁnancial measures in the Balanced Scorecard measure how well the organization is meeting the targets established in its strategy.
Kaplan and Norton use ‘strategy maps’ to identify cause–effect relationships, although these should be modiﬁed over time as a result of experience gained within organizations. They also argued that budgetary allocations and incentives need to be consistent with strategy, while reﬂecting the importance of continual learning and improvement.
One of the most important elements of strategy implementation is capital investment decision-making, because investment decisions provide the physical and human infrastructure through which businesses produce and sell goods and services. This is the topic of this chapter.