IDC Notes PDF

lOMoARcPSD|26307470 IDC Notes Information for Decisions and control (University of Technology Sydney) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university...

lOMoARcPSD|26307470 IDC Notes Information for Decisions and control (University of Technology Sydney) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 TOPIC 1 INTRODUCTION TO IDC MANAGEMENT ACCOUNTING Management accounting is defined as:  The processes and techniques that focus on the effective and efficient use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value  Management accounting systems  Management accounting information  Used by managers Management accounting vs. Financial Accounting WHY DO ORGANISATIONS NEED MANAGEMENT ACCOUNTING? Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Over time, the type of management accounting information has changed in response to organisational needs Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 CIMA GLOBAL MANAGEMENT ACCOUNTING PRINCIPLES CASE STUDY ANALYSIS Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 CASE STUDY ANALYSIS PROCESS CHAPTER 1 OF TEXT BOOK Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 WHY ACADEMIC WRITING STINKS SUMMARY Key concept review:  Management accounting systems o Chapter 1 of the textbook  22421 Subject requirements o IDC subject outline, group assignment instruction  Academic writing o “Why Academic writing stinks” by steven pinker Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 TOPIC 2 – FUNDAMENTALS OF PERFORMANCE MEASUREMENT WHAT IS “PERFORMANCE”? “one of the primary principles of effective management is that rewards should be the third thing you work on. Measurement should come second, and both rewards and measurements should be subordinated to performance definition; i.e. clear and unambiguous articulation of what needs to be done.” – Steven Kerr, Chief learning office, Goldman Sachs  Multi-dimension concept  Inferred through the achievement of the organisations objectives and strategies Inferred through the achievement of the organisations strategy What strategies and plans has the organisation adopted and what are the processes and activities that it has decided will be required for it to successfully implement these?  Strategy is how we achieve organisational objectives: o The long-term direction to achieve an organisations mission and objectives o 3 Levels: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Corporate strategy  Competitive strategy  Operational strategy ORGANISATIONAL OBJECTIVES CORPORATE LEVEL STRATEGIES  Choices about the types of businesses  How best to structure and finance the organisation BUSINESS LEVEL STRATEGIES  The way a business competes within its chosen market  Distinct business strategies for each business unit ADDITIONAL STRATEGY – HYBRID  Integration of both cost leadership and differentiation  Organisations that successfully deliver both strategies obtain the advantages of both approaches  Organisations that fail to attain both end up ‘stuck in the middle’ Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 ORGANISATIONAL LEVEL STRATEGIES Tactical and operational decisions about how the organisations will deliver competitive strategy:  How does the business function on a daily basis?  What are the core activities or processes?  How do we structure our processes and activities? Cost leadership  Use porters value chain to identify: o Relative importance of each activity with respect to total cost; o Cost drivers for each activity and their comparative efficiency; o How costs in one activity influence costs in another; and o Which activities should be undertaken within the organisation, and which ones should be outsourced Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 DEFINE PERFORMANCE ‘performance’ is shaped by what we define as the organisational unit  Need to specify the unit that we define performance for BASICS OF MEASUREMENT WHAT IS MEASURE? A measure transforms something in reality into a quantified, standardised unit of information  Can also be referred to as: indicator, metric, scale, index  Measures must have units Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 WHY PERFORMANCE MEASUREMENT?  Informs how well an organisation is progressing  Support managerial decision making  Forms a base for performance evaluation  Guides employees’ decisions and actions  Communicates with stakeholders DESIGNING GOOD PERFORMANCE MEASURES METRICS AND THE VIETNAM WAR  Between 1965 and 1973 2,709,918 U.S troops served in Vietnam  9.7% of their generation  25% were drafted  Their average age was 22 Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Previous metrics of military progress did not work o % territory occupied o No. Key positions held  War of attrition o “The body count was a measurement of adversary’s manpower losses. We undertook it because one of Westy’s objectives was to reach a so-called crossover point, at which the Vietcong and North Vietnamese casualties would be greater than they could sustain.” DESIGN PRINCIPLES OF PERFORMANCE MEASUREMENT 1. Validity: the extent to which a measure captures what is intended to capture 2. Reliability: The extent of accuracy, objectivity and precision of the measurement 3. Clarity: The extent to which the measure (and measured output) is easy to understand, without vagueness in interpretation 4. Cost efficiency: the cost of collecting and measuring performance information does not outweigh the information benefits 5. Timeliness: the extent to which information arrives in time for analysis and action to be taken 6. Access: the extent to which the measurer has the right to access the required performance information 7. Controllability: the extent to which you can improve or reduce the value of the measured output through action 8. Cannot be gamed: gaming when a measure alters the behavioural patterns of employees but does not help achieve the intended objective 9. Cannot be manipulated: manipulation is when managers or employees influence a measure so that it no longer reflects what was originally intended. Manipulation of measurement “The former police chief commissioner Neil Comrie’s inquiry was unable to determine exactly how many times police had manipulated breath test devices to falsely inflate the number of tests conducted.” STRATEGY CLOCK SUMMARY Key concept review: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Objectives, Corporate strategy, competitive strategy, operational strategy o Strategy clock  Outputs vs outcomes, performance measures, cybernetic loops  Design principles of performance measurement o HBR article: “the 5 traps of performance measurement”  1. Measuring against yourself  2. Looking backward  3. Putting your faith in numbers  4. Gaming your metrics  5. Sticking to your numbers too long o SMH article about KPIS TOPIC 3 – FINANCIAL AND NON-FINANCIAL PERFROMANCE MEASURMENET WHY ORGANISATIONS NEED TO MEASURE BOTH FINANCIAL AND NON-FINANCIAL PERFORMANCE Financial Measures:  Expressed in $ or a ratio of $  E.g., Profit ($), profit margin (%), Revenue ($), revenue growth (%), Cost variances (e.g., labour, materials, overhead), Return on investment (%), Return on Equity, Net Present Value ($) Why would it be useful for managers inside organisations? There are at least three reasons: 1. Provide aggregate summary results of economic activities 2. Well-established on how to design and use them 3. Align with organisations objectives Decentralisation  Who has the authority to make decisions? o Decentralisation is the process of delegating authority to frontline decisions makers Why measure Financial Performance?  To measure the economic results of business units within a decentralised organisation: o Standardised measurement system o Aligns to financial objectives o Aggregates/disaggregates financial objectives o Gives autonomy to units for activities Why measure non financial performance?  Value of non-financial measures o Capture performance in multiple aspects Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 o More timely o Easier to query and more actionable o Specific to organisations or industries o More understandable and easier to relate to, particularly at the operational level LEAD VS LAG MEASURES WHAT FINANCIAL MEASURES WE SHOULD USE Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Designing (some) non-financial measures There are many types of non-financial measures  Will be tailored to individual organisations’ circumstances 1. Common measures for customer performance Market share (%): market penetration  Can be calculated based on proportion of: o Number of customers; Number of units (volume) sold; $ customer spend Customer acquisition: effectiveness of efforts to attracts new customers  Total number of new customers Measuring customer performance Customer satisfaction (%): how successful is the firm in meeting customers’ needs?  Captured in customer surveys (rating)  Measure customers’ perceptions against specific areas of performance: o Online service or product quality, delivery time, cost, etc.  Noisy measure  Assesses attitudes rather than action Customer retention: maintenance of existing customer base  Proportion of sales (%) from existing customers  No. of repeat purchases Customer profitability: relative costs and revenues of different types of customers  Calculate low cost vs. high cost customers  Can use activity- based cost analysis Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Measuring Internal Processes Measure quality, productivity, time, innovation, or improvement  Productivity (Ratio of output to input) o Labour productivity = units produced / DL hrs o Total factor productivity = units produced / cost of all inputs  Time & Timeliness: the time it takes to complete a process o System down time (in hours) o % of on-time departure o Break-even time (like payback period) o Average time (in days) to resolve customer complaints Measuring internal processes Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Measuring the value of long-term drivers of performance What are the sources of long-term growth and improvement  Information capital o Technology and information systems  Physical capital o Machines, buildings, equipment  Social and organisational capital o Workplace culture, relationships with stakeholders  Human capital o People, knowledge How can we measure ‘performance’ of drivers?  Acquisition and investment  Sufficiency for organisational needs: o Quality o Coverage  Level of development and improvement  Maintenance and retention o Employee retention o Training programs RESPONSIBILITY ACCOUNITNG Financial Responsibility Centres  Responsibility Accounting: o The process of assigning authority and responsibility to managers of sub-units, and then measuring and evaluating their performance o Each sub-unit of an organisation where the manager is held accountable for the unit’s activities and performance o Managers responsibilities are defined at least partially in financial terms o Four types of responsibility centres Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 CONTROLLABILITY PRINCIPLE Why use different financial measures for different responsibility centres?  The controllability principle: o Should only hold employees accountable for what they can control o the extent to which managers can improve or reduce the value of the measured output through action o The type of centre should reflect the activities and decisions that the managers supervise o The managers should only be assigned responsibility for the revenues, costs or investments that they (or their subordinates) can control Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Rationale for the controllability principle  Uncontrollable factors distort performance measures and evaluations  Uncontrollable risks are best borne by shareholders (who are better able to diversify them)  If managers bear the risk: o They must be compensated for it o They may engage in undesirable actions to protect themselves from the risks  E.g., by engaging in “game playing” behaviours Types of uncontrollable factors to business:  Acts of nature (force majeure)  Economic conditions  Competitive factors  Interdependencies o Uncontrollable due to decisions made by personnel in other parts of the organization, such as at higher levels or in other entities Why do organisations want their managers to be responsible for some uncontrollable facotrs (do not buffer them completely from the uncontrollable factors)? 1. Uncontrollable costs have to be covered 2. Increase awareness of uncontrollable factors and encourage managers to find ways to improve performance 3. Train mangers to develop a holistic view of the organisation WHAT NON-FINANCIAL MEASURES WE SHOULD USE LIMITATIONS ASSOCIATED WITH MEASURING FINANCIAL AND NON-FINANCIAL PERFORMANCE RESPECTIVELY Problems with measuring financial performance  Too narrow (single aspect) o Only measure one aspect of performance, does not capture non-financials, e.g., quality, speed, sustainability o Does not measure what creates value o Incomplete reflection of managerial performance  Backwards looking o Summarises historical outcomes  Provide limited guidance for future actions  Little relation to long term strategy  Not timely o Only available after the end of period  Does not measure inputs or activities  No early warning about problems  Too aggregated o Aggregate measures capture everything  Reflect results of non-controllable factors  Violate controllability principle o Often requires approximations (e.g., overhead costs)  Too ‘Financial’! o Not intuitive for many managers o Not meaningful to employees’ day-to-day activities  Motivate gaming and manipulation o May provide misleading information about the health of the company  Earnings management Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 o May encourage actions which decrease long term value  ‘Denominator-driven’ management Problems with measuring non-financial performance May not link measures to organisational strategy  If adopting common measures  If not tailoring choice to organisation Solution:  Map value drivers (casual chains) May not have valid links  Existing measures become less relevant over time  Not test whether lead/lag relations actually hold; or  Measure too many things and lose focus Solution:  Test the relevance of measures, review and remove obsolete measures, adjust weightings May measure incorrectly  Possible to use measures that lack validity and reliability;  Base measures on available information; or  Measure inconsistency Solution:  Apply the nine design principles of performance measures May set incorrecct targets  Assume maximum performance (e.g. 100%) is always optimal Solution  Treat targets with care  Test and revise targets over time MYOPIA Managers who are motivated to produce accounting profits or returns can (in the short-term) do so by:  Not making investments, even worthwhile ones o Investment myopia  Making operational decisions to shift income across periods, even when harmful long-term o Operational myopia Overcoming myopia:  Reduce pressure for short-term profit  Extend the measurement horizon  Measure the drivers of financial performance –non-financial performance SUMMARY Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Responsibility centres - Chapter 18 of the textbook  Controllability principle  Limitation of financial performance measurement  Benefits of non-financial performance measures o HBR Article: Kaplan, R., & Norton, D. (1992). “The balanced scorecard  measures that drive performance”.  Lead vs. lag measures  Limitations of non-financial performance measurement o HBR Article: Ittner, C. D., & Larcker, D. (2003). Coming up short on non-financial performance measurement. TOPIC 4 – STRATEGIC PERFORMANCE MEASUREMENT SYSTEMS (SPMS) MEASURES VS SYSTEMS A collection of measures ≠ a measurement system  Performance measurement systems are: “a set of processes that includes the collection, analysis and reporting of actual performance, usually compared to a target”.  Similar definition in Management literature: A system contains a set of financial and/or non-financial measures that support the decision-making processes of an organisation. FEATURES OF STRATEGIC PERFORMANCE MEASUREMENT SYSTEMS (SPMS) Features of strategic performance measurement systems (SPMS): 1. Integrate long term strategy and operational gaols 2. Measure performance in multiple perspectives 3. Provide measures, performance targets and initiatives 4. Show explicit and strong casual relationships between measures and between objectives VARIOUS FORMS OF SPMS DU PONT CHARTS Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 TABLEAU DE BORD  French for “dashboard”  In use since 1930s  Originated from efforts to stimulate fair competition through use of similar MAS  Monitor physical and financial indicators of performance (real-time)  Focus on short-term operational control  Forward looking causal modelling o Links condition, action and outcome variables Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 DASHBOARD PERFORMANCE PYRAMID  Emphasis on interconnections across different organisational hierarchical levels: BSC Balanced scorecards:  A tool that translates an organisation’s mission, objectives and strategies into performance measures for each key strategic area of the business  Used to implement strategy and to monitor and manage organisational performance  Focus on handful of critical measures Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Typically four performance perspectives  BUT can be altered, reduced, expanded or renamed: o Sustainability, Clients, Student perspectives, etc. o Which stakeholder interests are important? o What are critical performance areas?  Perspectives can be re-ordered o e.g. non-profit BSCs o Depend on the ultimate organisational objective Strategic Alignment  Selection of measures is driven by vision and strategy of organisation o Clarifies and translates vision o Communicates strategy to other organisational units o Aligns strategic initiatives Balance of measures  Measures performance outcomes and drivers: Cause and effect relationships  Expected cause-and-effect relationships reflect  coherent business model: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 o Each measure should have strong causal relationship with other measures to forms a performance path to achieve the performance targets in the highest perspective o Based on logical relations, or empirical relations, or heuristic relations (managers expectations) STRATEGY MAPS Strategy maps:  Graphical Representation of main objectives  Show causal relationship between objectives and perspectives o What leads to what? o Financial not always the ultimate goal o Shows linkages between and within perspectives Have two important functions:  They communicate the strategy to managers and employees o Strategy maps communicate both desired outcomes as well as how employees can contribute to strategy o Communicating information about causal linkages improves employee effort allocations and performance  They set out cause-and-effect relationships that form an Action plans for implementing strategy and evaluating performance o Linking strategic measures and providing strategy information improves performance evaluation judgments Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 EVALUATING THE DESIGN OF SPMS Basic structure:  How well does it conform to the basic structure, layout or design? o Applies to ‘off-the-shelf’ systems (e.g. Du Pont, BSC, Performance Pyramid Strategic alignment:  How closely does the system align and represent the organisation’s strategy?  How customised is it? Is it too vague?  Does it capture the key strategic drivers and dimensions of performance? ‘Balance’:  Does the system achieve balance between: o Lead and lag measures o Financial and non-financial measures o Objective and subjective measures o Long term and short term measures Causal linkages:  Are there cause-and-effect linkages between the measures (or objectives)? o Are these linkages logical? o Are these explicit and clear? Measure design:  How well designed are the individual measures? Think about the 9 principles of good-quality measures  Are there any problematic measures that should be reviewed?  Meaningful measures  Ability to observe actions  Ability to measure outputs accurately  Cause and effect o Do inputs and activities really lead to outputs? o Relative cost of gathering information o Risk of not gathering information Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 ‘Systemness’:  Is the system: o Coherent? o Complete? o Clear?  Is anything missing?  Are there any redundancies? SUMMARY  Strategic performance measurement systems, causal linkages and Balance Scorecards o Eldenburg et al. 4th ed. Chapter 19 p.607-618  Strategy maps o CIMA report by Merchant, K.A. & Chen, X. “Strategy o Mapping: An examination of a homebuilder's performance measurement and incentive systems” Tutorial tasks: Evaluating the BSC and strategy maps designed by the managers of the Luxury and Economy divisions (TAP Case) TOPIC 5 – PLANNING AND MOTIVATION WHAT IS PLANNING?  Planning...is basically the process of deciding about the goals of an organization (and/or its members) as well as the means to attain those goals” (Flamholtz, 1983, p.155)  “Planning involves the setting of work goals for each key functional area and the establishment of standards for each goal” (Flamholtz, 1985, p.39)  “Written plans...clarify where the organization wishes to go, how it intends to get there, and what results should be expected...” (Merchant & Van Der Stede, 2003, p.302)  “...Planning is decision-making in advance”(Merchant & Van Der Stede, 2003, p.302) WHY DO WE NEED TO PLAN?  Decision-making in advance o Provides information Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 o Identifies information gaps o Clarifies assumptions of decisions  Planning helps coordinate activities and manage interdependencies o Aligns goals of different functional areas of an organisation o Identifies and manages interdependencies in work activities of different groups/individuals  Planning directs effort and behaviour o Sets out the goals/expectations of different functional areas of the organisation o Provides the standards/targets to be achieved o Clarifies the behaviour expected from employees USING PERFROMANCE MEASUREMENT SYSTEMS FOR PLANNING USING BUDGETS FOR PLANNING Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Operational budgets are plans; they provide details of what management hopes to accomplish and how. Their value in the planning process comes from the fact that budgeting forces management to examine in detail both the general economic situation of which the company is a part and the economic interrelationships among all the company's various activities. Budgeting allows managers to explore how costs and revenues will behave under specific sets of operating assumptions. The process often points out conflicts between top management's objectives and the realities of the company's capabilities. Through budgeting, management can both identify resources that will be necessary to achieve objectives and learn how those resources must be applied. If present resources cannot meet planned objectives, the process of operational budgeting may bring about an examination of the financial implications of additional asset procurement (capital budgeting) BUDGETING IN ORGANISATIONAL CONTEXT FORECASTING SALES Internal factors: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Past sales levels and trends for the company  New products planned by the company  The pricing policy of the company  Planned advertising and product promotion External factors:  General economic trends  Trends which affect the industry  Other trends which affect sales  Political and legal events  Expected competitor and customer activity DEVELOPING FORECASTS AND ESTIMATES DEVELOPING BUDGETS  Incremental vs. zero-based budgeting o Incremental: update last period’s estimates o Zero-based budgeting: justify each activity in order to receive an allocation of resources  Main differences: o Use of last periods information o Consumption of resource and time (i.e. cost efficiency) o Consideration of underlying assumptions BUDGETS AND TARGET SETTING Involvement by staff: “Participative budgeting”: where managers develop their own initial budget estimates for their own area of operations  Top-down budgeting is where senior managers impose objectives and budget targets  Bottom-up budgeting is where lower managerial and operations levels initiate their own budgets and actively participate in the process Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 TARGET SETTING APPROACHES TO TARGET SETTING Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 FORMS OF BENCHMARKING  Internal benchmarking o Comparison with similar business unit inside the organisation  Competitive benchmarking o Comparison with performance of competitors  Industry benchmarking o Comparison with similar companies  Best-in-class or process benchmarking o Comparison with best performers in the industry by activity or process MOTIVATING BEHAVIOUR MOTIVATING BEHAVIOUR IN TARGET SETTING How to build budget acceptance: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Set targets at the right level  Develop targets with the participation of employees  Attach meaningful rewards to achievement of targets  Adhere to the controllability principle  Provide frequent feedback on performance Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 THE EFFECT OF BUDGET DIFFICULTY ON EMPLOYEE Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 SUMMARY Key concept review:  Uses of accounting (e.g. budgets) for planning o HBR article Barrett and Fraser (1977) “Conflicting Roles in Budgeting for Operations”, Harvard Business Review  Forecasting, target setting and benchmarks o Deloitte article: Zero-based budgeting, zero or hero?  Motivating behaviour in target setting TOPIC 6 – PERFORMANCE EVALUATION AND MOTIVATION COMPLETEING THE CYBERNETIC LOOP Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Why evaluate performance and provide feedback?  Goal achievement o Align actions with intended levels of performance  Goal congruence o Directs and motivates behaviour towards goals o Create accountabilities for actions and performance o Reward/reinforce good behaviour  Goal revision and learning o Assess appropriateness of performance targets o Form basis of future forecasts FORMAL VS. INFORMAL FEEDBACK SYSTEMS WHY USE FORMAL SYSTEMS TO EVALUATE PERFORMANCE? 1. Allows for management-by-exception:  Monitor and track many aspects of performance  Conserve top managers time to focus on significant variances: o Unfavourable variances to understand why expectations were not met; what courses of action are required o Favourable variances to understand why actual results exceed expectations, how to reproduce the results  Two approaches to following up on variances: o Diagnostic control –management-by-exception o Interactive control –closely monitor and debate 2. Reliable basis for comparison 3. Create historical record of performance 4. Overcome problems in self-evaluation  Dunning-Kruger effect THE DUNNING-KRUGER EFFECT Dunning & Kruger conducted several experiments:  Tested students’ ability in humour, logical reasoning and grammar  Asked each student to self-rate their ability relative to other students Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 In later phases Dunning & Kruger examined effect of:  Doing peer-assessment o Only top performers became more accurate in assessing their relative ability o Poor performers still could not assess their own incompetence  Training o Poor performers became aware (finally!) of their own limitations Conclusion: “...When people are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but also their incompetence robs them of the ability to realize it.” EFFECTIVE PERFORMANCE EVALUATION: ACCOUNTABILITY AND CONTROLLABILITY How do we hold responsibility centres managers accountable?  Performance measurement for responsibility centres  If managers aim to maximise subunit performance, this will naturally align to improving organizational performance (i.e., goal congruence) Remember controllability principle?  The manager of a responsibility centre should only be assigned responsibility for the revenues, costs or investments that they can control  Controllability principle → performance measures must align to responsibility centre type (e.g., Profit centre - profit margin %) Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 EFFECTIVE PERFORMANCE EVALUATION  Think about what’s being captured by each measure. o E.g., profit WHICH PROFT? What about uncontrollable factors?  External factors: o Acts of nature o Macro-economic changes  Internal factors: o Company-level systems or policies(uncontrollable by individuals) o Interdependencies between sub-units o Where the activities of one sub-unit affect the performance of other sub-units. Benefits of making adjustments Benefits of making adjustments  More accurate performance evaluations  Less manager frustration, better motivation  Better decision-making, less “noise” in the performance measures  Lower compensation costs(in the long run –less risk, less turnover) Solution: make adjustments  Flexible performance targets  Relative performance evaluation  Subjective judgements Hopwood (1972) “An Empirical Study of the Role of Accounting Data in Performance Evaluation Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Research Question o How does manager’s use of accounting data in evaluation relate to the occurrence of functional/dysfunctional behaviour?  Theory o Job-related behaviour depends on the style in which budget is used rather than technical design  Method o Questionnaire to 167 cost centre managers o Follow-up interviews Results: Three supervisory evaluation styles:  Budget constrained supervisory evaluation style o High RAPM (reliance on accounting performance measure); managers use budget in an inflexible manner - give subordinates negative feedback for budget overrun regardless of mitigating circumstances o resulted in negative behavioural consequences, eg. job-related tension, manipulation of accounting reports, avoidance of innovation, adoption of sort-term expedients at the expense of higher long-run costs.  Profit conscious supervisory evaluation style: o Medium RAPM; budget information is used in a careful and flexible manner o has none of the negative consequences associated with budget constraint style and it motivates managers to be concerned with controlling costs.  Non accounting supervisory evaluation style: o Low RAPM - managers are indifferent to budgetary performance information or are unaware of its intended use o Has none of the negative consequences but managers are less concerned with costs Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 RELATIVE VS ABSOLUTE PERFORMANCE Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 WHY DO WE NEED TO MOTIVATE EMPLOYEES IN ORGANISATIONS? MOTIVATING BEHAVIOUR THROUGH REWARDS The provision of incentives (rewards) to motivate individuals and groups in organisations Benefits of Rewards  Inform relative importance of competing performance areas (informational effect)  Induces employee effort (motivational effect)  Attract and retain personnel Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 WHAT INDUCES EMPLOYEES’ MOTIVATION? Expectancy theory Employee motivation is a product of three things: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 1. Expectancy: perception that effort will lead to a certain performance 2. Instrumentality: perception that performance will lead to desired outcome (a reward) 3. Valence: the degree to which the outcome satisfies the individual’s goals, and the attractiveness of the reward SUMMARY Key concept review:  Informal vs. formal feedback o CIMA report: Formal and informal feedback in management accounting  Dunning-Kruger effect o Journal article: Kruger, J., & Dunning, D. (1999). “Unskilled and unaware of it: how difficulties in recognizing one's own incompetence leads to inflated self-assessments”  Styles of performance evaluation o Book Chapter: Hopwood. A. (1972). “The role of accounting data in the evaluation of performance”  Relative vs. absolute performance evaluation  Agency theory, expectance theory, & two-factor theory TOPIC 7 – MAKING BETTER DECISIONS WHAT IS DECISION MAKING? Decision making is the process by which individuals weigh up the pros and cons of different alternatives in order to make a choice. Decision making processes (Rational choice and satisficing model) Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 RATIONAL DECISION PROCESS 1. Clarify the problem Clarify problem that requires a rational decision-making process for a solution Different types of problems  structured problems o The problems are well-defined and familiar; goals are clear o Complete information about alternatives and outcomes available  ill-structured problems o Problems are new, rare or ill-defined; goals are not clear o Information about alternatives and outcomes is ambiguous or incomplete  Tactical decisions o Short-term time horizon, can be changed or reversed quickly  Long-term decisions o Long-term time horizon, strategic in nature, involve significant changes in capacity 2. Specify the decision criteria What objectives does the decision maker have?  Maximise profit (criterion: profit) Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Increase market share (criterion: market share)  Minimise cost (criterion: cost saving)  Minimise waste (criterion: waste reduction)  Improve company reputation (criterion: improvement in reputation)  Increase product quality (criterion: improvement in quality)  Improve employee skills and capability (criterion: improvement in employee skills) How can we measure this criteria? What is the weighting of these criteria? 3. Identify the alternatives Rational choice decision model: Identify full range of alternatives Satisficing decision model: Identify a limited set of alternatives 4. Collecting information about the relevant costs and benefits Characteristics of relevant information:  Differ between alternatives o What will change? Short-term vs. long-term  Relates to the future o Past costs cannot be affected by the current action (e.g., sunk costs) - irrelevant  Timeliness vs. accuracy o More accurate information may take longer to produce  Both qualitative and quantitative Why only relevant information? Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Generating information is costly  Supplying irrelevant information to managers can lead to a waste of managerial resources  Information overload if also consider irrelevant information o decreases the effectiveness of decision making 5. Qualitative vs. quantitative considerations  Quantitative information can be expressed in numeric terms  Qualitative information cannot be expressed accurately in numerical terms  Can all considerations be quantified?  What to do with qualitative information? o Account for the direction of how a factor would shift the decision 6. Collecting information What kinds of systems can we use to collect information for decision making?  Budgets  Performance measurement systems, including Balanced Scorecards, KPI dashboards, DuPont charts, Performance Pyramids, etc.  Enterprise Resource Planning (ERP) systems if in use Compare, Select and Evaluate Assumptions of rationality What are the assumptions of a rational decision model?  Problem is clear and unambiguous  All alternatives and consequences are known  Preferences and criteria are clear and measurable Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Preferences and criteria are constant and stable over time  No time or cost constraint  Final choice will yield the maximum payoff SYSTEMS 1 VS. SYSTEMS 2  System 1 o Makes decisions based on emotion o Short attention span o Not very observant o Has difficulty processing complex or large amounts of information  System 2 o Makes decisions based on logic o Emotionally detached o Highly observant o Remembers everything HEURISTICS AND COGNITIVE BIASES Heuristics  A heuristic is a kind of mental short-cut, a decision-making strategy Can be helpful:  They are less cognitively demanding  They help us to make decisions quickly  They work well when we don’t need to select the best possible alternative Cognitive biases Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Subconscious deviations in judgment leading to inaccurate judgment Representativeness heuristic Example: Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student she was deeply concerned with issues of discrimination and social justice and also participated in anti-nuclear demonstrations. Which is more probable? A. Linda is a bank teller. B. Linda is a bank teller and is active in the women’s rights movement Availability Heuristic Which is more common? A. Words that start with the letter R B. Words that have R as the third letter Anchoring Heuristic  Estimate the value of your antique watch  Use the price of a similar watch as the starting point  Caution: incorporate the difference between two watches in your estimate Heuristics “In general...heuristics are quite useful, but sometimes they lead to severe and systematic errors.” Tversky and Kahneman (1974) Problem: Heuristics may not perfectly represent the realities. DECISION BIASES Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Biases and Solutions Sunk-costs bias: We make choices to justify past actions, even when they are no longer relevant to the current situation  “Escalation of commitment” Examples:  Continuing failing projects  Financing decisions How can accounting help:  Only include relevant information  Disregard past losses/investments Loss aversion bias: We are much more sensitive to losses than to gains. Examples:  Speculative buying/selling  Premature project termination How can accounting help:  Establish clear benchmarks, targets, thresholds  Maintain historical record of performance over time Confirmation bias: we search for and interpret information to confirm what we already believe  ‘Post-hoc’ rationalisations Examples:  Premature selection of proposal  Poor hiring/promotion decisions How can accounting help: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Establish clear decision criteria before searching for alternatives  Encourage full search and analysis of all alternatives Status quo bias: we overweight alternatives that maintain the status quo  Switching costs  ‘Organisational inertia’ Examples:  Superannuation choices  Overvaluing ownership How can accounting help:  Value opportunity costs  Check default settings (opt-in vs opt-out) So why do people make bad decisions? Often unethical decisions are caused by a departure from rational decision-making:  Problems in motive  Problems in cognition Using accounting to address problems in motives  Consider: o What is ‘performance’? o What are the goals and targets? o How are people being evaluated? o What opportunities exist for gaming and manipulation? o How are people rewarded? SUMMARY  Rational decision-making process o HBR article: Courtney, H, Lovallo, D, & Clarke, C 2013, 'Deciding How to Decide',  Relevant information, decision criteria and opportunity costs  Assumptions of rationality  Heuristics, biases and cognitive errors o HBR article: ‘Hidden Traps in Decision Making’ (1998), by Hammond, Keeney, Raiffa  Ethical barriers to decision making o HBR article: ‘Ethical breakdowns’ (2011), Max Bazerman and Tenbrunsel, Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 TOPIC 8 – INFORMATION SYSTEMS AND CONTROLS WHAT ARE AIS? Accounting information systems (AIS) are technology solutions to capture, verify, store, sort and report financial data relating to an organisation’s activities. Types of AIS:  Manual  Legacy  Integrated Data and information  Data are facts or figures in a raw or unstructured form.  Information is data that has been processed, organized, or structured to provide context and meaning.  Knowledge is the combination of relevant information, past experience and intuition that leads to understanding and insight. AIS and business processes Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Business processes Business processes are a set of logically interrelated tasks performed to achieve a defined business outcome. Business Processes are often cross-functional, i.e., they require collaboration across business functions or even across multiple organisations. Trend in Business & Business Systems: Integration Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 WHAT ARE ERP SYSTEMS? Enterprise resource planning (ERP) systems: Software packages that support information systems that span different functional areas of an organization. ERP systems:  Contain a set of modules covering accounting, purchasing, manufacturing, distribution, etc.  Integrate internal business processes, and between an organization and its customers and suppliers  Automate and standardize data collection from business processes The key principal behind ERP is that there is a single database of information – one ‘source of truth’  Each data point is stored in one place without duplicates  Linkages to data elements are by reference only  New data entered will automatically update all related information Achieving a single source of truth can be challenging, as many organizations have multiple systems for different functions that are not able to be fully integrated with one another. Evolution of ERP ERP is an enterprise system Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Enterprise systems (ES) are large-scale organizational systems built around packaged enterprise system software (ESS). ESS is a set of packaged application software modules that integrate data, processes and information technology across an organization’s value chain. Typically these packages are ‘semi-finished’ products that can be partly customized during implementation. ESS includes:  enterprise resource planning (ERP)  customer relationship management (CRM)  supply chain management (SCM)  product life cycle management (PLM)  eProcurement software. ERP and IT architecture A data warehouse holds data that has been extracted from databases for the purpose of reporting and analysis. It sits between enterprise systems and other data sources (e.g. ERP) and business intelligence systems (e.g. dashboards) ERP benefits  Common database for numerous departments or functions  Consistent user experience and user interface  Business process integration  Automation for repetitive tasks  Data analysis helps gain insight into performance Disadvantages and challenges with ERP  Costs of hardware, software, and consulting  Complexity increases risk of project failure due to high resource and time commitments  Training and competencies of staff  Customization requirements increase complexity and costs  Legacy systems can be difficult to migrate or integrate  Business processes need to be adapted  Resistance to chang ERP Implementation Rolls-Royce is a power technology organization involved in civil aerospace, nuclear power, and engines and power plants for military vehicles. They employ over 50,000 people and have operations in 14 countries. In March 1998, they adopted a new organizational structure that was flatter and more customer focused, and embarked on an ERP implementation project. Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Prior to ERP implementation, there were more than 1500 separate information systems.  More than 10,000 end-users of information systems attended training seminars during implementation.  An internal business process re-engineering programme was required to reconfigure existing processes to fit SAP requirements  The main technical issue was ensuring accuracy in the transfer of data from legacy systems to the new data repository. All new data must be identified, validated, cleaned, loaded, and archived.  ERP implementation took more than 3 years and was mostly successful. Some of the reasons why include: i) gaining buy-in from managers, ii) redesigning business processes to fit the software, iii) a focus on bridging the legacy systems and ensuring data accuracy, iv) technical training of both managers and shop floor workers, and v) conducting multiple pilot tests of the system. What is Cloud Computing? Cloud computing broadly refers to the delivery of computer services over the Internet. This is in contrast to client-server computing where the software and data reside on servers within an organization. Three main models of cloud computing:  Infrastructure as a service  Platform as a service  Software as a service Cloud based ERP Impacts of ERP on MA  Dramatic change in the role of management accountants o Less time on routine tasks, such as gathering data from multiple sources, generating monthly reports, etc. Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 o More time on analysing data, providing advice to management, managerial planning, cross-functional analysis, examining project timelines and profitability, etc.  Get involved in ERP projects in all stages o Decision to deploy ERP systems o Design of ERP systems o Implementation of ERP systems o Post-implementation of ERP systems  Construct post-implementation benefit tracking processes ERP Systems as MA Tools ERPs as tools for budgeting  Simplify budgeting process  Pull data from various functional areas  Reduce computational burden and time  Conduct sensitivity analysis – ‘what if’ test to predict future performance in different scenarios. ERPs as tools for performance measurement and evaluation  Provide actual performance information, e.g., sales, profit, production volume, etc.  Allow drilling down into the performance in connected functional areas  Support decisions on operational improvement and strategic planning BSC as ERP performance measurement approach SUMMARY  Accounting information systems (data, information) Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Business process integration and system integration  Impacts of ERP systems on management accountants  BSC-based ERP performance measurement framework  Cloud computing  Internal control for information systems (COSO, COBIT 5) TOPIC 9 - DIGITALISATION AND MANGEMENT ACCOUNTING INDUSTRY 4.0 DIGITAL TRANSFORMATION Digital transformation involves major organizational changes driven by emerging digital technologies. It changes the way a business generates value. Example: Nest (digital thermostat) generates value from both retail sales of the device plus the data that it generates about energy consumption patterns which can be used to provide analytics services to the energy sector Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 DBS Bank is a large Singaporean-based bank that operates in China and Southeast Asia with over 26,000 employees. Over the course of a decade from 2009, they underwent a significant transformation:  Rather than thinking like a bank, they saw tech companies as their competitors. They wanted to be the digital leader in the banking sector.  Significantly enhanced technological capabilities. In 2009, 85% of systems were outsourced. By 2018, 90% were managed in-house.  Used performance management to achieve digital transformation: o Developed a core measure called ‘digital value capture’ that quantified the value of a digital customer over a traditional customer o Used the Balanced Scorecard – 20% of the scorecard (tied to managerial compensation) reflected digital transformation objectives. o Changed the culture – codified expected cultural traits, which included being data-driven and customer- focused.  Implementing digital technologies such as machine learning and advanced analytics. WHAT IS DIGITALISATION? Digitalization is the use of digital technologies to improve business processes. Digitalization is fundamental to digital transformation. However, companies can increase digitalization without necessarily undergoing fundamental transformation. DIGITAL TECHNOLOGIES Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 AUTOMATION OF THE FINANCE FUNCTION Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 MACHINE LEARNING EXAMPLES Deep Blue (by IBM) defeated the chess world champion  Programmed using 4,000 positions and 700,000 grandmaster games  Demonstrated ability to learn and make judgements AlphaGo (by DeepMind Technologies) defeated one of best Go players  Used a machine learning and neural network algorithms  Trained using 30 million moves AlphaZero  Trains itself  Current world’s leading player of Go and chess Today, businesses can access computing power and storage to  process vast amounts of data  Utilize advanced analytics At the end of 2019, the overall capacity of wind energy systems was about 650 gigawatts, according to the World Wind energy Association. Objective:  To increase 54% in total wind power by 2024 compared to 2019. A major challenge: Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Wind speed fluctuates randomly and unsteadily, makes it difficult to forecast How machine learning can help:  Complicated algorithms to extract wind speed data (e.g., temperature, moisture, air pressure, wind direction) to improve accuracy of wind power forecasting.  Optimizing wind turbine design and position in a wind farm  Planning for maintenance, etc. BIG DATA & ANALYTICS Big Data refers to datasets which are too large and complex to be analysed traditionally.  Financial and non-financial data, structured, semi structured and unstructured data  4 V’s: o immense Volume, o high Velocity, o broad Variety, o uncertain Veracity Data quality: Complete, precise, valid, accurate, relevant, consistent, and timely Structured data  Present in standard forms, easy to retrieve and analyze  Examples: customer orders, invoices, etc. Semi-structured data  Require more effort to process and summarize in useful ways  Examples: email data, website traffic data, etc. Unstructured data  Not arranged in a pre-set form  Examples: customer reviews, social media discussion, customer service call transcripts, etc. STARBUCKS CASE Leverage big data and artificial intelligence to direct marketing and other business decisions Big data:  90m transactions a week in 25,000 stores worldwide  17m active mobile app users  13m active reward program users  Users’ locations, coffee-buying habits, weather, etc. Uses of data  Personalize offers  Determine new store locations  Menu updates, etc. DATA ANALYTICS FOR BUSINESSES Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Data analytics – the use of data through tools and techniques to support decision making  Involves use of technologies, systems, methodologies, databases, statistics to analyze diverse business data  Gain insight into the data to support decision making Example: Assume a brand manager at Samsung identifies that an older demographic might be concerned with the use of a Samsung Galaxy smartphone and the radiation impact it might have on the brain. How might Samsung use Data Analytics to assess if this is a problem? WHAT IS DATA ANALYTICS? DATA ANALYTICS AND PERFORMANCE MANAGEMENT ANALYTICS AND DECISION MAKING Whether you should act on a significant association depends on:  Confidence that the association will reliably recur  Trade-off between risk and reward in taking action Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 In recent years, Australia’s largest supermarket chains (Woolworths, Coles) started selling insurance. Why?  Large margins (10-20%)  Access to data – combining loyalty card program data with insurance claim information Interesting findings:  People who buy red meat and milk have low insurance risks.  People who buy pasta, spirits and who fuel their cars at night have high insurance risks. Potential responses: 1. Targeting insurance marketing to loyalty card holders in the low-risk group 2. Pricing car insurance based on these buying patterns  Causal reasoning behind association is not known with confidence.  Targeted marketing is relatively low risk, whereas pricing is much higher risk. Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 DASHBOARDS "A dashboard is a visual display of the most important information needed to achieve one or more objectives. This information is generally consolidated on a single computer screen, so it can be monitored at a glance.“ DASHBOARDS VERSUS SCORECARDS Scorecards are typically based on a formal methodology, such as the Balanced Scorecard, that provide managers with an aggregated picture of overall performance.  Standardized presentation.  Emphasize alignment to organizational or BU strategy.  Reported periodically (e.g. monthly, quarterly). Dashboards are concerned with specific business problems, functions, or processes, and provide decision-makers with a select array of key metrics and visualizations.  Tailored to specific users.  Emphasize operational performance and actions.  Refreshed frequently (e.g. daily) or represent real-time data.  Often allows users to ‘drill-down’ to underlying data. Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 DASHBOARD TYPES DASHBOARD DESIGN Three clever aspects:  KPIs are also the colour legend  The hex map is also a filter Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470  Great stacked bar chart WHAT IS DATA VISUALISATION? Data visualization is the abstraction of data in pictorial or graphical form for the purpose of communicating information more efficiently and effectively.  Humans have evolved great visual and spatial skills  Utilize highly developed skills to make sense of large quantity of data  “A picture is worth a thousand words”  “A picture is worth a thousand rows of data” IMPORTANCE OF VISUALISATION Statistics do not always tell the whole story. Consider the following data set (called Anscombe’s Quartet). Each group has nearly the exact same mean, variance, correlation, and linear equation. The brain processes visual information significantly faster, allowing for complex patterns, trends and insights to be understood more easily and by a wider audience. Academic research has shown that:  90% of the information transmitted to the brain is visual  Human brains process visuals up to 60,000 times faster than they do text  If a scientific claim is presented in pure words or numbers, 68% of people will believe that the information is accurate and truthful. But if you put a simple graph with the claim, the number rises to 97%.  Memory retention after three days: 10% when text and audio only but 65% when text and image Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 Our short-term memories can only store about five chunks of information.  Table has 48 chunks (data points)  Graph has three chunks (lines) that summarize 16 data points each In an experiment, Soyer and Hogarth (2012) asked 257 academic economists to make inferences based on different presentations of regression outputs.  The first group of participants received a standard statistical output of the analysis o 72% made incorrect inferences  The second group received the output in statistical and graphical forms o 61% made incorrect inferences (but not statistically different from first group)  The third received only graphs o 3% made incorrect inferences CHART JUNK “The interior decoration of graphics generates a lot of ink that does not tell the viewer anything new. The purpose of decoration varies — to make the graphic appear more scientific and precise, to enliven the display, to give the designer an opportunity to exercise artistic skills. Regardless of its cause, it is all non-data-ink or redundant data-ink, and it is often chartjunk.” Downloaded by Zaira Khan ([email protected])  lOMoARcPSD|26307470 SUMMARY  Digitalization and digital transformation  Machine learning  Big data o Volume, velocity, variety, veracity o Structured, semi-structured and unstructured data  Data analytics (descriptive, diagnostic, predictive and prescriptive) o Article: Impact of business analytics and enterprise systems on managerial accounting  Data visualization (importance of visualization, dashboards, Tableau software) Downloaded by Zaira Khan ([email protected])