Table of Contents Chapter 1: Accounting for management control ....................................................... 2 1.0 Introduction ....................................................................................................... 2 1.

1 Basic Issues in Management Control ............................................................. 3 1.2 A Contingent Approach .................................................................................... 5 1.3 Types of Control ............................................................................................... 5 1.4 Conclusion ........................................................................................................ 5 Chapter 2: Control Systems and Human Behavior................................................... 7 2.0 Introduction ....................................................................................................... 7 2.1 Management Control System .......................................................................... 7 2.2 A Model of Control Process............................................................................. 7 2.3 Planning and Control........................................................................................ 8 2.4 Performance Appraisal .................................................................................... 9 2.5 Organizational Control System ....................................................................... 9 Chapter 3: The Role of Budget in an Organizational Control ................................ 11 3.0 Introduction ..................................................................................................... 11 3.1 Multiple Role of Budgeting............................................................................. 11 3.2 Conclusion ...................................................................................................... 13 Chapter 4: Motivating Good Performance ............................................................... 14 4.0 Introduction ..................................................................................................... 14 4.1 Budget as Target ............................................................................................ 14 4.2 Effects of Budgets on Performance .............................................................. 15 4.3 Example of organization Reward Employees for Performance.................. 15 4.4 Conclusion ...................................................................................................... 15 Chapter 5: Performance Appraisal........................................................................... 16 5.0 Introduction ..................................................................................................... 16 5.1 Performance Measure ................................................................................... 16 5.2 Setting Standards for Performance .............................................................. 16 5.3 Bias in Budget Estimate................................................................................. 17 5.4 Conclusion ...................................................................................................... 17 References ......................................................................................................................... 18

Chapter 1: 1.0

Accounting for management control

Introduction

In the stiff competition business world, a business organization becomes more and more complex entity in order to cope with the changing environment and complication in managing the firm. The changing size from small or medium to large organization involves huge demanding for recruiting, staffing attracting large number people in different stages along the firms value chain activities such as need more employees for operation, more suppliers for raw resources, more customers who will purchase the products or services and financial providers who provide sufficient funds for a firm to operate smoothly. There are stages where a small firm can be transform into large firm in order to survive from the competition which increasing tremendously. A fail to develop to larger size firm will tend to lose competition to other rivalry in the same industry easily compared to larger sized firms and may exit from the involved industry. Cefis and Marsili (2005) find that the firms most likely to exit and disappear from the market are small and young firms. But, even for a well establish and large size firms will have the possibilities to fail in market if ignoring the issues of consumer demands and technological change. I have the same opinion with the author where if a firm unable to cope with changes, it will fail in the market. For an example, IBM (PC Group) was sold to China computer maker firm, Lenovo in year 2004, shows that if firm or subdivision of a firm fails to cope with consumer demand and the technological change will have to shut down its operation and being sold to other competitors who have better performances in the same industry involved. Besides the consumer demand and technological changing factors, the management control is another aspect which is crucial for a firm to focus as it also has the impact to the survival and performance of a firm. The top and middle level management in a firm normally set the objective, mission, vision, guide, coordinate and control the people who responsible to perform the tasks for a firm survival. The information

should easily flow across different level of management so that firm can operate more effectively and efficiently. Therefore, I am agree with the author of the book who mentioned that if a firm has the excellent and brilliant people for managerial level, a firm not only will innovatively to survive, but also expand its business in the market. Example of a firm which very successful in the airline market is AirAsia where this firm really make huge profits and expanding it business across different industries such as telecommunication and hospitality. The CEO of the AirAsia, Tony Fernandes is one of the top level management who is brilliant in setting up the strategies, controlling the operation and motivates employees in many ways which contributed to the firms success. 1.1 Basic Issues in Management Control

In order for a firm to develop a good management control system should solve the three basic questions as propose by the authors of this book as follows (David Otley, 1987). 1. What are the dimensions of good performance that the organization is seeking to encourage? 2. How are appropriate standards of performance to be set, both for the whole organization and for its segment? 3. What rewards (penalties) are to be associated with the achievement (nonachievement) of performance targets? 1.1.1 Dimension of Good Performance

The author of this book defined the performance by looking into several aspects instead of only concentrate in the aspect of profitability. Usually, there is no single objective which can be used in define the good performance for a firm. As the profitability is commonly used to define the performance, some issues may arise such as short term versus long term profit, measurement of profit, and its associations with liquidity and growth. It becomes more complex to be measured as the firm involve in many business activities.

Besides profit used as the objective to measure a firms performance, a firms overall goals should take count of the various subsidiaries goal setting matters such as the aspects of product range, quality, customer service, market segmentation and many more. The goals should also consider the different functions department which available in the firm such as marketing, finance, human resources, research and development and many more. For an example, the Petronas, a Government Link Company (GLC) of Malaysia had set their mission and vision which are the firms major goal in achieving desired performance accordance to many aspects across its business functions and firms subsidiaries goals. The vision and mission of Petronas are shown below (http: // www. petronas. com. my/ about_us/vision. aspx).

Vision Statement o To be a Leading Oil and Gas Multinational of Choice

Mission Statement o o o We are a business entity Petroleum is our core business Our primary responsibility is to develop and add value to this national resource o Our objective is to contribute to the well-being of the people and the nation

1.1.2

Setting performance Standards

With referring to the first dimension, after sufficient performance goals being obtained, the next step should be done by the firm is to setting up appropriate standard of performance in order to answer the second question. The problems of setting standard of performance arise from the conflict between the desirable and attainable. A product may be questioned either to be improve quality or being costs cut by the parent and subsidiaries of an organization. The second problem is determination of the person who is responsible for decision making.

1.1.3

Linking Reward with Performance

For the final section of basic issue in management control is the linkage between reward and the performance. Author had indentified that it is very important for a manager to rewards its subordinate for the equal or higher target achievement. The rewards can be in the form of financial, incentives, award and many more. 1.2 A Contingent Approach

The fundamental basis of the contingent theory in management accounting become the most appropriate control system for an organization depends upon certain contingent variable that is system must be matched with circumstances. The management control system requires to be tailored in order for an organization to meet the certain circumstances such as nature of environments where the organization located, types of task and technology, organizational structure, firms strategies and the culture 1.3 Types of Control

The accounting information system provides aid to manager for the purpose of control a set of activities for an organizations operation. Accounting control is more appropriate for the senior management level than the junior level. The second type of controls is the behavioral control which is appropriate for lower level of an organization as the tasks were undertake by employees such as routine clerical work. The third type of control is the output control where the manager will specific out the result that wishes to achieved for the organization and appropriate for the diversified company. The fourth type of control is the input control where the amount of specific resources needed by the specific department of a firm being determined without required for amount of outputs. 1.4 Conclusion

As a conclusion for chapter one, it is important for a manager to use the availability budget information to influences the behavior of the subordinates. The author

mentioned the importance for the firm to design an effective system of accounting for management control because the capacity of the system must be closely related to the needs of the organization. Most importantly, the data especially for accounting and non-accounting method derived by the manager should be easily for analyzed and being reported to the stake holders and improvement to the organization.

Chapter 2: 2.0

Control Systems and Human Behavior

Introduction

Control is basically defined in two definitions which had stated in this book. Based on the management accounting system (MCS), the first definition is the idea of domination where a person exercises the power and authority and imposes to others. Second definition would be the gathering of information from various sources in order to regulate and monitor activities in order to obtain the desired outcomes. 2.1 Management Control System

There are few other researchers also that defined the control in similar perspectives. The control not only occur from top to bottom management, but also from bottom to the top as the subordinates have the desired to control the behavior of their superiors in an organization. Lowe (1970) defined control as an individual concerned with the attainment of own objectives and aims where overall formal control system are required to ensure the organizational goals and objectives to be achieved. Meanwhile, Machin (1983) defined that management control system (MCS) is a set of interest activities for an organization system including data handling system. Another researcher, Anthony (1965) defined that the classical management control is to allocate the resources and utilized it effectively and efficiently in order for an organization to achieve goals and objectives. As an overall conclusion for management control system definition is the activities that influencing people behavior as it is do with the technical design of information system. 2.2 A Model of Control Process

A superior management control system must be aligned with the well designed internal operation process within an organization. In order to have good internal process, there are four conditions which must be satisfied by the organization as shown below. 1. Existence of objectives.

2. The desired and actual attainment objectives can be compared from the output of the process as it can be measured. 3. A predictive model must be developed. 4. There must be capability exist which allow for the actions to be taken. 2.3 Planning and Control

In the previous sections, the definition of control had been defined and its important for an organization to achieve organizations objectives. In this section, the planning is part of the control process. According Willdavsky (1975) quoted by the author of this book state that planning is the future control. The fundamental nature of planning is to react at the present time in order to receive the expected future benefits. There are three or four necessary conditions for control planning such as objectives must clear, there is adequate predictive model and the ability to perform the planning and control. The planning process if begins with expected result where else control process begin with measuring the actual performance. Planning is the support control because it is only an expected error (feedforward) that is used to stimulate the control process (feedback control). In some cases, the purpose of planning is for counterproductive because it will recommend corrective action to avoid unwanted result that may occur to an organization. Example of a firm do planning to reach company objective is subsidiary of PepsiCo in America called Pepsi Americas. PepsiAmericas (PAS) needed to analyze the forces and trends that could impact the company in the next three to five years. The leadership team opted to benchmark companies or other industries to identify any opportunities or threats and this investigation reveals the results. The human resources department at PepsiAmericas is trying to figure out a plan to increase the number of diverse employees in management. The decision was made to create a strategic plan that could improve the recruiting process for attracting more diverse candidates. In order to change the current process, the company conducted research on alternatives for increasing the diversity in management. The leadership used environmental scanning, SWOT analysis, Matched pair analysis, and grand strategy

cluster matrixes to develop a strategic plan. The entire plan is closely related to the accounting management where it need proper financial planning in order all of the strategy can be implemented. The challenges currently facing PepsiAmericas are minor setbacks when focusing on the projected benefit which is its objective. 2.4 Performance Appraisal

Appraisal of employee performance is one of the most important responsibilities of managers. Yet performance appraisals have been the source of considerable dissatisfaction for both managers and employees because of the many shortcomings that have plagued appraisal systems. Performance appraisal works as a simple form of feedback control system. A better system would be act before actual performance moved away from target. Systems of performance appraisal, conducted by such devices as accountability are sufficiently effective method of managerial motivation. While the performance being in place, there some evident that the nature of balancing the emphasis to be placed that will trouble to some managers depends upon contingent factors in the situation such as the degree of uncertainty involved in task completion. Performance can be an important source of information needed by managers to make decisions on matters such as shown at below. 1. Granting pay increases based on job performance 2. Improving employees' work performance 3. Selecting, assigning and terminating employees 4. Identifying employees with potential for advancement 5. Planning for future human resource needs (Murphy & Cleveland, 1991). 2.5 Organizational Control System

Wide range of controls being used by an organization to influences the employees behavior. The controls may come from different ways such as procedures, rules, norms and values. As mentioned by the author of this book, the rule and regulation can be very effective at the lower hierarchy level in an organization and social control

such as norms used in the upper hierarchy level. Example found in the book is using time clock to monitor the employees present time in office. When come to top level, they are tending to present at the time similar to low level employees without the time clock. Example can be seen in the private small and medium firms in Malaysia where such as subsidiary of CIMB group where employees need to note the time once they come to work. But the superiors do not require follow the same rules but they also will punctual according to the time the lower level employees reach. Some organizational practice peripheral matters such as dress and speech codes. In most cases, even behavior are good, but his/her still not performing well in their work and. This scenario shows that there is condition which is not sufficient. It can be concluded that there must be a flexibility when impose rule and regulation at the workplace, Sometimes non-monetary method also being used as one of the organizational control systems. For example, a senior manager who does not perform well in their duties may be transferred to undesirable department. Overall, the aim of the control process is to encourage all employees to perform with their best efforts in the interest of the organization.

Chapter 3: 3.0

The Role of Budget in an Organizational Control

Introduction

A well designed and developed control will lead to a firms effective and efficient performances. The most appropriate for the control is not from the accounting control but through other ways would be more direct such as a site visit, phone calls and many more. The feedbacks would be easier to be obtained. Although accounting control has the slower respond compared to other ways, but it still has important role to play. The important of accounting information in control increasing as move to the higher hierarchical level in an organization. This is due to the complex environment where higher levels managers need to control. The simplest accounting statement can be used to view the organization overall performance such as profit and loss account. Besides, the accounting system can help to indentify the areas within the organization which did not perform well and suitable actions could be perform in order to improve the weaknesses. According to the author of the book, there are two main aspects to the budgetary control which are planning programs of activities and management control is designed. Therefore, budgetary control is important for effective organization performance establishment. There are many roles of budgeting for an organization discussed in the next section. 3.1 Multiple Role of Budgeting

There are few roles of budgeting to the overall organizational performance such as authorization, forecasting and planning, communication and coordination, motivation, and performance evaluation. 3.1.1 Authorization

The simplest utilization of budget is acting as the authorization for a manager of an organization to spend specific amount of money for activities. Different organizational

structures give different power to the managerial level to utilize the amount of budget which had been stated. Decentralized structure organization firm give the budget holder more freedom in making decision for utilize the money for profit and cost target compared to the centralized firm. Google is one of the examples of the company that has the decentralized structure where its subsidiaries managerial level has the authority to make decisions for organization performance. 3.1.2 Forecasting and Planning

As stated in the book, all the budgets are based on the forecast which is predicting the future events which may occurs and affect the organizations performance. The forecast may involve some issues within a country such as inflation rate, customers preferences and many more which will be considered in firm budget planning. I am totally agreed with the author statements in the book as the budget is planned based on the forecast of future events. Example that can be seen clearly for this country is the budget makes announce by the federal government of Malaysia each year. The budget will determine the amount of money to be spend on every sectors or departments of government organization in order for the money being utilized in the proper way, bring benefits to the citizens and most important, country can obtained more income (profit for business organization) and minimize the loss which may occurs. 3.1.3 Communication and Coordination

Budgets can play a part in the communication process of an organization. Budget can allow the manager and executive in a organization to communication with each other in deciding the utilize the budget for the necessary activities which will improve the performance. Budget will allow more effective communication and coordination between the managerial levels and subordinates when activities being held for the firms benefits.

3.1.4

Motivation

Budgets also can be used as a tool in motivating the managers to be better performs in their duties in order to achieve the organizational objectives. Allowing the managers participate in the budget planning will increase their motivation towards the organization in several ways such as improve the budget standard as perceived by recipients (managers), improve the attitudes of managers and the improvement of communication between the managers and their superiors.

3.1.5

Performance and Evaluation

Budgetary information has the important role in performance evaluation in an organization. It has the impact to the middle and junior managers being controlled by the budgetary system. The rewards (monetary and non-monetary) are attached to successful performance and because success is measured relative to the budgetary standard, therefore, there are substantial pressures brought to bear the budget system. This pressure contributes to some of the impact to the organization such as bias into the budget, inappropriate activities to maintain plant properly or skipping quality, and manipulates the accounting information to alter the actual results to be reported to the organization. Therefore, there are necessaries to overcome such problems which will affect the firm performances in the long run. 3.2 Conclusion

The implication for designers of budget system is clear. They must be responsible for the ways that the budget is implemented. All the activities for the budget must in line with the overall firm objectives to reach the goals. There must be efforts which minimize as possible the problems or conflict when designing or implementing the budget. Accounting information in this case can help in contribute to the establishment of effective systems of organizational control.

Chapter 4: 4.0

Motivating Good Performance

Introduction

One of the important functions of accounting system is the motivating purposes which can help in improving the organizational performance. The obtained information will provide clear insight of the result of the activities. To achieve the excellent performance of the budget, the managers have to face a challenging goals or objective. The management must believe that the issues that challenging the objectives or goals can be achieved. The aim of the framework in the budget should be appropriate and in the seedling into the personality and character of the operations entrusted to the management within the organization for reaching objectives. 4.1 Budget as Target

There are researchers and scholars who did studies the relationship between the budget and the organizational performance. A budget has the strong potential for motivation as it represent a definite, quantitative goals but it incorporated need to be accepted by those involved before their existence will motivate performance. Hofstede (1968) findings as quoted by the author of this book are regarding the budget difficulty that concerning the conditions where budgets could have higher degree of relevance. He concluded the budget difficulty as follow. a) Budgets have no motivational effect unless they are accepted by the managers involved as their own personal target. b) Up to the point where the budget target is no longer accepted, the more demanding the budget target, target the better result achieved. c) Demanding budgets are also seen as more relevant than less difficult targets, but negative attitudes result if they are seen as too difficult. d) Acceptance of budgets is facilitated when good upward communication exits. The use of departmental meetings was found helpful in encouraging managers to accept budget targets. e) Managers reactions to budget targets were affected both by their own personality and by more general cultural and organizational norms.

4.2

Effects of Budgets on Performance

There are some effects of to the organizational performance when implementing motivation to the employees. Some effects exist such as some mangers react well to have the budget goals, lead best actual performance, participation improve the purpose of budget to be meet, more stress to managers to set and perform the budget and many more. 4.3 Example of organization Reward Employees for Performance

In year 2002, Sunway Holdings Berhad terminate the old employees share option scheme (esos) and create a new esos scheme in order to better motivate its employees for the performances that they achieved. The reward which is one the area where certain amount of money had been allocated in the budget tend to reward and motivate the employees to work harder and perform better so that the companys goals and objectives can be achieved. 4.4 Conclusion

To motivate the best possible level of performance budget standards should represent a challenging target, yet one which the managers concentrate believe they may be able to achieve. Accounting information provides good path for designing budget to motivate employees from the top to the bottom level. Encouraging participation for the managerial level in budget planning will better improve the effects of budget to the overall firm performance.

Chapter 5: 5.0

Performance Appraisal

Introduction

Good performance related to the achievement of higher level of profit or return on investment may become the most desired goal for an organization even subjected with some constraints such as maintenance of liquidity and good relationship with the employees. Therefore, the achievement of balance between a whole set of goals and constraints are preferable for an organization. 5.1 Performance Measure

There are many measurements for the performance appraisal in an organization. Managers had been ask to included the dimensions of performance for construction and composite measure of performance into overall performance indicator. Thus, when develop the performance measures for a part of an organization involves several issues which are shown below. 1) The objective of the organization is a complex and difficult to integrate into one measure only, 2) There are tasks that have the relationship and require the cooperation of other parties. Therefore, only the units that measure alone is not sufficient. 3) There are some departments performance cannot be measured by numbers and figures (e.g. legal and R&D department). 4) The essence of the work related to management cannot be forecasted ahead. 5) Management areas are areas within the complex and uncertain. 5.2 Setting Standards for Performance

There are difficulties for the managers to rewards for the employees who perform well on their duties if there is no appropriate standard which used to measure their performance. The measures of performance normally involve the accounting information and the used of budget as the standard against which results are be

monitored. There are five major types of standard against which performance can be compared. 1) The performance of the same unit in previous time periods. 2) The performance of similar units in the same time period. 3) Estimates of expected performance, made in advance. 4) Estimate of what might have been achieve, made after the event. 5) The performance in necessary to achieve certain desired goals. 5.3 Bias in Budget Estimate

There are existing of bias when conflicts arise from the used of budgetary information as forecast for future events, budgetary standards to motivate and comparison between actual and desired results for a managerial or unit performances. There are three major Budget bias causes that are attractive budget only related to the good performance, past history effects and insecurity of some managers for not performing well in their duty which make them feel obligated to promise for better performance in future and incorporated optimistic estimate into their budgets. 5.4 Conclusion

In this book, there is author (Hopwood, 1972) who distinguished between the rigid use of accounting information and a more flexible style. Besides, there are some uncertainty which had the impact to the accounting information, performance the budget setting for an organization. There is a study show that high reliance on accounting measures of performance under conditions of uncertainty is likely to prejudice effective performance. As a overall conclusion, the performance evaluation system is strongly affected by the accounting information.

References Cefis, E., and Marsili, O. (2005) Survival, A Matter of Life and Death: Innovation and Firm

Industrial and Corporate Change, vol. 14, iss. 6, pp. 1167-92.

Murphy, K., and Cleveland, J. (1991). Performance Appraisal: An Organizational Perspective. Boston: Allyn and Bacon. Otley, D. T., 1987. Accounting Control and Organizational Behaviour, CIMA. Petronas (2011). Vision and Mission Statement. Retrieved 19 April from http://www.petronas.com.my/about_us/vision.aspx