Unit 1: the role and context of management accountingSession 1-4

What is an organization?

•Organization is a group of individuals working together to achieve one or more objectives.

•Organization has common features:▫composed of individuals and groups of

individuals.▫Oriented to achieving collective goals.▫Consist of different functions▫Functions need to be coordinated▫Exist independently form it members

Mintzberg’s generic model (five component of an organization)

• Strategic apex: ensure the organization follows its mission and managers, and it relationship with the environment (CEO/ long term organization objective)

• Middle line: group of managers who are concerned with converting the objectives and broad plan of the strategic apex.(responsible of translating plans into actions/ monitor efficiency and effectiveness of activities)

• Techno structure: group of people who are concerned with the best way of doing a job and ensure that personal have the required skills

• Support staff: other administrative function (mailroom, cafeteria)

• Operating core: people who are doing basic work of producing product or making a delivery.

• Mintzberg’s generic structure is based on the separation of direction and management.

Why organization exist

•A group of people working together achieve more than sum of achievement

•Reduce transaction cost

Type of organization

•Organization can be classified using different ways, most common is the purpose or objective:▫Profit entity▫Non-profit entity

•Maximizing shareholder wealth and continue existence is were the primarily objective

organisational structure

•it refers to the repationship between the various functios and positions in an organization.

• it determine the authority and resoinsiblity for particular task in the organization.

•management accounting is important as it provide information to carry out the activities an insure that the organization achieve their objective

principles of organization structure•specialization

▫work is divided into separate activities▫to increase efficiency and effectiveness

•coordination▫coordinate with each other to work torward

the same objective

tall vs. flat organization• reasons that helped in making the organization move to flat

tructure:• information technology• empowerment: lower level worker have been delegated

authority

• advantages of delayering• reduction of cost• motivation• faster communication

• disadvantage of delayeing▫ loss of control▫ unablitity to understand goals of higher management

forms of organization structure

•functional structure•product or service structure•geographic structure•matrix structure•projet team•hyird structure

decentralisation vs. centeralisation

•centerlizatio is when decision making authority is held predominanty by a senior managers within an organization.

•decenterlization is when the authoity of decision making is delegated to people at lower level in the organization

advantage and disadvantage of decentralization

advantages

specialisation

timelines

motivation

human resource

development

organizational segment

performance

disadvantage

dysfunctional decision making

loss of control

increase cost of control

responsibilty centers

cost center

revenue center

profit center

investment center

What is management• Management is often consisting of planning control

and decision making.• Planning is essentially rational process, rational

planning consist of:▫ establishing objectives and ▫ developing plans to achieve those objective

• Control is making sure that the organization in on track to achieve the objective, by taking corrective actions

• Decision making consist of choosing between different possible courses of action based on a careful weighting up of the relative costs and benefits of each.

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Strategic management

•Is undertaken by senior managers and is concern with the implementation of formulation of strategy.

•Strategy can be defined as:▫The determination of basic long term goals

and objective of the enterprise and the adoption course of action necessarily for carrying out those goals (example of strategy product or price deffrenciation)

strategy

•When developing strategy it is important to undertake SWOT analysis.

•SWOT is an analysis for the external ( politics , economy, technology) and internal factors( capability and resources).

•SWOT help manager in choosing the required strategy:▫New product/ market▫Reduce scope of operation▫Sell off unprofitable part of business

Level of strategy

• Company usually consist of:▫ Head office▫ Number of separate operating division

• There are three level of strategy:▫ Cooperate strategy:

It is concerned with how the head office manage the portfolio of individual unit division (which to close/ invest in)

▫ Business strategy It deals with how individual units compete in particular

product market in order to achieve sustainable competitor advantage (by reducing cost of unit or producing product superior to competitor)

▫ Functional strategy It is concern with the main individual function with the

organization will have its own.( production strategy, marketing strategy, marketing strategy, financial strategy, HR strategy)

The competition environment

•Managers have to analyze the competitive environment for the company.

•Several analytical tools were developed▫Porters competitive environment (1985)▫Value chain model (1985)

Porter 5 forces model• Can help managers to understand the nature and

intensity of competition in particular industry/ product/ market.

• It indicate the industry attractiveness thus formulate strategy

Porters model of industry attractiveness is relevant for both cooperate and business strategy

• The five forces are:▫ Entry : new/ cross /potential▫ Competition▫ Supplies▫ Buyers: distribution channel / customers▫ substitutes

Porter 5 forces model

Value chain• It helps the organization develop competitive

advantage by better understanding of the activities through which they create value.

• Business profitability depends on its ability to perform their activities efficiently and effectively.

• Competitive advantage can be gained:▫ Reducing cost (by knowing what drive the cost and

reducing it)▫ Product differentiation (adding and performing activity

better than competitor, which include better distribution system, high customer service, better input quality )

• Value chain can be reconfigured by:▫ Outsourcing▫ Vertical integration ( acquiring supplier and customers)

Value chain

Globalization

•Globalization is a major development in the competitive environment

•It have integrated national economics into international economics.

•It has removed trade barriers between countries and allow free flow of goods services capital and labor.

Globalization• Globalization effect:

▫Emergence of worldwide market for goods and services

▫Emergence of worldwide production facilities▫Emergence of worldwide financial market▫Movement towards world government via

institutes such as world bank▫ Increase of information lows between

geographically dispersed location▫ Increase of competition▫Development of global communication

infrastructure (internet)

Tactical management

•Is usually the province of middle managers and is concerned with conveying necessarily board business unit strategies into more details action plans allocating resources and responsibility to particular areas in order to translate strategies plans into specific action.

Operational management

•Concern with the implementation of tactical management plans

•It is concern in carrying out day to day task

Type of information required at each level• Strategic level( senior manager)

▫ External information▫ Market information▫ Competitor information▫ Information concerning general business requirement▫ Used for long term planning

• Tactical level (middle manager)▫ Information more historical and internal oriented.▫ Budget▫ Short term planning

• Operational level (front line managers)▫ Information regarding specific task▫ Purchase order▫ Inventory control

Difference between financial accounting and management accounting

•Purpose•Timing•Governed by•perspective

Data, information knowledge and wisdom•Knowledge management is collection of

processes that govern the creation dissemination and utilization of knowledge to fulfill organization objective

Data

•Data is a set of discrete, objective fact about event.

•Organization store data in some sort of information system, and they are heavily depended on

•Organization sometimes pile up data because they are factual and therefore create an impression of scientific accuracy.

•What do you think?

information• Information is data which have relative and purpose.• Adding value (meaning) to data will transform it in to

information. It can be added by :▫ Contextualization

We know why the data is gathered▫ Categorization

We know key component of the data▫ Calculation

Data may be analysis mathematically▫ Correction

Error have been removed from data▫ Condensation

The data may be summarized in a more concise form

knowledge• Knowledge is a fluid mix of experience values contextual

information and expert insight that provides a framework for evaluating and incorporating new experience and information.

• We drive knowledge from information as we drive information from data

• Information is transformed to knowledge by:▫ Comparison

How does information of this situation compared to situation we have known

▫ Consequences What implication does information have on decision of action

▫ Connections How does this relate to others

▫ Conversation What people think about this information

wisdom

•Wisdom comes from having correct understanding of the knowledge you have and being aware of limitation of that understanding

The data to wisdom hierarchy

Data collection method• Choosing among the data collection method

will depend on:▫The nature of the task▫The relative efficiency and cost

• Some of the data collection methods:▫Magnetic inc character recognition▫Optical mark reading▫Scanners and optical recognition▫Bar coding▫Electronic fund transfer at the point of sale▫Smart cards

Characteristic of good quality information• Relevant:

▫ Information is relevant when it helps user in the decision making.

▫ It should be provided by a certain timeline • Reliable

▫ Information of free from material error and bias• Comparability

▫ It should be comparable with the information provided earlier

• Understandability▫ It should be express as clear as possible and made

in a form that anticipated user can understand

Information cost benefits

•The benefit form information provided should justify the cost

Critical success factors

•No manager wants information which does not provide them with value addition

•CSFs can be thought of as what you need to be good at in order to achieve your ultimate aim

•Managers need to identify the CSF related to their job and be provided with information that would assess them whether thy are able to achieve their CSF

Critical success factors• To derive to the CSF in an organization:

▫We start from the objective (what does we want to achieve)

▫Decides what it needs to be good at in order to achieve these objective

▫Performance indicator to tell whether managers are going to achieve the objective

• Approaches used:▫Null approach▫By product approach▫The total study approach▫The key indicator approach

Sources can inform the determination of CSF•The industry in which the business

operates•The firm itself and its position within the

industry•Organization wider economic and social

environment•Organization factors which are current

managers concern (ex. High inventory level)

Information system

•Information system traditionally concerned with producing historical information.

•Now its also concern with providing useful information for decision making,

Characteristic of information

Operational system (transaction process system)• Transaction process system has increased the

speed and accuracy of the transaction.• It is inflexible for particular or specific

transaction presented on ad hoc basis.• Transaction processing system use:

▫Batch processing system Transaction are stored on batches and processed

together on later date (large volume transaction, salaries)

▫Online processing The users update the system directly and the effect

are direct (airline tickets)

Decision support systems (DSS)•This system is used for any of the three

levels:▫Operational level (ex. Inventory reordering)▫Tactical level (buy or make decision)▫Strategic level (capital investment

appraisal)•They do complex mathematical modeling

to stimulate the organization behavior at unexpected situations.

•It is based on sensitivity analysis

Executive information system (EIS)• It provide information to strategic level.• Managers need to view the organization and carrying

out long term planning• The information needed in this level is different that

the tactical and operation level.• The key features of EIS:

▫ Is organized around CSF▫ Provide information at different level of details▫ Include sophisticated user friendly graphical user

interface▫ Has fast time and accessible from many location▫ Is designed for each manager style▫ Shows trend and ratios

Office automation system (OAS)•Are networked computer system for local

area networks (LANs) that support office work for handling and managing documents and facilitating communication

Knowledge work system (KWS)

•Are computer applications that support knowledge workers nu helping in creating knowledge

Source of information

•Lower level management use internal information, while senior level management use external information.

•Environmental scanning is often used to describe the process of gathering external information.

Electronic data interchange(EDI)• Is a form of computer to computer data

interchange• It is developed in industries where large volume of

paper transaction is being sent between organization

• Organization are becoming aware of the supply chain and its relationship to the notion of a value chain.

• It links the supplier to the purchaser which increase the efficiency of both purchasing and selling functions

• Ex. Online ordering.

Information management and information technology• Data base:

▫ Is a store of data ▫ Is a collection or file of data structured in such

way that it may serve a number of software application without its structure being dictated by any one of those application

• Data based management system (DBMS)• Manages the interface between the data and

the application programs such that the data can be made available to other users , in their own tailored way

Data management system

otis

Enterprise resource planning

•Computerized ERP systems facilitate the integration of all the various functions of an organization by interlinking information databases

•In the ERP system there is a central data based feeds data into modular application relating each function of the organization

Advantage of data based system•Avoid unnecessary duplication of data•Avoid data conflict, as data is stored only

once•Data stored are independent from the

application

Disadvantage of data based system relating security and control•There are possibility of access of

unauthorized to the data•As the data is only held once at one place

the impact of system failure will be high•Inaccurate of data, as data is only held at

once•Cost of setting data based is very high

Information system security• Information is a precious recourse, it is important for

data not only reliable and accurate but also secured• Secured means protection of data form unauthorized

change, user and destruction• Type of measurement that the organization use in

protecting the data▫ Security control

Protect the data form unauthorized modification, disclosure or destruction and from unavailability of service to users

▫ Integrity controls Maintain the completeness and correctness of data

▫ Contingency control “disaster recovery plan” Deals with unscheduled interruption to information system

processing

Data warehoused and data mining

•Data warehoused:▫Used by large organization▫Contain high volume of data▫Utilize data from transaction system▫Are driven by information need

Information markets and the internet

•Information markets reflects the view that information is a commodity that can be bought, sold or exchange according to the terms and condition agreed by the buyer and the seller.

•Information market have emerged with the growth of the internet

internet

•Is a global information network that allows any computer with a telecommunication link send and receive information from any other suitable equipped computer

•The growth of the use of internet started with the time of development of graphical user interface and browser software.

•Users tend to use the web site that is regularly updated.

Commercial use of the internet

•Marketing•Sales•Distribution

Internal communication: intranets•An intranet is a network using internet

technology within the organization to support its work that is accessible only within the organization.

•Some of Intranet uses :▫PPM▫Daily company news paper▫financials

Knowledge work

•Depends upon the knowledge possessed by the worker not on the ability to perform physical task.

•Key attributes of knowledge work are that:▫Involve thinking processing information and

formulation analysis recommendation and procedures

▫It may use written or verbal input and output•The level of knowledge needed depends on

the level of work requirement

Types of knowledge work

•Diagnosis and problem finding•Planning and decision making•Monitoring and control •Authoring and presentation•communication

Information preference•Manager prefer live information they:

▫Prefer up to date information even if it is not thoroughly verified

▫Tend to favor verbal communication•Which will effect the decision making

Technology and decision making•Programmed decision

▫Routine and structure procedure•Non- programmed decision

▫Non routine procedure▫Use of Decision support system (expert

system “knowledge based system”)