ppt on behavioural aspects of managerial accounting
DESCRIPTION
TRANSCRIPT
Behavioral aspects of Management Accounting
Submitted by: Florian HuesmannMahimaAnita BakkarMoeen AkhtarAnkit Singh
Date: 03.11.09
Table of contentGeneral characteristics of Management
Accounting- Aims of MA- Differences between Management Accounting & Financial Accounting
Behavioral aspects of Management Accounting-Motivational theories in Management Accounting-Behavioral implecations of MA
EthicsConclusion
Management Accounting• Definition:
• A value-adding continuous improvement process of planning, designing, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives
Aims of management accounting
Planning
Feedback
Controlling
Acting
Aims of management accounting•Formulating strategies •Planning and constructing
business activities •Helps in making decisions•Supporting financial reports preparation •Safeguarding asset
Aims of management accounting•Distinguish between financial accounting
and management accounting•Information of management
accounting is used for internal purposes only, not for external reports
•Management accounting has a future perspective and helps managers in making decisions.
Differences between Financial Acc. and Management Accounting
Financial Accounting Management Accounting
External Internal
Investors, Creditors, Government authorities
Mangers of the business
Primary Users
Differences between Financial Acc. and Management Accounting
Financial Accounting Management Accounting
Help investors, creditors, and others make investment, credit, and other decisions
Help managers plan and control business operations
Purpose of Information
Differences between Financial Acc. and Management Accounting
Financial Accounting Management Accounting
Concern about adequacy of disclosure
Concern about how reports will affect employees behavior
Behavioral Implications
Role of MA within the Corporation•Cost accounting became the major role in
management accounting•Linkage between the management team
and the financial department•Management Accounting is important for
nearly every part of the company, as well as for the overall success of a company
Behavioral aspects of Management Accounting
Behavioral aspect of management accounting is that which influences the decision of the people concerned with decision making in the accounting system.
Subjective representation of objective phenomena
• Behavior depends on individuals’ mental representations, which can differ in important ways from objective indicators.
• Effects of MA practice on individuals’ behavior can depend not only on how objectively informative the MA practice is about factors that affect their welfare
• but also on how understandable the MA practice is how well individuals can form usable mental representations of it and connect it to their other mental representations
• and how it stimulates individuals’ attention, cognition, and/or motivation
Subfields of psychology in MA research
• Cognitive: Psychological processes that influence human thinking
▫ Attention, memory, comprehension, learning, judgments, decisions
• Motivation: Psychological processes that influence behavior
▫ Direction, intensity, and persistence of effort
• Social: How other people influence individuals’ minds and behavior
▫ Understanding people (attribution, person impression, social cognition), attitudes and social influence, social interaction and relationships
Motivational Theories in management accounting
•Goal setting theory
• Performance is a positive function of goal difficulty
• Specific goals reduce variation in performance• Incentives indirectly influence performance via
its effect on goal commitment• Goal-performance relation is influenced by goal
commitment, goal importance, feedback, task complexity, self-efficacy
Organizational justice theory
• Individuals are motivated to maintain a balance in exchange relations by comparing their and others’ ratio of inputs to outcomes (e.g., pay)
▫If individuals believe their ratio is inequitable, then they experience negative emotions, which they minimize by changing their inputs and/or outcomes
2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University
Human Resource ModelOf Motivation (HRMM)
•Perhaps the most contemporary management view of motivation
•Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices
• Introduces a high level of employee responsibility for and participation in decisions in the work environment
2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University
Central Assumptions ofthe HRMM
•Organizations operate under a system of beliefs about the values, purpose, and direction of their organization
•People find work enjoyable and desire to participate in:▫Developing objectives▫Making decisions▫Attaining goals in their work environment
•Individuals are motivated by both financial and nonfinancial means of compensation
2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University
Central Assumptions ofthe HRMM
•Employees have a great deal of knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole
•Individuals are highly creative, ethical, and responsible
•They desire opportunities to effect change in their organizations
COST BEHAVIOUR ANALYSIS
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges
level within the relevant range. of activity.
Fixed Total fixed cost remains the Fixed cost per unit goessame even when the activity down as activity level goes up.
level changes within therelevant range.
Types of Cost Behavior Patterns
The Activity Base
A measure of the event that causes the incurrence of a
variable cost – a cost driver
A measure of the event that causes the incurrence of a
variable cost – a cost driver
Unitsproduced
Unitsproduced
Miles driven
Miles driven
Labor hours
Labor hours
Machine hours
Machine hours
Minutes Talked
To
tal L
on
g D
ista
nce
Tel
eph
on
e B
illTrue Variable Cost Example
Your total long distance telephone bill is based on how many minutes you talk.
Number of Local Calls
Mo
nth
ly B
asic
T
elep
ho
ne
Bill
Total Fixed Cost Example
Your monthly basic telephone bill is probably fixed and does not change when
you make more local calls.
Step-Variable Costs
Activity
Co
st
Total cost remainsconstant within anarrow range of
activity.
Total cost remainsconstant within anarrow range of
activity.
Step-Variable Costs
Activity
Co
st
Total cost increases to a new higher cost for the
next higher range of activity.
Total cost increases to a new higher cost for the
next higher range of activity.
RelevantRange
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
Activity
To
tal
Co
st
Economist’sCurvilinear Cost
Function
The Linearity Assumption and the Relevant Range
Accountant’s Straight-Line Approximation (constant
unit variable cost)
Cost Behavior
MerchandisersCost of Goods Sold
MerchandisersCost of Goods Sold
ManufacturersDirect Material, Direct Labor, and Variable
Manufacturing Overhead
ManufacturersDirect Material, Direct Labor, and Variable
Manufacturing Overhead
Merchandisers and Manufacturers
Sales commissions and shipping costs
Merchandisers and Manufacturers
Sales commissions and shipping costs
Service Organizations Supplies and travel
Service Organizations Supplies and travel
Examples of normally variable costsExamples of normally variable costs
Examples of normally fixed costsExamples of normally fixed costs
Merchandisers, manufacturers, and service organizations
PBB taxes, Insurance, Sales salariesDepreciation, Advertising
Merchandisers, manufacturers, and service organizations
PBB taxes, Insurance, Sales salariesDepreciation, Advertising
ExamplesAdvertising and Research and Development
ExamplesAdvertising and Research and Development
ExamplesDepreciation on Buildings and
Equipment
ExamplesDepreciation on Buildings and
Equipment
Types of Fixed Costs
DiscretionaryMay be altered in the short-term by current managerial decisions
DiscretionaryMay be altered in the short-term by current managerial decisions
CommittedLong-term, cannot be reduced in the short
term.
CommittedLong-term, cannot be reduced in the short
term.
Ren
t C
ost
in
T
ho
usa
nd
s o
f D
oll
ars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
Fixed Costs and Relevant Range90
Relevant
Range
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal U
tilit
y C
ost
X
Y
A semivariable cost has both fixed and variablecomponents. Consider the example of utility cost.
A semivariable cost has both fixed and variablecomponents. Consider the example of utility cost.
Semivariable Costs
Total semivariable cost
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
Semivariable Costs
Total semivariable cost Y = a + bX
The Analysis of Semivariable Costs
1. High-Low Method
3. Least-Square Regression Method
2. Scattergraph Method
Plot the data points on a graph (total cost vs. activity).
Plot the data points on a graph (total cost vs. activity).
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f R
s
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
The Scattergraph Method
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f R
s
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
The Scattergraph Method (2)
Intercept is the estimated fixed cost (a) = Rs10,000
Intercept is the estimated fixed cost (a) = Rs10,000
Draw a line through the data points with about anequal numbers of points above and below the line.
Draw a line through the data points with about anequal numbers of points above and below the line.
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f R
s
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
The Scattergraph Method (3)The slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
The slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
Vertical distance is the change in cost.
Vertical distance is the change in cost.
Horizontal distance is
the change in activity.
Horizontal distance is
the change in activity.
WiseCo recorded the following production activity and maintenance costs for two months:
Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then express the costs in equation form Y = a + bX.
The High-Low Method
Changein costChange in units
The High-Low Method
Variable cost per unit = Change in cost ÷ change in units
The High-Low Method
Variable cost per unit = $2,400 ÷ 3,000 units
= $0.80 per unit
The High-Low Method
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $3,400 + $0.80X
The High-Low Method
• Software can be used to fit a regression line through the data points.
• The cost analysis objective is the same: Y = a + bx
Least-Squares Regression Method
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
0 1 2 3 4
To
tal
Co
st
10
20
0
Activity
****
**
****
Least-Squares Regression Method
R2 is the percentage of the variation in total cost explained by the activity.
R2 is the percentage of the variation in total cost explained by the activity.
R2 for this relationship is near100% since the data points are
very close to the regression line.
X
Y
Cost Estimation MethodsRegression AnalysisA set of data can be regressed using several
techniques:•Manual computations
•SPSS or SAS Statistical Software•Excel or other spreadsheet
A set of data can be regressed using several techniques:
•Manual computations•SPSS or SAS Statistical Software
•Excel or other spreadsheet
The result of the regression process is a
regression model:
TC = F + VX
The result of the regression process is a
regression model:
TC = F + VX
Each regression model has an R-square (R2)
measure of how good the model is.
Range of R2 = 0 to 1.0
Each regression model has an R-square (R2)
measure of how good the model is.
Range of R2 = 0 to 1.0
Simple Regression AnalysisExample
Fasco wants to know its average
fixed cost and variable cost per
unit.
Using the data to the right, let’s see
how to do a regression using
Excel.
Fasco wants to know its average
fixed cost and variable cost per
unit.
Using the data to the right, let’s see
how to do a regression using
Excel.
Simple Regression AnalysisExample You will need three pieces
of information from your regression analysis:
1. Estimated Variable Cost per Unit (line slope)
2. Estimated Fixed Costs (line intercept)
3. Goodness of fit, or R2
You will need three pieces of information from your
regression analysis:
1. Estimated Variable Cost per Unit (line slope)
2. Estimated Fixed Costs (line intercept)
3. Goodness of fit, or R2
To get these three pieces of information we will need to use THREE
different excel functions.
LINEST, INTERCEPT, & RSQ
To get these three pieces of information we will need to use THREE
different excel functions.
LINEST, INTERCEPT, & RSQ
Behavioral implications
~ Behavior is a mirror in which every one displays his own image. ~
J. Wolfgang von Goethe
Behavioral Implications• As measurements are made on operations and
especially on individuals and groups, their behavior changes
▫People react when they are being measured, and they react to the measurements
▫They focus on the variables and behavior being measured and spend less attention on those not measured
• Two old sayings recognize these phenomena:
▫“What gets measured gets managed”▫“If I can’t measure it, I can’t manage it.”
Behavioral Implications• People familiar with the current system may resist as
managers attempt to introduce or redesign cost and performance measurement systems
• They have acquired expertise in the use (and, perhaps, misuse) of the old system and wonder whether their experience and expertise will apply to the new system
• People also may feel committed to the decisions based on the information the old system produced▫Actions taken may no longer seem valid based on the
information produced by a newly installed management accounting system
▫A new management system can be a threat or lead to embarrassment and may lead to a resistance to change
Behavioral Implications
• Management accountants must understand and anticipate the reactions of individuals to information and measurements
• An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems
• More importantly, when the measurements are used not only for information, planning, and decision-making but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves
Ethics With Conclusion
~ Ethics is the activity of man directed to secure the inner perfection of his own personality. ~
Albert Schweizer
Ethics
• When management accounting information is used for control, management accountants may find themselves in complex situations, fraught with conflict▫ Especially when it is used for performance evaluation
• Pressure may be exerted to influence the numbers to make a favored product, customer, or line of business appear more profitable than it actually is
• Department managers may distort information so that unfavorable factors are not revealed in a management accounting report▫ The cost of inefficient processes▫ The existence of substantial amounts of excess capacity
Ethics• Senior executives whose incentive compensation
is based on the reported financial numbers may put pressure on accountants▫To recognize revenue from a customer early ▫To defer until subsequent periods the
recognition of an expense▫In some circumstances, to recognize certain
expenses early so that much higher earnings may be reported in future periods
• All of these behaviors were evident in the frauds dominating the financial news in recent years
• Organizational leadership plays a critical role in fostering a culture of high ethical standards
Ethics• The way an individual responds to pressure derives from
inner values and beliefs, but individuals are strongly influenced by their view of organizational standards
• If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned
• An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises▫ Such as being asked to misrepresent an organization
unit’s performance potential when the unit is being offered for sale
Ethics•Professional organizations usually establish
ethical norms and codes of professional conduct for their members
•The professional association can monitor and police its norms and codes through peer reviews▫They have procedures for disciplinary action
when violations are detected•Many of the guidelines are phrased in
terms of what management accountants should not do, consistent with how boundary systems operate