Management Accounting and Budget Process - Assignment Example

? Finance and Accounting: Management Accounting Question 2: Compare and contrast the problem of exercising management control in for-profit organisations (private sector) versus non-profit organisation (public sector) Proper management is paramount to the success of any organisation whether it is a public or private organisation. The management practices and principles employed differ from one organisation to another depending on their nature and the purpose of establishment. As suggested by Rodriguez and Hickson (1995), there are notable differences between management of for-profit entities and non-profit entities. Private organisations tend to have smoother management control process whereas public organisations experience more turbulence, conflicts and interruptions. Many scholars attribute these differences to the roles and purpose of private and public organisations in the society. Private organisations produce and sell products to consumers in the markets with objective of creating shareholders’ wealth. On the other hand, public organisations, such as state health centers and public schools undertake their operations for public interests. The distinct roles mean that there are diverse kinds of expectations and accountability that may can call for distinctive management control and decision-making processes (Ring & Perry. 1985). The problem of exercising management control in private sector versus public sector The contextual influence in the exercise of management control arises from the role of an organisation in the society. Whereas private organisations are means for creating shareholders’ wealth, public organisations are instruments of public policy. The functions of each sector dictate the governance and leadership arrangements that are necessary to exercise management control for different diverse types of owners and shareholders. The approach to governance adopted in each sector subject general managers in each sector to different demands and expectations, which have far-reaching impact on exercise of management control. The role of each sector dictate ways of dealing with clients and users of services or goods offered in different ways, and this may also influence how management control is exercised. Public organisations are constrained in ways that limit how they exercise their management control and strategic choices being made. In most cases, discussions of how management control should be pursued in public organisations are subject to public disclosure. The government passes legislative mandates which tend t affect budgets and budgeting process in a public organisation. As cited by Ring and Perry (1985), managers or leaders of public organisations are required to conform to budgets and legislative mandates passed by the state. As such, this is likely to limit the amount of money available for research on how to exercise management effectively. These mandates may even limit managers of public corporations from spending money on data collection and research thus influencing decision making process negatively. Management team of most public corporations must report to oversight committees, whose occupants are often political appointees, who are prone to leaking organisation’s undertakings and progress. This influences planning and management process in a negative way. These influences make management control problematic in public corporations than in for-profit organisations (Nutt, 2005). The external environment influences any organisation. Some of the attributes of external environment include cooperation, competition, political influence, cooperation and data availability. Private organisations can assess market situations through consumer buying behavior thereby enabling them to effectively manage their actions. Public organisations lack markets which can be source of revenue. As such, they depend on funds from oversight bodies that have tendency of setting reimbursement rules for the products or services offered by a public organisation. In most cases, budget allocations for services rendered by public organisations are done following certain historical precedent. This means that public corporations cannot pursue management control process as they consider necessary. As such, the extent to which they exercise their management control process is influenced by the amount of funds they are allocated unlike for-profit organisations which utilize revenue released from business operations to ensure that proper management and planning is exercised (Ring Perry. 1985). Unlike private sector which is owned by shareholders, public organisation is owned by the public. Its ownership is ubiquitous and this poses problems to management control. The management of a public sector must appreciate the expectations and desires of the public and the service recipients. Therefore, cumbersome mechanisms that facilitate logistics of consulting with the public must be put in place. This means that management must hold talks and discussions with the general public through public meetings, public announcements and task forces. This is a sure way of understanding the expectations and desires of the public. The diverse views and suggestions of the public must be incorporated when exercising management control. It is normal that different people have different views and suggestions about the same thing. Therefore, some of the views might be bogus hence may not be supportive but rather destructive to the management control process of an organisation. Principles of public management require widespread involvement in strategic management of public sector. This poses various complications that often create inertia. This poses challenges to management control process (Nutt, 2005). Goals and authority affect the way management control is exercised in public sector. In most cases, goals made in public sector are vague since they emphasize so much on notion of equity and fairness as opposed to creating shareholders’ wealth. In effect, little clarity is made about what a non-profit organisation should achieve thus making it difficult for find time and resources to exercise management control. This makes management control impossible to exercise. The need for consultative decision culture in non-profit organisations poses problems to the strategic management. This sharply contrasts with decision making culture of for-profit organisations in which most strategic decisions are left to top management. Managers of private organisations see less risk in management decisions they make than managers in private sector. This is because of the fact managers of private sector are answerable to the shareholders for their actions. As such, they must make sound strategic decisions otherwise they may loose their jobs. They would strive to ensure that management control is effective and exercise properly in a bid to realize objectives of a business firm. However, this might not be the case with public organisation. Since they are not vulnerable to job loss due to their decisions, they care less about what they do. Management control systems can be sabotage to cover actions of the managers. Question 5: Lukka suggests that different factors and motivations explain existence of budgetary biasing. Outline these and explain what you would do to limit managers from biasing their budgets Budget process is a valuable aspect of management control system of any organisation. Managers are expected to utilize budgeting information when pursuing investment planning, performance evaluation and product pricing to mention just but a few. Note mentioning, there are a number of things within an organisation that influence the effectiveness of budgeting process. According to Van der Stede, (2000), budget estimates are rarely achieved for various reasons. The budgetary biasing framework by Lukka (1988) associates budgetary biasing with motivation and other numerous factors. i. Personal goals: Managers are expected to act at the best interest of the company. However, this is not always the case. One of the personal goals that commonly contribute to budgetary biasing is self-esteem needs. This occurs particularly when self-esteem of concerned individuals is threatened. Research indicates that persons who have low opinions of themselves tend to research than individuals with higher self-esteem. This also applies in budgetary process. They would pursue budgetary bias in order to avert risks. ii. Organisation al factors: These include roles, norms and features of budgetary system. It is natural for a human being to make mistakes. Organisation has norms that ought to be conformed to when preparing budgets, which ought to appear in a particular manner. In the event that the concerned individuals realize that the budgets prepared do not have specific features of budgetary system of the organisation, they would action would be influenced. iii. Power factors: These include authority and influence. Organisations have different level of management. There are senior managers and junior managers. Most organisations require all levels of managers to participate in budgeting decisions. If the junior level managers are concerned in the budgeting process, it is not surprising that senior managers interfere with process because of their positions and influence in the organisation. They may request or force those concerned with budgeting process to prepare budgets in a particular manner. Consequently, this would lead to budgetary biasing (Lukka, 1988). iv. Situational factors: Every business is in business for business. The measure of organisation’s success is profitability. Business organisations are sometimes forced to do whatever it takes to realize profits as ultimate goal. Budgetary information are commonly used by parties within and outside the organisation. In order to woes investors, companies may tend to distort budgetary information as a means of achieving this goal. They induce biases in their budgets purposely to convince the external users such as investors and suppliers that the company is doing well. Uncertainty has also forced managers to induce biasness in budgetary process. Motivations: Motivated employees tend to be active in their undertakings. They are committed and would devote their time and energy in ensuring that the predetermined goals and objectives of an organisation are realized. The success of any undertaking depends entirely on the nature of the workforce. In some instances, there are no incentives available to employees. They are not motivated to assume their responsibilities. Basing on historical data and forecasts, managers may induce biasness into the budgetary process mainly to portray that what is expected has been met, which is otherwise in the real sense. Since they are not motivated, they care less about the consequences of their actions (Van der Stede, 2000). What should be done to avoid managers biasing their budgets? Budgetary biasing entails a deliberate distortion of information in the budgets. One of the factors that have been identified to cause budgetary biasing is motivations. As indicated earlier, motivated employees are committed to realization of the objectives of the company. They are committed to the rules and regulations governing their actions within the organisation. Motivation plays a very important role to the success of entire organisation. In order to limit managers from biasing budgets, it is important to ensure that they are motivated. This can be achieved through kinds of payoffs that are linked to positive outcomes (Lukka, 1988). Personal goals such as self-esteem and safety needs contribute to budgetary biasing among general managers of organisations around the world. Individuals tend to avert risks by inducing budgetary bias. Some organisations have strict measures regarding the outcome of employees’ actions. One of these measures is loss of job. As such, managers would do anything to safeguard their jobs. Therefore, they may be forced to induce budgetary biasing in order to reflect the information from positive end. Budgetary biasing occurring due to safety needs can be limited by assuring managers job securities provided that they act with due care. Managers should be assured that they will not loose their jobs provided they provide truthful communication (Van der Stede, 2000). Some organisations are not flexible in their structure, norms and roles played by each individual or employee. These features have far-reaching effect on the budgetary process i.e. it may lead to budgetary biasing. In order to avoid such malpractices, it is important to embrace flexibility in our organisation al structure and systems. Budgetary systems and norms that ought to be followed during budgetary process should be flexible so that managers can undertake budgetary process without manipulating them to certain fixed rules or structure (Lukka, 1988). The roles played by each individual especially those in the top management should be respected by others provided that they are being pursued at the best interest of the company. This is a rule that should be passed by all organisations. This helps to avoid cases where senior managers interfere with the work of junior managers. Even if they are not authorized to oversee or undertake certain jobs, senior managers have a tendency of using their powers to influence the outcomes of certain actions. With this rule in place, budgetary biasing is likely to limited (Van der Stede, 2000). An organisation should be ready to accept the outcome of their business undertakings at any given period of time. A business is undertaking with the aim of realizing profits. However, this is not always the case. Loss or lower profits than expected can be realized. Profitability has been determined to be one the factors that contribute to budgetary biasing. In order to limit this, an organisation should be ready for expected profits, lower profits than expected or losses. Question 6: Why do organisations adopt multi-divisional forms? What disadvantages are there to this type of structure and what other organisation al forms might firms adopt? The multidivisional form of an organisation contains of units which function independently. The units are able to function on their own since they have all the requirements in terms of resources and facilities. The divisions may be formed on the basis of a product or brand among others which are all aimed at creating efficiency in a company. Each of the individual units is usually set in a way which gives them dependence on their own management team, special identity as well design. All these enable the multidivisions to function as a full company. Organisations may take up one of the many available forms. Taking up a certain form of organisation is usually motivated by the benefits which are obtained from it (Mackenzie, 1978). For example there are several reasons why organisations take up the multidivisional form. The reasons for companies to adopt the multidivisional form include; The benefit of coordination- With a multidivisional form, a company is able to enjoy benefits associated with coordination. The activities in each division are able to get the much desired coordination. There is the fact that the people operating in each division will be able to communicate properly since it is a close knit unit. This makes flow of information efficient which translates to smooth running of the division and eventually the entire company. Motivation benefits- The fact that companies with divisional form create an environment for motivation of employees makes companies adopt this form. With units, it is usually easy to monitor performance and give rewards appropriately. This is usually a very good thing in the process of ensuring that the overall performance off a company goes up. With individual efforts recognized, employees are able to work harder so that they may get the same reward again. This makes the company enjoy higher productivity which is the source of increased company turn over. Unit members will always feel the desire to stick together and remain loyal which is good for the company. Despite all these benefits, there exist disadvantages of the multidivisional form of organisation structure. These benefits emanate from the fact that there are many independent units in one organisation (Mackenzie, 1978). These disadvantages include; Repetition of duties- With a multidivisional form, there is usually a possibility of the employees in the unit duplicating their duties. This happens in a case where each unit is trying to make things work more efficiently. For example where units may be created based on regions; the head office may do an advert while the regional office does another on the same thing. This is usually a disadvantage to the company since only one advert would have served the purpose. To handle this, there is the need to always create good communication channels which enable all units to work in sync. Unfair competitive attitude of the divisions- Since each division tries to outdo each other, competition among the units develop. The competition is always motivated by the interests of each division in terms of teams’ bonuses and other earnings. This hurts the core strategies of the company. The competition leads to a situation where the divisions do their things like separate organisations which harm the main objectives of the company (Mackenzie, 1978). To take care of this situation, there is the need for companies to have certain overall policies which control certain aspects such as remuneration among others. There is also the risk of divisions failing to cooperate with the others which leaves the company operations disintegrated which is quite dangerous. Hindered company flexibility- This form of organisation leads to a situation in the company which reduces the level of flexibility in the company. It occurs where the divisions may be pushing for a thing like the products liked by their customers while the corporate office may be of a different idea thus flexibility is hindered. The corporate office will not be able to adjust things as per its strategies since there is the stand of each individual unit. High Costs- It has been found that running a multidivisional company is quite costly. The costs are increased by the fact that sufficient resources and facilities have to be put in place by the company. For example more managers and employees have to be hired so that each division is well served. This means that administration costs go up too which translates to increased costs of the entire company. Creating certain resources for a division also consumes a lot of money. The duplication of duties also causes costs to go up such as the repeated marketing and advertising functions. Conflict of authority- Due to the divisions fighting to perform well, the managers in the divisions may go beyond their scope of work. There may also be a failure of the corporate managers to make decision from one point. This may be a source of lack of flexibility in the side of division managers. It may also hinder the strategies of the company due to division managers taking decisions which are in conflict. There are many other forms which organisations may adopt. One of these is the functional organisation structure. This form respects the company’s tasks and activities which make the basis of the structure. Employees carry out specific functions such as in finance, sales and research among others. The other form of an organisation is the matrix one. This is usually a form which incorporates the functional and divisional forms of an organisation. The matrix organisation structure is usually very useful when a company is handling project related activities (Banner & Gagne 1995). The matrix form of organisation is known to be the harbor of conflicts in an organisation. This is because a functions manager may collide with the divisional manager. This is because most of the time the two will always occupy the same space which creates conflict whenever it happens. There is also the federation form of an organisation. This is usually referred as an informal form of an organisation. The units in the federation form usually function very separately (Banner & Gagne 1995). They are usually in a form which resembles subsidiaries with the company as the holding company. Question 7: Textbooks suggest there are three main objectives for organisations in designing transfer pricing systems. Outline these and contrast them with the motives that multinational enterprises might have in choosing transfer pricing policies Objectives of transfer pricing systems According to Emmanuel and Mehafdi (1994), transfer pricing refers to the internal price charged by a selling division within an organisation for raw materials or finished goods and services, which are then supplied to another division or buying department within the same organisation. The fundamental aim of assuming this system is to simulate external market conditions within an entity so as to motivate managers of each division to perform exemplary. Other objectives of transfer pricing include: i. Goal congruence: Transfer pricing mechanism is designed in a way that ensures that the interest of individual profit centers does not supersede those of entire company. A general manager of each division should engage themselves in profit maximization but they should involve themselves in decision making that have negative influence on organisation’s performance. Their actions should optimize performance of the organisation as a whole (Emmanuel & Mehafdi, 1994). ii. Divisional autonomy: Every division ought to have optimum autonomy. Transfer pricing systems allows the advantages associated with decentralization to be retained even if each division is autonomous. With transfer pricing system, a manager of each unit or division should ensure that the requirements of his/her profit center are met through either internal or external sources. Throughout their undertakings, the process by which general manager of buying center strives to reduce cost and selling center manager works hard to maximize revenues should not affect the divisional autonomy. iii. Divisional performance evaluation: Transferring products or services between either profit centers or investment centers with the same decentralized organisation allows a manager of each division to calculate divisional profits, which have far-reaching effects on their performance evaluation (Emmanuel & Mehafdi, 1994). iv. Rational decision making: Transfer pricing systems enables an organisation to undertake reliable and objective assessment of the various activities that take place in each profit center. Transfer pricing provide valuable information that guide divisional managers when making decisions. Transfer price allows aid divisional manager assess performance of each division and the contribution of the profit center towards realization of organisation’s revenues (Emmanuel & Mehafdi, 1994). Objectives of transfer pricing system versus motives of transfer pricing in multinational companies Transfer pricing system has been embraced by different organisations for different purposes. The differences in these goals depend on the nature of an organisation. As outlined above, one of the main objectives of transfer pricing systems is goal congruence. Since every divisional manager has authority to decide whether to sell or buy either internally or externally, transfer pricing helps in ascertaining whether the incentives available to divisional managers are in line with the incentives of the entire company and the shareholders. This helps achieve goal congruence where divisional managers are free to transfer product in order to maximize corporate profits. This objective sharply contrasts with the motives of adopting transfer pricing system in multinational companies. One of the motives of transfer pricing in multinational corporations is to handle competitive pressures. Whereas goal congruence objective is to motivate divisional managers to work towards maximizing overall profit of a corporate organisation, the motive for adopting this system in Multinational Corporation is to affect the prices of one subsidiary in another country so as to match local competition. This means that the corporate profit is affected negatively (Plasschaert, 1979). The objectives of transfer pricing in small organisations operating within one region is to ensure profit maximization of divisions and the entities as a whole. In order to achieve this, divisional autonomy is important and this is achieved through transfer pricing. This means that each division undertakes its duties without interferences from other units or divisions. However, this is not the case in multinational organisations where transfer pricing is adopted to manage fluctuations in exchange rates. This means that divisions within a country or subsidiaries located in different countries have to work together to achieve this motive. Imports or exports from one subsidiary is used manage exchange rate fluctuations (Plasschaert, 1979). Multinational organisation uses transfer pricing system to facilitate free movement of funds between subsidiaries in different countries. As part of its business strategy, most multinational organisations transfer tends to invest its funds in a country after doing proper market analysis. It is through this strategy that transfer pricing is utilized as means of shifting funds from one subsidiary one country to another subsidiary in another country. This motive sharply contrasts with objective of transfer pricing of promoting divisional autonomy (Plasschaert, 1979). The motive for using transfer pricing among multinational organisations is distinctive from the objectives of transfer pricing system in small organisations. Multinational organisations use transfer pricing to counteract the impact of taxes and tariffs applicable in different countries. In order to realize profit maximization for the whole entity, there is a need to reduce tax liability especially in countries where taxes are lower. This is achieved by purchasing goods or services from business units or divisions of the organisation in overseas. This means that performance evaluation of the entire company supersedes performance evaluation of each division. This also goes against the divisional autonomy concept of transfer pricing in organisations operating within one country or region. The value added by profit centers in different countries towards the success of entire organisation is determined to ensure that profit maximization is realized (Plasschaert, 1979). Question 8: Outline Hofstede’s theory of national culture and assess to what extent you believe it might explain international variation in management accounting practices. Give examples. The Hoftede’s theory of national culture gives an insight on cultural features in different countries. This theory gives an insight on how cultural features and behaviors affect organisations in various countries in the world (Goddard, 2009). According to this theory, management of organisations in different countries in the world is subject to these unique cultural tendencies and behaviors. So that he may be able to explain this well, Hofstede applied five fundamental dimensions. These dimensions of national culture are able to bring out the cultural features as well as behaviors and their impact on management of companies in the specific nations. These cultural dimensions are able to classify the countries well on the basis of cultural features and behaviors. One of these fundamental dimensions in the Hofstede’s national culture theory is power distance. Hofstede argued that there is variance in the way countries handle cases where there is no equality. He states categorically that there are traces of inequality in each place. For example, he argues that some people in certain societies are given a chance to succeed thus variance in possessions and wealth sprout. This causes an inequality which continues for quite some time. This theory states that where the people in lower cadres do not depend much on the superior ones, consultation exists. This creates a situation where people from the opposite ends of power need each other thus creating a mutual position. You will find that with low distance in power, the people I the lower ranks will often raise their dissatisfaction with the superiors whenever it is felt. The second dimension is the avoidance of uncertainty. This perspective is explained as how a nation deals with possible risks to come. This perspective in the Hofstede’s theory on national culture tries to alert people that they should prepare. It is reflected as a good tool for ensuring that people have an estimation of what might befall them in future. This is usually measured by the application of uncertainty avoidance index (UAI). The level of the index may be high or low for a nation. If a nation has a high uncertainty avoidance index, then the citizens will always try to be in the know of what risks might befall them in coming days. The third dimension is the Individualism versus collectivism. The Hoftede’s theory presents this dimension as related to the way people belong. It describes situations where people doo not belong to groups, and also where they belong to groups. As the name suggests, individualism is where citizens do not belong to any group of interests thus the principle of every man for himself. The situation where people are in groups which are able to help them is referred to as collectivism. According to Goddard (2009), with collectivism, the theory indicates that those who subscribe to the groups are able to benefit due to their loyalty. The fourth dimension highlighted in the Hoftede’s theory of national culture is masculinity against femininity. This dimension describes the way people in different nations across the world handle responsibilities in relation to gender. The theory explains how some societies have responsibilities allowed for both genders. The theory explains that there are some societies which exhibit features which are feminine. It highlights that these societies are able to cooperate and the members of the societies share some qualities regardless of gender. In these societies, those who exhibit feminine qualities are able to get high levels of recognition. On the other hand in a masculine society, the features are different. There is a sense of high level competitiveness, focus on hard life and material things. People in masculine society leaders such as managers who exhibit aggressive attitudes are believed to be successful. Nevertheless, societies with feminine features are liked by employees since there are cooperation and assistance. The other dimension presented by Hoftede in his theory on national culture is Long term perspective against short term perspective. The theory indicates that the long term perspective is the one which shows societies which subscribe to strength for the future economic wise and stamina wise. The short teem perspective is the one which focus on the present and past time in terms of progressive efforts. The Hoftede's theory on national culture explains well the variation existing in the international management accounting practices. This is because in the different countries, as explained by the perspectives, different cultures exist. You will find that, in a society where there is very high difference in terms of power, the management accounting control should be in a way which tries to reduce the gap (Lucey, 2003). This will be in an effort to bring the two groups of people together in an effort to grow the society uniformly (Goddard, 2009). Secondly in a country faced with high uncertainty avoidance index, the management accounting systems should be in a way that recognizes dynamism thus requiring some touch of contingency measures. The theory further explains well why we variances in the international management accounting practices through scrutinizing the nature of planning. When we look at the long term versus the short term perspectives of the societies across the world, then companies in those societies should have the best fitted management practices. One will not expect to implement a long term strategy to a company operating in a society whose culture is strong on short term perspective of growth and stability. In such a case, success will occur when a short term form of planning is implemented. The Hoftede's theory on national culture is also able to explain why there exist differences in the international management accounting practices through the description of how the factor of society’s femininity or masculinity affects this. With companies operating in feminine societies, there will be a management control system which recognizes cooperation, delegation and assisting in the day to day activities (Goddard, 2009). On the other hand, with a masculine nation, the level of competitiveness and hardship will always have to be reflected in the management accounting practices. Therefore, all these arguments by the theory cement the fact that there has to be differences in the international management accounting practices (Goddard, 2009). References Banner ,D. & Gagne, T. 1995. Designing Effective Organisations: Traditional and Transformational Views. Sage Publishers. Emmanuel, C. & Mehafdi, M. 1994. Transfer Pricing. New York: Academic Press. Goddard ,G.2009. International Business: Theory and Practice. M.E Sharpe Lucey, T. 2003. Management Accounting. New York: Cengage Learning. Lukka, K. 1988. Budgetary biasing in organisations: Theoretical framework and empirical Evidence. Accounting, Organisations and Society, 13, 281-301. Mackenzie, K. 1978. Organisational Structures. AHM Publishing Corporation. Nutt, P. 2005. Comparing Public and Private Sector Decision-Making Practices. [online] Available at: (Accessed 12 May 2013). Plasschaert, S. 1979. Transfer pricing and multinational corporations: An Overview of Concepts, Mechanisms, and regulations. USA: The University of Michigan Ring, P., & Perry, J. 1985. Strategic management in public and private contexts. Academy of Management Review 10 (2): 276–86. Van der Stede, A. 2000. The relationship between two consequences of budgetary controls: budgetary slack creation and managerial short-term orientation. Accounting, Organisations and Society, Elsevier, 25(6): 609-622. Read More