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Summary Management Accounting and Control
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Summary MACLecture 1: Introduction
Management reporting system functions [human brain]
- Decision-facilitating: providing information to
others to take good decisions [remembering]
- Decision-influencing: instruct to act in the best
interest of the firm [instructing body parts;
thinking]
- Coordination-facilitating: motivate CGU’s to work
together [coordinate body parts]
Use of the managerial reporting system:
- Diagnostic: facilitating and implementing the current strategy
o Designing, maintain and improving the current MRS
o E.g. more data at lower costs, measure customer satisfaction in a better way
or move to real-time tracking of performance measures
- Interactive: allowing the firm to develop a better understanding of the strategic
uncertainties that could instigate a change in the current strategy
o Advisory role in important strategy decisions
o E.g. supplier selection, investigates possible uncertainties or look whether
bonusses should be used for motivating employees
Course goal: Make sure that employees
execute/implement the intended strategy in their
work give the best possible information, align
all individual behavior with organizational
objectives and facilitate cooperation between
entities
,Principal-agent relationship: a situation in which one individual acts on behalf of another
individual and is supposed to advance the principals goals
- Closing the gap: aligning the goals of the principal and agent
- Problems:
o Effort of agent unobservable: continuous monitoring impossible
o Risk averse agents and noisy signal of the agents’ effort
o Signal x can be manipulated by agent (bias)
A managerial reporting system resolves the agency problem to a certain extent, problem:
- Financial constraints: costs exceed the benefits
- Contextual factors: impossible (e.g. no email address available)
- Bounded rationality: too difficult to know everything
Payouts: principal: y – w(x) y=benefitsw(x)= payment agent x=PM
Agent: w(x) – C(a) C(a)= cost of effort a=unobservable action
e.g.: Y=accurate and complete master file X=number of clients called A=real effort
Lecture 2: three-legged stool
Three-legged stool: Should all be in balance when implementing a strategy:
1. Organizational design: how tasks and accountabilities are distributed inside an
organization e.g. centralization vs. decentralization
2. Reporting system: how people in a firm report to each other e.g. a centralized
firm will have strong vertical lines to the headquarter
3. Performance evaluation: evaluate performance of managers and employees e.g. a
decentralized firm enables a manager to positively influence their performance
4. Soft controls: used to resolve agency issues that can’t be addressed by the reporting
system of the performance evaluation e.g. the environment in which an
employee operates (motivation)
- About implementing a strategy and NOT about developing a new one
Centralization: Decision-making power is confined to the top management opposite
(decentralization) means that the tasks and accountabilities are allocated
- Advantages: exploit size and benefit cheaper deals
- Disadvantages: easier to adapt the product range to local needs
Paramount example:
- Overhead costs allocated to all movies
- Producer Forrest gump receives bonus based on profit
- Forrest gump had major profit, but all overhead allocated to this movieno bonus
- Problem: cost allocation is part of the reporting system but was linked to
performance evaluation in this case (lowering bonus through allocation)
Carrefour example:
- Operates with low operating margins switches to centralized system
- Without changing strategy, the prices should go up and that is not doable
- Too much capital in the company affects balance sheet amazons outperforms
everyone in the market
,GE example:
- Successful in changing because they change all elements of the stool
- Used to change of strategy, so they are experienced in it
Advice: Look at the current strategy use the three-legged stool to make an analysis on
how the strategy is currently implemented look at the fit between all the components
change when needed
Lecture 3: designing your organizations
Implementing your strategy:
1. Structure of organization
- Organized by market: divide groups geographically, per market or per customer
o Adv.: high responsiveness to customer preferences and market conditions
o Disadv.: duplication of functions/costs and little information flow across
markets
- Organized by function: having departments between CEO and the stores simple
o Adv.: efficiency in executing the functions
o Disadv.: slower recognition of opportunities and little information flow across
functions
- Matrix structure: individuals work within their functions as well as with individuals
from other departments in teams
o Adv.: interactions across dimensions
o Disadv.: slow decision making and blurred accountability
- Example:
o Harvard: vase-based lectured so no teaching philosophy
o Maastricht: dean chooses teaching philosophy
o Tilburg: lecturer chooses his teaching philosophy
2. Allocation of decision rights
- Definition: who decided what and who is accountable for what?
- Allocate the decision rights to the person that has the best information or to the one
who has the best incentive to take the best decision for the firm
- Based on economic determinants, personality and intrinsic value of decision rightf
- No delegation means that you have to put effort in it delegation means less effort,
but the possibility that the agent is self-interested
- Carrefour example: either the BU-manager decided (performance evaluation in
place) or the CEO decided (reporting system in place)
- People value decision rights rather take decision themselves
, - CE = certainty equivalent: minimum amount of money you want to participate in the
lotto instead of getting an amount for certain
o risk averse persons will have a higher CE
o literature: most principals have higher CE for delegation of lottery so they
value intrinsic decision rights (16,7%)
o intrinsic value of decision rights increases when the monetary amount
increases as well and intrinsic value of decision rights is higher, in case of a
conflict between the principal and agent
- Trade-off: for deciding yourself you need all information and you will spend time on
it delegating the decision will be less time-consuming and less information has to
be communicated upwards
Lecture 4: performance measures
Performance measure: a quantifiable indicator used to assess how well an organization is
achieving its desired objectives
- Sensitivity: the extent to which the value of PM changes when an agent does more
effort
- Precision: the extent to which the value of PM is influenced by factors outside of
control of the manager
- Verifiability: the extent to which a manager, ex ante, can see how the PM is
calculated
- Congruence: the extent to which a PM contributes to overall firm value
- Can be Aggregate (accounting measures) or Specific (internal non-financials)
Aggregate measures provide
information about multiple actions in
one beneficial because it saves costs
and when it’s too difficult to know all
actions of the manager
If PMs are good measures, delegation and relative incentive use is positively associated
increasing the use of financial PMs has a negative effect on delegation, if the aggregated
PMs are of lower quality
- Three-legged stool implication: link between organizational design and performance
evaluation: quality of the PMs determines how much is delegated (the better PMs,
the more delegation)
,Promotions:
- Incentive effect: probability of a promotion induces employees to work harder
- Matching effect: the firm want to promote the most capable employees to a higher
hierarchical position
Promotions have an incentive effect leading to
improvements on non-financial performance
measures and those improvements are caused
by both effort and learning (see graph)
Performance on nonfinancial performance
measures is incorporated in promotion decisions, implying that nonfinancial performance
measures play a role in improving the matching effect of promotions
Intertemporal choice problem: managers have a higher preference for actions from which
the benefits are realized at short(er) term
- Example: student jobs: students have a preference for working a job right now
in order to earn money and buy stuff, but in the long run studying more for the
future would benefit them more
- Problem: Less attention and resources for actions that benefit the firm in the
medium and long run
- Causes: pressures from evaluation systems and outsiders, a general preference for
immediacy, shorter CEO horizons
Multiple performance measures can together cause as much congruence as possible with
the reality:
- profit measures: backward-looking, evaluating past performance --> commonly used
in practise
- Accounting return measures: ROI, EVA, value creation of resources, investment
return, time value of money --> accused for short-sightedness but often used
- Non-financial measures: leading indicators of future performance, customer
satisfaction, focus on one business problem --> easy to understand
Problems of non-financial measures
- Lack of congruence: Weak link between stock prices and NFM
- Short lead times: benefits of taking actions are seen within a year
- non-linearity: too much investing in for example employee training would harm firm
performance (too costly)
- Non-verifiability: easily manipulated
Use of accounting return measures and non-financials induces managers to look at a longer
time horizon PMs can never fully mitigate moral hazard
, Lecture 5: subjectivity
Fundamental equation:
Observed value of PM = true value + noise + bias
- True value: never observed because the principal can never observe everything
- Noise: factors out of control of the agent combination of sensitivity and precision
- Bias: how the agent can increase the PM manipulation
- Example student evaluations:
o Noise: corona virus --> more difficult courses have overall more noise --> e.g.
for online shops it is positively
o Bias: extra information during the lectures bringing snacks to the class
room (bribery) --> can be negative but unlikely (lower earnings so lower tax)
o
Subjectivity used to lower noise and congruence problems:
- Noise factors are unforeseen and unpredictable contracting these factors would
be very difficult and costly
- Congruence factors aren’t included because employees would know what to do
(bias) employees would manipulate their real behaviour
Disadvantages of objective performance evaluation (principal perspective)
1. Not something like a complete PM
2. Most PMs are backward-looking and/or ST orientated
3. Managers can manipulate/optimize PMs
4. The presence of uncontrollable factors (noise)
5. Higher risk of unmotivated employees (subjectiveness can keep employees more
motivated)
6. Normally a bonus can never be rewarded in case of a loss, subjectivity can reduce
this
Disadvantages of subjective performance evaluation
1. Bonus decision can be influenced by the supervisor's conscious or unconscious
biases
2. Favoritism: supervisor can favor some employees
3. Employees can secretly influence the supervisor to favor themselves (put into
spotlight)
- These disadvantages are (partly) mitigated when there is sufficient trust
Subjectivity
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