Accounting For Performance Management
Summary of all Lectures
Radboud University Nijmegen
Yoël Guijt
,Lecture 1 — Introduction
Accounting:
> The name for all calculative practices used to manage organization/optimize performance
> Within organizations: Management accounting.
> Large extent about money, but more about other aspects within organization and societies
> Good administration is key for organization to function well!
Management:
> Optimizing performance:
> Financial vs Non- nancial performance // Sustainability in short and long run //
Performance for shareholders and stakeholders
Why care about accounting for performance management?
> Economic theories about organizations are crucial; important to link these theories to practice
> Role of culture/leadership/learning/motivation is crucial; only e ective if organization is healthy
> Often based on nancial information; using this without thinking will hurt culture/learning
Accounting can support performance management, so you would better understand it:
> Many organizations lack nancial literacy and cost consciousness
> Results in no attention for (hidden) costs + no accurate analysis for actual failings
Financial vs Management Accounting:
> Financial accounting:
> Prepare reports on past performance; External reporting + Past performance
> Produce Financial Information for other departments in the business
> Management accounting:
> Collate information (revenue, costs, debts) to produce timely reports for day-to-day
management and decisions: Internal Reporting + Forward-looking
> Combine nancial statements with non- nancial info to paint complete picture of the
business: Financial & Non-Financial Information
Tasks of management accountants:
> Report to CFO // Administer internal and external accounting // Budget-planning // Internal
consultant or business analyst
>>> Balance between providing info to other managers for decision making against providing
monitoring information used to control behavior of lower-leveled managers
> They constantly make decisions about which option is best from other alternatives
> Special orders, outsourcing, keep or drop, capacity expansion/contraction, pricing, etc
> Relevant, accurate, and timely accounting information is crucial to assist those decisions
Management Accounting / Controlling Profession in NL:
> RC Title: Financial controller or Business controller
> Connector between di erent departments // Advising role // Digitalization //Role in sustainability
> Cooperating together with a lot of departments within or outside the organization (ICT, HRM)
Role of Digitalization for Controllers:
> Digitalization of the primary processes, administration, nancial processes
> Collecting data to support decision-making
Role of Sustainability for Controllers:
> Demand for sustainability and function is a ected by this
> Part of strategy // Procurement // Investment criterion // Measured and reported external
> Less important in SMEs than other organizations
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, Role of Uncertainty for Controllers:
> Current global circumstances are a ecting controllers (not speci cally nancially)
> Rather practically: Suppliers can’t always deliver // Much competition for personnel
> Targets are being met, but less often than ve years
Lecture 2 — Organizational Architecture
1. Self-interested behavior:
> Fundamental assumption of economics:
> Individuals act on their own self-interest to maximize their utility + Opportunism (seeking
self-interest with guile) + Bounded rationality, not fully rational
> Utility: Preferences for money, working conditions, leisure, etc
> Resource constraints: Time, Money, Knowledge, etc
> Opportunity set: Work for other employer, work on other projects, relaxing, etc
Team production:
> Individuals form teams because:
> They can produce more in teams + Generate larger opportunity set
> Firm is de ned as a ‘nexus of contracts’ among resource owners who contract with individual
team members to bene t both the rm and the individuals
> Firms in an economic sense include pro t corporations, divisions within a corporation, non-
pro t corporation, and other entities
Firm as a ‘nexus of contracts’:
> Firm is a legal entity contracting with many parties and enforce these contracts in courts of law:
> Labor contracts // Supply contracts // Customer contracts // Finance contracts
> Some contracts are explicitly written, others implicitly oral agreements supported by reputation
Principal-Agent theory:
> Economic model of relations in a rm // Principals are owners/managers // Agents are
employees or independent contractors // Agent performs for principal // Multiple relations exist
> Agency costs: Reductions in rm value when agent pursues own interest (goal incongruence)
Agency problems:
1 Free-rider: Agents have incentive to shirk because individual e orts aren’t directly observable
> Solution: Incentive contracts, monitoring, etc
2 Horizon problem: Agents weigh short term consequences more heavily than long term
> Solution: Incentive contracts, monitoring, etc
3 Employee-theft: Employees take rm resources for unauthorized purposes
> Solution: Monitoring, Inventory control, etc
4 Empire-building: Managers seek larger number of agents to increase their own job security
> Solution: Modify incentives, benchmarking, etc
Information Asymmetry Problems:
> Adverse selection = Prior to contracting (more info than principal); solution = pre-
contract investigations, post-contract penalties
> Moral Hazard = After contracting (principal cannot observe deviations) hidden
action or hidden information; solution = inspecting/monitoring
2. Decision rights and Rights system:
> Decision rights are restrictions on how economic assets of a rm can(not) be used
> Management determines how decision rights are to be assigned to various agent in the rm
> Centralizing: Top management has a say in everything (micro-management)
> Decentralizing: Employee empowerment / or Lower-level managers
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