Session 9/Week 10 - Implementing management accounting in organisations

Question 1

6 Pre-implementation and design considerations

Answer 1

1. Assign responsibilities
   - Select groups/individuals who are responsible for particular tasks within the implementation process
2. Capture the economic “reality” of the firm
   - Map the VALUE CREATION/organisational processes
   eg. bottle manufacturer, ICRC examples
   - through site visits, expert interviews or document analysis -> graphical mappings
3. Design of the system(s)
   - Decide on scope of the system, eg. should implementation also encompass general mgmt. processes?
   - Agree on level of detail: balance between too much & too little info (rmb that detail can be costly)
   - Circumscribe eg. cost pools & define cost drivers
4. Planning the implementation process
   - Thorough planning to avoid as many unforeseen complications as possible
   - Include a SCENARIO analysis to retain flexibility
5. Monitoring and evaluation
   - Constant monitoring is crucial in order to make
   necessary adjustments as quickly as possible
   – But: Monitoring is expensive - so high frequency monitoring regimes should be applied with caution
6. Implementing the mgmt. accounting system (an “art” in itself)
   - can choose from a VARIETY of approaches, eg. top-down vs bottom-up

Question 2

What to take note of when Mapping the organisational Value creation process?

eg. ICRC (international committee of the red cross)

Answer 2

*SERVICE org.s have more options on the way of mapping, which shapes their decisions
eg. geographical location vs activity category
- The ways in which the process becomes visualised DIRECTLY AFFECT the COST PRIORITIES that employees assign to their respective tasks and might trigger unintended consequences
eg. might discontinue operations in countries that appear very expensive;
save specific equipment (eg. body armours); discontinue particular activities that appear expensive (eg. crisis response);
reduce inception costs -> could lead to poor planning

Question 3

7 important implementation process decisions to be made

Answer 3

1. Short vs long time horizon
   - ultimately affects implementation costs
2. Tight planning vs flexibility
   - mgmt can choose to follow a strictly defined roadmap or leave flexibility to implementation process
3. Bottom-up vs top-down
   - choose to control imp. process from upper hierarchical levels or allow participation from “below”
4. Core mgmt team vs multiplicity of teams (team size)
   - is one team sufficient or whether complexity requires multitude of teams
   » advantage of core team: teamwork, high coordination between members
   » for multiplicity: more specific knowledge, require someone to bring diff. teams together
5. Low vs high external environment
   - to what extent is the involvement of external experts eg. consultants or academics <- affects feeling of ownership
6. Parallel systems vs stand alone
   - mgmt decides whether OLD COSTING SYSTEMS remain online or are being dismissed
7. Replace vs align culture
   - mgmt decides whether implementation should be aligned w/ current org. culture or replace
   eg. Semiconductor producer vs Foreign aid NGO examples; self check-in example

Question 4

3 TECHNICAL problems may arise throughout the implementation

Answer 4

1. Complexity for users and cost of implementation
2. Representational accuracy
   - No ‘facts’ when it comes to costs… truth in the eye of the observer (vs. treating costs as ‘real’)
   – Need to trade-off accuracy with manageability => approximation
   – Many costs either inherently ‘common’ (e.g. staff activities, especially in service departments,
   can be complex and intertwined; and overlapping product life-cycles)
   - Or treated as such for LACK OF RESOURCES for further investigation
3. ALIGNMENT with strategy
   - Many SMA tools (eg. ABC, Life-Cycle Costing, Cost of Quality, Target Costing) are aimed at (to some extent) reducing costs
   – A focus on eliminating non-value added activities
   - Need to also focus on CUSTOMER VALUE (Johnson, 1992)
   » To remain competitive in the long term, more, not fewer sales orders need to be
   processed (in an ABC or CPP)

Question 5

3 main common Organisational problems during implementation

Answer 5

1. Selective visibilities
   - All SMA tools come with a set of ASSUMPTIONS. Activities categorised by the new system become the only valid activities
   - Assumption that support departments operate like assembly lines = set of
   REPETITIVE and simple activities
   - Can lead to a LOSS of FLEXIBILITY & diversity = loss of potential for learning and
   continuous improvement (dumbing-down of staff practices)
   - What’s measured is all that matters: activities NOT DIRECTLY RELEVANT to the
   cost object, but possibly useful, become INVISIBLE, unvalued and discarded
   &raquo_space; SMA tools can create new ‘invisibles’
2. SMA tools often implemented by EXTERNAL CONSULTANTS with support from the ‘top’
   - ppl in charge of performing the activities are not involved
   - possible lack of understanding, hostility, frictions
   - could be DEMOTIVATING for workers if they feel they’re regarded as an extra cost; atmosphere of FEAR & suspicion
3. Internal politics
   - MA implementation often accompanied by individually motivated politics, hidden agendas & redefinitions of power
   eg. ABC often used during organisational crisis to achieve “unpopular goals” like cutting workforce / replacing mgmt

Question 6

5 common causes for Organisational resistance during implementation

Answer 6

1. Lack of trust in management
   - employees may ascribe the changes to some -ve underlying reason or even assume they will eventually lose their jobs
2. Improper communication by mgmt regarding what the new system will mean for employees and local managers
   - as news of a change SPREADS through the hierarchy, members end up receiving INACCURATE, second-hand information
3. Lack of skills/training in the new system
4. SELF-INTERESTED individuals that may put themselves and their own agenda over that of the organisation
   - some want to maintain the STATUS QUO to better advance their own personal agendas {for their ego}; others have different motivations
5. Feeling of exclusion
   - employees may feel offended if they had no input in the decision making process (for a sudden change)

Question 7

5 ways to cope with organisational resistance

Answer 7

A much more effective way is through enacting DIALOGUE instead of enacting sanctions (to defend your position).
1. Communicate as much as possible
2. eg. anonymous suggestion box
3. Involve affected ppl to gain their buy-in & confidence (create ownership)
4. Gain and maintain active sponsorship from mgmt -> incentive
5. Sanctions - perhaps most prominent but least effective way, eg. firing problematic ppl

Question 8

8 pre-existing conditions / warning signs) that should exist within a company to warrant considering ABC as a possible solution

Answer 8

1. Functional managers want to drop seemingly profitable lines
2. Hard-to-make products show big profits
3. Departments have their own independent cost systems
4. The accounting department spends a lot of time on special projects
5. You have a high-margin niche all to yourself
6. Competitors’ prices are unrealistically low
7. Customers don’t mind price increases
8. The results of any undertaken bids are hard to explain

Question 9

Why does ABC offer a better solution than traditional cost systems?

Answer 9

• In multi-product businesses, high
  volume products tend to be OVER-COSTED and low-volume products tend to be UNDER-COSTED
• Historically, as many organisations’ overhead costs increased and the quantity of their DIRECT LABOUR used in production DECREASED, their OVERHEAD RATES skyrocketed. This is problematic as ACCURATE cost allocation is crucial for decision-making!
• ABC is better than TCS b/c it recognises the existence of NON-VOLUME RELATED activity cost drivers.
• more accurately relates actual costs to the actual work performed
• links cost of resources to the activities that consume those resources

Question 10

Scientific management bias - most often considered a technical problem in accounting implementation

Answer 10

successful implementation of an accounting system often requires it to be RECONFIGURED to a MESSY organisational reality where everything might not readily fit into the pre-conceived and theoretically constructed metrics and processes.

Question 11

3 factors that must be present for potential for Management Accounting change + 3 barriers to implementation, eg. of balanced scorecard

Answer 11

Kasurinen, 2002
1. Motivators, Catalysts and Facilitators
» Motivators - related to change in general, eg. competitive market, organisational structure
» Catalysts - directly associated w/ the change, eg. poor financial performance, loss of market share, launch of competing product
» Facilitators - necessary but not sufficient, eg. facilitating role of acct. staff, acct. computing resources, degree of autonomy from parent company
2. confusers, frustrators and delayers
- In a Finnish metals group
» Confusers - differences in goals between the division and biz unit management
» Delayers - lack of clear-cut strategies in the BSC

• If the business unit management is unable to send CLEAR STRATEGIC SIGNALS to employees, it is difficult to reach the project’s goals listed in the BSC.
• COMPLEX PROJECT ENVIRONMENT - lack of COORDINATION between various projects can create frustration and suspicion towards new initiatives in an org.
• The absence of a STRONG LEADER, eg. resignation of the division general manager, can reduce the MOTIVATION of the biz unit to implement the BSC