Chapter 9 – Behavioral and Organizational Issues in Management Accounting and Control Systems

Management accounting and control system (MACS)
A system that generates and uses information that helps decision makers assess whether an organization is achieving it’s objectives.
Control
The set of procedures, tools, performance measures, systems, and incentives that organizations use to guide and motivate all employees to achieve organizational objectives.
Technical considerations of MACS
1. Accurate
2. Timely
3. Consistent
4. Flexible
Behavioral considerations of MACS
1. Embedding the organization’s ethical code of conduct into MACS design.
2. Using a mix of short- and long-term qualitative and quantitative performance measures (or the Balanced Scorecard Approach).
3. Empowering employees to be involved in decision making and MACS design.
4. Developing an appropriate incentive system to reward performance.
Scientific management school (Taylorism)
Earliest attempt at studying the role of management. Developed at the turn of the 20th century. People find work objectionable, individuals care little for decision making or exercising creativity, and money is the sole driving force behind performance.
Human relations movement
People have needs that go well beyond performing a simple repetitive task at work and financial compensation is only one aspect of what workers desire.
Human resources model of motivation (HRMM)
Introduces a high level of employee responsibility for and participation in decisions in the work environment. People find work enjoyable; people desire to participate in developing objectives, making decisions, and attaining goals; people are motivated by both financial and non-financial means of compensation; employees have a great deal of knowledge about their jobs.
Goal congruence
Careful attention to motivation is a key step for the organization and employees to align their respective goals.
Employee self-control
Employees monitor and regulate their own behavior and perform to their highest levels.
Diagnostic control systems
Feedback systems that monitor organizational outcomes and correct any deviations from predetermined performance standards.
Interactive control systems
Foce a dialogue among all organizational participants about the data coming out of a system and what actions to take that are appropriate.
Task control
The process of finding ways to control human behavior so that a job is completed in a pre-specified manner.
Preventive control
Much, if not all, of the discretion is taken out of performing a task because of the precision required or the nature of the materials involved.
Monitoring
Inspecting the work or behavior of employees while they are performing a task. Can be accomplished using listening devices or through surveillance.
When task control is appropriate
1. When there are legal requirements to follow specific rules/procedures.
2. When employees handle liquid assets.
3. When the organization can control its environment and eliminate uncertainty and the need for judgement.
Results control
Focus on measuring employee performance against stated objectives.
When results control is appropriate
1. When organization members understand organizational objectives.
2. When organization members have the knowledge and skill to respond to changing situations with corrective actions.
3. When the performance measurement system is designed to assess individual contributions.
Dysfunctional behavior
Employees knowingly manipulating or falsifying performance measures.
Gaming the performance indicator
Employees altering their actions specifically in an attempt to manipulate a performance indicator through job-related acts.
Data falsification
Knowingly altering sales booking records in an employee’s favor.
Smoothing (earnings management)
When individuals accelerate or delay the preplanned flow of data without altering the organization’s activities.
Authoritative budgeting
When a superior informs subordinates what their budget will be without requesting input.
Benefits: straightforward and efficient.
Drawbacks: less information about the process being budgeted.
Participative budgeting
Uses a joint decision making process in which all parties agree about setting the budget targets.
Benefits: greater commitment to the budget, higher motivation.
Drawbacks: takes more time.
Consultative budgeting
Occurs when managers ask subordinates to discuss their ideas about the budget but no joint budget making occurs.
Benefits: input from employees can occur.
Drawbacks: pseudoparticipation.
Intrinsic rewards
Rewards that come from within an individual and reflect satisfaction from doing the job and from the opportunities for growth that the job provides.
Extrinsic rewards
Any rewards that one person provides to another to recognize a job well done.
Incentive compensation/pay-for-performance systems
Reward systems that provide monetary (extrinsic) rewards based on measured results/achieving or exceeding some measured performance.
Six attributes of a measurement system
1. Employees must understand their jobs and the reward system and believe that it measures what they control and contribute to the organization.
2. Designers of the performance measurement system must make a careful choice about whether it measures employee’s inputs or outputs.
3. Elements of performance that the performance measurement system monitors and rewards should reflect the organization’s critical success factors.
4. The reward system must set clear standards for performance that employees accept.
5. The measurement system must be calibrated so that it can accurately assess performance.
6. The reward system should reward group rather than individual performance when appropriate.
Cash bonus
Pays cash on the basis of some measured performance; one-time award that does not become part of the employee’s base pay in subsequent years. Fixed in amount or proportional to the level of performance relative to the target.
Profit sharing
Cash bonus calculated as a percentage of an organization’s reported profit; group incentive compensation plan focused on short-term performance.
Gain sharing
A system for distributing cash bonuses from a pool when the total amount available is a function of performance relative to some target.
Stock options
The right to purchase a unit of an organization’s stock at a specified price, called the option price.
Tight budgets
Targets are perceived as ambitious but attainable.
Stretch targets
Exceed previous targets by a significant amount; usually require an enormous increase in a goal over the next budgeting period.
Budget slack
The influence of behavior to “pad” a budget via misstating expenses and/or revenues