Behavioral aspects of Management Accounting

Submitted by: Florian HuesmannMahima VirmaniAnita BakkarMoeen AkhtarAnkit Singh

Date: 03.11.09

Table of contentGeneral characteristics of Management

Accounting- Aims of MA- Differences between Management Accounting & Financial Accounting

Behavioral aspects of Management Accounting-Motivational theories in Management Accounting-Behavioral implecations of MA

EthicsConclusion

Management Accounting• Definition:

• A value-adding continuous improvement process of planning, designing, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives

Aims of management accounting

Planning

Feedback

Controlling

Acting

Aims of management accounting•Formulating strategies •Planning and constructing

business activities •Helps in making decisions•Supporting financial reports preparation •Safeguarding asset

Aims of management accounting•Distinguish between financial accounting

and management accounting•Information of management

accounting is used for internal purposes only, not for external reports

•Management accounting has a future perspective and helps managers in making decisions.

Differences between Financial Acc. and Management Accounting

Financial Accounting Management Accounting

External Internal

Investors, Creditors, Government authorities

Mangers of the business

Primary Users

Differences between Financial Acc. and Management Accounting

Financial Accounting Management Accounting

Help investors, creditors, and others make investment, credit, and other decisions

Help managers plan and control business operations

Purpose of Information

Differences between Financial Acc. and Management Accounting

Financial Accounting Management Accounting

Concern about adequacy of disclosure

Concern about how reports will affect employees behavior

Behavioral Implications

Role of MA within the Corporation•Cost accounting became the major role in

management accounting•Linkage between the management team

and the financial department•Management Accounting is important for

nearly every part of the company, as well as for the overall success of a company

Behavioral aspect & implications of management accounting

~ Behavior is a mirror in which every one displays his own image. ~Behavioral aspect of management accounting is that which influences the decision of the people concerned with decision making in the management accounting system.

J. Wolfgang von Goethe

Behavioral Implications• As measurements are made on operations and

especially on individuals and groups, their behavior changes

▫People react when they are being measured, and they react to the measurements

▫They focus on the variables and behavior being measured and spend less attention on those not measured

• Two old sayings recognize these phenomena:

▫“What gets measured gets managed”▫“If I can’t measure it, I can’t manage it.”

Behavioral Implications• People familiar with the current system may resist as

managers attempt to introduce or redesign cost and performance measurement systems

• They have acquired expertise in the use (and, perhaps, misuse) of the old system and wonder whether their experience and expertise will apply to the new system

• People also may feel committed to the decisions based on the information the old system produced▫Actions taken may no longer seem valid based on the

information produced by a newly installed management accounting system

▫A new management system can be a threat or lead to embarrassment and may lead to a resistance to change.

Behavioral Implications

• Management accountants must understand and anticipate the reactions of individuals to information and measurements

• An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems

• More importantly, when the measurements are used not only for information, planning, and decision-making but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves

Subjective representation of objective phenomena

• Behavior depends on individuals’ mental representations, which can differ in important ways from objective

indicators.

• Effects of MA practice on individuals’ behavior can depend not only on how objectively informative the MA practice is about factors that affect their welfare.

• But also on how understandable the MA practice is how well individuals can form usable mental representations of it and connect it to their other mental representations

• and how it stimulates individuals’ attention, cognition, and/or motivation

Subfields of psychology in MA research

• Cognitive: Psychological processes that influence human thinking

▫ Attention, memory, comprehension, learning, judgments, decisions

• Motivation: Psychological processes that influence behavior

▫ Direction, intensity, and persistence of effort

• Social: How other people influence individuals’ minds and behavior

▫ Understanding people (attribution, person impression, social cognition), attitudes and social influence, social interaction and relationships

Motivational Theories in management accounting

•Goal setting theory

• Performance is a positive function of goal difficulty

• Specific goals reduce variation in performance• Incentives indirectly influence performance via

its effect on goal commitment• Goal-performance relation is influenced by goal

commitment, goal importance, feedback, task complexity, self-efficacy

Organizational justice theory

• Individuals are motivated to maintain a balance in exchange relations by comparing their and others’ ratio of inputs to outcomes (e.g., pay)

▫If individuals believe their ratio is inequitable, then they experience negative emotions, which they minimize by changing their inputs and/or outcomes

2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Human Resource ModelOf Motivation (HRMM)•Perhaps the most contemporary

management view of motivation

•Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices

• Introduces a high level of employee responsibility for and participation in decisions in the work environment

2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Central Assumptions ofthe HRMM•Organizations operate under a system of

beliefs about the values, purpose, and direction of their organization

•People find work enjoyable and desire to participate in:▫Developing objectives▫Making decisions▫Attaining goals in their work environment

•Individuals are motivated by both financial and nonfinancial means of compensation

2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Central Assumptions ofthe HRMM•Employees have a great deal of

knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole

•Individuals are highly creative, ethical, and responsible

•They desire opportunities to effect change in their organizations

COST BEHAVIOUR ANALYSIS

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges

level within the relevant range. of activity.

Fixed Total fixed cost remains the Fixed cost per unit goessame even when the activity down as activity level goes up.

level changes within therelevant range.

Types of Cost Behavior Patterns

The Activity Base

A measure of the event that causes the incurrence of a

variable cost – a cost driver

A measure of the event that causes the incurrence of a

variable cost – a cost driver

Unitsproduced

Unitsproduced

Miles driven

Miles driven

Labor hours

Labor hours

Machine hours

Machine hours

Minutes Talked

To

tal L

on

g D

ista

nce

Tel

eph

on

e B

illTrue Variable Cost Example

Your total long distance telephone bill is based on how many minutes you talk.

Number of Local Calls

Mo

nth

ly B

asic

T

elep

ho

ne

Bill

Total Fixed Cost Example

Your monthly basic telephone bill is probably fixed and does not change when

you make more local calls.

Step-Variable Costs

Activity

Co

st

Total cost remainsconstant within anarrow range of

activity.

Total cost remainsconstant within anarrow range of

activity.

Step-Variable Costs

Activity

Co

st

Total cost increases to a new higher cost for the

next higher range of activity.

Total cost increases to a new higher cost for the

next higher range of activity.

RelevantRange

A straight line closely

approximates a curvilinear

variable cost line within the

relevant range.

A straight line closely

approximates a curvilinear

variable cost line within the

relevant range.

Activity

To

tal

Co

st

Economist’sCurvilinear Cost

Function

The Linearity Assumption and the Relevant Range

Accountant’s Straight-Line Approximation (constant

unit variable cost)

Cost Behavior

MerchandisersCost of Goods Sold

MerchandisersCost of Goods Sold

ManufacturersDirect Material, Direct Labor, and Variable

Manufacturing Overhead

ManufacturersDirect Material, Direct Labor, and Variable

Manufacturing Overhead

Merchandisers and Manufacturers

Sales commissions and shipping costs

Merchandisers and Manufacturers

Sales commissions and shipping costs

Service Organizations Supplies and travel

Service Organizations Supplies and travel

Examples of normally variable costsExamples of normally variable costs

Examples of normally fixed costsExamples of normally fixed costs

Merchandisers, manufacturers, and service organizations

PBB taxes, Insurance, Sales salariesDepreciation, Advertising

Merchandisers, manufacturers, and service organizations

PBB taxes, Insurance, Sales salariesDepreciation, Advertising

ExamplesAdvertising and Research and Development

ExamplesAdvertising and Research and Development

ExamplesDepreciation on Buildings and

Equipment

ExamplesDepreciation on Buildings and

Equipment

Types of Fixed Costs

DiscretionaryMay be altered in the short-term by current managerial decisions

DiscretionaryMay be altered in the short-term by current managerial decisions

CommittedLong-term, cannot be reduced in the short

term.

CommittedLong-term, cannot be reduced in the short

term.

Ren

t C

ost

in

T

ho

usa

nd

s o

f D

oll

ars

0 1,000 2,000 3,000 Rented Area (Square Feet)

0

30

60

Fixed Costs and Relevant Range90

Relevant

Range

Total cost doesn’t change for a wide range of activity,

and then jumps to a new higher cost for

the next higher range of activity.

Total cost doesn’t change for a wide range of activity,

and then jumps to a new higher cost for

the next higher range of activity.

Fixed Monthly

Utility Charge

Variable

Cost per KW

Activity (Kilowatt Hours)

To

tal U

tilit

y C

ost

X

Y

A semivariable cost has both fixed and variablecomponents. Consider the example of utility

cost.

A semivariable cost has both fixed and variablecomponents. Consider the example of utility

cost.

Semivariable Costs

Total semivariable cost

Fixed Monthly

Utility Charge

Variable

Cost per KW

Activity (Kilowatt Hours)

To

tal

Uti

lity

Co

st

X

Y

Semivariable Costs

Total semivariable cost Y = a + bX

The Analysis of Semivariable Costs

1. High-Low Method

3. Least-Square Regression Method

2. Scattergraph Method

Plot the data points on a graph (total cost vs. activity).

Plot the data points on a graph (total cost vs. activity).

0 1 2 3 4

*

To

tal

Co

st i

n1,

000’

s o

f R

s

10

20

0

***

**

**

*

*

Activity, 1,000’s of Units Produced

X

Y

The Scattergraph Method

0 1 2 3 4

*

To

tal

Co

st i

n1,

000’

s o

f R

s

10

20

0

***

**

**

*

*

Activity, 1,000’s of Units Produced

X

Y

The Scattergraph Method (2)

Intercept is the estimated fixed cost (a) = Rs10,000

Intercept is the estimated fixed cost (a) = Rs10,000

Draw a line through the data points with about anequal numbers of points above and below the line.

Draw a line through the data points with about anequal numbers of points above and below the line.

0 1 2 3 4

*

To

tal

Co

st i

n1,

000’

s o

f R

s

10

20

0

***

**

**

*

*

Activity, 1,000’s of Units Produced

X

Y

The Scattergraph Method (3)The slope is the estimated variable cost per unit.

Slope = Change in cost ÷ Change in units

The slope is the estimated variable cost per unit.

Slope = Change in cost ÷ Change in units

Vertical distance is the change in cost.

Vertical distance is the change in cost.

Horizontal distance is

the change in activity.

Horizontal distance is

the change in activity.

The High-Low MethodWiseCo recorded the following production activity

and maintenance costs for two months:

Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then express the costs in equation form Y = a + bX.

Changein costChange in units

The High-Low Method

Variable cost per unit = Change in cost ÷ change in units

The High-Low Method

Variable cost per unit = $2,400 ÷ 3,000 units

= $0.80 per unit

The High-Low Method

Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost

Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)

Fixed cost = $9,800 – $6,400 = $3,400

Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost

Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)

Fixed cost = $9,800 – $6,400 = $3,400 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $3,400 + $0.80X

The High-Low Method

Least-Squares Regression Method

• Software can be used to fit a regression line through the data points.

• The cost analysis objective is the same: Y = a + bx

Least-squares regression also provides a statistic,

called the R2, that is a measure of the goodness

of fit of the regression line to the data points.

Least-squares regression also provides a statistic,

called the R2, that is a measure of the goodness

of fit of the regression line to the data points.

Least-Squares Regression Method

0 1 2 3 4

To

tal

Co

st

10

20

0

Activity

****

**

****

R2 is the percentage of the variation in total cost explained by the activity.

R2 is the percentage of the variation in total cost explained by the activity.

R2 for this relationship is near100% since the data points are

very close to the regression line.

X

Y

Cost Estimation MethodsRegression AnalysisA set of data can be regressed using several

techniques:•Manual computations

•SPSS or SAS Statistical Software•Excel or other spreadsheet

A set of data can be regressed using several techniques:

•Manual computations•SPSS or SAS Statistical Software

•Excel or other spreadsheet

The result of the regression process is a

regression model:

TC = F + VX

The result of the regression process is a

regression model:

TC = F + VX

Each regression model has an R-square (R2)

measure of how good the model is.

Range of R2 = 0 to 1.0

Each regression model has an R-square (R2)

measure of how good the model is.

Range of R2 = 0 to 1.0

Simple Regression AnalysisExample

Fasco wants to know its average

fixed cost and variable cost per

unit.

Using the data to the right, let’s see

how to do a regression using

Excel.

Fasco wants to know its average

fixed cost and variable cost per

unit.

Using the data to the right, let’s see

how to do a regression using

Excel.

Simple Regression AnalysisExample You will need three pieces

of information from your regression analysis:

1. Estimated Variable Cost per Unit (line slope)

2. Estimated Fixed Costs (line intercept)

3. Goodness of fit, or R2

You will need three pieces of information from your

regression analysis:

1. Estimated Variable Cost per Unit (line slope)

2. Estimated Fixed Costs (line intercept)

3. Goodness of fit, or R2

To get these three pieces of information we will need to use THREE

different excel functions.

LINEST, INTERCEPT, & RSQ

To get these three pieces of information we will need to use THREE

different excel functions.

LINEST, INTERCEPT, & RSQ

Ethics With Conclusion

~ Ethics is the activity of man directed to secure the inner perfection of his own personality. ~

Albert Schweizer

Ethics

• When management accounting information is used for control, management accountants may find themselves in complex situations, fraught with conflict▫ Especially when it is used for performance evaluation

• Pressure may be exerted to influence the numbers to make a favored product, customer, or line of business appear more profitable than it actually is

• Department managers may distort information so that unfavorable factors are not revealed in a management accounting report▫ The cost of inefficient processes▫ The existence of substantial amounts of excess capacity

Ethics• Senior executives whose incentive compensation

is based on the reported financial numbers may put pressure on accountants▫To recognize revenue from a customer early ▫To defer until subsequent periods the

recognition of an expense▫In some circumstances, to recognize certain

expenses early so that much higher earnings may be reported in future periods

• All of these behaviors were evident in the frauds dominating the financial news in recent years

• Organizational leadership plays a critical role in fostering a culture of high ethical standards

Ethics•Professional organizations usually establish

ethical norms and codes of professional conduct for their members

•The professional association can monitor and police its norms and codes through peer reviews▫They have procedures for disciplinary action

when violations are detected•Many of the guidelines are phrased in

terms of what management accountants should not do, consistent with how boundary systems operate

Ethics• The way an individual responds to pressure derives

from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards

• If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned

• An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises▫ Such as being asked to misrepresent an organization unit’s

performance potential when the unit is being offered for sale

THANK YOU