Tutorial Week 8

Q1. (a) Describe the essential elements of an effective cost control system. Answer Effective control system would require the following : i. The need for a system of responsibility accounting based on a clear definition of a managers authority and responsibility. ii. The production of performance reports at frequent intervals comparing actual and budget costs for individual expense items. iii. Variances should be analyzed according to whether they are controllable or non controllable by the manager. iv. The managers should participate in the setting of budgets and standards. v. The system should ensure that variances are investigated, causes found and remedial action is taken. vi. The effective control system must not be used as punitive device but should be seen as a system that helps managers to control their costs more effectively. vii.The effective control system should include financial and non financial information for managers to have a holistic view of the company. (b) Identify possible problems which may be encountered with the introduction of a cost control system into an organization. Answer Problems include: Difficulties in setting standards for non repetitive work. Non acceptance by budgetees if they view the system as punitive device to judge their performance Insolating variances where interdependent exits. Results might be wrongly interpreted. Standard might be out of date, unsuitable to the current condition.

i. ii. iii. iv. v.

Q2. There is no universally best management accounting control system which can be applied to all organizations. Discuss.

Designing of effective MACS needs consideration on circumstances in which they will be used. There is no one best design of a management accounting control system (MACS) - it all depends on the situational (contingent) factors faced by the organization. According to the contingency theory basis No universally appropriate system applicable to all organizations Theory attempts to identify specific aspects of a system associated with certain defined circumstances and demonstrate an appropriate matching. There is no one best design for a MACS It all depends on situational factors The factors are contingent variables Each organization is unique Range of situation is enormous Categorized to simplify understanding Q3. Discuss the behavioural arguments for and against involving those members of management who are responsible for the implementation of the budget in the annual budget setting process. (10 marks) Answer Budgets may be imposed upon managers who are responsible for their implementation. Alternatively managers may participate in determining the budget for which they are responsible. For a discussion of the advantages and disadvantages of allowing managers to participate in the budget process see Participation in the budget and target setting process in Chapter 16. In particular, the answer should stress the following advantages which have been claimed to have resulted from a participative budgeting process: (i) Participation increases the aspiration levels and motivation of the budgetees and increases the probability that the budget will be accepted as a legitimate target for which to aim. (ii) Participation may lead to an increased level of efficiency. (iii) Participation improves communication between the budgetees and their superiors. The disadvantages of participative budgeting include: (i) It may lead to creation of budget slack. Where managers are able to influence their budget standard, there is a possibility that they will bias the information in order to gain the greatest possible benefit. This will apply particularly where the reward system places great stress on achieving the budget. 2

(ii) The personality traits of the budgetees may limit the benefits of participation. Individuals with certain personality traits may perform better when budgets are imposed by a higher authority. (iii) Participation may encourage managers to adopt a departmental self-centred approach and concentrate solely on maximizing the benefits of their own departments at the expense of the benefits of the organization as a whole. Some of the disadvantages which result from imposed budgets include: (i) Non-acceptance of the budget as a target may result in the budgetees not attempting to achieve the target set. (ii) The budget is likely to be viewed as a punitive device which management uses in a recriminatory manner to evaluate subordinates. There is a danger that this might create hostility towards the budget system and a failure to use the system as a planning and control device. (iii) Pressure to achieve an imposed budget might result in the falsification of data or under performance in order to influence the setting of future budget targets so that they are set at easily attainable levels. Q4. Output or results controls involve collecting and reporting information about the outcomes of work effort. Senior managers do not have to be knowledgeable about the means required to achieve the desired results or be involved in directly observing the actions of subordinates. They merely rely on output reports to ascertain whether or not eh desired outcomes have been achieved. Results measures also include non-accounting measures. The stages involved in output controls are: (i) establishing results measures that minimize undesirable behaviour; - desirable behaviour should improve the performance measures and undesirable behaviour should have a detrimental effect. - a performance measure that is not a good indicator of what is desirable might actually encourage employees to take actions that are detrimental to the company. - what you measure is what you get establishing performance targets; - the existence of a clearly defined quantitative target is likely to motivate higher performance than vague statements.

(ii)

- not advisable for do your best expectations - difficult to interpret results without predetermined standards. (iii) measuring performance - ability to measure some outputs effectively constrains the use of results measures. - outputs in non-profit organizations are difficult to measure - measurements should be sufficiently accurate for the purposes required - objectivity can be achieved if performance are being measured by independent people. providing rewards or punishments. - link to the success or failures in achieving the results measures - rewards include salary increase, bonuses, promotions and recognitions - punishments include demotions, faiklure to obtain the rewards and possibly the loss of ones job.

(iv)