FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ABMC 3084 Information for Control and Decision making

Assignment Submission Form for Semester 2, 2014

Programme Diploma in Business Studies (Accounting)

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Lecturer / Tutor Mr Sam Chew / Mr Pius Chong
No. Student Name ID Number Signature
Submission Date Week 8
1. Liew Chie Cheng 13WBD00706

2. Liang Wen Jiar 13WBD01772

3. Shervin Teoh You Si 13WBD02210

4. Chuang Xin Rong 13WBD01255

5. Tang Kang Wan 13WBD01702

6. Wong Peak Meng 13WBD00278

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Appendix A :

Faculty of Accountancy, Finance and Business

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ASSIGNMENT QUESTION

Question: 1
Management accounting is the application of professional knowledge and skill in the
preparation and presentation of information to all levels of management in the
organization structure. The source of such information is the financial and cost accounts.
The information is intended to assist management in its policy and decision-making,
planning and control activities.
You are required to explain to your senior management of how the provision of
management accounting information can create SUCCESS in an organization.
(Total: 25 marks)

Question: 2
In a research study of ‘The behavioural aspect of Budgeting’, published in the
November 2010 Asian Financial Journal, it was reported inter alia the following
comment by a financial controller of an European automobile company with regard to the
practice of participation in the setting of budgets in his company:
‘We bring in the managers of budget centres, we tell them that we want their frank
opinion, but most of them just sit there and nod their heads. We know they’re not
coming out with exactly how they feel. I guess budgets scare them.’
You are required to suggest:
(a) Reasons why managers may be reluctant to participate fully in setting budgets.
(b) The ways on how to encourage the managers to participate in setting budgets, and
(c) Unwanted side effects which may arise from the imposition of budgets by senior
(Total: 25 marks)

Question 1
According to Business Dictionary (2014), the definition of Management Accounting is
a process which included identifying, measuring, analyzing, interpreting and
communicating information to achieve a common goal of an organization. This process
actually preparing management reports and accounts that provide accurate and
timely financial and statistical information required by managers to make short-
term decisions. Besides, it also known as ‘cost accounting’.
Nowadays, management accounting information drive success in an organization through
financial expertise, involving special skills or knowledge in financing and business
acumen, keenness and quickness in understanding and deal with business situation that
lead to good result. In normal way, an organization use more management information
compare to financial information. No doubt, MA information using future-quantitative
and qualitative-dynamic to estimate performance. The mixture of both methods is highly
dependent on access to relevant expertise, and on the nature of the problems being
studied. They represent different approaches to handling information, and contribute
powerful insights in own ways. FA information used historical event to solve problems,
which get quantitative data from past examined artifacts and pre-existing data (archival
records).

As shown in Journal of Accountancy (2013), purposes to guide business in decision

making are to outline the fundamental values and qualities that represent management
accounting. Besides, they need to improve understanding of the management accounting
profession to make the right decision to bring the best result for organization. Lastly, it is
to enable management accounting potential to be realized.

To get into effective business performance, management process enables managers to

evaluate and measure individual performance and optimize productivity by using these
ways, which are aligning individual employee's day-to-day actions with strategic business
objectives (Success Factor, 2014). Providing visibility and clarifying accountability
related to performance expectations also one of the way to drive efficiency of business.
Management has to establish focus for skill development and learning activity choices to
improve employee’s skill.

The combination of MA and FA information has constituted to create a success

organization. By managing business opportunity, an organization actually increase cost
efficiency with offering the same or lower quality or lower price. This increase profits for
the same price and positioning management as a low-cost provider. Besides, maximize
the production to earn benefits on it. To solve business problem by decision making, an
organization should measure performance before start doing business such as measuring
the riskiness of doing particular project.

Both Management Accounting and Financial accounting are important for solving
business problem faced by organisation. Any decision must be evaluated under cost-
benefit criteria which must be relevant; accurate; timely or also known as relevant cost,
only relevant information should be consider. They are differential cost, incremental cost,
opportunity cost [ CITATION Ric14 \l 5129 ]. The top level management would need both
MA and FA to have a better understanding on what is going on in the business as
Financial Accountants will provide a series of provisions of accounting information
(basis) for Management Accountants to make “informed” business decision so that the
organisation is well-prepared for any changes to their management and control functions [
CITATION Man14 \l 5129 ]. For example, managers will used Financial Statement to
evaluate whether the organisation have been purchasing inventories at a lower or higher
price. If is higher, they would need reconsider on whether they should search for another
supplier.

So as the organisation is busy figuring out a well-planned strategy, at the same time they
would need to foresee future events and transactions in order to value assets and
liabilities under certain circumstances. Financial accounting uses historical information,
not because investors are interested in the past, but rather because it is easier for
accountants and auditors to agree on what happened in the past than to agree on
management’s predictions about the future [ CITATION Dif13 \l 5129 ] . The past can be
“audited.” Investors then use this information about the past to make their own
predictions about the company’s future. Meanwhile, managers need detailed information
about their part of the organization, so management accounting provides detailed
information tailored for specific users [ CITATION Dif13 \l 5129 ] . Also, managers must
make decisions, sometimes on a daily basis, that affect the future of the business, and
they need the best predictions of the future that are available as input in those decisions,
no matter how subjective those estimates are.
The business environment has drastically changed over the recent decades and will
continue on due to globalization. So how Management Accounting is adapting to
constant changes? Bear in mind that, our “constant variable” is change. Organizations are
keeps on experiencing changes from their strategy, structure, processes, products,
employees, customers etc [ CITATION Dla11 \l 5129 ]. These changes are in response to
environmental changes like competitions, regulations, clients, technology and
uncertainty. All change are more likely to be related to each other therefore
implementation of ABC (Activity-Based Costing) will come in handy to adapt to all these
“cost driver” that are both volume and non-volume related [ CITATION Ave14 \l 5129 ] .
ABC gives more meaningful product cost when there is a diverse product range as it will
provide a more accurate product costing since overhead absorbed relates to activities
more closely[ CITATION Ave14 \l 5129 ].

Innovations in Management Accounting are considered as ideas, practices or objects that

are recognized as new by the organization adopting innovations. Basically, innovation
involve changes, therefore, MA is said to be the practice of measuring and reporting
financial and non-financial information needed by managers for decision making to reach
the organization vision and mission[ CITATION Cha12 \l 5129 ] . Although innovation can be
an administrative or technical initiative, but innovations involve new elements that may
necessarily an adoption of another innovations causing it to gain less benefits directly but
will beneficial in the long run[ CITATION Cha12 \l 5129 ].

Bear in mind that management accounting information provides a good strategy planning
for company future business investment to achieve the vision and mission being set. By
using the reports and accounts that provide accurate and timely financial and statistical
information , it required by managers to make decisions, in the same time to plan
business strategy .(Business Dictionary , 2014)Good strategy are planned based on
information from management accounting information to predict happenings in future .
For instance, global competition, ultramodern technology, and enhanced communication
systems. Strategies can help company to overcome difficulties and make an enterprise
goes smoothly today. A successful company today could not ensure that it will be satisfy
in the coming years. Strategies are changing based on monthly or yearly depend on the
conditions or issues of the organization is facing. For example, the team has to make
decisions on doing short term or long term financial aid. A decisive role of managerial
accounting is to continually assess how an organization stacks up against the
competition , with an eye toward continuously improving .(Ronald W.Hilton ,
2010)Different company using different types of strategies , for examples new companies
may face different challenges than companies that are more established , that’s why
different strategies they implement on different situations.

It also serves as a platform to “produce” agreements among all departments. Every

organization had their own target. However , as a worker, they are having their own goal
as well.The goals of individuals are different, and their goals are often not likely with the
company’s .Goal congruence is to motivate managers and other employees to put in their
efforts toward accomplishing the organization’s goals. Goal congruence means same
goals are shared by top managers and their subordinates (allbusiness, 1999). Besides, on
this platform, it allows managers from different departments gather together and come
out with a good strategy for the organization. By gathering managers from different
department could help each other to understand how other departments are operating.
This system prevents individuals acting against the interests of the organization. The
essential task of management is to arrange organizational conditions and methods of
operations so that people can achieve their own goals best by directing their own efforts
towards organizational objectives. (George Henderson, 1996, p31) Another way in goal
congruence which employees can be motivated toward the organization’s goals is
through empowerment. Employees can be encouraged to achieve the company’s goals is
through empowerment. Empowerment is a key element of change acceptance and change
management. Employee empowerment is the concept of encouraging and authorizing
workers to take the initiative to improve operations, reduce costs, and improve product
quality and customer service. (Ronald W.Hilton , 2010) In simple words, workers are
given power or rights to make influential decisions.
In conclusion, Management accounting provides information to people within an
organization while financial accounting is mainly for those outside it, such as
shareholders management accounting and financial accounting are both major and play
important role in different aspect in a company .When both of these accounting merged
and worked out together, they will create a best performance for the organizations.

Question 2(a) Reasons why managers may be reluctant to participate fully in setting
budgets
Budget frequently reflects the actual performance of manager and its departmental
efficiency. Therefore budget has imposed major effect on manager competencies and
their career significantly. In such situation, budget may carry out dysfunctional behavior
of manager, thus manager treated budget setting as tools to punishment for their non-
performance result (Hansen et al., 2009, p. 275). Sometimes budgeting tends to create
authoritarian leadership who has authoritarian expectation over manager (Management
Control System, p. 134). An authoritarian leader generally apply their own thought to
make decision or judgment, they rarely agree others people advises (EBA, 2014). A
dictator could causes the managers in contribution as a budgeting team lost the chance to
grow. Managers are feeling distrusted and undervalue, consequently they will be refused
to participate in budgeting as authoritarian leadership builds resentment in long term
(EBA, 2014).

Besides, manager may think that the budgeting process is just a fundamental target set
for the senior manager before their formal acceptance (Management Control System, p.
134). Since the engagement of lower-level management is merely superficiality, the
effort that subordinate manager had put it in will not be fully acknowledge (Hansen et al.,
2009, p. 277). It also knows as pseudo participation. In addition, manager may also want
to safeguard their personal interest, goal or destiny which manifests the desire for
participation reduced (Management Control System, p. 134). When comparing budget
with actual result, managers face with the threat of adverse variance which usually review
their respective departmental weaknesses and inefficiency to top management (Hans
Jonni, 2012). It allows top management to pin point each of their department failure to
achieve the target set.

Others than that, managers might be insufficiency of understanding towards budgeting

procedure because they think that it’s complicated, or the managers themselves consider
budgets are used in a recriminatory manner by their superior (Management Control
System, p. 134). Budgets are designed to reflect manager reporting behavior when the
senior managers are the one who actually have final authority over budget approval, this
typically leads to conflicts of interest between subordinate and superior management in
financial matter. Budget deems to restraint the money that a manager able to control and
restrict the flexibility of their respective departmental activity.
Question 2(b) The ways on how to encourage the managers in participate in setting
budgets.

First of all, budget setting provides a goals and performance yardstick for an organization
(Jo Avis, p341). The goal that set is set by manager himself and it can say to be a
motivation for manager achieves the goal because it may be a challenging and
achievable goal for the manager (sihna, p201). When a target is set, it will give the
manager a clear direction in how to lead the stuff for not only achieve the organization
goal but may also success in achieving individual goal. Budget setting is a positive
inducement for managers to take corrective action when the adverse variance occur (Jo
Avis, p318).

Second, a budget setting can be a valuation tools for the performance of the management
and the employees (Jo Avis, p341). One of the purposes of setting budget is to improve
performance, reward should give to managers if the budget set is achieved or the
performance is improved. Reward given to managers can be in monetary term, certificate
or may depend on manager’s reasonable requirement (Jo Avis, p318). This reward will
motivate the manager be more participating in budget setting and also work harder to
achieve target set.

Furthermore, participate in budget setting able manager to make a useful decision for the
company. In time when budget preparation process, every centre manager co-ordinate
together to prepare the budget setting (Sihna, p194). The inconsistency between each
department will show up when they all convert into the overall plan (Sihna, p194). Not
only that, the most alternative ways to solve the inconsistency between each department
can be done when the managers communicate with each other and presenting their ideas
in solving the inconsistency.
Last but not least, managers may feel a sense of belonging when participating in setting
budget. Budget setting able them to not only make planning for the organization but also
involved they in giving their opinion, controlling the budget set and improving from the
past event. They might treat themselves as a part of the company, and when they do so,
they will do all their best to improve more and give their best to the organization.

Question 2(c) Unwanted side effects which may arise from the imposition of budgets
by senior management.

As shown in FIA FMA Management Accounting (2012), imposition of budget is

allowance which is set without permitting the ultimate budget holder to have the
opportunity to participate in the budgeting process. Due to the delegation, senior
managements are responsible for the imposition budget. The involvement may result in
more realistic targets, but the unwanted side effects that might arise from the imposition
of budgets by senior management.

First of all, the budget is described as a punitive device which senior management uses
in a recriminatory manner to evaluate subordinates (Henderson, 2013).These will create a
danger in the budget system and a failure to use the system as a planning and control
device. In short, it reduces the efficiency of whole organization.

Secondly, the budgets might consider the method of performance evaluation to be

unjust because it encourages dysfunctional behavior (Michael Jenson, 2001). The experts
have noted tendency of senior management to pay their budgets either in anticipation of
cuts by superiors or to make the subsequent variances more favourable. Although the
decisions are contrary to the wider purpose of the company, there are a lot of examples of
managers making decisions in response to performance indices nowadays.
The third, reduced efficiency by senior management so as to protect themselves
against what they consider to be increasingly stringent targets (Michael Jenson,
2001). Senior management may complain that they are too busy to spend time on
budgeting. So, they will build ‘slack’ into their expenditure estimates. On the other hand,
they may argue that formalizing a budget plan on paper is too restricting and that
managers should be allowed flexibility in the decision they take. Therefore, they may
base future plans on past results rather than using the opportunity for formalized planning
to look at alternatives or new ideas.

Besides that, it may lead to creation of budget slack (Collin, Drury, 2012). Where senior
managements 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.
The budget system will be undermined (Collin Drury, 2012). The problem is the way
management used the system rather than inadequacies of the budget system itself. For
instance, senior management might resent control information on imposition of budget.
They may treat it as part of system of trying to find fault with their work. This resentment
is likely to be particularly strong when budgets or standards are imposed on them without
permission to participate in budget setting process.

Furthermore, an increase in suspicion and mistrust which will be undermined the

whole budgeting process (Collin Drury, 2012).If the starting point of motivating unit or
department heads to falsify forecasts and some more hide or manipulate critical
information. This will lead to undermine the salutary effects of budgeting. In brief, an
uncoordinated, chaotic interactions cause by the decision making on the basis of distorted
information that they receive from other departments. Since senior management are well
aware that everyone is attempting to game the system for personal reasons which will
create an organization full with cynicism, suspicion, and mistrust.

According to CIMA C01 Fundamentals of Management Accounting (2012),

organizational environment may become more competitive and conflict rather than
one of cooperation and conciliation. When the imposition of budget targets becomes
routine, it can undermine the integrity of an entire organization. Once the management
cheat and conceal information to enrich themselves, they will extend their mala fide
behavior to all parts of the company's management system and even to its relationships
with other parties, such as shareholders, bankers and customers. The real cases happened
in the corporate world involving companies such as Informix and Lernout & Hauspie.

The most common is the senior management might try to achieve budget at all costs
even if this results in actions that are not in the best interests of the organization
(Collin Drury, 2012). They might put in only just enough effort to achieve budget targets
without trying to beat targets. Therefore, the imposition of budget will encourage rigidity
but not flexibility. As a result, there might be minimal cooperation and communication
between senior management. 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.

Non-acceptance budgets act as a target may result in the budgetees not attempting to
achieve the target set (Henderson, 2013). This may cause by the reasons of conflict
among senior management themselves. Finally, the acceptance of company goals and
objectives could be limited.

Other than that, encouraging budgetees to falsify and manipulate information

presented to management (Henderson, 2013).This is because the pressure to achieve an
imposed budget might result in the falsification of data or under performance. A huge bad
result will influence the setting of future budget targets. So, they are set at easily
attainable levels.

As a conclusion, even though imposed budget effective during periods of economic

hardship, in small business or newly-form organisations, senior management must also
consider the disadvantages of imposition budget by themselves.
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Appendix B: Marking Scheme for the Group Written Assignment