Management accounting and control
Lecture 1
Roles of managerial reporting systems and how they relate to the human brain:
1. Decision-facilitating role of MRS - remembering
2. Decision-influencing role of MRS - instructing
3. Coordination-facilitating role of MRS - coordinating
For the controllers that design, maintain and improve the managerial reporting system. MRS
facilitates the implementation of the current strategy they use a diagnostic use of MRS and the
controller is as an “administrator”
For the controllers that have a more advisory role for operational and strategic decisions MRS
allows to develop a better understanding of the strategic uncertainties that could instigate a
change in the current strategy. They use an interactive use of MRS and the controller is as a
“business partner”
Organizations operate in the ‘real world’ and need to survive in this world by taking good
decisions → Diagnostic use of MRS. Controllers need to make sure that the reflection of ‘the
real world’ the firm is operating in → controllers need to know the business!→
The management reporting system is the only way through which organizations can observe ‘the
real world’ they are operating in. → Interactive use of MRS. Controllers help managers in taking
decisions in order to navigate successfully through ‘the real world’ the firm is operating in. →
controllers need to know the business!
Management reporting system
- Decision-facilitating, decisions-influencing, coordination-facilitating.
- Not visible to outsiders.
- Willingness to invest in properly functioning MRS is rather low.
- Weak MRS limit value creation.
- Other functions in the firm do not function properly without MRS.
- Improving MRS is difficult and delicate.
,What is the problem? Macro-level
A MCS embodies the elements of an organization that, taken together, support people in the
achievement of the organization’s objectives. An effective control system reduces the probability
of a risk happening, the impact when a risk occurs, or both.
What is the problem? Micro level
Problems when the business grows, employees are hired and paid a fixed wage could be:
1. Lack of effort; there is a gap between the effort of the employee and entrepreneur
2. Lack of direction; employees don’t know the strategy or control objectives
3. Lack of ability; employees don’t have the right ability to implement the strategy
Macro level - How should we design the management control system in general and the
management reporting system in particular to reduce the impact of internal and external risks on
the strategy implementation?
Micro level - How should we design the management control system in general and the
management reporting system in particular so that employees (1) provide enough effort, (2)
know what is expected from them and (3) have the right ability.
Analytical - How should we design and use performance measures that carry information about
the ability and effort of managers and employees and provide information about the direction in
which the firm wants to go.
A managerial reporting system provides information about the signals x that carry information
about the ability and effort of managers and employees and the signals also provide information
,about the direction in which the firm wants to go. In general, a managerial reporting system
provides information about anything that happens inside the firm. Signals x are the so-called
performance measures.
Lecture 2
The 3-legged stool
Reporting system. How is information generated, sorted, reported and used?
→ Organizational design. Who decides what?
→ Soft controls. What are the culture, social norms, and leadership?
→ Performance evaluation. How is performance evaluated and rewarded
Will be a multiple choice exam question
Performance evaluation: Revenues become a very important component of the equation for
performance evaluation.
Reporting system: vertical/horizontal reporting lines, operation questions, is reporting truthful?
Soft controls: Do the changes fit with the current organizational culture or the culture in the
country?
Organizational design: centralized/decentralized.
A management control system consists of different components. When you change one
component you need to also check the other components.
The three-legged stool is a metaphor for the complementarity (or fit) between the different
components of a management control system. There has to be complementarity for it to work,
there is no ‘one-size fits all’.
Lecture 3
Designing your organization
When answering a question on the exam try to look at the big picture first and use one of the
frameworks to answer the question.
Designing a 3-legged stool for project management (how to improve this?) example
1. Make an analysis of the current control environment for project management by means of
the 3-legged stool.
2. Analyze which elements of the stool can best be changed at reasonable cost
- Stricter enforcement of policies and procedures regarding setting up projects
(Organizational design)
- Develop an information system about projects (Reporting system)
- Newly hired employees should better fit into the fast-moving, more bureaucratic
and sometimes chaotic organization/industry. (Soft controls)
3. Develop a roadmap (with milestones and assigned responsibilities) to implement the
changes (and follow up on them).
4. Involve people throughout the project.
, Organizational design
Decision 1: the structure
1. Organizing by market: by customer, geography, and product
2. Organizing by function:
3. Organizing by matrix structure: along the dimensions of businesses, markets, and
functions (most organizations are structured in this way.)
Decision 2: allocating decision rights
Who decides what and who is accountable for what
Within a chosen organizational structure, decision rights are allocated leading to a level of
centralization/decentralization.
Who allocated decision rights in a business?
Humans - The allocation of decision rights (and organizational design in general) is not the
outcome of a mechanical process but of a human decision-making process, this does not always
lead to the most optimal decision.
The delegation game
The principal holds the decision right to implement a project whose outcomes determine the
payoffs of the principal and the agent. The principal needs to decide (1) in case of no delegation
which project he will choose and the own effort level and (2) in case of delegation the minimum
effort requirement he expects from the agent if he would delegate. The delegation only takes
place when the minimum effort requirement is at least equal to the effort the agent wants to do.
If you don’t delegate you have to put effort in but can choose the alternative you want, if you
delegate you don’t have to put effort but the agent might not do exactly what you want.
Comparing a delegation lottery with a control lottery, people want to pay more for a delegation
lottery than for a control lottery.
Delegation lottery = control lottery + intrinsic value of decision rights..
The large majority of the principals have a higher CE for the delegation lotteries than for the
control lotteries. The intrinsic value of decision rights increases with the monetary amounts that
are at stake. People could accept a lower-paid job if it offers more autonomy.
An activist hedge fund means that the investors actively engage with the management of the
firm. It usually is because they own a large amount of assets.
In a matrix structure, the revenues and cost of goods sold are typically decided by the business
unit. The sales costs by the sales and market organization and the general/ad costs by the general
function. The latter 2 (indirect costs) need to be allocated an overhead allocation rate.
Your decision right allocation influences how you set up your management reporting system.
The better the reporting system the better the overhead costs can be allocated.
Lecture 1
Roles of managerial reporting systems and how they relate to the human brain:
1. Decision-facilitating role of MRS - remembering
2. Decision-influencing role of MRS - instructing
3. Coordination-facilitating role of MRS - coordinating
For the controllers that design, maintain and improve the managerial reporting system. MRS
facilitates the implementation of the current strategy they use a diagnostic use of MRS and the
controller is as an “administrator”
For the controllers that have a more advisory role for operational and strategic decisions MRS
allows to develop a better understanding of the strategic uncertainties that could instigate a
change in the current strategy. They use an interactive use of MRS and the controller is as a
“business partner”
Organizations operate in the ‘real world’ and need to survive in this world by taking good
decisions → Diagnostic use of MRS. Controllers need to make sure that the reflection of ‘the
real world’ the firm is operating in → controllers need to know the business!→
The management reporting system is the only way through which organizations can observe ‘the
real world’ they are operating in. → Interactive use of MRS. Controllers help managers in taking
decisions in order to navigate successfully through ‘the real world’ the firm is operating in. →
controllers need to know the business!
Management reporting system
- Decision-facilitating, decisions-influencing, coordination-facilitating.
- Not visible to outsiders.
- Willingness to invest in properly functioning MRS is rather low.
- Weak MRS limit value creation.
- Other functions in the firm do not function properly without MRS.
- Improving MRS is difficult and delicate.
,What is the problem? Macro-level
A MCS embodies the elements of an organization that, taken together, support people in the
achievement of the organization’s objectives. An effective control system reduces the probability
of a risk happening, the impact when a risk occurs, or both.
What is the problem? Micro level
Problems when the business grows, employees are hired and paid a fixed wage could be:
1. Lack of effort; there is a gap between the effort of the employee and entrepreneur
2. Lack of direction; employees don’t know the strategy or control objectives
3. Lack of ability; employees don’t have the right ability to implement the strategy
Macro level - How should we design the management control system in general and the
management reporting system in particular to reduce the impact of internal and external risks on
the strategy implementation?
Micro level - How should we design the management control system in general and the
management reporting system in particular so that employees (1) provide enough effort, (2)
know what is expected from them and (3) have the right ability.
Analytical - How should we design and use performance measures that carry information about
the ability and effort of managers and employees and provide information about the direction in
which the firm wants to go.
A managerial reporting system provides information about the signals x that carry information
about the ability and effort of managers and employees and the signals also provide information
,about the direction in which the firm wants to go. In general, a managerial reporting system
provides information about anything that happens inside the firm. Signals x are the so-called
performance measures.
Lecture 2
The 3-legged stool
Reporting system. How is information generated, sorted, reported and used?
→ Organizational design. Who decides what?
→ Soft controls. What are the culture, social norms, and leadership?
→ Performance evaluation. How is performance evaluated and rewarded
Will be a multiple choice exam question
Performance evaluation: Revenues become a very important component of the equation for
performance evaluation.
Reporting system: vertical/horizontal reporting lines, operation questions, is reporting truthful?
Soft controls: Do the changes fit with the current organizational culture or the culture in the
country?
Organizational design: centralized/decentralized.
A management control system consists of different components. When you change one
component you need to also check the other components.
The three-legged stool is a metaphor for the complementarity (or fit) between the different
components of a management control system. There has to be complementarity for it to work,
there is no ‘one-size fits all’.
Lecture 3
Designing your organization
When answering a question on the exam try to look at the big picture first and use one of the
frameworks to answer the question.
Designing a 3-legged stool for project management (how to improve this?) example
1. Make an analysis of the current control environment for project management by means of
the 3-legged stool.
2. Analyze which elements of the stool can best be changed at reasonable cost
- Stricter enforcement of policies and procedures regarding setting up projects
(Organizational design)
- Develop an information system about projects (Reporting system)
- Newly hired employees should better fit into the fast-moving, more bureaucratic
and sometimes chaotic organization/industry. (Soft controls)
3. Develop a roadmap (with milestones and assigned responsibilities) to implement the
changes (and follow up on them).
4. Involve people throughout the project.
, Organizational design
Decision 1: the structure
1. Organizing by market: by customer, geography, and product
2. Organizing by function:
3. Organizing by matrix structure: along the dimensions of businesses, markets, and
functions (most organizations are structured in this way.)
Decision 2: allocating decision rights
Who decides what and who is accountable for what
Within a chosen organizational structure, decision rights are allocated leading to a level of
centralization/decentralization.
Who allocated decision rights in a business?
Humans - The allocation of decision rights (and organizational design in general) is not the
outcome of a mechanical process but of a human decision-making process, this does not always
lead to the most optimal decision.
The delegation game
The principal holds the decision right to implement a project whose outcomes determine the
payoffs of the principal and the agent. The principal needs to decide (1) in case of no delegation
which project he will choose and the own effort level and (2) in case of delegation the minimum
effort requirement he expects from the agent if he would delegate. The delegation only takes
place when the minimum effort requirement is at least equal to the effort the agent wants to do.
If you don’t delegate you have to put effort in but can choose the alternative you want, if you
delegate you don’t have to put effort but the agent might not do exactly what you want.
Comparing a delegation lottery with a control lottery, people want to pay more for a delegation
lottery than for a control lottery.
Delegation lottery = control lottery + intrinsic value of decision rights..
The large majority of the principals have a higher CE for the delegation lotteries than for the
control lotteries. The intrinsic value of decision rights increases with the monetary amounts that
are at stake. People could accept a lower-paid job if it offers more autonomy.
An activist hedge fund means that the investors actively engage with the management of the
firm. It usually is because they own a large amount of assets.
In a matrix structure, the revenues and cost of goods sold are typically decided by the business
unit. The sales costs by the sales and market organization and the general/ad costs by the general
function. The latter 2 (indirect costs) need to be allocated an overhead allocation rate.
Your decision right allocation influences how you set up your management reporting system.
The better the reporting system the better the overhead costs can be allocated.
