MANAGEMENT DECISIONS AND CONTROL

LECTURE 2: INTRODUCTION TO PERFORMANCE MEASUREMENT

What is a measure? A measure transforms something into reality, into a quantified, standardized unit of information.
(aka indicator, metric, scale, index) must have units

Performance measures: generally focus on the outcome of activity, process or behaviour

Why measure Formulate plans and implement strategy
performance? Motivate managers and employees (evaluation + rewards)
Support managerial decision making
How do orgs. Management accounting information has changed in response to organizational needs.
Measure
performance? Otleys performance management framework
Objectives What are the key objectives that are central to the organisations overall future success, and
how does it go about evaluating its achievement for each of these objectives?
Strategies, activities + What strategies and plans has the organization adopted and what are the processes and
measures activities that it has decided will be required for it to successfully implement these? How does
it assess and measure the performance of these activities?
Targets What level of performance does the organization need to achieve in each of the areas defined
in the above 2 questions and how does it go about setting appropriate performance targets
for them?
Rewards/penalties What rewards will managers (and other employees) gain by achieving these performance
targets (or conversely, what penalties will they suffer by failing to achieve them)?
Information flow What are the info flows (feedback and feed-forward loops) that are necessary to enable the
organization to learn from its experience and to adapt to its current behavior in the light of
that experience?
What is It depends on the level: individual, division, whole organization
performance in Performance of activity (process) or outcome
organisations? Organisational performance: achievement of organizational objectives (e.g. profit and returns to shareholders,
reputation and customer satisfaction, quality, safety, employee satisfaction, innovation etc).
Strategy: how we achieve organizational objectives the long term direction to achieve an organisations mission and
objectives. 3 levels
Corporate Strategy Competitive Strategy Operational Strategy
Choices about the types of business. The way a business competes within Tactical and operational decisions
How best to structure and finance the its chosen market. about how the organization will
organization i.e. single business or Distinct business strategies for each deliver competitive strategy i.e. how
multi-business units. business unit e.g. cost leadership/ does the business function on a daily
 differentiation/ Niche basis? What are the core activities or
processes? How do we structure our
processes and activities?
Designing good Design Criteria
measures Validity The extent to which a measure captures what is intended
Reliability The extent of accuracy, objectivity and precision of the measurement
Clarity The extent to which the measure and output is easy to understand, without vagueness in interpretation
Cost efficiency The cost of collecting and measuring performance information does not outweigh the information
benefits.
Timeliness The extent to which information arrives in time for analysis and action to be taken
Access The extent to which the measurer has the right to access to the required performance information
Controllability The extent to which you can improve or reduce the value of the measured output through action
Cannot be Gaming when a measure alters the behavioural patterns of employees
gamed
Cannot be Manipulation is when managers or employees influence a measure so that it no longer reflects what was
manipulated originally intended.
Performance A set of processes that includes the collection, analysis and reporting of actual performance, usually compared to a
measurement target.
systems Effective Performance measurement system
Link to strategy and goals of the organization goal congruence
Recognize controllability measures should relate to activities and processes under their control
Embrace participation and empowerment
Be simple
Emphasis on the positive motivate improvements
How do performance measurement systems work? pre-conditions of cybernetic control
1. Measures enable the quantification of an underlying phenomenon activity or system
2. Standards of performance or targets to be met
3. There is a feedback process
4. There is a comparison of the outcome to the standards
5. There is the ability to modify the phenomenon, activity or system
LECTURE 3: FINANCIAL PERFORMANCE MEASUREMENT
What are financial Net profit, Gross profit, contribution margin
performance Revenue growth (%)
measures? Price efficiency/usage budget variances etc
Return on Investments %, Return on Equity, Return on Assets
Why do Provide aggregate summary measures of results of economic activity
organisations Align to organisations financial objectives
measure financial Well developed history on how to design and use them (standardized)
performance? Financial information is used by external stakeholders: Shareholders, government, creditors
Decentralisation: spreading out authority to make decisions. Decision making is dispersed throughout the organization.
Advantages Disadvantages
Conserve top-managers time to strategic issues Narrow focus on own units goals
More timely responses Duplication of tasks
Local specialized information Coordination between units
Develop expertise Goal congruence
Training
Motivation
To measure the economic results of units within decentralized organization:
Standardised measurement system
Aligns to financial objectives
Aggregates/disaggregates
Gives autonomy to units for activities
Responsibility The practice of holding managers responsible for the activities and performance of their area of the business.
Accounting The basis of a responsibility accounting system is the designation of each sub-unit of the organization as a particular
responsibility centre. TEXTBOOK
Responsibility centre: a unit in an organization where the manager is held accountable for the units activities and
performance.
Cost Costs e.g. cost of personnel
Revenue Revenues e.g. control authority over sales
Profit Costs, revenues e.g. generates revenue/costs
Investment Cost, revenues, and significant control over investment
Controllability The extent to which you can improve or reduce the value of the measured output through action.
Applied to responsibility centres the type of centre should reflect the activities and decisions the manager presides over
Applied to financial measures: the manager should only be assigned responsibility for the revenues, costs or investments
that they can control
Limitations of Only measures one aspect of performance i.e. does not capture quality, speed, sustainability
financial Measures summary of historical outcomes not processes or drivers of performance
performance Provides limited guidance for future actions
measures Does not measure future value creators
Little relation to long term strategy
Can only approximate an organisations economic cost function
Incomplete reflection of managerial performance
Reflect results of non-controllable factors
Not intuitive for managers
Not meaningful to employees day to day activities
May encourage actions which decrease shareholder and customer value
Provide misleading information about the health of the company

LECTURE 4: NON-FINANCIAL PERFORMANCE MEASUREMENT
What is non- Any quantitative measure of either an individual or an entitys performance that is not expressed in monetary units.
financial PM?
Why measure it? Value of non-financial information:
Capture non-financial aspects of strategy
Captures drivers of future financial performance [TEXTBOOK CHAPTER 14]
E.g. reputation and customer satisfaction, quality products, safety, employee satisfaction, environmental management,
stakeholder management, innovation, LT growth
Value of non-financial measures:
More timely
Easier to query and develop actions
More understandable and easier to relate to, particularly at the operational level
May emphasize strategy
Can be the drivers of future financial performance
High performance in these areas will flow through to improved financial performance
More actionable
Easier to investigate the source of low performance
Lead Measures Lag Measures
Measure critical Inputs + processes that drive output Measures outputs
Provide information that is actionable and Show achievement of objectives
manageable Shows whether operational changes have been
Early warning measures translated into improved outcomes
Improvements flow through to improvements in lag E.g. return on equity, customer satisfaction, market
indicators share, number of new customers, number of
E.g. cost per product, number of product returns, customers retained, number of good units completed,
number of product variations available, number of employee satisfaction survey
customer complaints, product defects, number of
product returns, product development time
Designing There are many types of non-financial measures it will be tailored to the organization
appropriate Common of non-financial measures capture:
measures for Customer performance
Operational process performance
Long term value driver performance
How can we Measure Definition Examples
measure customer Market share The proportion of an orgs sales to total industry sales Market share % of women 25-39
performance Customer The rate at which an org attracts and wins new New customer revenue/sales call
 acquisition customers
Customer The rate at which a business retains, or maintains Proportion of sales % of existing
retention ongoing relationships with customers customers
Customer The satisfaction of customers, in terms of specific criteria Noisy measure, lacks controllability
satisfaction
Customer The profit attributable to a customer or customer group Calculate low cost vs. high cost
profitability customers
How to measure What the organization must do internally to deliver strategy i.e. critical processes
productivity Innovation operations sales and marketing regulatory stakeholder processes
Productivity: the ratio of outputs produced per unit of input e.g. labour productivity = units produced/DL hrs
How to measure Timeliness: the time it takes to complete a process
timeliness E.g. time to develop new products and services time to market
How to measure Quality: degree product or service meets expectations
quality Product quality: defect rates, waste %, scrap %, rework % vs.
Service quality: information accuracy, order fulfilment rate, rework %, cost to customer
How to measure Sources of long term growth and improvement?
long term value Information capital technology and information systems
creators Physical capital machines, buildings, equipment
Social and organizational capital workplace culture, relationships with stakeholders
Human capital people, talent knowledge
How can we measure performance of drivers?
Acquisition and investment
Sufficiency for organizational needs quality, coverage
Level of development and improvement
Maintenance and retention
Limitations of non- Wide choice of non-financial measures available
financial Inclusion of non-financial measures can be ad hoc and undirected
performance Managers must necessarily make trade-offs
measures Some non-financial measures lack integrity
Some measures may not easily translate into financial outcomes
LECTURE 5: INTEGRATED PERFORMANCE MEASUREMENT
Understand the design considerations of integrated performance measurement systems:
Structured ,Systematic, Organized, Ordered
Measures vs. A collection of measures is NOT a system
systems System: a set of things working together as parts of a mechanism or an interconnecting network ==a complex whole
Measures: transforms something in reality into a quantified, standardized unit of information
Trade-off of performance measures:
Information about inputs is necessary but rarely sufficient for control
To ensure valuable inputs are transformed effectively and efficiently in quality outputs we need to measure the
transformation process or the outputs produced
Meaningful measures ability to observe actions and measure outputs accurately
Cause and effect do input and activities really lead to outputs?
Costsrelative cost of gathering information and risk of not gathering information
Scope for autonomy, creativity
Presence of other controls
Different types of Balanced Scorecard (BSC)
integrated PM A tool that translates an orgs mission, objectives and strategies into performance measures for each key strategic area of the
systems business
Used to implement strategy and to monitor and manage organizational performance
May form part of the organisations planning cycle
Du Pont Charts [TEXTBOOK CHAPTER 14]

Tableau de Bord
French for dashboard
Originated from efforts to stimulate fair competition through use of similar MAS
Monitors physical and financial indicators of performance (real-time)
Focus on short term operational control
Forward looking causal modelling
Performance pyramid
Emphasis on interconnections across different organizational hierarchical levels
Designing Designing a BSC:
integrated systems Can be used for different levels of the organization or whole organisation
Financial perspective: how do we look to our shareholders?
Central objective to increase shareholder value
Traditionally been measured by profitability, growth, shareholder value and cash flow.
Customer perspective: how do your customers see us?
How a firm creates value for the customer is at the core of its strategy.
Measured by customer satisfaction, market share, no. of complaints
Internal process perspective: what must we excel at?
Relates to the internal functioning of the business in its efforts to fill the needs of the customer.
Measured by quality, internal customer satisfaction, on time delivery, lead times, waste etc.
Learning and growth perspective: How can we continue to improve and create value?
Centres on establishing what skills, capabilities, technology and corporate climate are needed to support the overall strategy.
Measured by number of new products, employee skills and training, employee satisfaction and retention etc
 Selection of measures is driven by vision and strategy of organization clarifies and translates vision | communicates strategy
to other organizational units | aligns strategic initiatives
MEASURES PERFORMANCE OUTCOMES AND DRIVERSBalance of measures:
Across all performance perspectives
Leading and lagging measures
Processes and outcomes
Internal and external measures
Subjective and objective measures
Short term and long term measures
CAUSE AND EFFECT RELATIONSHIPS expected cause and effect relationships reflect coherent business model:
Logical relations
Empirical relations
Heuristic relations managers expectations
STAGES OF DESIGNING A BSC
1. Articulate the mission, overall goals or objectives and strategic priorities
2. Develop specific objectives for each perspective and formulate a strategy map
3. Choose performance measures for each perspective
4. Develop targets for each performance measure
5. Cascade the BSC down the organisation
6. Plan and undertake initiatives and activities to implement the chosen strategies to support the achievement of the
objectives
7. Generate reports to monitor and manage actual performance against targets for units and the organisation as a whole
8. Assign units and personal BSCs to specific managers to enhance accountability and improve performance

STRATEGY MAPS
Graphical representations of main objectives or measures within a BSC
Show causal linkages between measures and perspectives
Communicate the strategy to managers and employees (what and how)
They set out cause and effect relationships that form an action plan for implementing strategy and evaluating performance
Evaluating Effective performance measurement systems
integrated PM Link to strategy and goals of the organization > Recognise controllability
systems. Embrace participation and empowerment > Be simple
Emphasise the positive > Be timely
Include benchmarking > Include only a few PM
Link to rewards
LECTURE 6: PLANNING
Why plan ahead? Planning is what connects strategy to action
Planning is basically the process of deciding about the goals of an organization as well as the means to attain those goals.
Planning involves decision-making in advance: provides information, identifies information gaps, clarifies assumptions of
decisions
Planning helps to coordinate activity and manage interdependencies: aligns goals of different functional areas of an
organization; identifies and manages interdependencies in work activities of different group/individuals.
Planning directs effort and behavior: sets out the goals/expectations of different functional areas of the organization;
provides the standards/targets to be achieved; clarifies the behavior expected from employees
Using PMS for Planning happens before anything else does
planning Planning involves choosing goals and setting targets in relation to them
Budgeting: a budget is a detailed plan summarizing the financial consequences of an organisations operating activities for
a specific future time period.
What are the different types of budgets?
 OPERATING BUDGETS:
1. Specifies how operations will be carried out to meet the forecasted sales demand
Includes
2. Sales budget: estimated sales units and revenues from the organisations products:
3. Internal factors: past sales levels, new products panned, intended pricing policy and planned advertising and
promotion
4. External factors: general economic trend, specific trends, , politics and legal events, expected activities of competitors
and customers.
5. Costs budget:
6. Purchase budget: quantity and costs of goods it needs to purchase to satisfy expected sales revenue
7. Production budget: number of production units to be manufactured to meet sales and satisfy inventory requirements,
including budgeted costs for direct materials, direct labour and overheads.
8. Cost of service delivery budget: shows how the expected demand for services will be met
9. Expense budgets: details the costs of operations needed to support forecast sales demand
Just as manufacturer, retailers/wholesalers and service firms have different types operations resulting in different profit and
loss statements, they will have different types of operating budgets.

USING BUDGETS FOR PLANNING

Translate the operating plan into a set of expected FS
Coordinate activity across multiple interdependent business units
Ensure efficient resource allocation
Communicate expectations of behavior and performance
Set performance targets and standards
Forecasting and Estimate performance outcomes in the future
target setting Considerations what outcomes, what probabilities, what time period, what information is available
Internal Factors
Past sales levels and trends fro the company
New products planned by the company
The pricing policy of the company
Planned advertising and product promotion
External Factors
General economic trends
Trends which affect the industry
Other trends which affect sales
Political and legal events
Expected competitor and customer activity
Thinking about Approaches to target setting
assumptions Involvement by staff: Participative budgeting where managers develop their own initial budget estimates for their own
area of operations
Top-down budgeting: is where senior managers impose budget targets
Bottom up budgeting: where lower managerial and operations levels are active in setting their own budgets
Baseline Baseline + x% Baseline (adjusted)

Previous periods actual performance
Rolling average of past performance
(e.g. previous 5 periods)
Negotiated
Benchmarking
Previous periods actual performance + Previous periods actual performance
x% adjusted for expected changes to
operations
Rolling average of past performance + Rolling average of past performance
x% adjusted for expected changes to
operations
Negotiated Negotiated
Relevant benchmark +x % Relevant benchmark adjusted for
differences from source of comparison

Benchmarking Internal benchmarking: comparison with similar business unit inside the organization
approaches Competitive benchmarking: comparison with performance of competitors
Industry benchmarking: comparison with similar companies
Best in class or process benchmarking: comparison with best performers in the industry by activity or process

(1)Identifying the functions or activities to be benchmarked

(2)Choosing benchmark partners
(3)Data collection and analysis
(4)Establishing performance goals
(5)Implementing plans
LECTURE 7: MOTIVATING BEHAVIOUR
Why do we need to Agency Theory: when the objectives of higher management is different to those of the agents diverging interests and
motivate employee information asymmetry.
behavior in Motivation: the processes that account for an individuals intensity, direction and persistence of effort towards attaining
organisations? goals.
Intrinsic: employees engaging in activities without any external inducement.
Extrinsic: derives from sources outside of the individual
What induces Expectancy theory: employee motivation is a product of 3 things:
employees Expectancy: perception that effort will lead to a certain performance (effort performance)
motivation? Instrumentality: perception that performance will lead to desired outcome (Performance outcomes)
Valence: the degree to which the outcome satisfies the individuals goals, and the attractiveness of the reward
(outcomes personal goals)
Where does We can influence motivation in the process of setting of expected targets.
management We can influence motivation by rewarding results.
accounting fit it?
Motivating Ex ante control: motivation of performance before the operational or behavioural system is executed. The standard is
behavior in target intended to influence the desired performance levels of people. Through setting of targets.
setting Ex post: motivation through rewarding performance types of rewards, linking rewards to results
How can we The psychological evidence suggests that the best results will be obtained by setting the most difficult goals that will
maximize be accepted by managers and thus internalized and accepted as their own personal objectives.
employees How to build budget acceptance
motivation and Set targets at the right level Budget difficulty relates to the level at which targets are set
effort in target Aspiration target: a goal that is designed to be achievable only with the exertion of maximum effort
setting? Develop targets with the participation of employees
Budget participation occurs when employees who are held accountable for budget performance help in developing the
targets bottom up budgeting increases likelihood of target acceptance = improved communication
Attach meaningful rewards to achievement of targets
Adhere to the controllability principle
Provide frequent feedback on performance
As the budget target increases, performance will also increase, but up to a certain point.
Do you want an accurate, expectations budget?
o to use for planning
Do you want an motivating, aspirational budget? to use for motivating performance
There is a fundamental conflict in using the same target for both planning and control/motivation
Budgetary slack: the difference between the revenue or cost projection that a person provides and a realistic estimate of that
revenue or cost.
Motivating The provision of incentives to motivate individuals and groups in organisations.
behavior through Pay for performance, when individuals exerts effort for the performance of tasks at above standards. This allows for
rewards achievement of outcomes at or above standards expectedcontributes to achievement of organizational goals.
Pay for performance is necessary when we cant specify which actions are required or it is costly to specify or monitor
actions.
Types of rewards
Base salary
Short term incentives
Long term incentives
Prizes
Promotion
Work conditions
Personal work satisfaction
- Whether the type of reward is motivating depends on its valence. valence will be shaped by an individuals needs
Herzbergs two- There are 2 factors that affect employee behavior
factor theory Hygiene factors: those factors that provide the necessary setting for motivation but do not themselves motivate
employees
When these factors are adequate, employees will not be dissatisfied, but also, they will not be satisfied.
Only motivating factors lead to higher motivation.
Links between Have a floor so as to avoid paying rewards for mediocre performance
rewards and Have a cap:
results - Fear of undeserved high bonuses (windfall gains, short-term behaviour, faulty plan design)
To avoid encouraging unsustainably high growth
To ensure middle managers are not paid more than senior managers (vertical equity)
Keep total compensation consistent over time
Adhere to broader institutional norms
LECTURE 8: PERFORMANCE EVALUATION AND FEEDBACK
Completing the Performance evaluation and control occurs at the end of the cycle
cybernetic loop Goal achievement: Align actions with intended levels of performance
Goal congruence
Directs and motivates behaviour towards goals
Create accountabilities for actions and performance
Reward/reinforce good behaviour
Goal revision and learning
Direct attention
Form basis of future forecasts
Using formal Formal Informal
evaluation systems Source: Source:
Formal performance reviews Everyday interactions, interpersonal
System based Timing:
Timing: Unplanned, spontaneous, irregular
Planned, systematically scheduled, regular Rule
Rule: Voluntary, unsolicited
Mandatory routines, hierarchical relationships
ALLOWS FOR MANAGEMENT BY EXCEPTION
Monitor and track many aspects of performance
Conserve top managers time to focus on significant variances:
Unfavourable variances: to understand why expectations were not met; what courses of action are required.
Favourable variances: to understand why actual results exceed expectations, how to reproduce the results.
RELIABLE BASIS FOR COMPARISON
CREATE HISTORICAL RECORD OF PERFORMANCE
OVERCOME PROBLEMS IN SELF-EVALUATION Dunning Kruger effect those who lack the ability to complete a task
assume they are the best at the task.
Dunning kruger Doing peer-assessment
effect Only top performers became more accurate in assessing their relative ability
Poor performers still could not assess their own incompetence
Training
Poor performers became aware (finally!) of their own limitations

Effective Ensuring accountability decentralization, responsibility accounting, controllability

performance A responsibility accounting: the practice of holding managers responsible for the activities and performance of their
evaluation area of the business
 The basis of a responsibility accounting system is the designation of each sub-unit of the organisation as a particular
responsibility centre.
A responsibility centre is a unit in an organisation where the manager is held accountable for the units activities and
performance.
Four types:
Cost centre
Revenue centre
Profit centre
Investment centre
How do we hold Performance measurement responsibility centre level
responsibility If managers aim to maximise subunit performance, this will naturally align to improving organizational performance
centres managers (i.e. goal congruence)
accountable?
Controllability The extent to which you can improve or reduce the value of the measured output through action.
The manager of a responsibility centre should only be assigned responsibility for the revenues, costs or investments
that they (or their subordinates) can control
Controllability principle performance measures must align to responsibility centre type:
Revenue centre sales growth %
Cost centre Budget price and efficiency variances
Profit centre Profit margin %
Investment centre ROI %
LECTURE 9: INFORMATION FOR DECISION MAKING
What is decision The process by which individuals weigh up the pros and cons of different alternatives in order to make a choice.
making?
TYPES OF DECISIONS
Simple decisions Single, clear objective; all alternatives and outcomes are known with certainty
Multi-criterion Multiple objectives; all alternatives and outcomes are known with certainty
decisions
Decisions All alternatives are known; likelihood of outcomes can be estimated based on probability
involving risk
Decisions under Problem is unclear or ambiguous, information about alternatives is limited; likelihood of outcomes
uncertainty cannot easily be estimated
TACTICAL Short term time horizon
DECISIONS Do not require significant changes in capacity
Can be changed or reversed quickly
E.g. special orders, pricing decisions
LONG TERM Long term time horizon
DECISIONS Strategic in nature
Involve significant changes in capacity
E.g. capital investment
Types of decision Rational decision Aims to identify the single best possible alternative
making processes model
Satisficing Aims to find any suitable alternative
decision model
Intuitive decision Aims to select an alternative without overthinking it
making
Expert judgment Aims to select an alternative based on problem recognition and experience
Decision making in organisations
Executives o What are the organisations goals?
o What markets should we operate in?
o Should we outsource our service department?
Middle o Should we accept a special order?
Management o Who should I hire to fill a vacant position?
o Which project should we undertake/invest in?
All employees o What task should I focus on?
o How much effort should I put into this activity?
 o Will I even turn up to work today?
Making rational
decisions

Identifying and IDENTIFICATION OF A PROBLEM

using relevant What is a decision?
information A choice between two or more alternatives
What is a problem?
An obstacle between the current state and a desired goal
What is the problem? Problematic symptoms or actual problems?
Classifying problems
Structured Problems Unstructured problems
The problem is well-defined and familiar; goal is clear Problems are new, rare or ill-defined; goal is not clear
Complete information about alternatives and outcomes Information about alternatives and outcomes is
available ambiguous or incomplete
Can be solved by programmed decisions (e.g. procedures, Cant be solved by programmed decisions, requires
rules + routines) judgment and creativity
E.g. return policies, special examinations, credit decisions E.g. developing a new product line; how to adapt to IFRS
DEVELOPMENT OF DECISION CRITERIAWhat criteria are relevant to the decision?
Financial concerns
 Quality concerns
Sustainability concerns
Supply chain/logistics concerns
Employee concerns
Customer/competitive concerns
Longevity concerns
Organizational structure concerns
COLLECTING INFORMATION ABOUT ALTERNATIVES What information should we collect about alternatives?
Information which differs between alternatives
Future oriented
Timely
Inclusive of opportunity costs
Based on output levels not unit information
Both qualitative and quantitative
Tactical decision Should we accept a special order?
making (special Which mix of products should be produced?
orders, What price should we set for our products?
outsourcing, Should we subcontract (outsource) production?
product mix) What should the target cost for a product be?
Which customers should we do business with?
Using PMS for PMS can help us to:
decision making Identify problems: a gap between actual performance and our targets can indicate a problem
Develop decision criteria: which of our performance measures are affected by the problem/decision?
Collect information: PMS provide large amounts of performance information that can be used to make comparisons
Evaluate the decision: did performance improve after we made the decision?
Decision-support How is all of this data managed and stored?
systems How do managers access the data they need?
Is there other important information that is NOT captured by PMS?
How can managers work with the data to produce the specific information they need?
How do managers identify and evaluate possible alternatives?
Business An umbrella term that combines architectures, tools, databases, applications and methodologies to enable interactive access to
Intelligence data, manipulation of data and to provide business managers and analysts the ability to conduct appropriate analysis.
Analyses historical and current data, situations and performances, decisions makers can get valuable insight to make better
decisions.
Brings distributed data together for detailed analysis
Online analytical processing allows viewing data along multiple dimensions
 Query the data over the internet and view results in numerous forms
LECTURE 10: MAKING BETTER DECISIONS
Assumptions of Rational decision model: Aims to identify the single best possible alternative (from types of decision making)
rationality Assumptions of rationality
Problem is clear and unambiguous
All alternatives and consequences are known
Preferences are clear
Preferences are constant and stable over time
No time or cost constraints exist
Final choice will yield the maximum payoff
The decision maker behaves rationally
Makes decisions based on logic Makes decisions based on emotion
Emotionally detached Short attention span
Highly observant Not very observant
Remembers everything Has difficulty processing complex or large amounts of
information
Perceptual biases Perceptual biases affect the way that we interpret perceptual information
What we (think we) see
What we (think we) hear
What we (think we) feel, taste, smell etc
How perceptual biases affect our decision making
Visual illusions Causes us to interpret what we see in different ways, and often incorrectly.
Selective attention Causes us to see what we expected to see and miss other important things that are going on in our
environment
Change blindness Causes us to not notice subtle, incremental changes in our environment
Decision making Heuristic: a kind of mental short-cut that helps simplify problem solving and decision making
heuristics instead of going through each of the steps of the rational decision model, we:
Decide based on examples that are easy to recall (availability heuristice.g. which is more common, words that start with the
letter R or have R as the 3rd letter? 2nd option correct but most people say the former cause its easier)
Decide based on how similar the situation is to something we have experienced before (representativeness heuristic
professional stereotypes)
Decide based on our emotional state (affect heuristic)
How heuristics affect our decision making
They are less cognitively demanding
They help us make decisions quickly
They work well when we dont need to select the best possible alternatives
 BUT using heuristics can sometimes lead us to the wrong conclusions and decisions
We rely too much on recent or memorable information, and not enough on other important information
We make assumptions about probabilities that arent based on evidence, and can be incorrect
We let our first impressions or gut feeling override other important information
Common decision errors cognitive biases and heuristics can cause human decision makers to make predictable, systematic
decision errors
Loss aversion: we are much more sensitive to losses than to gains
Sunk costs: we consider costs which have already been incurred and cant be reversed when deciding about future actions
Confirmation bias: we search for and interpret information in a way that confirms what we already believe.
Self-serving bias: we search for and interpret information in a way that makes us look and feel good
Ethical decision The economically rational decision is not always the right decision.
making What is rational depends on the criteria that we identify in our decision making process
Financial criteria will produce a financially optimal decision, but not always a good decision.
Whenever we have a decision to make we must also consider its ethical dimensions.
Causes of unethical decision making in organisations
Goals that reward unethical behavior
Conflicts on interest that motivate people to ignore bad behavior when they have something to lose by recognizing it
A tendency to overlook dirty work thats been outsourced to others
An inability to notice when behavior deteriorates gradually
A tendency to overlook unethical decisions when the outcome is good

LECTURE 11: MANAGEMENT ACCOUNTING SYSTEMS IN CONTEXT

Situational Contingency Theory: there is no universally appropriate accounting system which applies equally in all situations rather,
influences particular features of an appropriate accounting system will depend upon the specific circumstances in which an

organization finds itself

1. Environmental The broad set of factors that make it difficult to predict the future in a given areai
Uncertainty Sources
Natural conditions, politics, economic climate, competitors, customers, suppliers, regulators
Pace of technological change
Distance into the future
Implications for MAS Management accounting systems
Generally high environmental uncertainty creates greater reliance on results/outcome control
BUT under high uncertainty
Employees might not understand how to generate desired result (low expectancy)
Difficult to set optimal targets
Targets may include uncontrollable
Employees bear more risk
Organisations will tend to decentralize goal congruence issues
2. Strategy Corporate Strategy What businesses the firm should invest in and how these businesses should be coordinated
Defines where to compete
Single business related/unrelated diversified
Business unit Determines how to compete in each of the businesses
competitive Low cost differentiation
strategy
Operational Tactical and operational decisions about how the organisations will deliver competitive strategy
strategy
Corporate Strategy

Implications for MAS

Competitive
Strategy

Implications for MAS

3. Cross-nationality Difference across countries
Issues > Factors that affect MCSs across countries Management control system
National culture: peoples tastes, norms, values, social attitudes, religions, personal priorities, responses to interpersonal
stimuli
Local institutions: government agencies, banking systems, labour unions, financial markets, accounting rules,
regulations etc
Local business environments: stage of economic development, political risk, inflation, labour availability, labour
quality, labour mobility etc
National culture implications
> Different national cultures are characterized (broadly) by different dimensions
Individualism: potentially affects incentives based on individual vs. group performance; propensity of engaging in
myopic, self-centered behavior
Power distance: potentially affects degree of centralization of decision making degree of participation in setting
performance targets
Uncertainty avoidance: potentially affects degree of subjectivity in performance evaluations; degree of formality of
planning and budgeting processes
Masculinity: potentially affects degree of performance-based rewards
Local Institutions Labour unions: use of performance-based rewards (merit based vs. seniority based)
Financial markets and stock market valuations: - frequency of profit measurement use of short term incentives
likelihood of myopic behaviour
Threat of hostile takeovers: use of reward schemes to get common stock in managers and employees hands
Accounting regulations
Local Business Risk and uncertainty-related factors
environments Business risk: military conflicts, terrorism, corporate espionage
Political risk: Adverse: forced production, prohibition of layoffs, price controls; Protective: tariff barriers, subsidies,
research support
Stage of economic development: age and size of corporations, degree of computerization, degree of development of
accounting, information and control systems
Inflation: financial risk
Responding to Understanding the need for MAS
control problems Control problems frame and describe the need for MAS (control solutions) in organisations
Framing (done by researcher, student, consultant):
Can be general or specific the more specific the more detailed the guidance for MCS design and use
Based on important organizational factors nature of employees, activities, structure, strategy
Typically arise from the combination of factors
Shows the dysfunctional consequence that would occur without appropriate control solution
 Types of control problems
Behavioural problems
Coordination problems
Decision making problems
Behavioural Organizational objectives vs. individual interests
control problems Divergent interests
Control problem: need to enable goal congruent behaviour
Contribution factors
reliance on employee behaviour to achieve organizational objective
individual employee interests diverge from organizational objective
In absence of MAS
Non-goal congruent employee behaviour
Coordination E.g. how to get front of house to coordinate with the kitchen
control problems Control problem: need to enable coordination between kitchen and service departments in a restaurant
Contributing factors
Specialization of sub units
Interdependencies between sub-units
Autonomy of subunit managers
Possible self-interest of sub-unit managers
Fluctuating/uncertain customer demand
In absence of MAS
Poor customer service
Build up of unsold inventory by kitchen