Revision Question for Advanced Performance Management

Topics: Management accounting, Management, Cost accounting Pages: 36 (8464 words) Published: August 10, 2012

Revision Question 1

A competent management accounting system should endeavour to enhance the performance of a company. It should, in particular, consider the behavioural consequences of the system.

(a)Explain why it is necessary when designing a management accounting system to consider the behavioural consequences of its application.

(b)Explain the potential behavioural issues that may arise in the application of performance monitoring, budgeting and transfer pricing and suggest how problems may be overcome.


(a)The role of a management accountant is to provide information which can be used
to assist and guide management in the pursuit and achievement of organizational
objectives. The management information provided is read, interpreted and
responded to by people within the organization, and their responses will determine
the quality of the decisions made and the extent to which corporate objectives are
achieved. Management accountants should be aware of this relationship and
endeavour to ensure that the information that they supply is used in a way that
benefits their organization. The design and operation of a management accounting
system should anticipate the behavioural consequences that are likely to arise as a
result of its activities. A management accountant who fails to consider these
repercussions or denies responsibility for them is likely to operate a dysfunctional
system. This is most likely to manifest itself in a failure to secure goal congruence
between the interest parties. The management accounting system will need to
consider the particular culture of the organization, whether it has a hierarchical or
democratic structure, its attitude towards employee empowerment and the extent
of delegated team decision making.

(b)Performance Monitoring:
There is a general acceptance of the idea that an organization that monitors
performance and rewards individuals for ‘good performance’ is more likely to
encourage behaviour that is consistent with the objectives of the organization. This
involves the organization ‘transmitting signals’ to its people as to what it deems
desirable activities and outcomes in the workplace. This approach has resulted in
such terms and activities as performance monitoring, performance related pay,
payment by results, bonus systems. The reward for the achievement of desired
outcomes could be money, promotion, job security, preferred work activities,
alternatives work environments. Unfortunately this a very complex task and
problems are likely to arise in a number of areas.

- It is very difficult in many work environments to measure individual performance – and if you resort to team performance, it is difficult to gauge the contribution from individual members.

- It is difficult to ensure that individual targets are not considered with other individuals or corporate objectives.
- Current measured performance may discourage consideration of longer term issues that may have adverse repercussions.
- Can a performance monitoring system comprehensively measure the key variables? For example, the desire to achieve greater volume/activity may be at the cost of quality that is more difficult to identify and appraise. - Measure fixation – concentrating on the measurement process and not on what needs to be achieved.

- Misrepresentation – ‘creative’ responses that give a favourable view of activities.
- Myopia – short sighted viewpoint with limited consideration to long term issues.

The problems highlighted above can be managed if the following points are

- Do not underestimate the scale of the task in designing a performance monitoring...
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