p3 risk management - global edulink · 2018. 10. 2. · • industry reports on changing trends...
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P3 Risk Management
Module: 05
Management Control Systems
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1. Management control systems
What are management control systems?
Consider Bob, who runs an accountancy practise in his home town. He's got 10 staff at different levels all supporting him in his work. He needs to ensure all his staff do all the
things he wants them to do to achieve his goal, which is to make the business profitable.
The way he does this known as his management control system and for accountancy
practice like Bob's this could include:
• The strategic plan – setting out how the organisation will succeed and grow – for Bob this might be to provide the best service of anyone in the town.
• His staffing plans – showing how they are organised and how they are controlled. Bob
might create an organisational structure, plan staff recruitment, appraisal systems,
training programmes and how he will best manage the staff.
• His financial plans – setting targets for key financial measures and monitoring performance as he progresses. Profit is obviously a key target, but as a growing business cash flow is often important too!
• The culture he aims to create - customer service is obviously key as this is his basis of
success, but for an accounting firm following standard procedures and diligence will also be key aspects that ensure success.
• The specific policies and procedures he will impose – tight control over work done using financial controls, checklists and supervision will be key for accurate work.
Definitions
We have two formal definitions of management control systems:
Robert N. Anthony (2007) defined Management Control as the process by which
managers influence other members of the organisation to implement the
organisation’s strategies.
According to Maciariello et al. (1994), management control is concerned with
coordination, resource allocation, motivation, and performance measurement.
As you see, management control is about managing people well and effectively to
achieve the organisation's goal.
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2. Management control - human resources
One key aspect of Management Control Systems is through the control of staff. This
can be implemented through the following key management controls:
Organisational structure
An organisational structure outlines the roles and responsibilities of individuals and
groups within an organisation. An organisational structure consists of activities such as
task allocation, coordination and supervision, which are directed towards the
achievement of organisational aims.
Structure is used for management control as it provides:
• The foundation on which standard operating procedures and routines rest as these are often structured and controlled by a specific group. Bob's tax department will be in charge of the procedures for producing tax returns for instance.
• A focus for decision making – with clear decision making responsibilities allocated to
department managers. Bob's tax manager may be responsible for the results of the tax
department and take key decisions based on his knowledge of that product.
• Functional or project responsibilities can be allocated to specific parts of the structure creating a control centre which is then responsible for control of a particular
area of the business (e.g. financial control to the finance manager).
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Typical structures and how they relate to control: Entrepreneurial
Control exercised by the leader, their expertise and the way they run and manage their staff directly.
Functional
In a functional structure, groups of experts work together to perform specified roles
for the organisation. Control is exercised by functional responsibilities and functional
experts.
From a management accounting perspective, each functional area is usually a cost
centre to which individual budgets are allocated, and costs reviewed and controlled using
variance analysis.
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Divisional
Divisions can be based on product, customer or geographic groupings. Control is
exercised by delegated managerial responsibility for each division.
Each division can controlled using profit based targets for division managers (profit
centre). If the manager also controls investment divisions it can be managed using
Return on Investment (ROI) or Residual Income (RI) measures as an investment
centre.
Matrix
Often used in project environments to get more control over projects through better
management and communication in project teams.
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Network
Network organisations depend on the relationships with external organisations.
Control is exercised mostly by well drafted and focused contracts (also called service
level agreements or SLAs) including clear performance measurements and penalties for
non-compliance. Relationships with partner companies are also key to control.
Human resources management
Human resource management (HRM, or simply HR) is the management of an organisation's workforce, or human resources. Organisational control is exercised by:
1. Attracting and selecting suitably qualified staff.
2. Training to give people the right skills and attitudes to do the best work.
3. Rewarding of employees including incentive schemes.
4. Employment contracts, setting out clear expectations of role.
5. Setting and applying disciplinary procedures.
6. Ensuring staff satisfaction and motivation, leading to good productivity.
7. Performance appraisal to give feedback.
Culture
Culture is defined by Charles Handy as “The way we do things around here”.
Culture is a combination of the VANE factors:
a) Values
b) Attitudes
c) Norms
d) Expectations
Individuals often act within the standard norms of group behaviour. If, for example, people
generally work late it is likely that a new employee will see that this is the norm and do that
too, even if this is not stated in the company's policies.
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Such cultural norms can have a dramatic effect on the organisation and its
success, particularly when such norms relate to attitudes to:
• Working hard or long hours
• Loyalty
• Innovation
• Quality
• Customers
• Meeting deadlines
• Support for others
Control over culture can be exercised through:
• Statement of values outlining what the organisation stands for
• Training
• Recruitment of staff with new beliefs, values or approaches
• Senior management being seen to act in a new way
• New rules and procedures - clarifying expected behaviours
• New symbols (e.g. buildings, job titles, logos)
• Changing groups and structures
• New reward systems encouraging new behaviour.
Policies, procedures and processes
Standard policies, procedures and processes ensure people know what is expected of
them, and that they operate in a standard structured way. Their work is therefore
‘controlled’ within the bounds of the policy, procedure or process.
There are three types of business processes:
Management processes, the processes that govern the operation of a system. Typical
management processes include "Corporate Governance" and "Strategic Management".
Operational processes, processes that constitute the core business and create the
primary value stream. Typical operational processes are Purchasing, Manufacturing,
Advertising and Marketing, and Sales.
Supporting processes, which support the core processes. Examples include accounting,
recruitment, call centre, technical support.
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Business Processes are designed to add value for the customer and should not include
unnecessary activities. The outcome of a well designed business process is increased
effectiveness (value for the customer) and increased efficiency (less costs for the
company).
3. Management accounting control systems
So, you're a management accountant, or are an aspiring one at least! Why are people
going to pay you so much money (or so you might hope) when you are qualified? You're
not generating revenue for them, your not producing a product, or making sales, or
managing the business, building a brand, supporting customers or building a valuable IT
system. So what are you doing?
You are providing a control. A financial control. You are helping ensure the finances are
well managed – that the company spends it's money effectively, has enough funds to stay
healthy and is generating profits (if that's your company's goal of course). Given the
relatively large pay accountants earn organisations must see that as very important and
so they should.
Management accounting controls are one of the keys to business success. Let's see why.
What is management accounting?
Management accounting is "the process of identification, measurement,
accumulation, analysis, preparation, interpretation and communication of
information used by management to plan, evaluate and control within an entity and
to assure appropriate use of and accountability for its resources. Management
accounting also comprises the preparation of financial reports for non-management
groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA
Official Terminology).
Long definition, yes, but the key word for this subject is 'control'.
Methods of accounting and their relationship to control
Every management accounting technique helps to control the business in some way, so let's take a look at a range that by this stage in your studies you hopefully know well to
see how they provide control.
Once you've gone through the first one of two of these, you might like to try to come up
with the answers yourself before looking at ours. Sometimes that's the best way to learn!
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Management
accounting method
Spending
What does it control?
Budgeting
Variance analysis
Business planning (assuming budgets link directly to
overriding business plans and strategies)
Spending within budgeted limits Efficiency (e.g. labour
usage variance) Wastage (e.g. Idle time variance)
Standard costing Spending within expected costs and efficiency
levels
Investment analysis (NPV,
IRR, Relevant costing)
Investment decisions e.g. NPV ensures investments
achieve the returns required to satisfy shareholders
Transfer pricing
Absorption, marginal and
activity based costing
Responsibility accounting
(Cost centres, Profit centres,
Investment centres, ROCE)
Balanced scorecard
Market Control i.e. allows for managers to make their own
decisions based on fair transfer prices
Ensures fairness within internally based pricing systems
Organisational or divisional profit
Sets a cost card that allows for control of pricing and costs
Controls functional and division managers by setting
budgets and through performance measurement
Controls functional and divisional managers through non-
financial as well as financial measures. The four areas are:
Financial, Internal, Innovation and learning, Customer.
Break-even analysis Investment decisions
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Controls costs and business planning through more accurate budgeting and costing
Strategic Management Accounting (SMA) builds on management accounting, while
widening its scope. Strategic management accounting evaluates an organisation from
a strategic perspective to provide vital information to management to support
decision-making. It helps to control the overall strategy of the company, by providing
directors with any information that will support them.
Examples of SMA:
• Investment analysis.
• Market trends analysis of a target markets.
• Product profitability analysis.
• Customer profitability analysis.
• Industry reports on changing trends (e.g. PESTEL factors and 5 forces).
Problems with use of management accounting techniques for control
Management accounting is not without its problems. Here are a some of them, which, if
you are a management accountant yourself, I'm sure there are a few here of which you
are aware:
• The process is too long winded so investment decisions and business plans are
delayed.
• Cost of analysis (e.g. staff wages, consultant reports).
• There is a lot of game playing (e.g. over budgeting or investment decisions).
• Business decisions change but the budget does not causing frustration amongst
staff or cost overruns.
• People in charge of budget are held accountable in areas where they have no
responsibility.
• Inaccurate forecasting makes budgets and investment appraisals inappropriate.
Forecasting techniques,
such as regression
analysis and time series
analysis
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4. Controlling Ethics
Ethics and social responsibility
Ethics are a code of moral principles that people follow with respect to what is right
or wrong.
Examples might include:
• Treatment of workers.
• Avoiding bribery.
• Good professional conduct and honesty.
• Respecting people’s personal data.
• Appropriate and fair advertising.
• Safety at work.
Social responsibility is the duty the organisation has towards the wider community
or society. Examples might include
• Supporting charity.
• Environmental issues.
• Public safety.
• Exploitation of third-world workers.
Most modern organisations take the view that they, and their boards of directors, have a
duty of care to wider stakeholders to look after the interests of all stakeholders from a
moral perspective. That could mean spending more money (e.g. on safer equipment, or
using more responsible suppliers) which may reduce profits in the short term.
The board, therefore, aim to balance ethical obligations with their fiduciary duty to provide
shareholders with a good return on their investment. In the long term it can be argued
that “good ethics is good business” as the reputational benefits can outweigh the short
term costs.
Ethical Risks - Why are ethics important to the business?
The long and short of ethics is the idea of moral right and wrongs. An organisation should hold itself up to high moral standards for no other reason than they think it is the right
thing to do.
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However, as well as being morally right, being ethical also has business consequences. Ethical issues can have a number of advantages to the business:
• Generate good feeling amongst staff.
• Avoid legal action.
• Avoid bad publicity and the potential damage to reputation which might result.
• As a source of competitive advantage, as positive ethical behaviour can become a
selling point and support the brand.
Ethical risks are the risk that ethics will not be effectively managed and hence these
benefits will not accrue, while simply also acting in a way that is morally wrong.
Ethics and risk management
Risk management ensures that the key risks involved in the business are well
managed and controlled, and as such is a key element of corporate governance. As
such risk management ensures that excessive risks are not taken and ensures
shareholders returns are protected, employees jobs are safer, customers are more
assured of continued supply of their product and creditors and suppliers more assured of
a return of their money. A duty of care is owed to all these stakeholders and as such
good risk management upholds the organisation's ethical duties.
Ethical control
There are three key ways to control ethics within an organisation:
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1. Personal ethics
These are the moral principles held by individuals. The ethics of the organisation will
closely reflect the ethics of its staff. This is particularly true of the senior management in
an organisation since they make the significant decisions. They are also role models for
other staff and so their behaviour may influence that of other staff.
Control over personal ethics can be exercised through employing people with
suitable ethical principles. This might be through making it a part of the recruitment
procedure through references being taken or doing checks on personal histories.
2. Organisational culture
The culture is the combination of the beliefs, values and standards of behaviour
inherent in an organisation. Often behaviours are influenced by what is seen to be right
or wrong within the group of employees. A group "ethical stance" may well develop
which is adhered to by its members and perpetuated through others learning what is
acceptable within the group.
Control can be exercised through:
• Statement of values outlining what the organisation stands for. Values such as
integrity, fairness, truthfulness might encourage an ethical approach to work.
• Communication of ethical expectations (e.g. on induction programmes).
• Senior management leading the way by behaving ethically themselves and
supporting ethical behaviour in others.
3. Organisational systems
These are the sets of internal processes and activities which dictate the way the
organisation operates. The development of organisational systems around ethical
issues can facilitate ethical control. These could include
• Reward systems - to reward good ethical behaviour.
• Recruitment systems - to recruit the right people.
• Ethical codes - outlining strict behavioural rules to be followed.
• Ethical audits - a review of a department's ethical behaviour.
• Disciplinary procedures - to be used when people break ethical rules.
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5. CIMA's Code of ethics
As we have seen earlier, one key method of ethical control is personal ethics. One driver
of such personal ethical behaviour for professionals are ethical codes of conduct. The
CIMA code is one good example of this and is applicable to all CIMA members and
students.
Of course, as you have to abide by these, I'm sure you know them all off-by- heart already,
but just in case you do not, here's a quick reminder!
Fundamental Principles of CIMA code of Ethics
The CIMA code of ethics identifies 5 fundamental principles to which a professional
accountant should comply:
Integrity
This means being straightforward and honest in all professional and business
relationships. The accountant should not be associated with information they believe
contains a false or misleading statement, or which is misleading by omission. Integrity
also means acting consistently.
For example, an accountant should not misstate information because they have been
asked to do so by a superior if that information is not correct.
1. Objectivity
This means being unbiased and acting in an impartial manner. There should be no
conflicts of interest or illicit relationships that might influence members in their
professional or business judgements.
For example, an accountant should not accept (or offer) excessive hospitality from
people with whom they might have to review their work as this could lead to bias creeping
in or feelings of embarrassment, which might prejudice their independence.
2. Professional Competence and Due Care
This means ensuring that one’s professional knowledge, skills and technical standards are maintained at the level required to practice with full competence.
Keeping up to date with developments in practice, legislation and techniques. Any
limitations in technical and professional standards should be disclosed and remedied.
For example, attending professional courses to update knowledge of the latest
accounting rules.
Due care refers to doing work diligently and carefully so it is done correctly.
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3. Professional Behaviour
This means avoiding actions that could discredit the profession, and complying
with relevant laws and regulations. They should be honest and truthful.
For example, the accountant should not make exaggerated claims about their
qualifications or the services they offer and should not make disparaging references to
the work of others or say anything dishonest or untrue.
4. Confidentiality
This means respecting confidentiality and safeguarding information obtained
through professional and business relationships. The accountant should not use
information for their personal advantage. They should not disclose unauthorised
information, acquired from professional relationships, to others outside the company or
employing organisation. This includes breeching confidentiality in a social situation.
For example, you should not discuss a colleague’s financial information with a family
member.
The principle of confidentiality continues even after a business relationship has been
terminated.
Disclosure
The exception to maintaining confidentiality is when there is a legal or professional
right or duty to disclose. CIMA’s code of conduct lists the particular circumstances in
which confidential information could be disclosed. They are:
• Where disclosure is required by law, such as in a case of legal infringement.
• Where disclosure is permitted by law, such as during a legal investigation
where one is protecting one’s professional interests.
• Where disclosure is authorised by a client or employer.
• Where disclosure is professionally permissible.
Example
So, here's an example. As you read through, see if you can identify where there is a
breach of the code of ethics....
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Paschal has just passed his CIMA certificate exams and on doing so joined Un-Ethi-Cal Ltd for his first accountancy role. Upon arrival he was been asked to do his company's
corporation tax return, and not wanting to seem as if he was not keen in his first week,
tells them he knows what to do and so goes online to find out how to do it. He's got to go
to a party that night, so although he can't work it out properly he fills in the form as best he
can so he can get out on time. Hoping to save Un-Ethi-Cal Ltd some money, wherever
he's not quite sure what the right answer is he always chooses the option that will keep
tax down to a minimum – after all – he needs to keep his new employers happy! He
heads off to the party where he proceeds to tell everyone about his amazing first day at
work and the huge profits his new company are making and how much he's already
saved them. “My future is bright” he tells everyone!
Well, perhaps not! Let's take a look through the ethical code and see where Paschal might
have issues:
Integrity – Paschal should not have lied about knowing how to do a Corporation Tax
Return.
Objectivity – Showing bias towards Un-Ethi-Cal Ltd is indeed unethical! Accountants
should apply the rules without any bias whatsoever even if it means there are negative
consequences.
Professional Competence and due care– Paschal should not have done a
Corporation Tax return if he didn't know how to do it. Even after he started he should still
take 'due care' to do it as best he could and not just go to the party before working out
how it should be done.
Professional behaviour – He has not applied the tax rules properly, and is potentially
committing a crime on behalf of his organisation.
Confidentiality – Paschal should not have disclosed the profitability of his company.
Paschal has been a very naughty boy! He risks being brought up in front of CIMA's ethics
committee, being fined and potentially being thrown out of the Institute.
Ethics in budgeting
John is a group manager and he's been asked to estimate the profits of his group this
year. Now, John has a dilemma. He and his team get a bonus if he hits his target, and so
they will gain from him understating the target profit
– making it nice and easy to hit! On the other hand John knows that this is wrong and
he should give his best estimate. Herein lies the heart of the problem with budgeting and
ethics.
At the end of the year, his colleague Abdul, who is the group finance manager, has an
issue. The group are very close to the target and with a little creative accounting he
knows he could show the required profit and everyone will get their bonus. “Just a few
sales from January put back to December will do the job.”, he thinks to himself. In fact a
few of the team have told him that he should flex the numbers in this way or 'that will be it!'
as they put it. Herein lies our second ethical issue with budgeting. Should Abdul skew
the figures? CIMA's ethical principles bear down on him at this point, particularly the
values of Integrity and Objectivity and Abdul decides to do the right thing and declare the
true profits.
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From these examples we can see that it is essential for companies to make sure that
there isn't a conflict between personal and company objectives when budgeting
and reporting, and that there are clear ethical principles in place that ensure that
budgets are set in a way that is realistic and fair and results are produced in a fair way
too.
Ethical Conflict Resolution
Ethical dilemmas arise when there is a trade-off between two or more decisions due
to a conflict of interest. Staff may be asked to carry out a task which puts their
professional integrity at risk, for example, a waiter could be asked to serve food which
may be out of date to the restaurant's customers; but on the other hand not carrying out
the task or following the supervisor's orders may lead to termination of his employment.
Difficult choice! Or is it? Well, CIMA have come to the rescue! They have produced a code help deal with just such an ethical conflict. According to CIMA, inaction or silence
would be regarded as a further breach of the Ethical Code, and when faced with a
conflict, the following must be kept in mind:
• Ethical issues involved.
• Relevant facts.
• Fundamental principles related to the matter in question.
• Established internal procedures.
• Alternative courses of action.
So, for instance, applying these to the above example, we have:
• Ethical issues raised – compromise of professional integrity, immoral to serve food
unfit for consumption, likely to be breaking the law, wrong of the manager to force the
waiter to act in this way.
• The facts - How long the food has been spoiled for? What possible consequences
might result from its consumption might? What are the regulations over time limits for
use of this type of food?
• Principles related to the matter – Integrity, Fairness, Duty to restaurant owner to
deliver profits
• Established internal procedures – This refers to any standard practices that may
already exist to respond to spoiled food. If the request is beyond the standard time
then that is a guide that the food should not be served. If the restaurant also has an
ethical code, that could also be a guide to behaviour here i.e. it is wrong to serve
food unfit for consumption.
• Consider alternative courses of action – These could be to serve the food,
reporting this to someone in a more senior position, or alerting the authorities.
• Take a decision – The ethical decision here is not to serve the food, and report the manager and so that's what the waiter should do.
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It is also important for the waiter to document or record the actions taken by him to
respond to the issue, as these would act as proof should he ever need it to justify his
behaviour.
5. Controlling Quality
There are 3 key methods of managing quality in an organisation, quality control,
quality assurance and Total Quality Management (TQM).
Quality Control
Quality control is the process of ensuring that the quality of goods meets set standards. The following process is usually used:
• Set quality standards.
• Set procedures and production processes to deliver these standards.
• Measure actual quality produced.
• Discard rejects or rectify problems identified.
• Change the process if products are consistently below quality standards.
Quality Assurance
Quality assurance aims to reduce the amount of quality checking that occurs by having
good internal processes and procedures which guarantee the quality of the final
products. This might for instance include:
• Using machinery that is a high quality.
• Training staff to a high level.
• Getting suppliers to guarantee the quality of goods supplied (this avoids the costs of quality checks on receiving goods).
Total Quality Management (TQM)
TQM is the principle of a culture of quality throughout the whole organisation.
Quality is a key strategic focus. TQM has a number of key principles:
• Errors and defects should be prevented, the costs of prevention being less than
the costs of correction – part of 'Getting things right first time'.
• The aim is to achieve no defects.
• Continuous improvement.
• Quality should be a concern of the whole organisation not just production.
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Quality management like this can be applied to a management accounting function, with
the aim that management accounting information should be 'right first time' and
'continuously improved' with the focus on the organisation’s needs for better quality
information.
To achieve these goals in a management accounting function the department might
include:
• Training staff (e.g. CIMA qualification, excel training).
• Communication mechanisms being put in place to encourage the sharing of ideas –
both with the users of the information and the finance staff themselves.
• Processes are redesigned for quality (e.g. excellent finance systems which are
tested and checks and have internal controls built in them).
• Use of reconciliations and checks.
• Supervision and review of all information produced.
Cost of quality
There are four key costs associated with quality. We will link each of these to what
these would be for a management accounting department aiming for high quality levels:
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Prevention costs – costs associated with preventing errors (e.g. training costs, using
qualified staff, excellent IT systems).
Appraisal costs – costs associated with the review of information to check for errors and problems (e.g. management accounting manager salary).
Internal failure costs – costs when an error is made within the department (e.g. costs of
staff recalculating numbers after an error is made).
External failure costs – costs associated with errors after information has left the
department. These could include the costs of poor decisions made by managers using
information that is not correct.
6. Lean production and management
Born out of competition between Japanese and Western countries; lean production is
essentially the act of cutting all non-value adding parts of the business from the
value chain; or in layman’s terms achieving the same outcome from less work and cost.
A lean production system will integrate all employees, managers and suppliers working
together towards the same goal and remove any people, processes and parts that do
not support that goal.
One element of lead production is the removal of waste. According to the Toyota
Production System there are seven key areas of waste:
Transport – When an item or machine is unnecessarily moved when this movement plays no part in production. For example, you build your car bodies in one room but
attach the wheels next door. The time to transport between buildings adds no value to the
product and so should be removed from the process.
Inventory – When raw materials, finished products or works in progress are
unnecessarily in stock; this should not happen under lean production as excess or
stationary inventory adds no value to the product. In other words lean production
systems use a Just-In-Time (JIT) inventory system.
Motion – People or machines being moved more than required; for example, you
are a mechanic working on a car production line and your job is to check and correct any
default in the engine. However, every default requires different tools and the tools must
be kept in another room, as a result at lease once an hour you have to make a 2 minute
round trip to the next room. This is an example of motion that is not beneficially to the
product and so is a waste. If this happened just once an hour you would waste an hour
and twenty minutes a week!
Waiting – Any time a product, person or machine is left waiting to complete their
task is not adding value to the product. To return to our car example, any time a
worker completes their task on a car, a new car should be rolling into their station. If they
have to wait for whatever reason that is wasted time, that employees time adds no value
to the end product during that time and so steps will need to be taken to ensure waiting
time is reduced.
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Overproduction – When more stock is produced than needed, the excess stock will
need space, tying up unnecessary capital and risking stock obsolescence. Our cars,
unlike a fine wine, will not appreciate in value by being stuck in a warehouse and as a
result this storage is not adding anything to the cars' value, therefore any overproduction
needs to stop.
Over processing – Another perhaps slightly confusing waste, essentially it means that
more quality or extras added to a product do not necessarily mean consumers will
value it more. For example, if our cars target market only want a cheap little run around
yet we have spent time and money installing the most expensive branded tyres, in the
eyes of our consumers we have not added any value to the car; they will NOT be willing
to pay more for these tyres. Therefore the time and money these tyres cost over
standard non branded ones is a waste as they did not contribute value to the customer.
Defects – Defects often cost far more than people think; in addition to the added
costs/time needed to repair the product (or scrap if necessary) we must also include
the materials that went into the product, the cost of the machines and personnel who
made it and the cost of the products that would have been made in its place. Often the
true cost of a defect can be up to 10 times what it appears to initially have cost,
particularly if it happens after the customer has received the product where not only are
their cost implications but reputation implications also.
Lean management accounting
Lean management accounting is management accounting in a lean production
environment.
As a starting point, the accounting function itself should also aim to be 'lean' cutting out all
elements of 'waste' so that the financial processes are efficient and only provide
information that is of value to managers.
One key role of lean management accounting is to measure and cost the different types
of waste, helping to quantify the financial impact of these and support decisions made
about how to cut out waste in the organisation.
Another focus in information produced which focuses on what is adding value to the
customer and financial information is produced focused around these 'value streams' –
the different value-adding activities of the business.
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7. Controls by department
Each department needs to have controls to manage their area of operation. There
can be many many controls for any department, and the key in exam questions is to
ensure that any control that is suggested specifically deals with the risks in that case.
However, let's look at a few of the most common controls for each department:
Sales department
Controls include:
• Sales targets for the department.
• Sales targets for individual staff.
• Staff recruitment controls to attract good candidates.
• Staff appraisals.
• Staff training programmes.
• Controls over expenses.
• Supported by receipts.
• Set limits on expenditure for specific items.
• Manager review of claims.
Purchasing department
Controls include:
• All purchases supported by an authorised purchase order.
• Set limits for authorisation of certain amounts by agreed staff (e.g. amounts over £1,000 to be signed off by a director).
• Set processes for tendering.
• Authorised suppliers only to be used.
• Authorised catalogues of items only allowed.
• Budgets for each department and item category, reviewed regularly against actual amounts spent (e.g. variance analysis).
• Robust IT systems which have been tested and include built in controls.
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Treasury function
The treasury function is responsible for working capital management and financing in an
organisation.
Controls include:
• Regular cash flow forecasts.
• Supervisor authorisation of key transactions e.g. foreign exchange contracts.
• Overdrafts and flexible financing to allow for unexpected cash needs.
• Staff recruitment processes – knowledgeable qualified staff.
• Staff training.
• Robust IT systems which have been tested and include built in controls.
• Non-recourse factoring – where the factoring company takes the risk of the bad debt.
• Credit insurance against bad debts.
Distribution/Stores
Controls include:
• Regular stock-takes to review actual quantities against those reported on the system – differences should be investigated and causes found and rectified.
• All purchases linked to purchase orders and goods received notes.
• All receipts and deliveries reviewed and checked.
• quantities
• quality
• All deliveries signed for by customer.
• Robust IT systems which record all stock in and stock out, and which have been tested and include built in controls.
• Staff recruitment processes – trustworthy staff.
• Staff training.
• Delivery vehicles monitored (E.g. using telematics and GPS tracking).
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HR department
Human resource management (HRM, or simply HR) is the management of an
organisation's workforce, or human resources. Organisational control is exercised by:
• Attracting and selecting suitably qualified staff
• Training to give people the right skills and attitudes to do the best work
• Rewarding of employees including incentive schemes
• Employment contracts, setting out clear expectations of role
• Setting and applying disciplinary procedures
• Ensuring staff satisfaction and motivation, leading to good productivity
• Performance appraisal to give feedback
IT department
You must also be aware of IT controls, but these are dealt with in their own chapter.....
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8. Risks in control systems
As you can see there are a wide range of different control systems which can be
applied to the business. In this chapter we have reviewed:
• Structural control.
• HR control.
• Cultural control.
• Processes and policies.
• Quality control.
• Management accounting control systems.
• Ethical control.
• Controls by department.
• Purchasing
• Sales
• HR
• Treasury
• Distribution/stores
There are two key risks in control systems:
• The control system does not adequately manage the risks of the process,
department or organisation as a whole (they are not 'precise' (i.e. not focused on
meeting the control objectives) or 'sufficient' (when combined they do not fully
manage the risk).
• The controls in place are not properly applied.
As such controls and controls systems need to be regularly reviewed and updated to
ensure they remain relevant and tested to ensure those in place actually are being
applied and work.
The internal audit department are specifically tasked with documenting and testing
controls throughout the organisation. Managers of departments must also take
responsibility for control of their area of work too though and should regularly review the
efficacy of the controls and make appropriate changes to keep them up to date.
Whether the combination of all controls in the organisation adequately control the risks
in the business is the responsibility of the board of directors as a whole, although often
that responsibility is delegated to the audit committee or risk committee.