Behavioral aspects of

Management Accounting

Submitted by: Florian Huesmann

Mahima Virmani
Anita Bakkar
Moeen Akhtar
Ankit Singh
Date: 03.11.09
Table of content
General characteristics of Management Accounting
- Aims of MA
- Differences between Management Accounting & Financial Accounting
Behavioral aspects of Management Accounting
-Motivational theories in Management Accounting
-Behavioral implecations of MA
Ethics
Conclusion
Management Accounting
• Definition:

• A value-adding continuous improvement

process of planning, designing, measuring and
operating both nonfinancial information
systems and financial information systems that
guides management action, motivates behavior,
and supports and creates the cultural values
necessary to achieve an organization’s
strategic, tactical and operating objectives
Aims of management accounting

Acting

Planning Controlling

Feedback
Aims of management accounting
• Formulating strategies
• Planning and constructing
business activities
• Helps in making decisions
• Supporting financial reports preparation
• Safeguarding asset
Aims of management accounting
• Distinguish between financial accounting and
management accounting
• Information of management
accounting is used for internal purposes only,
not for external reports
• Management accounting has a future
perspective and helps managers in making
decisions.
Differences between Financial Acc.
and Management Accounting

Primary Users

Financial Accounting Management Accounting

External Internal
Investors, Creditors, Government Mangers of the business
authorities
Differences between Financial Acc.
and Management Accounting
Purpose of
Information

Financial Accounting Management Accounting

Help investors, creditors, and others Help managers plan and control
make investment, credit, and other business operations
decisions
Differences between Financial Acc.
and Management Accounting
Behavioral
Implications

Financial Accounting Management Accounting

Concern about adequacy of disclosure Concern about how reports will affect
employees behavior
Role of MA within the Corporation
• Cost accounting became the major role in
management accounting
• Linkage between the management team and the
financial department
• Management Accounting is important for nearly
every part of the company, as well as for the
overall success of a company
Behavioral aspect & implications of
management accounting

~ Behavior is a mirror in which every one

displays his own image. ~
Behavioral aspect of management accounting
is that which influences the decision of the
people concerned with decision making in the
management accounting system.

J. Wolfgang von Goethe

Behavioral Implications
• As measurements are made on operations and especially
on individuals and groups, their behavior changes

▫ People react when they are being measured, and they

react to the measurements
▫ They focus on the variables and behavior being
measured and spend less attention on those not
measured

• Two old sayings recognize these phenomena:

▫ “What gets measured gets managed”

▫ “If I can’t measure it, I can’t manage it.”
 Behavioral Implications
• People familiar with the current system may resist as
managers attempt to introduce or redesign cost and
performance measurement systems
• They have acquired expertise in the use (and, perhaps,
misuse) of the old system and wonder whether their
experience and expertise will apply to the new system
• People also may feel committed to the decisions based on
the information the old system produced
▫ Actions taken may no longer seem valid based on the
information produced by a newly installed management
accounting system
▫ A new management system can be a threat or lead to
embarrassment and may lead to a resistance to change.
Behavioral Implications
• Management accountants must understand and
anticipate the reactions of individuals to information and
measurements

• An analysis of the behavioral and organizational

reactions to the measurements must accompany the
design and introduction of new measurements and
systems

• More importantly, when the measurements are used not

only for information, planning, and decision-making but
also for control, evaluation, and reward, employees and
managers place great pressure on the measurements
themselves
Subjective representation of objective phenomena

• Behavior depends on individuals’ mental representations,

which can differ in important ways from objective
indicators.
• Effects of MA practice on individuals’ behavior can depend
not only on how objectively informative the MA practice is
about factors that affect their welfare.
• But also on how understandable the MA practice is how
well individuals can form usable mental representations of
it and connect it to their other mental representations
• and how it stimulates individuals’ attention, cognition,
and/or motivation
Subfields of psychology in MA research

• Cognitive: Psychological processes that influence

human thinking
▫ Attention, memory, comprehension, learning,
judgments, decisions
• Motivation: Psychological processes that influence behavior
▫ Direction, intensity, and persistence of effort
• Social: How other people influence individuals’ minds and
behavior
▫ Understanding people (attribution, person impression, social
cognition), attitudes and social influence, social interaction
and relationships
Motivational Theories in
management accounting
• Goal setting theory
• Performance is a positive function of goal difficulty
• Specific goals reduce variation in performance
• Incentives indirectly influence performance via its
effect on goal commitment
• Goal-performance relation is influenced by goal
commitment, goal importance, feedback, task
complexity, self-efficacy
Organizational justice theory

• Individuals are motivated to maintain a balance in

exchange relations by comparing their and others’ ratio
of inputs to outcomes (e.g., pay)

▫ If individuals believe their ratio is inequitable, then

they experience negative emotions, which they
minimize by changing their inputs and/or outcomes
Human Resource Model
Of Motivation (HRMM)
• Perhaps the most contemporary management
view of motivation

• Based on initiatives to improve the quality of

working life and the strong influence of
Japanese management practices

• Introduces a high level of employee

responsibility for and participation in decisions
in the work environment
 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson,
Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University
Central Assumptions of
the HRMM
• Organizations operate under a system of beliefs
about the values, purpose, and direction of their
organization

• People find work enjoyable and desire to

participate in:
▫ Developing objectives
▫ Making decisions
▫ Attaining goals in their work environment

• Individuals are motivated by both financial and

nonfinancial means of compensation
 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson,
Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University
Central Assumptions of
the HRMM
• Employees have a great deal of knowledge and
information about their jobs, the application of
which will improve the way they perform tasks
and benefit the organization as a whole

• Individuals are highly creative, ethical, and

responsible

• They desire opportunities to effect change in

their organizations
 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson,
Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University
COST BEHAVIOUR
ANALYSIS
 Types of Cost Behavior Patterns
Summary of Variable and Fixed Cost Behavior
Cost In Total
Variable Total variable cost is
proportional to the activity
level within the relevant range.
Fixed Total fixed cost remains the
same even when the activity
level changes within the
relevant range.
Per Unit
Variable cost per unit remains
the same over wide ranges
of activity.
Fixed cost per unit goes
down as activity level goes up.
The Activity Base
Units
Machine
produce
hours
d
A measure of the
event that causes
the incurrence of a
variable cost – a
cost driver
Miles Labor
driven hours
True Variable Cost Example
Your total long distance telephone bill is based
on how many minutes you talk.
Total Long Distance
Telephone Bill

Minutes Talked
Total Fixed Cost Example
Your monthly basic telephone bill is probably
fixed and does not change when you make more
local calls.
Monthly Basic
Telephone Bill

Number of Local Calls

Step-Variable Costs
Total cost remains
constant within a
narrow range of
activity.

Cost
Activity
Step-Variable Costs
Total cost increases to a
new higher cost for the
next higher range of
activity.

Cost
Activity
The Linearity Assumption and the
Relevant Range Economist’s A straight line
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
Total Cost

relevant range.
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)

Activity
Cost Behavior
Examples of normally variable costs
Merchandisers Service Organizations
Cost of Goods Sold Supplies and travel

Manufacturers Merchandisers and

Direct Material, Direct Manufacturers
Labor, and Variable Sales commissions and
Manufacturing Overhead shipping costs

Examples of normally fixed costs

Merchandisers, manufacturers, and
service organizations
PBB taxes, Insurance, Sales salaries
Depreciation, Advertising
 Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the
reduced in the short short-term by current
term. managerial decisions

Examples Examples
Depreciation on Advertising and
Buildings and Research and
Equipment Development
Fixed Costs and Relevant Range
90
Thousands of Dollars

Total cost doesn’t

Rent Cost in

Relevant change for a wide

60 range of activity,
Range and then jumps to a
new higher cost for
the next higher
30 range of activity.

00 1,000 2,000 3,000

Rented Area (Square Feet)
Semivariable Costs
A semivariable cost has both fixed and variable
components. Consider the example of utility cost.

Y
Total Utility Cost

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Semivariable Costs
The total semivariable cost line can be expresse
as an equation: Y = a + bX

Where: Y = the total mixed cost

a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
Y activity (the slope of the line)
Total Utility Cost

X = the level of activity

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
The Analysis of Semivariable Costs

1. High-Low Method

2. Scattergraph Method

3. Least-Square Regression Method

The Scattergraph Method
Plot the data points on a
Y graph (total cost vs. activity).
20
* ** *
1,000’s of Rs
Total Cost in

* *
**
10 * *

0 X
0 1 2 3 4
Activity, 1,000’s of Units Produced
The Scattergraph Method (2)
Draw a line through the data points with about an
equal numbers of points above and below the line.

Y
20
* ** *
1,000’s of Rs
Total Cost in

* *
* **
10 * Intercept is the estimated
fixed cost (a) = Rs10,000

0 X
0 1 2 3 4
Activity, 1,000’s of Units Produced
 The slope is the estimated variable cost per unit.
The Scattergraph Method (3)
Slope = Change in cost ÷ Change in units

Y
20
* ** *
1,000’s of Rs
Total Cost in

* *
* **
10 *Horizontal
distance is Vertical distance is
the change in the change in cost.
activity.
0 X
0 1 2 3 4
Activity, 1,000’s of Units Produced
The High-Low Method
WiseCo recorded the following production activity and
maintenance costs for two months:

Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400
Using these two levels of activity, compute:
the variable cost per unit;
the fixed cost; and then
express the costs in equation form Y = a + bX.
 The High-Low Method

Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400

Variable cost per unit = Change in

Changein costin units
cost ÷ change
Change in units
 The High-Low Method

Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400

Variable cost per unit = $2,400 ÷ 3,000 units

= $0.80 per unit
 The High-Low Method

Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400

Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit

 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
 The High-Low Method

Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400

Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit

 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
Total cost = Fixed cost + Variable cost (Y = a + bX)
Y = $3,400 + $0.80X
 Least-Squares Regression Method
• Software can be used to fit a
regression line through the
data points.
• The cost analysis objective is
the same: Y = a + bx

Least-squares regression also provides a statistic,

called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
Least-Squares Regression Method
R2 is the percentage of the variation in total cost
explained by the activity.
Y
20
* ** *
Total Cost

* * **
10 * * R2 for this relationship is near
100% since the data points are
very close to the regression line.
0 X
0 1 2 3 4
Activity
Cost Estimation Methods
Regression
A set of dataAnalysis
can be regressed using several
techniques:
•Manual computations
•SPSS or SAS Statistical Software
•Excel or other spreadsheet

The result of the Each regression model

regression process is a has an R-square (R2)
regression model: measure of how good the
model is.
TC = F + VX Range of R2 = 0 to 1.0
Simple Regression Analysis
Example
Month Total Costs Units (Meals)
January $6,720 1,280
Fasco wants to February 7,260 1,810
know its average March 7,270 1,620
fixed cost and April 11,060 2,830
May 12,580 3,630
variable cost per June 8,660 2,610
unit. July 8,580 2,460
August 9,550 2,640
Using the data to September 13,050 3,620
the right, let’s see October 11,060 2,840
November 7,320 1,820
how to do a December 7,370 1,650
regression using January 6,790 1,260
Excel. February 7,480 1,850
March 6,990 1,710
April 11,400 2,940
Simple Regression Analysis
Example
You will need three pieces Month
January
Total Costs
$6,720
Units (Meals)
1,280
of information from your
regression analysis: February 7,260 1,810
March 7,270 1,620
1. Estimated Variable Cost April 11,060 2,830
per Unit (line slope) May 12,580 3,630
2. Estimated Fixed Costs June 8,660 2,610
(line intercept) July 8,580 2,460
3. Goodness of fit, or R2 August 9,550 2,640
September 13,050 3,620
October 11,060 2,840
To get these three pieces November 7,320 1,820
of information we will December 7,370 1,650
need to use THREE January 6,790 1,260
different excel functions. February 7,480 1,850
March 6,990 1,710
LINEST, INTERCEPT, & RSQ April 11,400 2,940
Ethics With Conclusion

~ Ethics is the activity of man directed to

secure the inner perfection of his own
personality. ~

Albert Schweizer
 Ethics
• When management accounting
information is used for control,
management accountants may find
themselves in complex situations, fraught with conflict
▫ Especially when it is used for performance evaluation

• Pressure may be exerted to influence the numbers to

make a favored product, customer, or line of business
appear more profitable than it actually is
• Department managers may distort information so that
unfavorable factors are not revealed in a management
accounting report
▫ The cost of inefficient processes
▫ The existence of substantial amounts of excess capacity
Ethics
• Senior executives whose incentive compensation is based
on the reported financial numbers may put pressure on
accountants
▫ To recognize revenue from a customer early
▫ To defer until subsequent periods the recognition of an
expense
▫ In some circumstances, to recognize certain expenses
early so that much higher earnings may be reported in
future periods
• All of these behaviors were evident in the frauds
dominating the financial news in recent years
• Organizational leadership plays a critical role in
fostering a culture of high ethical standards
Ethics
• Professional organizations usually establish
ethical norms and codes of professional conduct
for their members

• The professional association can monitor and

police its norms and codes through peer reviews
▫ They have procedures for disciplinary action when
violations are detected
• Many of the guidelines are phrased in terms of
what management accountants should not do,
consistent with how boundary systems operate
Ethics
• The way an individual responds to pressure derives from
inner values and beliefs, but individuals are strongly
influenced by their view of organizational standards

• If individuals see unethical or illegal behavior practiced

by the organization’s leaders and superiors or coworkers,
they may feel that such behavior is accepted and
sanctioned

• An individual without a strong set of personal beliefs and

values may find it difficult to withstand the pressure to
“go along with the flow” and participate in this behavior
when a difficult or conflicting situation arises
▫ Such as being asked to misrepresent an organization unit’s
performance potential when the unit is being offered for sale
THANK YOU