ACC2MAC Managment Accounting And Control
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Introduction:
To better understand differences between many similar types of terms in accounting such as management accounting and financial accounting, management control and financial control and strategic management accounting we will explore the case study of TNT and how the company has been able to implement these important concepts practically in this case.
Firstly, we will see how the management and financial controls were used in order to achieve what Taylor say’s is Critical Mass. We will also see how efficient and effective Taylor was in utilizing his resources given the limited number of employees and the outsourcing of his production to save underutilization costs.
Further we will discuse;Essay on Stocks Are Financial InstrumentsTo better understand differences between many similar types of terms in accounting such as management accounting and financial accounting, management control and financial control and strategic management accounting we will explore the case study of TNT and how the company has been able to implement these important concepts practically in this case.
Firstly, we will see how the management and financial controls were used in order to achieve what Taylor say’s is Critical Mass. We will also see how efficient and effective Taylor was in utilizing his resources given the limited number of employees and the outsourcing of his production to save underutilization costs.
Essay on the Effect Of Working Capital Management On Profitability
Secondly, we will examine the spreadsheet which was flexible enough to alter according to the changing needs, of which Taylor had made good use of, by making a model which has all the elements programmed in it, which assisted Taylor in decision making and forecasting sales, which resulted into preplanning for the future.
Lastly, we will see in the later part of the report, that there are many other situations where TNT has made good use of the models such as Porter’s five forces and Value chain analysis.
“Management control is plan of organization, methods and procedures adopted by management to ensure that its goals are met whereas financial control involves management of a firm's costs and expenses in relation to budgeted.
Management controls include processes for planning, organizing, directing, and controlling program operations. Financial Control include comparison of what you have actually achieved with what you have planned in your budget and as such it is one business function amongst many, and comprises but one facet of the wider practice of management control.
A subset of management controls are the internal controls used to assure that there is prevention or timely detection of unauthorized acquisition, use, or disposition of the entity's assets with money being used as a convenient measure of variety of other more complex dimensions not as an end in itself.
A financial control firstly uses financial information to monitor financial flows; that is it is concerned with looking after the money. Secondly, it is also often used as a surrogate measure for other aspects of organizational performance.”
Following related topices are which may also help
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Some of Financial controls in field study are:
Taylor reduced the capital investment in CNC cutting and milling machinery and avoided the capacity utilization problem his competitors (mainly engineering companies that manufactured packaging machines) are facing by outsourcing its manufacture.
He has employed 120 peoples worldwide that lead to lower amount of salary payments. Doing all the financial planning with the efficient use of Spread sheet model which is used for: Historical record, forecasting, decision making.
Matching results of external accountant with his results to avoid errors and misstatements. Flexible model was easy to modify according to time, technology and expansion. Model enabled him to approach finance and develop export market with in his cash flow and borrowing limits.
Some of Management controls in field study are:
Formulation of Strategies:
To achieve “Critical Mass”.
Planning based on future changes
To build premises and using it as security for lenders and subleasing the spare capacity to cover his interest cost because bank lend against real-estate not business.
Management Control:
Used spreadsheet model and very good market knowledge to make strategic decisions like, firstly switching to a stainless steel construction, necessary for wet packaging. Secondly he plans to dominate the low cost machines market which is 25 % of the market and wants his competitors to go broke. Used model to estimate how many Robags TNA could sell.
Used Cost benefit ratio to make important decision.
Emphasised Research and development.
Defending Intellectual property (Patents)
Emphasis on expanding business worldwide.
Managing global company with just 120 employees.
Prepared monthly management accounts to control expenses. An abstract from an Article which shows example of Management and Financial control “The Prime Minister told Caucus yesterday that he allowed Mr. Conrad Black's Telegraph Plc to increase its shareholding in the John Fairfax group after Mr. Black persuaded him that he needed greater management and financial control over the company.” Having established the controls TNT have put in place, we can now explore the facts of the cases from a range of perspectives. Normative theories assist in explaining the rational perspective in the sense that they help explain why individuals aim the maximize behavior. Such behavior is considered rational and driven by self interest that are ranked through personal wealth and thus behavior us maximized through profits, returns in relation to share prices, dividends and rewards. Specifically rational systems aim to reduce transaction costs, focus on division of labor and specialization of tasks . March and Simon (1958) argued that rational actors who contained relevant information aimed at maximizing satisfaction in behavior . Satisfaction was based on bounded rationality whereby most individuals are partly rational and are affected by decision making as they have limited information and limited time to process that information. Scott (1998) argued the notion of the rational perspective being based on the classical management theory. Here the organizations are highly organized in away that will allow them to achieve set goals. At the same token the notion of contract strongly exist based on the agency theory and transaction costs economics.
TNT has an organized structure through the hiring of three directors in their geographic expansions. Alf Taylor ceased the opportunity to expand into snack food and other food packaging thereby maximizing his satisfying behavior through enabling the recognition of profit with the expansion. Through its expansion Taylor has chosen to outsource its manufacturing with its aim to reduce its capital investment in which he is acting rationally as he attempts to avoid the capacity utilization problem. Taylor has structured his organization in such a way that he is able to dominate the market by adopting a market push approach with a five year plan. In a rational sense Taylor is analyzing and recognizing the company’s potential in obtaining wealth and with Taylor being the owner he is also acting in self interest. One could argue that out of his ranked outcomes one of his, if not the first priority is to maximize self interest. Bank funding to finance TNT’s growth is a substantial issue, hence with the information Taylor has from his projections he is able to process that information and use his custom built premises to provide as collateral for lending. This has enabled him to make decisions about whether to sell or leaseback properties for the purpose of research and development and market development.
Taylor as a rational actor contained relevant financial information about TNT that he used to create a spreadsheet that captured his sales, cash flows and forecast amongst other critical information. The model was used in great depths by Taylor, hence he felt there was no need for an accountant as they would create more work for the company. Taylor is clearly acting in his best interest and he is bounded by rationality. This is so because he is specifying his task and from the developments of completing the model he is able to make rational decisions about the company. In Taylor maximizing his behavior in realizing the company’s potential to increase its market share significantly, thus maximizing profits alongside the expansion. Through its expansions of stainless steel construction Taylor still intends on keeping costs low through the development of the low cost machine.
An interpretive paradigm approach is based upon the positive accounting theory as it accounts for what happens as opposed to what should happen. Preston (1995) describes that individual’s act towards things that contain meaning for them therefore being a critical process as opposed to a rational one. These meanings, as the facts of the case will indicate, are derived to social interactions hence they are socially constructed by the individuals themselves. Having said that through the model that Taylor has created he is able to approach and interact with his bankers for finance, as through his model the Financiers are able to gather the position of the company at that time in other words what is actually happening from a financial perspective. From a non-financial view Taylor also values his 120 staff worldwide. From Taylor’s perspectives he was able to gain market knowledge from meeting with his employees and he used the opportunities of the social interactions to find out what people were doing. Through these interactions also referred to as social events the employees also tested Taylor’s reaction to ideas and strategies to win customers and develop markets. These interactions were important as the results of these events were not captured in Taylor’s model hence he could not determine employee value and satisfaction through his spreadsheet.
The critical perspective in contrast with the previous two, questions assumptions behind financial statements and profit determination . Power here is the central issue and in conjunction the assumptions underlying shareholders position and profit takings are questioned. In relation to the case we can view the owner Alf Taylor’s position within his company and how he imposes his power within the organization. More importantly the role accounting plays in maintaining the structures of power. For example through the discourse he has with his employees he is keen on sharing his knowledge and delegates but at the same time he lets people know he is in control and that the final decisions is always his. Alongside he re-enforces his position through maintaining control of his model, being solely responsible for the budgets, cash flow, forecasts and he a rewards his employees with increase in salaries, bonuses, holidays amongst other gifts. Taylor is clearly showing his ability to influence the behavior of his employees. At the same token Taylor set his standards alongside that of his employees by travelling economy class whilst on his business trips. On an international level with TNA acquiring patents over its Robag mechanical design, Taylor here re-enforces his power, of which the results of his design and the retention of power though the patents will follow through to the financial statements and the issue of rewards as mentioned before. This essentially re-enforces Taylor’s position in TNA. “Control is the process of guiding a set of variables to attain a preconceived goal or objective”.
“Management Control Systems are the formal, information – based routines and procedures managers use to maintain or alter patterns in organizational activities”.
P.M.Collier (2005) “Management control systems encompass management accounting systems but also include other controls. The definition of management control systems has evolved over the years from a focus on formal, financially quantifiable information to assist managerial decision making to include external information relating to markets, customers, competitors, non-financial information about production processes, predictive information and a broad array of decision support mechanisms and informal personal and social controls.”
Under the given case study it can be easily noticed that organization had two different modes of control i.e. accounting and social. The study reveals TNA’s control system as the construction of a relevant accounting at the margins of traditional accounting, using a sophisticated spreadsheet based business model.
The case study reviews various frameworks for understanding management control, particularly in relation to the linkages between formal, systems-based approaches to control and more informal, social controls. Various frameworks exist in relation to management control formal which is more systems and informal, social or cultural form.
Taylor’s approach to management control initially focused on Make or buy decision which proved to be a crucial issue towards management control. He took into consideration a justified relevant cost approach, decision-dependent production costs in terms of opportunity costs of the “make” alternative compared with the buying price to be paid to a third party (Vosselman & Meer-Kooistra, 2006). By outsourcing his operations, he focused on reducing TNA’s capital investment in CNC cutting and milling machinery.
With regards to Budgeting Taylor’s cash flow model contained various aspects which Taylor used to analyse the business wealth. Taylor budgeted his estimates using his forecast model by comparing variables such as previous time periods, similar organizations, estimates of future organizational performance, Estimates of what might have been achieved, the performance necessary to achieve defined goals (Emmanuel et al, 1990). The model was well equipped to forecast various variable of the business. The model also enabled Taylor to monitor how well his sales targets were being met. Taylor’s model could quickly reflect orders and recognised the impact of growth on cash requirements. It was a tool for monitoring the effect on his sales targets. The summation for the entire budgeting process is done by Taylor. Taylor’s spreadsheet model contains a feed forward loop in the form of determining forecast cash balance and inventory level, unearned income and forecast profit which approximated taxable income. Taylor’s feedback loop enabled him to monitor his sales targets being met, quickly reflect orders into the ‘build’ programme and the ability to recognise the impact of growth on cash requirements.
Taylor was operating in an industry which is ever-changing and growing. The contingency theory of management accounting suggests that there is no universally applicable system of management control but that the choice of appropriate control techniques will depend upon the circumstances surrounding a specific organization (Otley, 1999). The central contingent variable that Taylor decided to pursue was growth and continuous cash flow. These objectives heavily influenced the desired outcomes and his strategy (Otley, 1999).
Taylor’s conceptualization of control is the management of contextual factor dependency (Siriyama, 2006). Being a decentralized organization the focus of the control system is diverse and refers to Processes, outcomes and values. The rationale in his organization is achievement (Siriyama, 2006). The dual emphasis on growth and cash flow has been a major driver of Taylor’s control over TNA. The goals and strategies in the TNT were totally dominated by Taylor.
Strategy is a paramount sub-component in the overall management control framework. A strategy is a master plan on how an organization intends to compete in its environment and what sort of structure, including coordination and control devices, is required to implement the plan (Macintosh, 1994, p. 89). Wilson (1991, p. 82) defined strategy as “an integrated set of actions aimed at securing a sustainable competitive advantage”. A given strategy in an organization should support the achievement of goals and objectives relative to its competitors (Vosselman & Meer-Kooistra, 2006). His spreadsheet had an industry view of the competition as well as a top down analysis of markets and competitors. Taylor uses a market push method, where he analyses the economics of the market and develops a system and equipment and push the industry down that path and also identify which of his competitors were likely to lose market share. Taylor modified his marketing strategy continuously to target the customers of weaker competitors and attain more market share.
Firstly Taylor should make more use of his monthly management accounts and look forward to further streamline his business considering the expenditure on travelling and sales. Taylor could use the monthly management accounting data to allocate R&D or export marketing costs over products and further reduce product costs. Secondly, Taylor can use a balanced scorecard method to better assess non financial indicators. It leads to a more non linear approach with a focus on customers, business processes and longer-term sustainability (Otley, 1999). Taylor could use the monthly management accounting Traditional reporting and budgeting need to be adapted to reflect varying input and output. There is a need for the accountant to devise costing and billing procedures that satisfy the requirements of the growing and diverse number of customers. (management control in a business environment). Taylor should consider the accountants suggestion of the need for more controls, In order to gear up for the future and more transparent decision making by managers when decisions are delegated to them.
Strategic Management defined:
The notion of strategic management accounting (SMA) is linked with business strategy and maintaining or increasing competitive advantage. Article reflects the importance of SMA: “STRATEGIC management practices involving deployment of fewer network management staff can effectively reduce the problems of networking failures, an industry specialist has found.” SMA emphasis:
Taylor’s shift in attitude recognised that an internal accountant should be able to add value because of the size of TNA by proactively contributing to strategy, rather than be dominated by historical reporting shows accounting should be more outward looking.
Taylor’s evaluated his competitors strategy as in this case by planning to dominate the low cost machines market which is 25% of the market by designing a economy Robag (for the low-end market) and wanting his competitors to go broke as they were facing problem of under-utilized capacity. His pricing was 2 to 3 times more than competitive equipment but its good at speed and accuracy, producing 180 bags a minute that is 50 to 100% faster, and having rejection rate of less than 1%, whereas competition has it between 2 to 4%.
It helped Taylor in decision making when he was switching to a stainless steel construction, necessary for wet packaging. In addition when he plans to dominate the low cost machines market which is 25 % of the market.
Reflection of Characteristics of SMA:
There was a long term horizon of 5 years in Taylor’s mind when in 1995 he was concerned about achieving ‘critical mass’ by 2000 to be able to sustain its position in an open market situation with out patent protection. Use of flexible spreadsheet model and very good market knowledge helped him to make strategic decisions. By outsourcing his manufacture, TNA reduced the capital investment in CNC cutting and milling machinery and avoided the capacity utilization problem his competitors were facing (mainly engineering companies that manufactured packaging machines). Taylor’s model enabled him to forecast cash balance, inventory level, unearned income and forecast profit which approximated taxable income at the same time helping him to monitor how well the sales target were being met. This enabled him to tell his external accountant whether the statutory accounts were accurate.
Models used for SMA
Porter’s 5 forces model to evaluate industry attractiveness from the perspective of long term profitability. 1, There is a threat of new entrant for TNA.
2, There is a threat of substitutes but due to high productivity advantage it can’t be beaten for now. 3, There is Strong competition from competitors as every one wants to become leader. 4, Supplier (TNA) is in good position to bargain as it has competitive advantage of having more produce per minute. 5, Bargaining position of customers is less as they don’t have any other efficient options.
Porter’s generic strategies that lead to sustainable competitive advantage and the firm’s relative position within its industry. 1, Cost Leadership: By decreasing the cost of products production cost they are the leaders. 2, Production differentiation: TNA changed the way they produced by outsourcing their manufacturing. 3, Focus on Market Segment/ Niche Market: TNA focused on capturing the lower-end machine sector by introducing economy Robags for them.
Value Chain Analysis
1, TNA identified value creating activities like having a machine which can create more value by producing ‘more good bags per minute’. In addition it forms a pack from a roll of printed film, fills it and seals it in one continuous operation.
2, With outsourcing its manufacturing TNA saved huge amount of capital investment and saved them from incurring capacity underutilization costs unlike its competitors. Conclusion:
Through management accounting concepts we have been able to gain a better understanding of TNT. We have seen the imposition of financial controls through the spreadsheet that Taylor has constructed which has proven to be a vital tool in his budgeting. Alongside there is evidence of management control through Taylor’s 5 year plan, the extensive research and development undertaken by TNT and the preparation of monthly management accounts. With the financial and management controls in place we have seen some of the strategic decisions that have been made by Taylor, for instance initially it was make versus buy decisions and that slowly lead to outsourcing which reduced capital investment requirements. An emphasis was placed on the growth and cash flow of TNT in order to attain critical mass which was a primary objective for TNT. Taylor also adopted a market push strategy which allowed him to dictate market movements and experiences. We were also able to view Taylor’s strategic decisions and himself as a director from the three different perspectives. The relation enabled us to gain an understanding as to why Taylor was making such decision, for instance to attain critical mass as a rational being. At the same token his position was significantly re-enforced amongst his employees and within TNT. Taylor was very critical with his decisions that he made as he evaluated his competitors strategy which lead to the low cost machine. Taylor also focused on a long term horizon and with the outsourcing his decisions became more strategic. Clearly signs of strategic management accounting. To further this analysis we looked Porters 5 force model which assisted in exploring TNT from an industry perspective and the value chain analysis whereby the outsourcing and the machine hours was a crucial component.
Reference List
•Source: http://financial-dictionary.thefreedictionary.com/, Course Book. •Black Needed Greater Say In Fairfax: Keating, By Anne Davies, 4 May 1993 Sydney Morning Herald •Collier,P.M (2006). “Accounting for Managers: Interpreting accounting information for decision-making.” (2nd ed). Chichester: John Wiley. ISBN 0-0470-01609-4. 536 pages,p.50. •March,J.G and Simon, H.A (1958). “Organizations. Chichestor: John Wiley & Sons, cited in Collier,P.M (2006). Accounting for Managers”: Interpreting accounting information for decision-making. (2nd ed). Chichester: John Wiley. ISBN 0-0470-01609-4. 536 pages, p.50. •Scott, W.R. (1998). Organizations: Rational, Natural, and Open Systems. (4th edn_. Upper Saddle River, NJ: Prentice Hall International cited in Collier,P.M (2006). Accounting for Managers: Interpreting accounting Information for decision-making. (2nd ed). Chichester: John Wiley. ISBN 0-0470-01609-4. 536 pages, p.50. •Preston, A. (1995). Budgeting, creativity and culture. In D.Ashaton, T. Hopper and R.W. Scapens (eds), Issues in Management Accounting (2nd edn), London : Prentice Hall, cited in Collier,P.M (2006). Accounting for Managers: Interpreting accounting information for decision-making. (2nd ed). Chichester: John Wiley. ISBN 0-0470-01609-4. 536 pages, p.59. •Collier,P.M (2006). “Accounting for Managers: Interpreting accounting information for decision-making”. (2nd ed). Chichester: John Wiley. ISBN 0-0470-01609-4. 536 pages, p.117. •Vosselman, G.J. Meer-Kooistra.J (2006), “ Changing the boundaries of the Firm”, Journal Organizational change Management, Vol.19 No. 3, pp.318-334. •Emmanuel, C., Otley, D. and Merchant, K. (1990). Accounting for Management Control. (2nd edn). London: Chapman & Hall. •Otley, D.(1999), “Performance management: a framework for management control systems research”, Management Accounting Research,Vol.10, pp.363-382. •Siriyama, K.H. (2006), “A framework for management control research”, Journal of Management Development, Vol.26, No.9, pp.895-915. •Bardy.R. (2006), “Management control in a business network: new challenges for accounting, Qualitative Research in Accounting and Management, Vol.3, No.2,pp.161-181. •Definition Taken From: “Anthony, Robert N., John Dearden, and Norton M. Bedford” “Management Control Systems.” 6th ed. Pg No 5 •Definition Taken From : Robert Simons “Levers of Control : How Managers Use innovative Control Systems to Drive Strategic Renewal”, Page No - 5 •Collier,P.M (2006). “Accounting for Managers: Interpreting accounting information for decision-making”. (2nd ed). Chichester: John Wiley. ISBN 0-0470-01609-4. 536 pages, p.322 •“Planning cuts system down time, costs.”, By Adrian Lynch, 24 November 1998, The Australian
Taylor reduced the capital investment in CNC cutting and milling machinery and avoided the capacity utilization problem his competitors (mainly engineering companies that manufactured packaging machines) are facing by outsourcing its manufacture.
He has employed 120 peoples worldwide that lead to lower amount of salary payments. Doing all the financial planning with the efficient use of Spread sheet model which is used for: Historical record, forecasting, decision making.
Matching results of external accountant with his results to avoid errors and misstatements. Flexible model was easy to modify according to time, technology and expansion. Model enabled him to approach finance and develop export market with in his cash flow and borrowing limits.
Some of Management controls in field study are:
Formulation of Strategies:
To achieve “Critical Mass”.
Planning based on future changes
To build premises and using it as security for lenders and subleasing the spare capacity to cover his interest cost because bank lend against real-estate not business.
Management Control:
Used spreadsheet model and very good market knowledge to make strategic decisions like, firstly switching to a stainless steel construction, necessary for wet packaging. Secondly he plans to dominate the low cost machines market which is 25 % of the market and wants his competitors to go broke. Used model to estimate how many Robags TNA could sell.
Used Cost benefit ratio to make important decision.
Emphasised Research and development.
Defending Intellectual property (Patents)
Emphasis on expanding business worldwide.
Managing global company with just 120 employees.
Prepared monthly management accounts to control expenses. An abstract from an Article which shows example of Management and Financial control “The Prime Minister told Caucus yesterday that he allowed Mr. Conrad Black's Telegraph Plc to increase its shareholding in the John Fairfax group after Mr. Black persuaded him that he needed greater management and financial control over the company.” Having established the controls TNT have put in place, we can now explore the facts of the cases from a range of perspectives. Normative theories assist in explaining the rational perspective in the sense that they help explain why individuals aim the maximize behavior. Such behavior is considered rational and driven by self interest that are ranked through personal wealth and thus behavior us maximized through profits, returns in relation to share prices, dividends and rewards. Specifically rational systems aim to reduce transaction costs, focus on division of labor and specialization of tasks . March and Simon (1958) argued that rational actors who contained relevant information aimed at maximizing satisfaction in behavior . Satisfaction was based on bounded rationality whereby most individuals are partly rational and are affected by decision making as they have limited information and limited time to process that information. Scott (1998) argued the notion of the rational perspective being based on the classical management theory. Here the organizations are highly organized in away that will allow them to achieve set goals. At the same token the notion of contract strongly exist based on the agency theory and transaction costs economics.
TNT has an organized structure through the hiring of three directors in their geographic expansions. Alf Taylor ceased the opportunity to expand into snack food and other food packaging thereby maximizing his satisfying behavior through enabling the recognition of profit with the expansion. Through its expansion Taylor has chosen to outsource its manufacturing with its aim to reduce its capital investment in which he is acting rationally as he attempts to avoid the capacity utilization problem. Taylor has structured his organization in such a way that he is able to dominate the market by adopting a market push approach with a five year plan. In a rational sense Taylor is analyzing and recognizing the company’s potential in obtaining wealth and with Taylor being the owner he is also acting in self interest. One could argue that out of his ranked outcomes one of his, if not the first priority is to maximize self interest. Bank funding to finance TNT’s growth is a substantial issue, hence with the information Taylor has from his projections he is able to process that information and use his custom built premises to provide as collateral for lending. This has enabled him to make decisions about whether to sell or leaseback properties for the purpose of research and development and market development.
Taylor as a rational actor contained relevant financial information about TNT that he used to create a spreadsheet that captured his sales, cash flows and forecast amongst other critical information. The model was used in great depths by Taylor, hence he felt there was no need for an accountant as they would create more work for the company. Taylor is clearly acting in his best interest and he is bounded by rationality. This is so because he is specifying his task and from the developments of completing the model he is able to make rational decisions about the company. In Taylor maximizing his behavior in realizing the company’s potential to increase its market share significantly, thus maximizing profits alongside the expansion. Through its expansions of stainless steel construction Taylor still intends on keeping costs low through the development of the low cost machine.
An interpretive paradigm approach is based upon the positive accounting theory as it accounts for what happens as opposed to what should happen. Preston (1995) describes that individual’s act towards things that contain meaning for them therefore being a critical process as opposed to a rational one. These meanings, as the facts of the case will indicate, are derived to social interactions hence they are socially constructed by the individuals themselves. Having said that through the model that Taylor has created he is able to approach and interact with his bankers for finance, as through his model the Financiers are able to gather the position of the company at that time in other words what is actually happening from a financial perspective. From a non-financial view Taylor also values his 120 staff worldwide. From Taylor’s perspectives he was able to gain market knowledge from meeting with his employees and he used the opportunities of the social interactions to find out what people were doing. Through these interactions also referred to as social events the employees also tested Taylor’s reaction to ideas and strategies to win customers and develop markets. These interactions were important as the results of these events were not captured in Taylor’s model hence he could not determine employee value and satisfaction through his spreadsheet.
The critical perspective in contrast with the previous two, questions assumptions behind financial statements and profit determination . Power here is the central issue and in conjunction the assumptions underlying shareholders position and profit takings are questioned. In relation to the case we can view the owner Alf Taylor’s position within his company and how he imposes his power within the organization. More importantly the role accounting plays in maintaining the structures of power. For example through the discourse he has with his employees he is keen on sharing his knowledge and delegates but at the same time he lets people know he is in control and that the final decisions is always his. Alongside he re-enforces his position through maintaining control of his model, being solely responsible for the budgets, cash flow, forecasts and he a rewards his employees with increase in salaries, bonuses, holidays amongst other gifts. Taylor is clearly showing his ability to influence the behavior of his employees. At the same token Taylor set his standards alongside that of his employees by travelling economy class whilst on his business trips. On an international level with TNA acquiring patents over its Robag mechanical design, Taylor here re-enforces his power, of which the results of his design and the retention of power though the patents will follow through to the financial statements and the issue of rewards as mentioned before. This essentially re-enforces Taylor’s position in TNA. “Control is the process of guiding a set of variables to attain a preconceived goal or objective”.
“Management Control Systems are the formal, information – based routines and procedures managers use to maintain or alter patterns in organizational activities”.
P.M.Collier (2005) “Management control systems encompass management accounting systems but also include other controls. The definition of management control systems has evolved over the years from a focus on formal, financially quantifiable information to assist managerial decision making to include external information relating to markets, customers, competitors, non-financial information about production processes, predictive information and a broad array of decision support mechanisms and informal personal and social controls.”
Under the given case study it can be easily noticed that organization had two different modes of control i.e. accounting and social. The study reveals TNA’s control system as the construction of a relevant accounting at the margins of traditional accounting, using a sophisticated spreadsheet based business model.
The case study reviews various frameworks for understanding management control, particularly in relation to the linkages between formal, systems-based approaches to control and more informal, social controls. Various frameworks exist in relation to management control formal which is more systems and informal, social or cultural form.
Taylor’s approach to management control initially focused on Make or buy decision which proved to be a crucial issue towards management control. He took into consideration a justified relevant cost approach, decision-dependent production costs in terms of opportunity costs of the “make” alternative compared with the buying price to be paid to a third party (Vosselman & Meer-Kooistra, 2006). By outsourcing his operations, he focused on reducing TNA’s capital investment in CNC cutting and milling machinery.
With regards to Budgeting Taylor’s cash flow model contained various aspects which Taylor used to analyse the business wealth. Taylor budgeted his estimates using his forecast model by comparing variables such as previous time periods, similar organizations, estimates of future organizational performance, Estimates of what might have been achieved, the performance necessary to achieve defined goals (Emmanuel et al, 1990). The model was well equipped to forecast various variable of the business. The model also enabled Taylor to monitor how well his sales targets were being met. Taylor’s model could quickly reflect orders and recognised the impact of growth on cash requirements. It was a tool for monitoring the effect on his sales targets. The summation for the entire budgeting process is done by Taylor. Taylor’s spreadsheet model contains a feed forward loop in the form of determining forecast cash balance and inventory level, unearned income and forecast profit which approximated taxable income. Taylor’s feedback loop enabled him to monitor his sales targets being met, quickly reflect orders into the ‘build’ programme and the ability to recognise the impact of growth on cash requirements.
Taylor was operating in an industry which is ever-changing and growing. The contingency theory of management accounting suggests that there is no universally applicable system of management control but that the choice of appropriate control techniques will depend upon the circumstances surrounding a specific organization (Otley, 1999). The central contingent variable that Taylor decided to pursue was growth and continuous cash flow. These objectives heavily influenced the desired outcomes and his strategy (Otley, 1999).
Taylor’s conceptualization of control is the management of contextual factor dependency (Siriyama, 2006). Being a decentralized organization the focus of the control system is diverse and refers to Processes, outcomes and values. The rationale in his organization is achievement (Siriyama, 2006). The dual emphasis on growth and cash flow has been a major driver of Taylor’s control over TNA. The goals and strategies in the TNT were totally dominated by Taylor.
Strategy is a paramount sub-component in the overall management control framework. A strategy is a master plan on how an organization intends to compete in its environment and what sort of structure, including coordination and control devices, is required to implement the plan (Macintosh, 1994, p. 89). Wilson (1991, p. 82) defined strategy as “an integrated set of actions aimed at securing a sustainable competitive advantage”. A given strategy in an organization should support the achievement of goals and objectives relative to its competitors (Vosselman & Meer-Kooistra, 2006). His spreadsheet had an industry view of the competition as well as a top down analysis of markets and competitors. Taylor uses a market push method, where he analyses the economics of the market and develops a system and equipment and push the industry down that path and also identify which of his competitors were likely to lose market share. Taylor modified his marketing strategy continuously to target the customers of weaker competitors and attain more market share.
Firstly Taylor should make more use of his monthly management accounts and look forward to further streamline his business considering the expenditure on travelling and sales. Taylor could use the monthly management accounting data to allocate R&D or export marketing costs over products and further reduce product costs. Secondly, Taylor can use a balanced scorecard method to better assess non financial indicators. It leads to a more non linear approach with a focus on customers, business processes and longer-term sustainability (Otley, 1999). Taylor could use the monthly management accounting Traditional reporting and budgeting need to be adapted to reflect varying input and output. There is a need for the accountant to devise costing and billing procedures that satisfy the requirements of the growing and diverse number of customers. (management control in a business environment). Taylor should consider the accountants suggestion of the need for more controls, In order to gear up for the future and more transparent decision making by managers when decisions are delegated to them.
Strategic Management defined:
The notion of strategic management accounting (SMA) is linked with business strategy and maintaining or increasing competitive advantage. Article reflects the importance of SMA: “STRATEGIC management practices involving deployment of fewer network management staff can effectively reduce the problems of networking failures, an industry specialist has found.” SMA emphasis:
Taylor’s shift in attitude recognised that an internal accountant should be able to add value because of the size of TNA by proactively contributing to strategy, rather than be dominated by historical reporting shows accounting should be more outward looking.
Taylor’s evaluated his competitors strategy as in this case by planning to dominate the low cost machines market which is 25% of the market by designing a economy Robag (for the low-end market) and wanting his competitors to go broke as they were facing problem of under-utilized capacity. His pricing was 2 to 3 times more than competitive equipment but its good at speed and accuracy, producing 180 bags a minute that is 50 to 100% faster, and having rejection rate of less than 1%, whereas competition has it between 2 to 4%.
It helped Taylor in decision making when he was switching to a stainless steel construction, necessary for wet packaging. In addition when he plans to dominate the low cost machines market which is 25 % of the market.
Reflection of Characteristics of SMA:
There was a long term horizon of 5 years in Taylor’s mind when in 1995 he was concerned about achieving ‘critical mass’ by 2000 to be able to sustain its position in an open market situation with out patent protection. Use of flexible spreadsheet model and very good market knowledge helped him to make strategic decisions. By outsourcing his manufacture, TNA reduced the capital investment in CNC cutting and milling machinery and avoided the capacity utilization problem his competitors were facing (mainly engineering companies that manufactured packaging machines). Taylor’s model enabled him to forecast cash balance, inventory level, unearned income and forecast profit which approximated taxable income at the same time helping him to monitor how well the sales target were being met. This enabled him to tell his external accountant whether the statutory accounts were accurate.
Models used for SMA
Porter’s 5 forces model to evaluate industry attractiveness from the perspective of long term profitability. 1, There is a threat of new entrant for TNA.
2, There is a threat of substitutes but due to high productivity advantage it can’t be beaten for now. 3, There is Strong competition from competitors as every one wants to become leader. 4, Supplier (TNA) is in good position to bargain as it has competitive advantage of having more produce per minute. 5, Bargaining position of customers is less as they don’t have any other efficient options.
Porter’s generic strategies that lead to sustainable competitive advantage and the firm’s relative position within its industry. 1, Cost Leadership: By decreasing the cost of products production cost they are the leaders. 2, Production differentiation: TNA changed the way they produced by outsourcing their manufacturing. 3, Focus on Market Segment/ Niche Market: TNA focused on capturing the lower-end machine sector by introducing economy Robags for them.
Value Chain Analysis
1, TNA identified value creating activities like having a machine which can create more value by producing ‘more good bags per minute’. In addition it forms a pack from a roll of printed film, fills it and seals it in one continuous operation.
2, With outsourcing its manufacturing TNA saved huge amount of capital investment and saved them from incurring capacity underutilization costs unlike its competitors. Conclusion:
Through management accounting concepts we have been able to gain a better understanding of TNT. We have seen the imposition of financial controls through the spreadsheet that Taylor has constructed which has proven to be a vital tool in his budgeting. Alongside there is evidence of management control through Taylor’s 5 year plan, the extensive research and development undertaken by TNT and the preparation of monthly management accounts. With the financial and management controls in place we have seen some of the strategic decisions that have been made by Taylor, for instance initially it was make versus buy decisions and that slowly lead to outsourcing which reduced capital investment requirements. An emphasis was placed on the growth and cash flow of TNT in order to attain critical mass which was a primary objective for TNT. Taylor also adopted a market push strategy which allowed him to dictate market movements and experiences. We were also able to view Taylor’s strategic decisions and himself as a director from the three different perspectives. The relation enabled us to gain an understanding as to why Taylor was making such decision, for instance to attain critical mass as a rational being. At the same token his position was significantly re-enforced amongst his employees and within TNT. Taylor was very critical with his decisions that he made as he evaluated his competitors strategy which lead to the low cost machine. Taylor also focused on a long term horizon and with the outsourcing his decisions became more strategic. Clearly signs of strategic management accounting. To further this analysis we looked Porters 5 force model which assisted in exploring TNT from an industry perspective and the value chain analysis whereby the outsourcing and the machine hours was a crucial component.
Reference List
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