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Changes in Management Accounting in Dynamic Business Environment

This study explores the changes in management accounting and performance measurement methods in response to the dynamic business environment. It examines the scope of management accounting systems, the use of financial and non-financial measures, and the shift in focus and time horizons. The findings are based on surveys and interviews conducted with Estonian companies during both economic booming and recession periods.

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Changes in Management Accounting in Dynamic Business Environment

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  1. CHANGES IN THE SCOPE OF MANAGEMENT ACCOUNTING AND PERFORMANCE MEASUREMENT IN THE DYNAMIC BUSINESS ENVIRONMENTToomas Haldma, Kertu LäätsPoznan, April 26, 2012 1

  2. Introduction Intensified competition increases companies managementneed for objective information about the formation and shape of their performance. In the organisations facing complex situations and high environmental dynamism, the broad scope management accounting information is crucial for managers decision making (Mia and Chenhall, 1994). 2

  3. Introduction Research groups of the Faculty of Business Administration of the University of Tartu investigated in 2007 and in 2011 the largest Estonian companies • development of management accounting systems (MAS) • development of performance management methods and • its influencing factors 3

  4. Structure • Theoretical background • Sample of the companies • Market environment • Design of the scope of management accounting systems • Financial versus non-financial measures • Conclusion 4

  5. Theoretical background • The scope of MAS involve the following dimensions (Chenhall and Morris, 1986): • focus, • quantification and • time horizon. • Broad scope MAS allows managers better to understand the relations between companies’ objectives, internal processes and activities, and organisational outcomes. • Broad scope of MAS has a positive effect on company’s performance (Van der Stede et al., 2006). 5

  6. Samples description Three datasets: - Survey on 65 companies from the Estoniansales TOP in 2007 + interviews - in period of economic booming (see findings Lääts, Haldma, 2011) • Survey on 198 Estonian companies in 2010-2011 + interviews- in economic recession period (see Vadi et al, 2011) • Survey on 100 Estonian machinery companies + interviews in 2010 - in economic recession period (see Varblane et al., 2011) 6

  7. Sample of 2007 Sample: 140companies from the Estoniansales TOP Replies:we received from 65 companies (51% response rate) Investigation: position in 2007 and 2004 Object: 16 indicators + 21 methods/principles 7

  8. Companies’ profile Areas : • Manufacturing - 35 companies • Wholesale – 10 • Financial services – 7 • General service – 7 • Others - 6 8

  9. Companies’ profile 9

  10. Estonian dynamic environment • GDP growth: 1997 11,7% …… ……. 2006 10,6% 2007 7,1% Average 2000-2007 8,3% 2010 3,1% 2011 5,0% • GDP decline: 1999 -0,3% 2008 -3,6% 2009 -14,6%

  11. Market environment In 2004 – 75% in growing stage In 2007 – 52% in growth (CEE-47%, GE-36%) - 44% maturity (CEE-46%, GE-61%) Change in market environment : • in customer needs for – 44%; • in products for – 50%; • in pricing policy for – 31%; 11

  12. MAS scope – FOCUS - BOOMING YEARS • high interest on the internal dimensions • cost budgeting; • direct costing and • contribution margin analyse of products or services and business units. • shifts towards higher use of external dimension • key performance indicators and • contribution margin analyse of customer groups • higher application of balanced scorecard approach 12

  13. Focus of MAS 13

  14. MAS scope – FOCUS RECESSION YEARS shifts towards higher use of external (market) dimension higher application of balanced scorecard approach – 42% of companies (10% in machinery companies) 14

  15. MAS scope – QUANTIFICATION - BOOMING YEARS high reliance on the traditional financial principles companies use less nonfinancial information than financial information.. more emphasis on the traditional financial information (e.g. revenue, net income, cost efficiency and EBIT) than the modern financial approaches (e.g. customer profitability, DCF, EVA calculation) increasing use of modern financial approaches, (activity based costing; customer profitability) and various nonfinancial approaches (e.g. customer satisfaction, employee satisfaction, sustainable growth). 15

  16. Quantificationof MAS 16

  17. Quantificationof MAS (continued) 17

  18. MAS scope – QUANTIFICATION RECESSION YEARS focus more and more on non-financial indicators(e.g. On-time delivery, market share) In strategic planning -market based external dates (e.g.market share) have used equally with financial based dates In short term planning the financial dates played more important role. 18

  19. MAS scope – TIME-HORIZONS BOOMING YEARS common prevalence of historical dimension – monthly reporting increasing long-run orientation by higher application of strategic planning (mean: 4,82 in 2004 and 5,52 in 2007) and mid-term planning early warning system was indicated as the less intensively used approach 19

  20. Time-horizonof MAS 20

  21. MAS scope – TIME-HORIZONS RECESSION YEARS the relevance of budgeting issues has been grown substantially companies stress more on short-term budgeting issues than on strategic approach. response capability on customer changed needs has substantially increased the planning period has been shortened - the share of budgets compiled for the period up to one-year has been increased. financial plans and development plans were mainly compiled for a period up to three years. relevance of budgeting issues were estimated higher than performance reporting ones. 21

  22. Activity based costing – ABC • Growing implementation – better understanding on the cost formation mechanism through the value chain • 7% manufacturing companies in 1999 • 56% companies in 2007 • Has grown almost to double during 3 years (+ 81%) • Continuous increase in 2011 22

  23. Client vs product orientation • 1999: 52% product-based vs 20% client-group based +17% sales region based • 2007: 75% product-based vs 53% client-group based contribution margin analysis of clients or customers has doubled Client-group based approach has grown in smaller companies 23

  24. Financial versus non-financial measures • Growth of implementation more than 25%: • Financial indicators: ROI • Non-financial measures : on time delivery, customer profitability, fastness of the reaction to new market threats 24

  25. Financial versus non-financial measures • Aspects of indicators which are used in more than 70% of companies: • Financial aspects • Client aspects • Internal processes aspects • Balanced Scorecard: 42% of companies 25

  26. Conclusion Stages in the development of management accounting and performance measurement systems: I From financial accounting to management accounting II Product-based financial indicators III Client-market and internal processes based non-financial indicators 26

  27. Thank you! 27

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