Except in the very smallest of companies, there is a division of tasks of manage- ment among a number of departments and business units; and therefore of per- sons, since companies are made up of people. It is the task of organization to ensure there is specialization to make maximum use of the aptitudes and abili- ties of people, for the various operations of the firm. The divisionalization, or other form of organization that arises from this specialization of duties, repre- sents a structure which consists of:
● Units of attention, or
● Centres of managerial interest.
This divisionalization also entails a number of problems, many of which have relevance to the accounting operations – starting with the fact that the latter must reach the lowest level of supervision. In manufacturing, the lowest level of supervision is the foreman. In an office environment, such as banking, the low- est level of internal supervision is the section head. In both cases,
● The highest level of supervision is the chief executive officer (CEO), and
● Above the CEO stands the board of directors to whom he or she reports.
Top to bottom, all levels of supervision, both at headquarters and in the sub- sidiaries, must benefit from management accounting support. Planning and con- trol provides a good example on how this should work.
● Planning is the process of deciding what action should be taken in the future.
The area covered by a plan may be a small segment of the entity, or it may be the whole enterprise. The decision as to whether the price of one product should be increased by, say, 3% is a plan; and so is a decision to merge the company with another firm.
The essential characteristic of a plan is that it involves a decision about action to be taken in the future. Planning is therefore to be distinguished from forecasting, which is an estimate of possible evolution; for instance, in market demand, in infla- tion, in general economic well-being, or in matters concerning the entity internally.
● Controlis the process through which management assures itself, as far as is feasible, that what the company does conforms to plans and policies.
Accounting information, particularly cost accounting, is most useful to manage- ment in evaluating the efficiency of employees in doing their jobs. Merits assigned in the aftermath of appraisal of performance may result in salary increase and/or promotion. Demerits may lead to reassignment, corrective action of various kinds, or even dismissal.
Accounting information assists in this appraisal process, even if an adequate basis for judging individual performance cannot be obtained from accounting records only. Organizational activities, discussed at the beginning of this section, also require reliable information for planning and control. The performance of a responsibility centre must be judged in terms of its inputs and outputs registered through accounting. Since output is often divided into qualityand quantitycom- ponents three key questions need to be considered simultaneously:
● How much was accomplished?
● How good was its quality compared to specifications?
● How much did it cost? (See section 7)
Actual results must always be compared with some standard showing what is expected. Part of the importance of giving due consideration to all three aspects of performance, identified through these bullet points, lies in the fact that divi- sionalization must be evaluated in terms of its deliverables. Results obtained in real life are the only way to test an organizational solution.
Divisionalization should never be made at random, and the same principle is valid about establishing the inputs and outputs of the accounting system. Two notions closely connected to organizational theory are: The span of controland layers of supervision– they are connected to one another. Span of control defines how many managers report to a superior. Layers of supervision are counted top to bottom: from the CEO to the lowest level. Other things being equal:
● The larger is the span of control, the fewer are the supervisory layers.
● Lean organizations have very few managerial levels; not more than five.
Badly managed firms may have fifteen.
Ideally, the accounting unitshould be a subsection of the lowest level of super- vision because this can assure both detail and greater accuracy. A basic aspect of the difference between financial and managerial accounting lies in the unit of accounting taken as the very basis of operations. Here again the distinction can be made top to bottom.
● For regulatory financial reporting, the firm is viewed as a single entity, in terms of which financial data is marshalled to show the position, or effects, of operations as a whole.
The company’s financial reporting is a summation of general accounting data whose detail is found in the aforementioned smallest units of operation (and supervision). This detail is most important, as well, for managerial accounting.
Costs and risks cannot be controlled in a summary manner.
● For management purposes, however, the notion that the firm is a single entity is not very useful because most critical decisions are not of the type that can be related to overall enterprise data.
Activities such as extending credit or making capital investments require detail – and, associated to it, maintenance of records to make readily available specific information. Typically, such information cannot be obtained except by following the transactions involving a particular customer or business unit, as well as its subdivisions.
Along a similar line of thinking, valuing assets or setting a selling price for a given product or service (see Chapter 10) cannot be done in terms of income statement aggregates. Some costs are variable with output, and some are related to factors other than output. All costs are important (see section 7), and it must be possible to track them to their origin.
● The proper appraisal of cost, as well as of risk and return, involves much more than mere aggregates or summary data.
A good way of going to the heart of costs and risks is to set up accounting units at the level of detail about which management wants information from account- ing, also specifying the kind of information that is wanted. Moreover,
● Information that is wanted in the future may vary considerably as man- agement requirements evolve and reorganizations reshuffle the units.
Therefore, it is desirable that the accounting structure follows the smaller subdi- vision(s) of the smaller organizational unit. Another factor leading in this direction
of greater detail is that the scope of managerial accounting may shift considerably, and likewise the kind of information that will be wanted as operations evolve.
Greater detail of accounting records also makes feasible information that may be accumulated for both:
● Regularly recurring, and
● Exceptional special-purpose, reports.
One of the prerequisites applicable to both general and managerial accounting is that the accounting function itself must be kept in the hands of persons separate from those who perform various activities, from R, D&I to manufacturing, market- ing, distribution, and after-sales service. When this is done, the system of account- ing serves as an independent reporting agency. Subsequently, the auditing process is checking all the activities of the firm in such a way as to bring to the attention of operating executives deviations or other data demanding immediate attention.
● Continuous review and reporting of conditions by an ‘independent agency’
is an effective means of making sure that operating executives do not over- look their responsibilities.
● In this sense, management accounting provides an overall check upon the entire organization, thereby contributing to better governance and performance.
This is done not by giving orders or attending to details of supervision, but by bringing various parts of the picture of the enterprise’s progress and achievement to the attention of the proper officers. Precisely because of this function, which is vital to good corporate governance, companies should welcome IFRS and its rigorous rules and clauses. The alternative is drifting.