In summary, to evaluate context, the managerial accountant has four matters to consider. There are the geographical factors that have three levels: global, national and regional. There are the influencing factors of the industry. They include the industry group within an economic sector, market structure, industry size, industry trends, industry success factors, industry competition, industry government regulation, and technological advancement and automation at the industry level. There are the immediate factors of the organization. Its performance characteristics include its history, corporate backing or parent, size, structure, culture, policies, creativity and innovation, and risk profile. These are supplemented with studies of the stage in the organization life cycle, its financial position, and its execution of strategy. There are the trends and particular or one-off events. Trends and one-off events can differentially affect industries and organizations (e.g., prices, competition and regulation). The factors that comprise context give the managerial accountant a checklist for investigating whether their analyses and recommendations overlook any salient influences. If these are overlooked or misunderstood, the managerial accountant cannot fulfill their role and responsibilities.
Notes
1. Some problems in the distinction between stocks and flows are identified by Clower (1959) and Harrison (1980). In accounting, profit or income is represented as a flow. In economics, stock amounts include money, financial assets, liabilities, wealth, real means of production, capital, inventories and labor, while, flow magnitudes include income, spending, saving, debt repayment, fixed investment, inventory investment and labor utilization. Thus, capital is a stock that produces a periodic income, which is a flow. The presence of these terms in psychology has other unconnected uses with cognition (e.g., Meehl, 1992).
2. Self - care refers to activities undertaken with the intention of enhancing energy, restoring health and manage stress. They ought to be part of a plan to maintain professionalism and avoid preventable illnesses and injuries, which is discussed in chapter 10.
3. Financial information takes the form of numbers as a monetary amount. It may be a profit statement, a job cost, a price, a budget amount, a variance or an actual amount. Non-financial information may either be numbers (such as the number of hours a machine is used) or take the form or words, symbols or diagrams. For this reason, many managerial accountants prefer to distinguish between quantitative information (that uses numbers) and qualitative information that is concerned with characteristics or properties. For example, a decision to outsource may consider the importance of employee morale and loyalty. The use of qualitative factors may also arise because quantitative data are not available, and estimates by experts vary (Oliver, 2012).
4. Globalization is the term used to describe the removal of borders for the international expansion of markets. Globalization has occurred with the adoption of the Gregorian calendar and since land and mercantile trade expanded from Europe. While cultural, political, technological and economic domains of countries expand beyond their own national boundary through creating transnational corporations (businesses with a base in one country but conducting operations in a number of other countries), the rate of globalization has been increased through agreement on standards, improved technologies and the lifting of trade restrictions.
5. To further confuse the classification, the terms ‘sector’ and ‘industry’ are often used interchangeably. Improvements in technology require less labor, and they move to the tertiary sector (Clark, 1940).
6. Issues include the very high standards of proof that are required to prove danger and the apparent unquestioning adoption by consumers. The presumption that new chemicals and technologies are safe until proven otherwise is a fundamental problem. Many new chemicals were introduced because they promised benefits but were later shown to cause great harm (e.g., some neurotoxicants, asbestos, thalidomide, diethylstilbestrol and the chlorofluorocarbons; Grandjean & Landrigan, 2014).
7. In a study of the decline of the pre-eminent cotton industry, Lazonick (1983: 232) uses the distinction between the manager of neoclassical theory who, “to use modern language, optimizes subject to ‘given’ constraints and the entrepreneur who alters these constraints, thus creating new profitable opportunities”. That is, managerial activity is different to entrepreneurial activity; so feasible technological choices and profitable opportunities may be constrained across the industry (Schumpeter, 1947).
8. Technology is the industrial use of scientific discoveries. There is no guarantee they will be successfully implemented (e.g., superconductivity of electricity with zero resistance has been known since 1991 but has not been commercialized), or that the superior technology will become established in the marketplaces (e.g., for video the VHS system replaced the superior quality Sony Beta recording).
9. Accounting software packages have replaced manual (i.e., handwritten) journals and ledgers, creating a central repository of accounting information. Also, manual worksheets completed with pencil and corrected using an eraser have been replaced by spreadsheet productivity applications, which allow calculations to be automatically completed, numbers to be changed and new numbers derived using formulas. These changes allow decisions to be made earlier in some cases.
10. One or more organizations may independently be pursuing an innovation to maximize sales before competitors can offer a similar or superior copy, but then see the advantages of pooling knowledge. This may occur through a joint venture (e.g., Concorde), sale to an organization with related capabilities or the result of catastrophe (e.g., after Comet crashes British jet, and aircraft technology was shared with US manufacturers, notably Boeing.
11. Some organizations mistakenly install an integrated system such as an enterprise resource planning system believing that it will standardize operations and eliminate many subsidiary and shadow systems. Generally, their lack of attention to the design of the new
system and migration between old and new systems results in a myriad of existing systems (for their features, or for their reliability), although management may not become aware of this for some time. There have been some cases where purchasing and sales information captured and transferred to the general ledger for business financial and non-financial reporting resolved discrepancies between reports produced by systems containing different data. However, more information does not produce better decisions. The expression ‘garbage-in, garbage-out’ is a reminder that where managers and employees blindly rely on reports produced by automated systems, they are likely to make substandard decisions.
12. Measures of performance include net profit, total assets, total sales, total revenue, tax paid, number of employees or number of branches.
13. Uncertainty is a potential, unpredictable and uncontrollable outcome. Risk involves damage, injury, liability, loss or any other negative occurrence that is caused by external or internal vulnerabilities that may be avoided through pre-emptive action.
14. The business life cycle is distinguished from the economic cycle. The economic cycle is the periodic but irregular rise and fall of economic activity, measured by fluctuations in real gross domestic product and other macroeconomic variables. Both the business life cycle and the economic cycle are irregular and unpredictable. While the economic cycle may affect the business cycle, other factors such as owner competence, product or service viability and competition affect the cycle experienced by a particular business. Peaks and troughs in the economic cycle may not coincide with the profitability of a particular business.
15. Adizes (1988) describes a more detailed version of stages in the life cycle based around predictability and flexibility (with analogies).
His book is full of aphorisms including, ‘too many priorities means no priorities’ (p. 34) and ‘What kind of people are left in a [threatening] environment? Administrators’ (p. 78). Part 2 deals with culture as leadership. More generally, Adizes’ sees interrelationships (p. 130–131) between performance (what), administration (how), entrepreneurship (when hides why) and integration (who and with whom). The energy of power (ability to reward and punish), authority (the capability to say yes or no) and influence are associated with implementing decisions.
16. Some organizations are designed for the short-term. For example, quasi government authority setup to host Olympic competitions.
Moreover, methods that bring success in a particular stage may not be successful in later stages. The organizations may be run from home, from a secretarial service or from a formal office.
17. The first author of Coyne, Coyne and Coyne (2010) is a former McKinsey associate and executive assistant to the Deputy Secretary of the Treasury. He proposes systematic methods to reduce costs assuming (a) that some cost cutting has already occurred and that there are no obvious areas or items a that could be cut, and (b) massive savings from high-risk actions would not be countenanced.
18. An organization may experience a one-off internal or external event that disrupts revenue. For example, an external disruption would be the cessation of supply of electricity. For example, an internal disruption would be an employee strike. One-off events lead to the loss of revenue but generally are not responsible for decline unless risk has been improperly assessed. For example, insurance cover for the organization has not been obtained or kept up-to-date.
19. A comprehensive review of takeovers in Australia between 2010 and 2015 (Damien & James, 2016), found 42.9% of hostile bids came from a foreign bidder and just 11.4% were bids from private equity; only 8.6% of hostile bids attracted rival offers. The average share price premium offered started at 37.2% and reached 53%.
20. Mintzberg (1987) provides five definitions of strategy: (1) plan or consciously intended course of action; (2) ploy or a specific maneuver intended to outwit an adversary; (3) pattern or realized strategy irrespective of the plan; (4) position or a mediating force between an organization and the environment and (5) perspective or view of the world shared by members of an organization. Thus, an organization has a deliberate strategy and an emergent strategy.
21. Capacity measurement should be regarded as a strategic direction and not as a means to evaluate operational performance (Brausch
& Taylor, 1997). This will prevent to operation managers from attempting to increase production to reduce unfavorable capacity volume variances resulting in the possible harmful effects of increasing inventory that becomes obsolescent, damaged or surplus to demand. A contribution margin report can be useful. Since all definitions of capacity except theoretical capacity are based on the output that embed waste, downtime and idle capacity into the everyday operations of the factory, there is impetus to maximize capacity, but this overlooks the ultimate goal of producing better, faster and cheaper products (McNair, 1994). Debruine and Sopariwala (1994) advocate using practical capacity because it is the maximum levels at which each plant (factory), shift, cell or work-island can operate efficiently, and thereby uncovers the cost of unused resources. It differentiates the cost of resources available from the cost of resources actually used for a particular purpose. Gantt (1994) highlighted erroneous decisions that can follow when production is reduced (e.g., when the economy is in a recession and production levels drop). More accurate cost structures are necessary to show the cost of inefficiency or the cost of not producing at capacity. Methods that allocate all the production overhead costs to the output regardless of volume creates inflated costs, provides managers with incorrect information, and subsequently facilitates incorrect decisions.
22. Another indicator of firm size, the Herfindahl–Hirschman Index, is a commonly accepted an indicator of the amount of competition among organizations in an industry.
23. Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. This requires coordination and collaboration between channel partners, which include suppliers, intermediaries, third-party service providers and customers (Karaian, 2014). In essence, supply chain management integrates supply and demand management within and across organizations (Council of Supply Chain Management Professionals, Supply chain management definitions and glossary, 2013).
24. For example, Alvin Toffler popularized the view that the economies would shift from manufacturing and mass production to a computerized and information-based model using contemporary trends and headlines. He concluded that ‘future shock’ (1965) was the product of growing feeling of anxiety brought on by the bewildering and ever-accelerating pace at which life was changing. F. M.
Esfandiary (also known as FM-2030) proposed that people will eventually become wholly made of synthetic parts, so humans would become ‘post-biological organisms’ and his predictions included a so-called Santa Claus machine that would produce three- dimensional objects in the manner of copying machines, teleconferencing, telemedicine and teleshop-ping (1977). ‘Nano-technology’
was coined by the Tokyo Science University Professor Norio Taniguchi in 1974 to describe the precision manufacture of materials with nanometer tolerances, and Eric Drexler (2007) popularized the potential of molecular nanotechnology. Ray Kurzweil created optical character and speech recognition systems and music synthesizers capable of accurately duplicating the sounds of real instruments. More recently, he explored health and medical learning and is employed to bring natural language understanding to Google. Hans Moravec (1998) is known for his work on robotics, artificial intelligence and generalizing Moore’s law to technologies predating the integrated circuit, and extrapolating it to predict super-intelligence. These futurists have all seen transformation as a nonlinear phenomenon. In contrast, some commentators believe that cultural rather than ideological differences will affect economies.
For example, Huntington suggests there are nine major civilizations concurrently seeking to exert their sovereign identity (1996) which occurs while there is internal instability from rival praetorian groups (2006).
9
Four Cardinal Points of the Managerial Accountant’s Compass
This chapter is the second of three that discuss the managerial accountant’s compass. It details the four cardinal points of the compass introduced in Chapter 8 and depicted in Figure 8-1. The four cardinal points are north (goals and principles), south (methods and models), east (boundaries and constraints) and west (collegiate relationship with other managers and employees), and they guide the managerial accountant in exercising their role and responsibilities. Chapter 10 discusses the center cardinal point, that of ethical conduct, which includes self-care for the managerial accountant. As with the previous chapter, the discussion both describes assumed knowledge of the managerial accountant, uses questions to guide attention and suggests avenues that the managerial accountant can constructively explore with non-accounting managers.