This chapter has made a major contribution to framing the managerial accountant’s compass. Most organizational decisions are not isolated. They are part of a series of decisions, so the individual decision is influenced by prior decisions and the extent to which their implementation was completed.
The extended stepwise decision process emphasizes that a successful decision is underpinned by problem analysis. Sometimes this involves creativity and awareness of changing circumstances. It continues through the implementation and the realization of claimed benefits. Although senior management judges’ success at different times and makes their judgment known, so to do other managers and employees. The managerial accountant uses their collegiate relationships across the organization and the extended decision process to assist reach an optimal decision and then during implementation to obtain outcomes beneficial to the organization. Both feature ethical processes and ethical behavior.
The contributions to the managerial accountant’s compass from this chapter contribute to its cardinal points. The financial outcomes underlying recommendations, decisions and judgments are expressed in the managerial accountant’s compass goal, another cardinal point of the managerial accountant’s compass. The extended stepwise decision process and implementation contribute to the methods one of the cardinal point of the managerial accountant’s compass. Judging success and realizing benefits are also methods used by the managerial accountant. The consideration of risks and constraints during the extended stepwise decision process has a close relationship with boundaries and constraints in the managerial accountant’s compass. The discussion of heuristics and cognitive bias are placed in the relationships with others cardinal point of the managerial accountant’s compass. Together recommendations, decisions and judgments have contributed to the four cardinal points of the managerial accountant’s compass.
With the review of role and responsibilities complete, the next part contains three chapters that introduce and discuss the managerial accountant’s compass. It begins with an overview of the managerial accountant’s compass and then discusses its perimeter known as the context in detail in Chapter 8.
Notes
1. Both for-profit and non-profit organizations seek financial outcomes. For profit organizations, they are profitability and growth (Capon, Farley & Hoenig, 1996). For non-profit organizations, they are cost minimization subject to maintaining liquidity and solvency (Wacht, 1984), if necessary through obtaining revenue from grants or donations.
2. It provides more detail than the traditional structure of revenue, selling, and general and administrative expenses. A classified income statement typically is organized into five blocks: (1) sales revenue and cost of goods sold/sales; (2) other operating revenue; (3) operating expenses; (4) other non-operating expenses, if applicable and (5) profit. The line items below these form budget categories and determine whether the expense item impacts gross profit, operating profit, or only net profit.
3. There are variations to terminology depending upon the industry. Cost of goods sold is the total cost of acquiring raw materials and turning them into finished goods, so it includes direct labor, direct materials and manufacturing overhead. For merchandising
businesses, it includes inventory and is designated cost of sales (which may include services). For exclusively service delivery organizations, it is designated cost of services.
4. Griffiths (1987) was read by partners at Ernst and Whinney, and Arthur Young when they were separate companies. Jameson (1988) identifies the managerial accounting connection with this kind of creative accounting in his discussion of budgets and variances highlighting the anecdotal variance analysis, that is excuses.
5. A structured decision features goals, resources are availability, known processes and a well-defined context. These tend to be routine operational decisions. An unstructured decision has uncertain outcomes, unknown resources and unique context.
6. There is a strong likelihood that intermediate decisions as well as the final decision will be affected by cognitive biases and that the receipt of the decision will be accompanied by unintended consequences. Therefore, all tasks should be informed by these human or behavioral considerations or factors. The impact of cognitive biases is discussed in their own right in the following section.
7. A root cause is the initiating cause of either a condition, or a causal chain that when removed eliminates the untoward outcome or effect. While it may be a process that is missing, incomplete or not followed, quality management asks why at least five times to prevent finding a cause that is not the ultimate cause (Wilson, Dell, & Anderson, 1993; Ohno, 1988).
8. Roeder (2011) makes a connection between reading as a learned skill and the reduced capacity to concentrate on the mass of information received through internet searches and hyperlink connections. Information must be understood before it can become knowledge, so skimming and attending to fragments of information that seem most relevant is a counterproductive practice.
9. All decisions have at least two options: the proposed course of action and the implied retention of the status quo. Options offer different approaches for changing the initial condition into the desired condition, which can be restated as a goal. The number of options should be sufficient to provide the decision maker with a spectrum of choices in more than one dimension. If the minimum is taken as three dimensions, and there are two options, this suggests a minimum of six feasible options would be proposed for evaluation against predetermined criteria.
10. A SWOT analysis or SWOT matrix contains two sets of conclusions: (1) the internal or business characteristics assessed with strengths (advantage over competitors) and weaknesses (disadvantage relative to competitors); and (2) the external or environment characteristics assessed with opportunities (favorable situations for competitive advantage) and threats (potential negative effect on the business). The table below depicts the relationship visually.
Relationship to the organization Helpful Harmful
Internal Strengths Weaknesses
External Opportunities Threats
It is completed after analysis is conducted and is used as a summary. After completing the SWOT matrix, conclusions are drawn using a qualitative rating (high, medium or low). Although some authors like to use figures from a scale and multiply ‘Importance’ X [‘Rating’ or ‘Probability’], this produces a misleading quantitative index on what is based on a subjective analysis.
11. A McKinsey review of 2,000 executives in 900 organizations found mediocre implementation, the most problematic aspect of organization change, while the hallmark of success was 2 years after a change effort ended the change itself endured (Johnston, Lefort & Tesvic, 2017).
12. It is a combination of ‘satisfy’ and ‘suffice’. Simon (1956) used it to explain the behavior of decision makers who were unable to determine the optimal solution. This was caused by either computational intractability or a lack of information. He later rephrased it as “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world” (Simon, 1979).
13. A Pareto solution (or Pareto efficiency) to a decision problem has the property that it cannot be improved with respect to any criterion without its performance worsening with regard to some other criterion. So, this is a test that the managerial accountant can use with regard to activities, employees or organizational units. It already has been used for evaluating economic systems and public policies.
14. Pareto’s original observation was that about 80% of the effects come from 20% of the causes, but it is applied to relationships between inputs and outputs, as well as effort and results (Koch, 2017).
15. Attribution theory is the use of information by a perceiver to arrive at causal explanations for their observations of others, even where there is none (Heider, 1958). The attributed cause may be some enduring internal characteristic, (e.g., personality, motives or beliefs) or some situation or event outside a person’s control.
16. Hidden in their 1968 computer utilization report from McKinsey Consulting Organization (1971: 104) were three tests of feasibility put as questions: Economic: Is there a greater monetary return than he costs to develop and implement it? Operational: After the system becomes operational will it be successfully used? Technical: Can this application be developed or implemented with the available technology and budget?
17. Gaming is also known as abusing the system, bending the rules, cheating the system, milking the system, playing the system, testing the system for loopholes or working the system.
18. Functional fixation occurs where the person attaches a certain meaning to an object or idea and then is unable to perceive other possible meanings or uses as a result of a mental block against using the object in a new way (Duncker, 1945).
19. Budgetary slack is either the deliberate (a) underestimation of budgeted revenue or (b) overestimation of budgeted expenses for the period (and sometimes within the period as well). It gives the manager the best chance of reaching budget targets because if costs increase or there are revenue shortfalls, there is a cushion to avoid an unfavorable variance numbers. Budgetary slack often occurs where performance appraisals and bonuses are tied to the achievement of budgeted numbers.
20. Problems include directing attention away from an overall goal, arbitrary weighting, leading to contradictory managerial decisions, observable unintended consequences including tension, reduced morale and communication distortion.
21. These typically include profitability, market position, productivity, product leadership, employee/manager development, employee attitudes, morale and social responsibility.
22. Edward Thorndyke (1920) asked two commanding officers to evaluate their subordinates. He found that once their commander rated the initial factor highly it was likely that later factors would also be rated highly, and vice versa. He named this the ‘halo effect’.
Rosenzweig (2014) applied this to business. He concluded that when an organization is regarded positively, factors such as managerial style, organization culture and strategy are attributed as the crucial drivers that led to success. Conversely, when an organization is out of favor, the same factors are usually viewed negatively, regardless whether they led to the poor outcomes or not.
23. The more extreme form of tick-the-box is pencil whipping. It is completing a form or record, especially a checklist, without performing the implied work required or without obtaining the supporting information or evidence. It may extend to providing incomplete or falsified information. The cognitive bias halo effect may contribute to pencil whipping not being detected because the
person has a favorable overall impression of the manager or employee, and this impression is transferred to the impression that work is being done satisfactorily.
24. This does not necessarily mean ‘do as little as possible’. It may mean not developing loyalty (for example, having a 3-year employment horizon), saving energy for outside-the-organization social impacts or demanding some aspect of personal fulfillment from their jobs, and being willing to freelance (Ernest & Young, 2015).
25. In an extended study using conversation analysis, Maynard (2003) suggests that when giving bad news, it is best to (a) signal it in advance, (b) prime the recipient, (c) be prepared to chat further and (d) try to use empirical objective measures that have independent agreement.
26. Organizational decision making reaches different conclusions to consumer choice theory. Consumer and retailing theory suggests that an abundance of choice (a) may delay or prevent a sale (known as decision paralysis) and (b) may not contribute to satisfaction of the consumer because it can cause anxiety (Schwartz, 2004). Organizational decision theory, which has major financial consequences and obligations of care to stakeholders, requires the generation of feasible options to obtain as many different perspectives as possible. In many cases there are trade-offs in terms of time taken to formulate them and the impossibility of obtaining knowledge of all options, or all consequences that follow from each option (Barnard & Simon, 1947). Often in practice, decision making is curtailed because the circumstances are unfamiliar, and there is urgency to resolve the situation. Both these are inimical to good decision making.
27. Examples of methods include brainstorming; reverse brainstorming where the opposite outcome from the desired outcome is the target; Crawford slip writing technique (Crawford & Demodovich, 1983; Crawford & Krone, 1984) where notes are made, using different perceptual positions (self, other, observer); concept fans that take steps backward (De Bono, 1992), metaphorical thinking (using comparisons); reframing matrix using several perspectives such as product, plan, people and potential (Morgan, 1993); radiant thinking or mind mapping (Buzan, 2005); and listing attributes and then identifying as many variations of the attribute as possible.
Part IV
Development of the Managerial Accountant’s Compass
8
Managerial Accountant’s Compass and Its Context
This chapter is the first of three that describe the rationale behind the managerial accountant’s compass. It gives the managerial accountant a comprehensive framework that encompasses their role and responsibilities. It ensures the managerial accountant works toward their performance, planning targets by making their time more productive. It guides the use information to address managerial accounting practices, issues and challenges. It supports an extended decision process to actively understand a specific organization problem or opportunity. It is compatible with a range of managerial accounting theories and theories of human cognition and action. It accepts that discourse actively constructs, enacts and negotiates managerial accounting, and encourages the reflexive use of language. The discussion following both describes assumed knowledge of the managerial accountant and suggests avenues that the managerial accountant can constructively explore with non-accounting managers. As noted earlier, it features the use of questions to engender communication. The managerial accountant’s compass promotes a sense of enquiry or discovery.