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Management Control System - Accounting Today, because of revolution in management accounting, both smallest corner store and largest multinational organization start their own innovation on their accounting perspective. They were successful by applying new cost accounting model such as ABC systems and JIT system to improving the cost accounting system. Their Sociological perspective can be understood as a point of view that focuses not on individuals but their group or society, this is another concept that can be improve the value of modern management accounting system. Nowadays, most successful organization are more and more concentrate on the management accounting system innovation, by using both technical model and sociological/behavioral perspectives to improve the value in their management accounting system. The following essay will discuss the organizations how to apply the management control system to improve the working performance, and guide the employees achieving the goals. Introduction Simon states that management control system as “the formal information-based routines and procedures managers use to maintain or alter patterns in organizational activities”. Management control system plays an important role in management accounting, it helps the directors to make decisions in daily operation and give good strategies of the business. In general, this system collects and uses information to aid and coordinate the planning and control decision. Moreover, the main point of management control system is to guide the behavior of the managers and employees to achieve the goal. In addition, management control system collects both financial and non-financial information inside and outside of the company. Management control system could depart as formal and informal control system. However, according to Simons’ definition of management control system the formal management control system much more helpful to aid the company achieve the goal. Because to the formal management control system itself, it includes the explicit rules, procedures, performance measures and incentive plans so that it could guide the behavior of its managers and employees. Technical control system As management accounting system is one of the formal management control system, and planning is one of the management process phase. Planning is used by management to develop the organization’s objective or goal, and set a plan that how to achieve it. For example, one organization set its objective to increase the market share by 10% and introduce its new product. The organization might decide to three actions to achieve it, increased advertising budget, open a new sales territory, and increase the research and development budget. Strategic planning is one kind of planning which is used by management to develop long-run courses of action to achieve the goal. Usually, a strategic planning involves a period’s cove five or ten years. Operational plans are typically designed to achieve quality goal such as customer satisfaction, production and cost. In management accounting system, budget is a good tool for planning and achieving the operational objective. Budget is a process of translating the planning and programming decisions into specific projected financial plans for short-run. It is a segment of action programs adopted that set out planned and estimate the resources to be applied for the budget periods in order to attain the accomplishments. It also includes financial and non-financial aspects of the plan and the blueprint of the company in the upcoming years. As a management accountant, usually spend a 1
lot of time in preparing and analyzing the budgets. The reason is that the manager could get some advantages from budget. The first advantage is strategic planning and implementation of plans. However, a successful of a business is not enough to be created by a good budget. Control is an important and necessary tool to meet the budget. It monitors the result between budget and actual to determine if the budget result is achieved or not. When the managers have planned the goals and directed the actions, there comes the need to assess how well the plan is working. “Control is taking actions that implement the planning decisions and deciding how to evaluate performance and what feedback to provide that will help future decision making.” Controlling and monitoring the operating results of implemented plans and comparing the actual results with the expected results. Because the traditional costing accounting gives too little attention to internal and cost controls and cost controls, matches revenue and expenses improperly. Thus an alternative to these suggested solutions is for the accounting system to adopt for new method of accounting for product costs under generally accepted accounting principles (GAAP). “Activity-base costing, technology, and JIT (Just-In-Time) system have been developed to update the traditional accounting model so it adequately reflects today’s manufacturing environment.” Activity-base costing “Activity-base costing Accounting accumulates product cost and other financial and operational information based on the activities required to manufacture the product or achieve a financial or operational goal.” Today’s management accountants are not allocating overhead to production solely on the basis of direct labor rather than before. The first step in activity-base costing is to identify the products that are the chosen cost objects. Controls also are strengthened under activity accounting because costs are controlled at the activity level where they are being incurred. The traditional model emphasizes cost control at the finished product level after the goods have been produced and the costs have been incurred. Therefore, activity base costing can be improved the management accounting by the stage of cost allocating and controls. Just-In-Time System The concept of JIT was defined of reducing inventories by working closely with supplies to coordinate delivery of materials just before their use in the manufacturing or supply process. This means JIT can minimize the inventory by supplying material and components to the production line directly before placement in to the product. Furthermore, in the ultimate JIT system, inventory is constant from year to year means that the cost of goods sold equals the cost of goods manufactured. However, normally, costs of goods, includes raw materials, work in process, finished goods inventory and cost of good sold. If cost of goods sold equals the cost of goods manufactured, then cost of goods sold will disappear, lead ending inventories to be immaterial. On the other hand, JIT profoundly affect the unit cost concept. “A successful JIT system requires the just in time supply of defect-free inventories to all stages of production.” Sociological control system It is not good enough for the company to achieve the goal for using technical system. Sociological control system could assist the company and achieve the goal easily. People may have problems from the planning and controlling. Of course, budgeting will bring a lot of benefits for operating the company in the future. However, budgeting could bring the stress to all 2
employees to achieve the goal at the same time. For example, in order to be effective, budgeting need to built “honest” relationships been the lower-level managers and high-level managers even their bosses. Because the lower-level managers want to keep successful and they may give the wrong number to higher-level managers and their bosses. “Empowerment is the most recent management initiative aimed at getting more effort, commitment involvement, and output from employees throughout the organization.” Attention of management at all levels focused on costs, profit, ROI, leverage, and other financial results. Analysis: As a result of buttered by intense level of competition under globalization of the marketplace. Most organizations need to apply an effective management system to create a committed workforce. Hence, management control system links socialization practices to the business strategy so that it can improve the working performance and aid the employees achieve the goals. “Human resource management can help a firm obtain competitive advantage lowering costs, by increasing sources of product and service differentiation or by both”. Conclusion The two parts, one is improving the value of management accounting system by technical model, and the other is sociological/behavioral perspectives. In the technical model, it was mainly talked about the ABC system, JIT system, and technology accounting as the tool to improve the value of the management accounting systems and practice. Furthermore, Sociological and behavioral also can lead the management accounting system value improve, based on their external and internal environment. Try to be more concentrate on the customers, as much as lower the input price, to get more competitive advantages, therefore, to improving the productivity and lower the production costs by applying the technical method, as a results to improving the value of the management accounting system. Therefore in conclusion, move to the successful organization, the group need to be brave in innovation, although the financial technical such as costing accounting system but some other perspectives like non financial perspectives sociological and behavioral is also important for an organization to move to successful. The main function of management control system is to combine technical method and sociological method, and aid the working performance lead to guide the employees achieving the objective. Single Entry System vs. Double Entry System Single Entry System: Most of financial accounting is based on double-entry bookkeeping. To understand and appreciate the advantages of double entry, it is worthwhile to examine the simpler single-entry bookkeeping system. In its most basic form, a single-entry system is similar to a checkbook register and is characterized by the fact that there is only a single line entered in the journal for each transaction. In a simple checkbook, each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash. This system is demonstrated in the following example for a repair shop business: Single Column System Date Description Amount Jan 1 Beginning Balance 3 1,000.00
Jan 2 Purchased shop supplies Jan 4 Performed repair service Jan 7 Performed repair service Jan 15 Paid phone bill Jan 30 Ending balance
(150.00) 275.00 125.00 (50.00) 1,200.00
While extremely simple, because the above system uses a single column, only the difference between revenues and expenses is totaled - not the individual values of each. Knowing the individual total amounts of revenues and expenses is important to a business, for example, when formulating a budget. The revenues and expenses also are reported in the income statement. In the above example, the individual revenue and expense amounts can be determined only by sorting through the transactions and tabulating the revenue and expense totals. This process can be designed into the system by using a separate column for revenues and expenses: Separating Revenues and Expenses Date Description Revenues Expenses Jan 2 Purchased shop supplies Jan 4 Performed repair service Jan 7 Performed repair service Jan 15 Paid phone bill January Totals 400.00 275.00 125.00 50.00 200.00 150.00
While the above example now uses two columns, it still is considered to be a single-entry system since only one line is used to record each transaction in the cash account. This single-entry system often is expanded to provide more useful information. For example, additional columns can be added to classify the revenues as sales and sales tax collected, and the expenses as rent, utilities, supplies, etc. Some single-entry systems may add dozens of columns for different types of revenues and expenses. Many small businesses utilize such a system. However, even with columns to classify the revenues and expenses, single-entry bookkeeping is limited in its ability to provide detailed financial information. Some disadvantages of a single-entry system include: • Does not track asset and liability accounts such as inventory, accounts receivable and accounts payable. These must be tracked separately. • Facilitates the calculation of income but not of financial position. There is no direct linkage between income and the balance sheet. • Errors may go undetected and often are identified only through bank statement reconciliation. Because of these drawbacks, a single-entry system is not practical for many organizations such as those having many thousands of transactions in a reporting period, significant assets, and external suppliers of capital. The more sophisticated double-entry bookkeeping system addresses the more demanding needs of such businesses. Double Entry Bookkeeping:
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The double-entry bookkeeping system was started in 13th century and refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits within the accounting equation, assets = liabilities + equity. The accounting equation serves as a kind of error-detection system: if, at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred. A business transaction involves an exchange between two accounts. For example, for every asset there exists a claim on that asset, either by those who own the business or those who loan money to the business. Similarly, the sale of a product affects both the amount of cash (or cash receivable) held by the business and the inventory held. Recognizing this fundamental dual nature of transactions, merchants in medieval Venice began using a double-entry bookkeeping system that records each transaction in the two accounts affected by the exchange. In the late 1400's, Franciscan monk and mathematician Luca Pacioli documented the procedure for double-entry bookkeeping as part of his famous Summa work, which described a significant portion of the accounting cycle. Double-entry bookkeeping spread throughout Europe and became the foundation of modern accounting. Two notable characteristics of double-entry systems are that 1) each transaction is recorded in two accounts, and 2) each account has two columns. In a double-entry system, two entries are made for each transaction - one entry as a debit in one account and the other entry as a credit in another account. The two entries keep the accounting equation in balance so that: Assets = Liabilities + Owners' Equity To illustrate, consider a repair shop with a transaction involving repair service performed on Jan 4 for a cash payment of $275.00. In a single-entry bookkeeping system, the transaction would be recorded as follows: Single Entry Example Date Description Revenues Expenses Jan 4 Performed repair service 275.00
In a double-entry system, the transaction would be recorded as follows: Double Entry Example Date Accounts Debit Credit Jan 4 Cash Revenue 275.00 275.00
A notation may be added to this journal entry to indicate that the revenue was from repair services. Note that two accounts (revenue and cash) are affected by the transaction. If the customer did not pay cash but instead was extended credit, then "accounts receivable" would have been used instead of "cash." In this system, the double entries take the form of debits and credits, with debits in the left column and credits in the right. For each debit there is an equal and opposite credit and the sum 5
of all debits therefore must equal the sum of all credits. This principle is useful for identifying errors in the transaction recording process. Double-entry accounting has the following advantages over single-entry: • Accurate calculation of profit and loss in complex organizations • Inclusion of assets and liabilities in the bookkeeping accounts. • Preparation of financial statements directly from the accounts • Easier detection of errors and fraud 1. In double entry system of bookkeeping as two fold aspect of each transaction is recorded in the books, a trial balance can be prepared to prove the arithmetical accuracy of the transaction. No trial balance can be prepared under single entry system and hence accuracy of books cannot be proved. 2. In double entry system the risk of fraud or its non discovery is less. But under single entry system chances of fraud or mistake remaining undetected are very high. 3. In double entry system a trading and profit and loss account can be prepared very easily. The proprietor can know the profit earned or loss suffered by has business. Under single entry system no trading and profit and loss account can be prepared scientifically and, hence, the proprietor will have no firm idea of profit earned or loss suffered. 4. In double entry system a balance sheet can be prepared from the books of accounts. The correctness of assets and liabilities can be proved. The balance sheet called statement of affairs in a single entry system is prepared in an unsatisfactory manner. The assets and liabilities are not proved from records. Hence the correctness of assets and liabilities cannot be relied upon. To appreciate the importance of double-entry bookkeeping, it is interesting to note that the industrial revolution might not have been possible without it. At that time, businesses increased in size and complexity. Accurate bookkeeping was required for managers to understand the financial status of their businesses in order to keep them solvent and offer a degree of transparency to investors. While a single-entry system can be adapted by a skilled bookkeeper to meet some of these needs, only a double-entry system provides the required detail systematically and by design.
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lot of time in preparing and analyzing the budgets. The reason is that the manager could get some advantages from budget. The first advantage is strategic planning and implementation of plans. However, a successful of a business is not enough to be created by a good budget. Control is an important and necessary tool to meet the budget. It monitors the result between budget and actual to determine if the budget result is achieved or not. When the managers have planned the goals and directed the actions, there comes the need to assess how well the plan is working. “Control is taking actions that implement the planning decisions and deciding how to evaluate performance and what feedback to provide that will help future decision making.” Controlling and monitoring the operating results of implemented plans and comparing the actual results with the expected results. Because the traditional costing accounting gives too little attention to internal and cost controls and cost controls, matches revenue and expenses improperly. Thus an alternative to these suggested solutions is for the accounting system to adopt for new method of accounting for product costs under generally accepted accounting principles (GAAP). “Activity-base costing, technology, and JIT (Just-In-Time) system have been developed to update the traditional accounting model so it adequately reflects today’s manufacturing environment.” Activity-base costing “Activity-base costing Accounting accumulates product cost and other financial and operational information based on the activities required to manufacture the product or achieve a financial or operational goal.” Today’s management accountants are not allocating overhead to production solely on the basis of direct labor rather than before. The first step in activity-base costing is to identify the products that are the chosen cost objects. Controls also are strengthened under activity accounting because costs are controlled at the activity level where they are being incurred. The traditional model emphasizes cost control at the finished product level after the goods have been produced and the costs have been incurred. Therefore, activity base costing can be improved the management accounting by the stage of cost allocating and controls. Just-In-Time System The concept of JIT was defined of reducing inventories by working closely with supplies to coordinate delivery of materials just before their use in the manufacturing or supply process. This means JIT can minimize the inventory by supplying material and components to the production line directly before placement in to the product. Furthermore, in the ultimate JIT system, inventory is constant from year to year means that the cost of goods sold equals the cost of goods manufactured. However, normally, costs of goods, includes raw materials, work in process, finished goods inventory and cost of good sold. If cost of goods sold equals the cost of goods manufactured, then cost of goods sold will disappear, lead ending inventories to be immaterial. On the other hand, JIT profoundly affect the unit cost concept. “A successful JIT system requires the just in time supply of defect-free inventories to all stages of production.” Sociological control system It is not good enough for the company to achieve the goal for using technical system. Sociological control system could assist the company and achieve the goal easily. People may have problems from the planning and controlling. Of course, budgeting will bring a lot of benefits for operating the company in the future. However, budgeting could bring the stress to all 2
employees to achieve the goal at the same time. For example, in order to be effective, budgeting need to built “honest” relationships been the lower-level managers and high-level managers even their bosses. Because the lower-level managers want to keep successful and they may give the wrong number to higher-level managers and their bosses. “Empowerment is the most recent management initiative aimed at getting more effort, commitment involvement, and output from employees throughout the organization.” Attention of management at all levels focused on costs, profit, ROI, leverage, and other financial results. Analysis: As a result of buttered by intense level of competition under globalization of the marketplace. Most organizations need to apply an effective management system to create a committed workforce. Hence, management control system links socialization practices to the business strategy so that it can improve the working performance and aid the employees achieve the goals. “Human resource management can help a firm obtain competitive advantage lowering costs, by increasing sources of product and service differentiation or by both”. Conclusion The two parts, one is improving the value of management accounting system by technical model, and the other is sociological/behavioral perspectives. In the technical model, it was mainly talked about the ABC system, JIT system, and technology accounting as the tool to improve the value of the management accounting systems and practice. Furthermore, Sociological and behavioral also can lead the management accounting system value improve, based on their external and internal environment. Try to be more concentrate on the customers, as much as lower the input price, to get more competitive advantages, therefore, to improving the productivity and lower the production costs by applying the technical method, as a results to improving the value of the management accounting system. Therefore in conclusion, move to the successful organization, the group need to be brave in innovation, although the financial technical such as costing accounting system but some other perspectives like non financial perspectives sociological and behavioral is also important for an organization to move to successful. The main function of management control system is to combine technical method and sociological method, and aid the working performance lead to guide the employees achieving the objective. Single Entry System vs. Double Entry System Single Entry System: Most of financial accounting is based on double-entry bookkeeping. To understand and appreciate the advantages of double entry, it is worthwhile to examine the simpler single-entry bookkeeping system. In its most basic form, a single-entry system is similar to a checkbook register and is characterized by the fact that there is only a single line entered in the journal for each transaction. In a simple checkbook, each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash. This system is demonstrated in the following example for a repair shop business: Single Column System Date Description Amount Jan 1 Beginning Balance 3 1,000.00
Jan 2 Purchased shop supplies Jan 4 Performed repair service Jan 7 Performed repair service Jan 15 Paid phone bill Jan 30 Ending balance
(150.00) 275.00 125.00 (50.00) 1,200.00
While extremely simple, because the above system uses a single column, only the difference between revenues and expenses is totaled - not the individual values of each. Knowing the individual total amounts of revenues and expenses is important to a business, for example, when formulating a budget. The revenues and expenses also are reported in the income statement. In the above example, the individual revenue and expense amounts can be determined only by sorting through the transactions and tabulating the revenue and expense totals. This process can be designed into the system by using a separate column for revenues and expenses: Separating Revenues and Expenses Date Description Revenues Expenses Jan 2 Purchased shop supplies Jan 4 Performed repair service Jan 7 Performed repair service Jan 15 Paid phone bill January Totals 400.00 275.00 125.00 50.00 200.00 150.00
While the above example now uses two columns, it still is considered to be a single-entry system since only one line is used to record each transaction in the cash account. This single-entry system often is expanded to provide more useful information. For example, additional columns can be added to classify the revenues as sales and sales tax collected, and the expenses as rent, utilities, supplies, etc. Some single-entry systems may add dozens of columns for different types of revenues and expenses. Many small businesses utilize such a system. However, even with columns to classify the revenues and expenses, single-entry bookkeeping is limited in its ability to provide detailed financial information. Some disadvantages of a single-entry system include: • Does not track asset and liability accounts such as inventory, accounts receivable and accounts payable. These must be tracked separately. • Facilitates the calculation of income but not of financial position. There is no direct linkage between income and the balance sheet. • Errors may go undetected and often are identified only through bank statement reconciliation. Because of these drawbacks, a single-entry system is not practical for many organizations such as those having many thousands of transactions in a reporting period, significant assets, and external suppliers of capital. The more sophisticated double-entry bookkeeping system addresses the more demanding needs of such businesses. Double Entry Bookkeeping:
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The double-entry bookkeeping system was started in 13th century and refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits within the accounting equation, assets = liabilities + equity. The accounting equation serves as a kind of error-detection system: if, at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred. A business transaction involves an exchange between two accounts. For example, for every asset there exists a claim on that asset, either by those who own the business or those who loan money to the business. Similarly, the sale of a product affects both the amount of cash (or cash receivable) held by the business and the inventory held. Recognizing this fundamental dual nature of transactions, merchants in medieval Venice began using a double-entry bookkeeping system that records each transaction in the two accounts affected by the exchange. In the late 1400's, Franciscan monk and mathematician Luca Pacioli documented the procedure for double-entry bookkeeping as part of his famous Summa work, which described a significant portion of the accounting cycle. Double-entry bookkeeping spread throughout Europe and became the foundation of modern accounting. Two notable characteristics of double-entry systems are that 1) each transaction is recorded in two accounts, and 2) each account has two columns. In a double-entry system, two entries are made for each transaction - one entry as a debit in one account and the other entry as a credit in another account. The two entries keep the accounting equation in balance so that: Assets = Liabilities + Owners' Equity To illustrate, consider a repair shop with a transaction involving repair service performed on Jan 4 for a cash payment of $275.00. In a single-entry bookkeeping system, the transaction would be recorded as follows: Single Entry Example Date Description Revenues Expenses Jan 4 Performed repair service 275.00
In a double-entry system, the transaction would be recorded as follows: Double Entry Example Date Accounts Debit Credit Jan 4 Cash Revenue 275.00 275.00
A notation may be added to this journal entry to indicate that the revenue was from repair services. Note that two accounts (revenue and cash) are affected by the transaction. If the customer did not pay cash but instead was extended credit, then "accounts receivable" would have been used instead of "cash." In this system, the double entries take the form of debits and credits, with debits in the left column and credits in the right. For each debit there is an equal and opposite credit and the sum 5
of all debits therefore must equal the sum of all credits. This principle is useful for identifying errors in the transaction recording process. Double-entry accounting has the following advantages over single-entry: • Accurate calculation of profit and loss in complex organizations • Inclusion of assets and liabilities in the bookkeeping accounts. • Preparation of financial statements directly from the accounts • Easier detection of errors and fraud 1. In double entry system of bookkeeping as two fold aspect of each transaction is recorded in the books, a trial balance can be prepared to prove the arithmetical accuracy of the transaction. No trial balance can be prepared under single entry system and hence accuracy of books cannot be proved. 2. In double entry system the risk of fraud or its non discovery is less. But under single entry system chances of fraud or mistake remaining undetected are very high. 3. In double entry system a trading and profit and loss account can be prepared very easily. The proprietor can know the profit earned or loss suffered by has business. Under single entry system no trading and profit and loss account can be prepared scientifically and, hence, the proprietor will have no firm idea of profit earned or loss suffered. 4. In double entry system a balance sheet can be prepared from the books of accounts. The correctness of assets and liabilities can be proved. The balance sheet called statement of affairs in a single entry system is prepared in an unsatisfactory manner. The assets and liabilities are not proved from records. Hence the correctness of assets and liabilities cannot be relied upon. To appreciate the importance of double-entry bookkeeping, it is interesting to note that the industrial revolution might not have been possible without it. At that time, businesses increased in size and complexity. Accurate bookkeeping was required for managers to understand the financial status of their businesses in order to keep them solvent and offer a degree of transparency to investors. While a single-entry system can be adapted by a skilled bookkeeper to meet some of these needs, only a double-entry system provides the required detail systematically and by design.
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