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MBL93FW
ADVANCED FINANCIAL SYSTEMS
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MODULE OVERVIEW
STUDY SCHOOLS
PRESCRIBED BOOKS
CASE STUDIES
ARTICLES
WEB LINKS
ASSESSMENT
TOPICS
MBL93FW
ADVANCED FINANCIAL SYSTEMS
Page
MODULE OVERVIEW
1.1
The kind of environment in which a firm operates can have a significant effect on the type of control
and communication system chosen and implemented.
A successful firm operating in a stable environment would tend to emphasise the maintenance of the
status quo, preservation of market share, stable growth and the continuation of efficient production.
Firms operating in a rapidly changing environment, where products and processes are constantly
being redesigned and improved are forced to re-evaluate how they do things. Improving performance
translates into constantly searching for ways to eliminate waste.
Thus, the control system for firms operating in a stable environment should be different from the
control system for those firms operating in a continuous improvement environment. Maintaining the
status quo is a very different objective from that of continuous improvement.
Thus, it is clear that the control system selected is contingent on the environment in which the firm
operates.
Management accounting offers three types of responsibility accounting system: functional based,
activity-based and strategic-based systems.
Functional-based responsibility accounting systems focus on organisational units such as
departments and plants, use financial outcome measures and static standards and benchmarks to
evaluate performance, and emphasise the status quo and organisational stability.
Activity-based responsibility accounting systems, in contrast, focus on processes, use both
operational and financial measures and dynamic standards, and emphasise and support continuous
improvement. Activity-based responsibility accounting adds a process perspective.
Now, strategic-based responsibility accounting expands the number of responsibility dimensions from
two to four. Customer and learning and growth perspectives are added. Also, the performance
measures become an integrated set of measures linked to an organisations mission and strategy.
Firms that operate in a stable environment with standardised products and processes and low
competitive pressures will most likely find the less complex functional-based responsibility accounting
systems to be adequate.
As organisational complexity increases and the competitive environment become more dynamic, the
activity and strategy-based responsibility systems are likely to be more suitable.
1.2
System dynamics is a method used to gain insight into situations of dynamic complexity, and is
increasingly being used to design more successful policies in companies. The goal is to find
management policies and organisational structures that help resolve system challenges.
The feedback structure of a system generates its behaviour, and most real-world examples represent
a small set of basic patterns or modes of behaviour. The feedback structure of systems will be
mapped by sketching causal diagrams to capture the feedback that is recognisable.
The stock and flow concept is introduced to identify the states of the system upon which decisions
and actions are based. Examples will show that understanding these dynamics can yield insight into
important problems.
You will appreciate that first-order linear systems are the building blocks on which all models are built
and from which more complex dynamics emerge. Linear first-order systems exhibit three behaviours.
These are exponential growth, exponential decay and equilibrium. Non-linear first-order systems can
exhibit s-shaped growth, because the dominant feedback loops shift as the system evolves.
1.3
Increasing compliance costs and the emergence of eco-efficiency have intensified the interest in
environmental costing. Eco-efficiency implies that cost reductions can be achieved by increasing
environmental performance, as environmental costs are a significant percentage of total operating
costs.
Environmental costs are those costs incurred because poor environmental quality exists or may exist.
There are four categories of environmental costs: prevention, detection, internal failure and external
failure.
The external failure category is divided into realised and unrealised costs. Realised costs are those
external costs the firm has to pay, and unrealised or societal costs are caused by the firm, but paid for
by society.
Reporting environmental costs by category reveals their importance and shows the opportunity for
reducing environmental costs by improving environmental performance.
This course will integrate the above so that by using System theory and dynamics students will be
able to design, review and recommend strategic financial systems in the area of Strategic
management accounting and, more particularly, design, review and recommend systems that
integrate the environmental impact into the organisations overall strategy.
STUDY SCHOOL
Topic number
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5
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7
Topic description
Strategic planning, systems theory and its application to the strategic
planning process
Strategic management accounting, information that creates value for the
21st century
Strategic management accounting for activity decisions
Continuous improvement through measuring, reporting and control of cost of
quality
Using the balanced scorecard as a strategic management system
Triple bottom line reporting and the implications for environmental risk
management
The life cycle assessment model, and activity and strategic-based
environmental control
PRESCRIBED BOOKS
Hansen, DR& Mowen, MM. 2007, Managerial accounting: International student edition, 8th edition.
South Western: Thomson
Young, SM, 2007, Readings in management accounting, 5th edition New York: Pearson Prentice Hall.
CASE STUDIES
No case studies.
ARTICLES
The History and Status of General Systems Theory. Ludwig Von Bertalanffy. Trends in General
Systems Theory, (New York: Wiley-Interscience, 1972).
General Systems Theory The Skeleton of Science. Kenneth E. Boulding. Management Science,
Vol 3 (April 1956):197-208.
Towards a System of Systems Concepts. Russell L. Ackoff. Management Science 17(11), July
1971.
The scope and limitations of Von Bertalanffys systems theory. Daniel F.M. Strauss. University of
the Free State. PO Box 339. Bloemfontein. 9300. This article is a revised version of a paper
presented at the Forty-Seventh Meeting of the International Society for the Systems Scientists.
(ISSS) held in Shangai (August 2 August 6, 2002).
The Management Theory Jungle Revisited. Harold Koontz. The Academy of Management Review
5(2) (April 1980):175-187.
The Origins and Purposes of Several Traditions in Systems Theory and Cybernetics. Stuart A.
Umpleby & Eric B. Dent. Cybernetics and Systems: An International Journal 30:79-103, 1999.
Transformational and Servant Leadership: Content and Contextual Comparisons. Brien N. Smith,
Ray V. Montagno, Tatiana N. Kuzmenko and Ball State University, Muncie, IN Journal of
Leadership and Organisational Studies 10(4).
WEB LINKS
No web links.
ASSESSMENT
7.1
INDIVIDUAL ASSIGNMENT 1
A consulting company that provides software and services relating to business intelligence and
analytics
includes a library of customer success stories on its website at
http://www.sas.com/index.html.
Select the link, more customer success and then customers by solution. Thereafter, click on the
financial intelligence/activity-based management link. Then, by also drawing from your information
gained from the Readings in Young (5 th edition), write a brief paper (3pp 1.5 space Arial font 12) that
integrates the readings and the success story.
PART 2: HANSEN AND MOWEN
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EXAMINATION STRUCTURE
This course equips students with a sound theoretical and practical knowledge of the major aspects of
advanced financial systems, for example, BSC, EVA and environmental costing in order to contribute
to the effective functioning of the financial sector of organisations at an advanced level.
This module is also a practical guide to the way in which the appropriate use of advanced financial
systems can add value to the overall corporate strategy used by an organisation.
TOPICS
8.1
8.1.1
Tuition period
Specific outcomes
Apply systems theory in the development of advanced financial systems that will support the strategic
planning process of any organisation.
8.1.3
Critical questions
What is a system?
Explain feedback as a method of controlling a system?
What is chaos theory?
Explain the concept of "useless systems".
8.1.4
8.1.5
Self-assessment
8.1.6
Reflection
Scientists use systems theory to understand how things work. Systems theory suggests that you
model natural and human-made phenomena as a set of interrelated components that work together to
accomplish some kind of process. Systems are used by humans in everyday life to describe the
operation of a number of diverse phenomena. Systems or models are also generalisations about
reality. One common way to present how things work is with a graphical model.
Systems tend to have similarities in the way they work. Within their defined boundaries, systems
contain three properties: elements, attributes and relationships. Elements are the things that make up
the system of interest. Attributes are the perceived characteristics of the elements.
Relationships are descriptions of how the various elements (and their attributes) work together to
carry out some kind of process. We need a more holistic view of what the financial world could be,
and I believe that organisations need to take into account that their decisions affect not only their
organisation, but also a greater system.
8.1.7
Conclusion
Adaptive organisations will soon motivate employees to adapt and grow to share fairly the wealth that
innovation creates. Adaptive organisations eventually replace dynamic and static organisations in
economic competition so that within a generation most people will have learnt to expect continual
improvement in their life experience.
The fact that their ancestors once worked at the same job in the same way for an entire lifetime will
seem almost as incredible as the fact that people used to stay at jobs that they didn't thoroughly enjoy.
The concern for excellence will be based upon getting things done on time, staying close to the
customer, using hands-on management, and doing what the company knows best.
Ultimately, we need to think of a business as a highly connected system, where change in one area
may have many effects elsewhere. Also, large connected systems manifest complex non-linear
behaviour. Think of a business organisation as having "a mind of its own".
8.2
8.2.1
Tuition period
Specific outcomes
Critical questions
8.2.4
Please read chapters 1 & 2 of the textbook by Hansen and Mowen (2007).
Also read from Young (2007):
8.2.5
Self-assessment
Answer the Exercises 1-1 & 1-2 on page 24 of Hansen and Mowen (2007).
8.2.6
Reflection
"The most exciting and innovative work in management accounting today is found in accounting
theory, with new concepts, new methodology even what may be called new economic philosophy rapidly taking shape. And while there is enormous controversy over specifics, the
lineaments of the new manufacturing accounting are becoming clearer everyday" (Drucker, PE. 1990.
The emerging theory of manufacturing. Harvard Business Review, May-June: 94).
8.2.7
Conclusion
8.3.1
Tuition period
Specific outcomes
Critical questions
8.3.4
chapters 3 and 4
8.3.5
Self-assessment
Work through the scenario on page 117 and then answer the "Questions to think about" on the same
page.
8.3.6
Reflection
Conclusion
Uncertainty in the company environment will increase and rapid changes will emerge all the time.
Products and technologies will rapidly go out of date.
Competition will increase continuously. Flexibility and rapidity will become primary objects for
accounting measurement.
Activity-based costing can be used to trace costs to specific customers, and the cost of serving the
customers can affect pricing decisions. Activity-based supplier costing uses activity-based costing to
identify the true costs of suppliers.
8.4
8.4.1
Tuition period
Specific outcomes
Critical questions
8.4.4
Self-assessment
Work through the scenario on page 667, and then answer the questions on the same page.
8.4.6
Reflection
Quality improvement can increase profitability in two ways: by increasing customer demand and/or by
decreasing costs. The principal objective of reporting on quality costs is to improve and facilitate
managerial planning, control and decision making.
The 2000 version of ISO 9001 has brought about many new thoughts on implementing a quality
management system to measure organisational performance. The changes have come about as a
modern development in line with other total quality management (TQM) and excellence thinking. TQM
has broadened the focus of the philosophy for the requirements of the business management
performance system.
8.4.7
Conclusion
Supplier performance and customer satisfaction with the quality of the products will become more
important in performance measurement. The networking of companies will become more and more
popular.
There are more than 1000 models of the quality concept to be found in literature today. A study of
them leads to a simple focus on the following issues:
8.5
8.5.1
Tuition period
Specific outcomes
Use the concept of the triple bottom line to develop environmental management accounting systems
in support of environmental stakeholder requirements.
8.5.3
Critical questions
How does strategic-based responsibility accounting differ from functional-based and activitybased responsibility accounting?
What two additional perspectives have been introduced by this approach, and how do they
support an organisation's mission and strategy?
8.5.4
Pay attention to exhibit 16.12 on page 745 of the textbook Managerial accounting (2007). Prepare a
summary from the elements shown in the exhibit.
Work through chapter 16 in Hansen and Mowen (2007: 744-754) entitled The balance scorecard:
Basic concepts.
Read the following in Young (2007):
8.5.5
Self-assessment
Reflection
The four perspectives of the balanced scorecard define the strategy of an organisation. These
measures, once developed, become the means for articulating and communicating the strategy of the
organisation to its employees and managers.
The measures also serve the purpose of aligning individual objectives and actions with organisational
objectives and initiatives.
8.5.7
Conclusion
The time span for strategic planning will shorten significantly. Systematic investment in research and
development activities (R & D) will significantly increase in all industries. The need for accounting
methods associated with R & D activities will increase. The employees will become the most
important production factor, and the need for employee development and education (learning) will
increase.
The role of teamwork will increase in importance as the need for new accounting methods to measure
and improve business performance increases.
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8.6
8.6.1
Tuition period
Specific outcomes
Use the concept of the triple bottom line to develop environmental management accounting systems
in support of environmental stakeholder requirements.
8.6.3
Critical questions
What are the performance measures that would be included on a "green balanced scorecard"?
What are the expected benefits of sustainability reporting?
Why must we adopt the Global Reporting Initiative (GRI)?
What are the pillars of the JSE Securities Exchange's SRI index?
What are the six incentives for or causes of eco-efficiency?
What is an environmental cost?
What are the four categories of environmental cost? Define each category.
What is the difference between a realised external failure (environmental) cost and an unrealised
external failure (societal) cost?
What does full environmental costing mean?
Explain how functional-based costing assigns environmental costs to products.
What are the problems with this approach?
8.6.4
Work through chapter 16 of Hansen and Mowen (2007) (pages 778 to 796).
Read the following in Young (2007)"
Also attempt to answer the following: Stakeholder theory requires that managers make decisions that
take into account the interests of all the stakeholders in the firm. How does the environment become a
stakeholder?
A degree of self-regulation would be Escoms testing, piloting and installation of "reverse osmosis"
water treatment technologies for their discharge waters.
Please obtain copies of the Earthyear magazines for 2004 and 2005. There you will find the names of
organisations that have obtained awards for looking after the natural environment. Please review
Sasol's performance in this regard. They have been reported as making a concerted effort to change
their old image. In 2003 they received a special commendation as a result of their investments in
innovation. They are committed to international standards and investing in cleaner production.
8.6.5
Self-assessment
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8.6.6
Reflection
Externalities are costs or benefits of a transaction or activity that are borne or enjoyed by parties not
directly involved in the transaction or activity. Negative externalities include pollution. Normally, firms
consider only their private costs and ignore the wider social costs of their activities.
The price mechanism thus fails to bring about an efficient allocation of resources, and in the case of
negative externalities, society expects government to intervene to promote efficiency. This is done by
regulating the producers of pollution or by taxing them to recover the cost to society.
The triple bottom line builds on the balanced scorecard, and is the most elaborate system of
accounting for social and ecological consequences. The core idea is to identify and measure a
company's impact on the environment at every stage of the value-creation process.
Environmental costs must be defined before they can be provided to management. The authors of
Managerial accounting adopt a definition consistent with a total environmental quality model. In the
total environmental quality model, the ideal state is that of zero damage to the environment
(analogous to the zero-defects state of total quality management).
Damage is defined as direct degradation of the environment, such as the emission of solid, liquid or
gaseous residues into the environment (e.g. water contamination and air pollution), or indirect
degradation such as unnecessary waste of materials and energy.
Environmental cost reporting is essential if an organisation is serious about improving its
environmental performance and controlling environmental costs. A good first step is a report that
details environmental costs by category, name, prevention costs, detection costs, internal failure costs
and external failure costs.
Both products and processes are sources of environmental costs. Production processes can create
solid, liquid and gaseous residues that are subsequently introduced into the environment. Products
themselves can be the source of environmental costs. After a product has been sold, its use and
disposal by the customer can produce environmental degradation.
8.6.7
Conclusion
An organisation's environmental policy must be relevant to the nature, scale and environmental
impacts of the organisation's activities, products and services. If, for example, an activity uses large
volumes of chemicals and produces large volumes of waste, these impacts should be considered in
shaping the environmental policy.
South Africa's rich and critical resource base has to be wisely used to provide sustainable
development and support to Africa. South African companies need to develop strategies to (1)
measure and monitor their impact, and (2) implement systems for sustainable development.
Companies need to develop strategies to (1) ensure King 2 compliance as a corporate citizen, (2)
understand the impact on all stakeholders, (3) balance the challenge of financial performance and
compliance whilst taking cognisance of stakeholder expectations, and (4) ensure respect for human
rights, peace and good governance.
Increasing compliance costs and the emergence of eco-efficiency have intensified the interest in
environmental costing. Reporting environmental costs by category reveals their importance and
shows the opportunity for reducing environmental costs by improving environmental performance.
8.7
12
8.7.1
Tuition period
Specific outcomes
Use the concept of the triple bottom line to develop environmental management accounting systems
in support of environmental stakeholder requirements.
8.7.3
Critical questions
8.7.4
Self-assessment
Reflection
The life cycle viewpoint combines supplier, manufacturer and customer viewpoints. Both internal and
external linkages are thus considered important in assessing environmental consequences of different
products, the product designs and process designs.
If the management accounting system is going to play a role in life cycle assessment, then the
assessment and assignment of the environmental costs of production must be carried out by the
producer in each of the life cycle stages. Management can then compare the economic effects of
competing designs.
8.7.7
Conclusion
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