Advanced Management Accounting case study Essay Example
Аdvаnсеd Маnаgеmеnt Ассоunting 10
Аdvаnсеd Маnаgеmеnt Ассоunting
Globalization may be regarded as the widening, speeding and deepening up of international interconnectedness in various aspects of contemporary social life ranging from the social life, criminal life, and spiritual to financial life. To others, globalization is a fundamental process of transformation that leads the humanity into a new era, and coincides with the beginning of a new millennium (R.j.reddy, 2011). Globalization provides huge potential activities for economic growth and improved living standards for various countries. On the contrary, globalization corrodes the independence of a nation by removing the ability of a state or a nation to protect its citizens through economic management and welfare policies
There are three approaches to globalization namely multinational approach, the global approach and the transnational approach. Multinational approach recognizes that an organization’s international subsidiaries have various nationally responsive strategies and is characterized by various local organizational structures. It also has high level of differentiation and local responsiveness. On the other hand, the global approach has some increased centralization of functions and decision making functions. Instead of becoming responsive nationally, subsidiaries have to implement strategies set at the headquarters. On the transnational approach, complex governance structures where national responsiveness and global learning are simultaneously managed.
In this case, Citibank has adopted the multinational approach because it has granted its subsidiary companies lots of autonomy and decentralization in some of the decision making. For example, the budgeting process is bottom- up process where the managers of the subsidiary companies could set their own targets using the instructions given from the headquarters. Every level of management was involved during the budgeting process and there was a lot of horse trading during the process
Action control— this ensures that employees undertake some actions that are beneficial or harmful to the organization. Most of the control measures are aimed at preventing uncouth behaviors.
As in this case, Citibank practiced action control by having direct control over the company’s activities in international branches, reviewing sovereign risk for each location and also reviewing of budgets and accomplishments
Budgeting as a control was done on a bottom-up process and was sent to managers in various branches indicating instructions to be followed. Every manager was mandated to have control over their branches and performance was reviewed and compared to the budget of every month.
Personnel control— It is about finding the right people to do the right job; training and developing employees for a greater sense of professionalism and creating interest in the job by assisting employees get more understanding about their job.
In the case of Citibank, employee control is seen in its ability to train their employees to enhance their skills. As a way of exercising people control and reducing the rate of turnover within the organization, the management found it good to increase compensation package to their employees. Nonetheless, Citibank could not sustain high compensation package since it also wanted to maintain high profits
Result control –involves rewarding of good results and punishing for bad results. Employees within the organization are empowered to take any necessary action not dictated by the company. In Citibank, bonuses were rewarded basing on the personal performance of a manager and corporate performance.
Cultural control- this type of control taps into the social pressures and norms existing within a given group. It is effective especially at the time group members have some emotional ties to each other. Citibank has a norm of practicing bottom-up process of budgeting and a process where the instructions describing the timing format of the budget is set for the whole bank. The established norms included growth rate of 12% to 15% per year, return on assets of 1.25% and Return on equity of 20% p.a.
One of the areas that need critical attention is people control since there is a high rate of employee turnover within the organization. Most of the employees are being taken to work in other organizations. Branch managers must look for the best ways of exercising people control
Employee involvement in the decision making within an organization is one of the critical elements that the top management of every organization should consider.
In involving employees, it requires management control so as to take necessary steps towards attainment of organizational goals. The emerging questions could be; does the employee understand what is required of them? Will they consistently work hard and try to achieve what they are expected of them? Are they able to deliver what they are expected of them? For the three questions to be answered it requires the management control to focus on action control, results control and the people control
Involving employees during the budgeting process allows both the employees and the management to set targets that act as a source of motivation and draws the commitment from each and every one towards the attainment of the set targets.
Bottom-up budgeting process
This type of budgeting process begins with the elementary components of an organization probably at the lower levels of the individual department or a branch to create a collective budget for the entire organization. As it can be seen in the case study of Citibank, budgeting process was bottom-up where every branch managers were only given instructions on what to do, and every branch came up with its budget that was later incorporated into the budget of the entire bank.
Advantages of bottom-up budgeting process
The process is decentralized and participative where both the managers and the employees take part in budget preparation where the knowledge of both the employees and the management is well utilized (Cattela, 2008).
The bottom-up process leads to greater employee motivation which leads to high morale, increased job performance and high commitment and satisfaction
This process is also accurate since the budget is prepared by managers and employees who are close to the sources of revenue and have full knowledge and expertise that top management lacks. Also, resource predictions, comprehensive costs, product and sales forecast are very correct
On the contrary, there are various shortcomings facing the bottom-up budgeting process
One of the greatest challenges of the bottom-up process is that it is time-consuming. Individual managers have to come up with their budgets, putting into consideration past budgets and expenditure while integrating the projections for the following year. At that time, the top level management has to review the budgets submitted by various managers and also to sum them up so as to find the totals.
Top-down budgeting process
It is a planning system where budgeting process flow of information starts from the top level of the organization down to the lower levels of the organization. Such flow of information from the top comprises of an outline of the goals for the entire year, specific guidelines for assisting lower level managers to design their budgets and templates to be filled for budget submissions (Hofstede, 2012).
One of the advantages of this method is that it gives the top management to assign and manage resources in better and effective way. It also enhances efficiency whereby there is a proper allocation of resources and budgets from the beginning of a project.
Although Mr. Mehli Mistri and his subordinates are committed toward the budget, they might not be able to meet the budget. With high level of volatility of oil prices which is the driving force of Indonesian economy, coupled with high rate of staff turnover, the intended prospective budget might not be met. The bank headquarters had to review the budget since the consolidated figures did not prove the success of the budget
Setting up a financial target of an organization is not only about guessing, it requires one to understand what he is trying to achieve at the end of the day and also involve determining the realistic amount of improvement needed. The top management always takes the accounting control system mainly as a tool of discharging their duties. The senior staff who can’t meet their targets devolves their responsibility in form of delegation of blame. They tend to maximize the delegation of blame rather than motivating the junior employees
Understanding the challenges of budgeting and setting of targets can be of great benefit especially during the budgetary process of you company. Some of the challenges ones are facing during financial performance target include the following.
Acceptance from employees-Winning employee support during the budgetary and target setting is one of the difficult tasks faced by the management. Those employees who are less committed to the budgetary process are rarely cognizant of the budget goals. To win the support for a financial target, there has to be a transparent process and continuous meeting so as to offer education to employees and keep them updated. When employees are well informed, they are most likely to understand the benefits of budgeting process and own the entire process of budget targets
Setting the goals- Those involved in designing budget targets to be used during the budgeting process often struggles to define the proper level of aggressiveness. Others are of the opinion that targets should be very challenging and that employees have to stretch so as to achieve their goals. Others believe that this practice is demoralizing and that the goals of the budget should be achieved by those who put reasonable effort. In either way, managers should consider continuous levels of success. Rather than accessing employees as attaining or not attaining a budget goal, managers should access their employees with a tiered system. An employee to misses the aim of the budget could be regarded as off-target, one who attains the budget goal would be regarded as on target, and anyone who goes beyond the expectation could be regarded as above target.
From the situation as it is, Mr. Mehli Mistri is faced with the challenge of high staff turnover within the organization the worst of it being his chief of staff and senior staff. The challenge of inadequate staff hampered the growth of the branch when it comes to profits. As the situation is, the targets were never achieved that made Mr. Mehli Mistri to revise his budget. He had to come up with his self-imposed risk limit which is less than what had been approved. As the things were in October 1983, there is a clear indication that things were not going on well with Mr. Mehli Mistri since the consolidated numbers were not pleasing to the top management.
With the way things are getting out of hand, i.e. high rate of staff turnover and economic uncertainties, I tend to believe that Mr. Mehli Mistri and his subordinates may not end up meeting their targets thus will be involved in gameplaying activities so as to meet the targets
Cattela, S. (2008). Efficient Business Management Through Budgeting and Budgetary Control. Macdonald & Evans.
Cave, S. R. (2007). Budgetary Control, Standard Costing, and Factory Administration. The University of California.
Dutta. (2003). Cost Accounting: Principles And Practice. Pearson Education India.
Hofstede, G. H. (2012). The Game of Budget Control. Routledge.
Horngren. (2010). Business Management. FK Publications.
John Forster, J. W. (2000). Budgetary Management and Control. Macmillan Education AU.
Kariuki. (2010). Budgeting: A fundamental management tool. KasnebNewsline, 4.
Matkin, G. W. (2005). Effective Budgeting in Business. Jossey-Bass.
R.j.reddy. (2011). Cost Accounting And Control Systems. APH Publishing.
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