Home Solutions (a) Define the terms `shareholder value`, ‘value chain’ and `cost management`, explaining how these terms differ from what is called the `conventional wisdom` of management accounting.
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It is often stated in the management accounting literature that non-controllable costs such as head office overheads should not be included in divisional performance reports. However, some research studies have also reported findings that seem to indicate that companies do not always exclude non-controllable costs when evaluating divisional performance.
(a) Within the context of divisional performance evaluation, explain the notion of controllability, stating the main arguments for and against including non-controllable costs in divisional performance reports.
(b) describe the balanced scorecard of performance measures and explain how it can help with the controversial concept of controllability in divisional performance evaluation.
The debate that was started more than thirty years ago about the future of management accounting seems to have prevailed particularly with regard to the relevance of management accounting to the information needs of the modern company. Many “new” management accounting models have been suggested in the desperation for improving management accounting theory and practice. Almost all of these models emphasise cost management and value chains, concepts that consultants are good at packaging and selling. Recent studies, however, have been telling a rather intriguing story as their findings show that traditional costing systems and performance measures are more popular than the so-called new management accounting models in many leading companies in developed countries (e.g. USA, UK, Australia and New Zealand).
Critically discuss the above statement. Your discussion should include
a) an explanation of the terms cost management and value chain,
b) a summary of the main arguments about the obsolescence of traditional management accounting and the need for change,
c) a contrast of the views about the suitability of the new management accounting systems and the usefulness today of the views expressed since the mid-1980s by some authors (e.g. Kaplan, 1986) about obsolescence and the need for management accounting change.
Back in the 1980s very convincing claims were made that management accounting had become obsolete as it failed to embrace change. In response to the claims, a number of `novel` ideas and models started to appear in the literature and soon became publicised as advanced management accounting techniques (or AMTs). Underlying the claimed superiority of the AMTs were the catch phrases of `shareholder value`, ‘value chain’ and `cost management`.
(a) Define the terms `shareholder value`, ‘value chain’ and `cost management`, explaining how these terms differ from what is called the `conventional wisdom` of management accounting.
(b) Refer to the Waldron (2005) article on management accounting change and critically evaluate the obsolescence claims levelled at traditional management accounting and explain to what extent change has taken place as a result of those claims.
There is an abundant literature on the subject of transfer pricing. Many authors believe that transfer pricing, which arises because of internal trade, is one of the most incomprehensible aspects of management control in the modern business world. While some believe that transfer pricing was a natural development in the large company and has become unavoidable in international trade, others however argue that it creates endless and sometimes very costly problems within companies as well as with tax authorities.
Critically discuss the above statement. Your discussion should include explanations of
(a) what justifies internal trade and transfer pricing, particularly in manufacturing companies,
(b) the arm’s length rule and the main methods for setting transfer prices,
(c) the internal problems that transfer pricing can create, giving examples of possible dysfunctional decisions by divisional managers involved in internal trade.