Organizing for Success in Business

Decentralized Structure
In 1946, Drucker wrote “Concept of the Corporation,” which explores the evolution of the business corporation and its impact on society. The result of 18 months of interviews and observation, the book discusses the beliefs and management style of Alfred P. Sloan, GM’s creator.

Drucker noted that GM gave its divisions great independence, which was uncommon by the standards of the day. “In over 20 years of work…Mr. Alfred P. Sloan Jr. has developed the concept of decentralization into a philosophy of industrial management and into a system of local self-government.” GM had 50 divisions, and Drucker estimated that all but 5 percent of decisions were within the control of the divisions.

Decisions that did require head office approval had to do with the financial function, pricing, labor costs and capital deployment. Drucker invented the term “profit center” to describe a division, and noted that these groups were held
highly accountable for results.

Management Accounting

The main objective of management accounting is to provide management information which will help managers to optimize their decisions with a view to improving present performance and providing for longer-term profitable growth. Management accounting could therefore be described as the development and maintenance of a management information system.

In carrying out this task, management accountants are governed by two key principles:

1. Comparison. Either of: what has been achieved with what should have been achieved – this
   is a feedback process designed to point the way to corrective action and improved performance, not simply a stick with which to beat managers; or alternative courses of action with a view to deciding which, on balance, is the best in terms of cost/benefit, cost-effectiveness or return on investment – this is an evaluative process.
2. Relevance. Management accounting as a decision making tool must only be concerned with relevant data, ie information that will lead the manager to the best decision. When managers make decisions they are choosing between alternatives in order to predict which one has the best future. Historical costs only help to shape predictions, and the relevant data or costs are the expected future data that will differ among alternatives. Any item is irrelevant if it will remain the same regardless of the alternative selected.

Management Accounting

Management accounting provides information to management on present and projected costs and on the profitability of individual projects, products, activities or departments as a guide to decision making and financial planning.

Management accounting uses the following techniques:

• Cost accounting – the recording and allocation of cost data.
• Cost analysis – the classification and analysis of costs to aid business planning and control.
• Absorption costing – the assignment of all costs, both fixed and variable, to operations or products.
• Marginal costing – the segregation of fixed and variable or marginal costs and the apportionment of those marginal costs to products or processes.
• Standard costing – the preparation of predetermined or standard costs and their comparison with actual costs to identify variances.
• Variance analysis – the identification and analysis of differences between actual and standard costs, or between actual and budgeted overheads, sales and profits, with a view to providing guidance on any corrective action required.
• Cost–volume–profit analysis – the study of the relationship between expenses, revenue and net income in order to establish the implications on profit levels of changes in costs, volumes (production or sales) or prices.
• Profit–volume charts, which specifically reveal the impact of changes in volume on net income.
• Break-even analysis, which indicates the point where sales revenue equals total cost and there is neither profit nor loss. It also shows the net profit or loss that is likely to arise from different levels of activity.
• Sales mix analysis, which calculates the effect on profits of variations in the mixture of output of the different products marketed by the company.
• Financial budgeting, which deals with the creation of budgets (statements in quantitative and financial terms of the planned allocation and use of the company’s resources). The basic form of budget is a static budget, ie one which assumes a constant level of activity.
• Flexible budgets, which take account of a range of possible volumes or activity levels.
• Zero-based budgeting, which requires managers to justify all budgeted expenditure and not to prepare budgets as no more than an extension of what was spent last year.
• Budgetary control, which compares actual costs, revenues and performance with the fixed or ‘flexed’ budget so that, if necessary, corrective action can be taken or revisions made to the budget.
• Overhead accounting – direct attention to the identification, measurement and control of overheads.
• Responsibility accounting, which defines responsibility centres and holds the managers of those areas responsible for the costs and revenues assigned to them.
• Capital budgeting – the process of selecting and planning capital investments based on an appraisal of the returns that will be obtained from the investments. The main capital appraisal techniques comprise accounting rate of return, payback and discounted cash flow.
• Risk analysis, which assesses the danger of failing to achieve forecasts of the outcome or yield of an investment.