Chapter 15 Granof & Khumawala-6e Chapter 15 1 Managing for Results.
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Transcript of Chapter 15 Granof & Khumawala-6e Chapter 15 1 Managing for Results.
Chapter 15
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Managing for Results
Learning Objectives
• Roles of accountants in the management of governmental and not-for-profit organizations
• How program budgets overcome limitations of traditional object-classification budgets
• The need for, and characteristics of, sound operational objectives
• Risks of establishing explicit organizational objectives
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Learning objectives (cont’d)
• Ways in which program budgets link expenditures to objectives
• Advantages and disadvantages of program budgets• Importance of reporting measures of service efforts
and accomplishments• Special problems in capital expenditures budgeting for
governments and not-for-profits.
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Role of Accountants
• They play multiple roles in entity’s management.
There are 4 phases to the process:• When social problems arise: area specialistso Collect and analyze budgetary and financial
informationo Compare potential costs and benefitso Accountants can make valuable contribution to
this phase.
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Role of Accountants (cont’d)• When policy-makers select among the options
presented to them:-Accountants have less to contribute in this
phase.• When programs are administered by appropriate
agencies:-Accountants actively involve in establishing
plans, operating budgets, controlling costs, preparing financial and other operating reports.
• When programs are audited: o Assessed by audit teams where accountants play a vital role. o The teams also include statisticians, economists, and other specialists.
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Limitations of Traditional Budgets• Budget:o is the most significant of financial documentso Determines amounts of resources to be receivedo Details the financial strategy of the organization
• Limitation: But budget doesn’t provide information on the extent the expenditures will enable the organization to achieve its objectives.
• Operational objectives:o Is at the heart of budgetingo Signifies specific sought-after resultso Should be both quantifiable and measurable
NOTE: Please look at the proposed budget for Highland Hills Assistance League on pg. 653.
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Traditional Budgeting Model
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Characteristics of Operational Objectives
Operational objectives:
• Are the basis for allocating resources, managing day-to-day activities.
• Are not the means to achieve organization’s goals. Instead, they represent the outcomes.
• Should be precise, doable and measurable.• Generally includes multiple objectives.• The central theme of recent management literature.
This suggests that organizations should be ‘mission’ driven rather than ‘rules’ driven.
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Adverse Consequences
Operational objectives:• May give rise to conflict• Risk of alienating organization’s
constituents• May result in dysfunctional behavior• Employees may target their efforts toward
improving what will be measured rather than what may be beneficial to the organization.
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Performance Budgets
• Relate expenditures to operational objectives.• Used instead of, or as a supplement to the traditional
object classification budgets.• Program budgets:o Common type of performance budgetso Allocate funds by program and not by objectso Ex. Funds appropriated for fire prevention
programs, health programs, for public safety programs etc.
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Performance Budgets (cont’d)
• Composed of activities directed toward a common goal.
• Generally carried out within a single organizational unit
• May also cut across departments.• Zero-base budgeting (ZBB):
o one variant of program budgetingo Requires explicit decisions and judgmentso Mandates that both current and proposed activities
be subject to common review.
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Focus on Activities• Expenditures are mostly classified based on object
and fund.• They should also be broken down by activities. • Ex: Highland Hills Assistance League maintains the
following programs:oEmployment skills, Housing rehabilitation, and
Teen substance abuse• Following are examples of activities in the
employment skills programs: oJob-seeking skills, Computer training, Electronics
training, and Day care Gra
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Review and Ranking
• Once requests for funding have been prepared, they must be reviewed and ranked.
• Sometimes, individual units establish criteria on how to rank the funding proposals.
• Some organizations establish uniform guidelines for their units.
• Organizations give prioritize to activities that will advance a particular phase of its mission.
• For instance, Highland Hills Assistance League may give priority to activities that involve children.
NOTE: An example of Budget Ranking Schedule can be found on Pg. 655.
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Advantages of Program Budgeting
• Directly relates expenditures to objectives• Considers alternative means of achieving the
same objective • Promotes analysis of behavior of costs • Encourages Periodic review of programs and
activities to ensure that they are consistent with the organization’s objectives.
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Disadvantages of Program Budgeting
• Organizational objectives may provoke conflict.
• The specific rankings of activities may make some employees feel that they are less important.
• It links expenditures with anticipated outcomes. Increasing budget will not necessarily lead to an increase in the outcome.
• May require extra efforts for initial implementation.
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Disadvantages (cont’d)
• May present decision makers with overwhelming amount of information.
• Technical adjustments to computer programs and control systems may be very expensive.
• It may not live up to the expectations of participants in the budgetary process.
• Program officials’ rankings might be overridden by the ultimate decision makers due to which the officials may become cynical toward the entire budget process.
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Service Efforts and Accomplishments
• GASB established the following as one of the main objectives of financial reporting: “Financial reporting should provide information to assist users in assessing the service efforts costs and accomplishments of the governmental entity.”
• In order to achieve this objective, GASB has conducted research on service efforts and accomplishments (SEA) indicators.
• In order to tie budgets to specific performance objectives: o an organization should periodically report to what extent it has
achieved those objectives.o should report results and audit those results.
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Performance Measures
Reasons for why governments should compile and incorporate performance measures into their management process:• Measuring and reporting upon performance
promotes higher-order accountability.• SEA reports stress the significance of achieving
objectives but traditional statements stress the importance of budgetary compliance.
• SEA measures are consistent with the purposes of financial reporting, nature of government and non-profit organizations.
• SEA reporting provides sound budgeting and administration.
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SEA Indicators
• Measures of efforts: o resources applied to a service.
• Measures of accomplishment: o include both outputs and outcomes
• Measures that relate efforts to accomplishment: o include efficiency measures o Cost-outcome measures
• GASB concepts statements emphasize that these 3 types of data be supplemented with explanatory information that can help users to understand the measures.
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Limitations of SEA
SEA measures:• Are unlikely to indicate entity’s true
accomplishments apart from the stated objectives.• They don’t provide a measure to find out if the
objectives are really worth achieving. • Since accomplishments can not be described by a
single measure, SEA might have to provide several measures.
• SEA data do not take into account different operating conditions and therefore, might not provide sufficient information to enable meaningful comparisons.
• Comparisons over time within the same organization can be deceptive if the conditions change.
• SEA data can be easily under-or over-aggregated.
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Audits of SEA Reports
• AICPA has separate standards for attesting to nonfinancial assertions.
• Auditors:ocould be required to assess the adequacy of the
informationoverify if the data provided are reliable oEvaluate whether they are fairly presented.
• This could require auditors to review the entity’s internal control systems and test selected transactions.
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Capital Expenditures
• Both government and non-profits acquire capital assets.
• They are costly and hence have long-term impact on operating costs and results.
• Capital assets provide benefits over more than a year and hence capital acquisitions are better financed with debt rather than with operating revenues.
• The amount of debt that can be issued is always limited by legal debt limitations.
• A project that needs to be financed should compete for funds with other projects that will be financed from the same pool of resources.
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Capital Expenditures (cont’d)
• Capital improvement program (CIP): oentity’s long-term schedule of capital acquisitions.oCommonly associated with infrastructure assets,
such as buildings, roads, and airports etc.
• Capital budgeting and programming are carried in 2 stages: (1) individual projects are screened to determine if
they should be undertaken by conducting cost-benefit analysis.
(2) projects are ranked.
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Capital Expenditures (cont’d)
• CIP enables an organization to sharpen its focus on capital outlays.
• Government and non-profit assets do not usually provide cash inflow but they still need service and maintenance.
• But there is a risk of failing to account for operating and maintenance costs associated with the newly purchased assets.
• Risk of overlooking maintenance costs can be minimized by incorporating an itemization of anticipated additional operating costs into the benefit-cost analysis. G
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Benefit-Cost Analysis
• Business Vs. Governments and Non-profits:• For business, benefits are cash flows• For governments and non-profits, benefits are drawn
from their own operational objectives.• Benefit-cost analysis is used to enhance the
objectivity of decision making. • By no means can it eliminate the role of informed
judgment.
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Benefit-Cost Analysis (cont’d)
• Governments and non-profits undertake projects that extend the length, or enhance the quality, of human lives.
• The benefits of available options are not always the same.
• It is not easy to place a dollar value on human lives or happiness. Future earning capacity is an approach that is used in placing an economic value on human life.
Ex: cost of purchasing an additional ambulance vs. the value of human lives it might save.
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Summary• Accountants play a vital role in all phases of the
management cycle.• Although operational objectives ideally should
represent true ends, organizations usually express their objectives as outputs rather than outcomes due to practical difficulties.
• Organizations face significant difficulties in establishing operational objectives.
• Program budgeting ensures that all expenditures are justified in relation to the objectives.
• Governments and non-profits must provide information about their service efforts and accomplishments.
• One of the disadvantages of evaluating capital expenditures apart from operating expenditures is that it is operating costs are usually overlooked.
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