1 UNSW Business School ACCT2522 Management Accounting 1 Term 1, 2022 Topic 8 – Performance Evaluation and Management Control Overall Theme In this week we examine the controlling aspect of management accounting, and consider issues involved in motivating employees to both “do things right” and “do the right things” using economic and psychology theories. In doing so, we re-examine some of our previous topics to focus on the behavioural aspects of management accounting. We also examine issues involved in developing a “good” incentive system. Desired Learning Outcomes and Essential Reading Required readings Moodle e-book After completing this topic, you should be able to: 1. Understand the role of accounting information in organisational control. 2. Recognise the difference between intrinsic and extrinsic motivation. 3. Appreciate different motivational theories and their implications for Management Accounting Systems (MAS). 4. Understand the principles behind incentive system design. 5. Understand the different choices involved in incentive system design. 6. Appreciate that dysfunctional behaviour may result from deign choices. 2 Tutorial Questions (must be prepared prior to the tutorial) Question One: World Furry Healthcare Question Two: Myer Sisters Apparel All tutorial questions are on the following pages. *** You should attempt these questions as if they were final exam questions. *** After reading the question, give yourself a few minutes to plan your answer i.e., what is the question What is the most logical way of arguing your case What case information can you refer to Only then should you start writing. Please note that there is no one right way of answering these questions, and sample solutions will not be provided (some guidance will be provided, similar to previous weeks’ discussion questions). Therefore, to get the most out of your tutorial, you should be familiar with all questions and come fully prepared. Your tutor will only be able to provide useful feedback if you have something to show them in the first place! 3 Question One World Furry Healthcare (WFH) is an Australian pet insurance company. It has 50 claims examiners in the Sydney division, who are each paid a fixed salary of $65,000 to process claims. Currently 5,000 new claims are processed each day on average, but 15% are processed incorrectly. Incorrectly processed claims have to be reassessed, which is costly and time consuming. Havana Brown, the state manager, is not satisfied with the current volume of claims processed. She has instructed Sam Sawet, the Sydney division manager, to devise a compensation scheme to motivate the claims examiners to work faster. However, Sam is concerned that the examiners would make more errors by working faster – part of her own compensation is currently based on keeping divisional costs down! Required: A. Suggest an incentive scheme for the claims examiners that will address both Havana’s and Sam’s concerns. Use principles of agency, goal setting, and expectancy theories to inform your answer (note: you do not need to ref
er to every part of every theory). B. Provide one (1) efficiency and one (1) effectiveness measure that would help you assess how well the plan you suggested in (A) is working and explain why you have chosen them. 4 Question Two Grace Myer is the founder and CEO of Myer Sisters Apparel, a retailer of high-end women’s business apparel. Earlier this year Grace opened her fifth retail store in Sydney’s Eastern Suburbs. While Grace has been pleased with the new store’s progress, she is concerned about the growing number of customer complaints and the low sales per square metre compared to some of her better-known competitors, such as Davie Laurie and HighChair Nine. When Grace had only one store that she individually owned and operated, she was able to control most of the details of the business. While she worked with a few employees, she always knew what they were doing. As the number of stores and the size of the stores increased, the number of employees also grew. When Grace was running the one store, she rarely heard a customer complaint, and her sales per square metre were $10,000, compared to $8,000 today. This concerns Grace greatly as her expansion plans for Myer Sisters had to slow down because the stores were not producing the returns that she expected. The store managers are also complaining to Grace because of the high training costs of bringing on new employees. The turnover rate seemed to be very high and Grace could not understand why. She is paying sales staff an average fixed salary of $70,000 per annum and store managers an average fixed salary of $130,000 per annum, which is one of the highest salaries in the industry – yet they are leaving to work elsewhere. The customers are also complaining about the lack of helpfulness of the sales staff. Even after extensive employee retraining, Grace is still hearing many complaints. Required: A. Based on your understanding of intrinsic motivation and extrinsic motivation, draw on case information to explain why Myer Sister’ employees are not motivated to perform at a high level. B. Grace is considering implementing an alternative reward system for her staff: A “gain- sharing” plan, with a focus on generating sales revenue. Specifically, 5% of any revenue in excess of the target sales level of $15 million per year will be placed in a “bonus pool” for distribution to all stores (last year’s sales were $12 million). For example, if Myer Sisters as a group achieves total sales revenue of $16 million ($1 million more than the target level), then 5% of the additional $1 million in sales revenue will be distributed to employees. All sales staff will receive a portion of the bonus pool, with store managers receiving a greater percentage compared to sales staff. Do you think this gain sharing plan is a good idea Support your answer using agency, goal setting and expectancy theories as appropriate (i.e., you do not need to refer to every part of every theory). C. Based on your understanding of the various principles of incentive system/performance evaluation system design, make three suggestions as to how Myer Sisters’ performance measurement/incentive system could be improved.