Performance Measurement

A Japanese multinational agro chemical company had launched its premium product in India. It could not perform well on account of incorrect strategy and management accounting system.

At first, the sales & marketing team was given a target to increase the sales and distributorship on a pan India basis. Business Managers entered into a big sales contract with other company for selling its premium product to them after packaging in their brand name. Distributorships were increased without proper background checking. Amount of expenses incurred on all distributorship a like without considering performance levels. Production was based on faulty sales forecasts to accumulate inventory and it was not based on confirmed orders in spite of possibility of less throughput time.

The Company started to increase its sales but incurred a huge amount on sales commissions and sales schemes to the distributors. Later on the company was facing huge sales returns from these distributors as product was not proving successful in the market. There were also dispute within the business heads and there were various schemes of misappropriation involved.

Consultants had been called from all renowned accounting companies who mainly reported on the accumulation of inventory and expired inventory, lack of approvals for sales returns, incorrect commission or scheme benefit paid, lack of approval for cash transactions, non calling of proper quotations etc. They suggested change in authorization levels and new standard operating procedures etc.

With top management pressure, the business managers now had been given a target to reduce inventory. The business managers now were devoting their huge time in selling near expiry stocks instead of fresh stocks. The product was sold in various sizes. Few big sizes which were over produced, the business managers had decided repack these into smaller sizes to reduced inventory although which only added to cost of re-packaging.

Also, there was incorrect decision with respect to product positioning and product pricing. The Company was competing with its own product on many occasions. The premium product was not successful and they had to change usage method instructions several times. There was problem with product costing and cost allocations too.

Management accounting must adapt to dynamic environments and organizations. Warning signals indicate that the management accounting system is not working and needs a change. It is clear that the consultants were not able to reach to the correct root causes to give solutions to the problems due to faulty frame of mind and approach.

One sign of management accounting system not working is dysfunctional behavior of the on part of the business managers due to inappropriate performance measures. Managers make decision to influence performance measure. If these performance measures are not consistent with the organisation's goals, management might make decisions that do not coincide with organizational goals. When organizational mangers are acting at cross-purposes with each other, the management accounting system is not working and should be changed.

Organisations must think about changing its management accounting system based on organization's non-ability to correctly forecast or to win a bid or gain competitive advantage in terms of effectiveness, efficiency and value chain benefit.

Organization should not look necessarily to the latest management accounting buzzwords to give them direction for changing their management accounting system. TQM, Six Sigma, JIT and activity based costing ( ABC) for example are appropriate to certain type of organizations and in particular environments. Some features of these concepts might be beneficial, while other might not contribute for creating value for the organization.