Chapter 5: The impact of information technology

Chapter learning objectives

Upon completion of this chapter you will be able to:

• assess the changing accounting needs of modern service orientated businesses compared with the needs of traditional manufacturing industry
• discuss how IT systems provide the opportunity for instant access to management accounting data throughout the organisation and their potential impact on business performance
• assess how IT systems facilitate the remote input of management accounting data in an acceptable format by non-finance specialists
• explain how information systems provide instant access to previously unavailable data that can be used for benchmarking and control purposes and help improve performance (for example, through the use of enterprise resource planning systems and data warehouses)
• assess the need for businesses to continually refine and develop their management accounting and information systems if they are to maintain or improve their performance in an increasingly competitive and global market
• demonstrate how the information might be used in planning and controlling activities, e.g. benchmarking against similar activities
• discuss how IT developments, e.g. unified corporate databases, RFIDs and network technology may influence management accounting systems
• evaluate the compatibility of the objectives of management accounting and management accounting information
• discuss the integration of management accounting information within an overall information system, for example the use of enterprise resource planning systems.

1 Exam focus

2 Introduction

This chapter discusses the influence of information technology (IT) on strategic management accounting.

There has been a wealth of recent IT developments. These include:

• Data warehouses: a data warehouse is a:
  • database: data is combined from multiple and varied sources (internal and external) into one comprehensive, secure and easily manipulated data store. A unified corporate database allows all users to access the same information.
  • data extraction tool: data can be extracted from the database to meet the individual user's needs.
  • a decision support system: data mining is used to analyse the data and unearth unknown patterns or correlations in data.

Illustration 1 - Influence of IT on Sainsbury plc

Sainsbury plc has a data warehouse with information about purchases made by the company's eight million customers.

Transactional details are tied to specific customers through thecompany's Nectar loyalty programme, producing valuable information aboutbuying habits.

Initial analysis of the information quickly showed Sainsbury's howineffective its traditional mass-mailing approaches were – where largenumbers of coupons were widely distributed in an attempt to getcustomers through its doors. Rather than buying more, many customerswould cherry-pick the specials and go to its competitors for otheritems. This meant many advertising campaigns were running at a loss.

Since those initial findings, a concerted focus on timely dataanalysis and relevant marketing has helped Sainsbury to design far moreeffective direct marketing campaigns based on customers' actualpurchasing habits.

In one campaign designed to increase the value of customers'shopping baskets, Sainsbury's analysed purchases and identified theproduct category from which each customer purchased most frequently. Acoupon for that category would then be sent, along with five othercoupons for areas in which it was hoping to boost sales – to encouragecustomers to buy other types of products. The response rate was 26%, atremendous amount in retail.

• Data mining - this is the analysis of data contained within a data warehouse to unearth relationships between them.

Illustration 2 - Data mining relationships

Data mining results may include:

• Associations - when one event can be correlated to another, e.g. beer purchasers buy peanuts a certain percentage of the time.
• Sequences - one event leading to another event, e.g. a rug purchase followed by a purchase of matching curtains.
• Classifications - profiles of customers who make purchases can be set up.

• Networks - most organisations connect their computers together in local area networks (LANs), enabling them to share data (e.g. via email) and to share devices such as printers. Wide area networks (WANs) are used to connect LANs together, so that computer users in one location can communicate with computer users in another location. Improvements in broadband speed and security have eased communication across sites and from home.
• Intranet - this is a private network contained within an organisation. It allows company information and computing resources to be shared among employees.
• Extranet - this is a private, secure extension of an Intranet. It allows the organisation to share information with suppliers, customers and other business partners.
• Internet - a global system of interconnected networks carrying a vast array of information and resources.
• Enterprise resource planning system (ERPS) - this is a way of integrating the data from all operations within the organisation, e.g. operations, sales and marketing, human resources and purchasing, into one single system. It ensures that everyone is working off the same system and includes decision support features to assist management with decision making. Software companies like SAP and Oracle have specialised in the provision of ERP systems across many different industries.
• Radio frequency identification (RFID) - organisations use small radio receivers to tag items and hence to keep track of their assets. It can be used for a variety of purposes, for example:
  • to track inventory in retail stores
  • to tag livestock after the BSE crisis in 2002
  • to track the location of doctors in a hospital.

RFID

Many clothing retailers began the phased rollout of item-levelradio frequency identification (RFID) tags in 2007 following extensivetesting of the technology. Stock accuracy has improved and stores andcustomers have commented on the more consistent availability of sizes inthe pilot departments.

The tags allow staff to carry out stocktaking 20 times faster thanbar code scanners by passing an RFID reader over goods. At the end ofeach day, stock on the shop floor will be scanned and the data collectedwill be compared with information in a central database containing eachstore's stock profile, to determine what products need to be replaced.This has led to improved sales through greater product availability.

Test your understanding 1

Explain how the introduction of an ERPS could impact on the role of management accountants

Illustration 3 - The internet and management information

An Internet site that allows customers to place orders on-line canprovide the following useful management accounting information:

Test your understanding 2

Discuss the impact of recent IT developments on management accounting and on business performance.

Accounting information

Required:

Evaluate the compatibility of the objectives of management accounting and management accounting information.

Answer:

Management accounting information may include information on performance, inventory values and variance reports.

Management accounting involves the provision and analysis ofdetailed information to help managers to run the business today and inthe future, i.e. they provide the management accounting information.However, for this information to be useful the management accountantmust ensure that it is:

• relevant
• accurate and complete
• timely
• appropriately communicated
• cost <>

3 Instant access to data

3.1 Introduction

• The information systems discussed in section 2 provide instant access to previously unavailable data. The impact on a business is as follows:
  • real time transaction processing
  • real time billing
  • real time performance monitoring.

• This information can be used by managers for benchmarking and control purposes (see below) and will allow targets and strategies to be updated on a regular basis.

• The new systems also facilitate the remote input of management accounting data in an acceptable format by non-finance specialists.

3.2 IT systems and benchmarking

Instant access to data allows managers continuous access to:

• internal data so that they can see patterns trends and changes quickly
• external data so that they can revise benchmarks quickly.

Together these ensure that decision makers have the most up-to-dateinformation about relative performance and can act accordingly:

(1)Organisational performance compared with the performance of 'best in class' organisations.

(2)Gaps in performance identified.

(3)Methods of improving performance identified.

(4)New methods implemented.

(5)Benefits monitored and necessary control action taken.

IT systems/benchmarking: Pricechallenger.com

This site claims the following:

Pricechallenger.com is a web-enabled solution that allows companies to benchmark, control and then substantially reduce costs.

The data at the heart of the system is drawn from the results ofthousands of real negotiations and genuine purchases – not publishedprice lists from supplier catalogues.

Reports provide each member with straight forward benchmarks which allow them to:

• assess their own suppliers
• measure the effectiveness of their buying team
• discover where and how to find better prices – the result being savings often between 10% and 20%.

The system searches out individual savings across hundreds ofproduct and service lines, and presents them to the buyer who gainsgreat efficiencies by focusing on the categories with the greatestsavings potential. What is more, the savings are on-going andsustainable. Through live market benchmarking there is no need torepeatedly issue tenders. Now members access benchmarking tools tosustain their buying position within the market.

3.3 IT systems and budgetary control

A budgetary control system compares actual financial performance to budgeted financial performance.

The elements of the control system are:

• standard: the budget
• sensor: the method of recording the actual output
• feedback: the actual results for the period, collected by the sensor
• comparator: the comparison between actual and budget (e.g. variance analysis)
• effector: the manager of the department, in consultation with others, takes action to minimise future adverse variances and to exploit opportunities resulting from favourable variances.

Improvements in IT systems have resulted in a more robust system of budgetary control:

4 Remote input of data

New data capture techniques allow non-finance specialists to remotely input management accounting data into an organisation's system. For example:

• Mobile sales staff can record orders using laptops or hand held computers.
• Shop floor sales staff use multi-purpose barcode scanners to collect information about what products are being bought, at what time and by which customers.

Test your understanding 3

How would equipping a mobile sales force with laptopscapable of communicating accounting information to and from head officehelp to improve a company's profitability?

5 The need for continual systems development

Information and accounting systems need to be developed continuallyotherwise they will become out of date either because of advances intechnology or because of environmental changes.

Test your understanding 4

Blueberry is a quoted hotel resort chain based in Europe. It isconsidering the use of an activity-based management approach and hasidentified five activity areas (cost pools) and cost drivers.

The company has recently invested in a 'state of the art' IT systemwhich has the capability to collate all of the data necessary forbudgeting in each of the activity areas.

Required:

Explain the problems that Blueberry might experiencein the successful implementation of an activity-based costing systemusing its recently acquired 'state of the art' IT system.

Illustration 4 – The need for continual systems development

New technology, such as radio frequency identification (RFID)technology allows individual items of inventory (like individual tins ofbeans) to be uniquely identified and tagged.

Marks and Spencer became an early adopter of RFID in autumn 2002,using tags embedded into standard trays which transported fresh foodfrom suppliers to depots. Their aim was to achieve high stock accuracythroughout the supply chain in a very efficient and cost-effectivemanner.

There are now 4.5 million trays in the M&S supply chain, usedby 100 food suppliers. This makes 90% of its food supply RFID-compliant.The data collected is used to confirm deliveries and automateprocurement four times more quickly than previous barcode scanningmethods, with 100% accuracy.

Test your understanding 5

Lead times are becoming increasingly important within the clothingindustry. An interesting example of a company going against theconventional wisdom is Zara International, part of the Inditex group(Spain).

• Zara produces half of its garments in-house, whereas most retailers outsource all production. Although manufacturing in Spain and Portugal has a cost premium of 10 to 15%, local production means the company can react to market changes faster than the competition.
• Instead of predicting months before a season starts what women will want to wear, Zara observes what is selling and what is not and continuously adjusts what it produces on that basis. This known as a 'design-on-demand' operating model.
• Rather than focusing on economies of scale, Zara manufactures and distributes products in small batches.
• Instead of using outside partners, Zara manages all design, warehousing, distribution, and logistics functions itself.
• The result is that Zara can design, produce, and deliver a new garment to its 600-plus stores worldwide in a mere 15 days.

By comparison a typical shirt manufacturer may take 30 days just tosource fabric and then a further ten days to make the shirt. For somefirms overall lead time could be between three and eight months fromconception to shelf.

Comment on the importance of IT systems to Zara's competitive strategy.

The use of Intranets to enhance performance

HI ltd is a large importer of cleaning products; HI ltd has itshead office situated in the centre of the capital city. This head officesupports its area branches; a branch consists of an area office and awarehouse. The branches are spread geographically throughout thecountry; a total of seven area branches are supported.

Currently each HI ltd area office and warehouse supports andsupplies its own dealers with the required products. When stocks becomelow they place a Required Stock Form (RSF) with head office. On receiptof the RSF, head office despatch the goods from their central warehouseto the appropriate area office. When the central warehouse becomes lowon any particular item(s) HI ltd will raise purchase orders and sendthem to one of their many international suppliers.

Typically, each area office has its own stock recording system,running on locally networked personal computer systems (PCs). RSFs aree-mailed to head office.

Required:

How would the introduction of an Intranet enhance performance within HI ltd?

Solution:

An Intranet could provide an excellent opportunity for HI to linkall the areas in a number of ways: i.e. allowing access to a centraldatabase would be a substantial improvement on the current system, whereupdates are faxed or e-mailed to head office. This may possibly lead tothe development of an integrated database system.

Automatic stock replenishment system could be introduced for thebranches, replacing RSFs. If some branches were short of specific itemsand other branches had ample stocks, then movement between branches maybe possible. Currently head office may order goods from suppliers whenthe organisation has sufficient stocks internally.

Dissemination of best practice throughout the organisation can beencouraged and savings in terms of printing and distributing paper basedmanuals, catalogues and handbooks. All the current internaldocumentation can easily be maintained and distributed.

The intranet would enable the establishment of versatile and standard methods of communication throughout the company.

Encourage group or shared development, currently several areaoffices have their own IT systems working independently on very similarprojects.

Automatic transfer of information and data i.e. the quarterlyfigures could be circulated. Monthly returns of business volumes couldbe calculated on an as required basis.

Information can be provided to all in a user-friendly format.

6 The needs of modern service industries

6.1 Introduction

Traditional manufacturing companies have been replaced by modernservice industries, e.g. insurance, management consultancy andprofessional services.

The differences between the products of manufacturing companies and those of service businesses:

• can create problems in measuring and controlling performance and
• this, in turn, affects the information needs of service organisations.

6.2 Characteristics of services

6.3 Measuring service quality

Service providers do not have a physical product so base competitive advantage on less tangible customer benefits such as:

• soundness of advice given
• attitude of staff
• ambience of premises
• speed of service
• flexibility/responsiveness
• consistent quality.

Test your understanding 6

State the performance measures that may be used to inorder to assess the surgical quality provided by a hospital indicatinghow each measure may be addressed.

Chapter summary

Test your understanding answers

Test your understanding 1

The introduction of ERPS has the potential to have a significant impact on the work of management accountants.

• The use of ERPS causes a substantial reduction in the gathering and processing of routine information by management accountants.
• Instead of relying on management accountants to provide them with information, managers are able to access the system to obtain the information they require directly via a suitable electronic access medium.
• ERPS perform routine tasks that not so long ago were seen as an essential part of the daily routines of management accountants, for example perpetual inventory valuation. Therefore, management accountants is not to be diminished then it is of necessity that management accountants should seek to expand their roles within their organisations.
• Management accountants may be involved in interpreting the information generated from the ERPS and to provide business support for all levels of management within an organisation.

Test your understanding 2

• IT developments, such as networks and databases, provide the opportunity for instant access to management accounting information.
• It is possible to directly access and manipulate information from both internal and external sources.
• Information is relatively cheap to collect, store and manipulate.
• Many of the modern forms of management accounting have been developed in conjunction with IT systems, e.g. it may be difficult to run a meaningful ABC system without IT support.
• Data mining techniques can be used to uncover previously unknown patterns and correlations and hence improve performance.

Test your understanding 3

The principal accounting information that will be provided by thesales force to head office will be about new sales orders. Thisinformation can be used for instant initiation of despatch/manufactureand ordering components.

The information can also be used to produce sales analyses andcomparisons to budgets. If, sales of certain components are lower thanexpected, quick decisions can be made about lowering their prices.

The principal accounting information be provided to the sales forcefrom head office is likely to be the latest selling prices, stockavailability and customers-related information, such as currentbalances.

Test your understanding 4

• A large amount of data will need to be collected initially on each activity. Therefore, the cost of buying, implementing and maintaining a system of activity-based costing will be high.
• Incorrect identification of cost pools and cost drivers would result in inaccurate information being produced by the ABC system and hence incorrect decisions by managers.

Test your understanding 5

IT systems are critical to Zara's short lead times.

Zara needs comprehensive information in the following areas:

• which garments are selling, at what price points and in what quantities – key information will relate to both Zara stores and those of competitors
• detailed product specifications for these garments to enable design of new products
• compatibility between reporting and design software systems
• supply chain management
• order and delivery systems.

Test your understanding 6

• The percentage of satisfied patients which could be measured by using the number of customer complaints or via a patient survey.
• The time spent waiting for non-emergency operations which could be measured by reference to the time elapsed from the date when an operation was deemed necessary until it was actually performed.
• The number of successful operations as a percentage of total operations performed which could be measured by the number of remedial operations undertaken.
• The percentage of total operations performed in accordance with agreed schedules which could be measured by reference to agreed operation schedules.
• The standards of cleanliness and hygiene maintained which could be measured by observation or by the number of cases of hospital bugs such as MRSA.
• The staff to patient ratio which could be measured by reference to personnel and patient records.
• The responsiveness of staff to requests of patients which could be measured via a patient survey.

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