Chapter 14 Managing for Results

1
Chapter 15
Managing for Results
2
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

3
Learning objectives (contd)

• 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.

4
Role of Accountants

• They play multiple roles in entitys management.
• There are 4 phases to the process
• When social problems arise area specialists
• Collect and analyze budgetary and financial
  information
• Compare potential costs and benefits
• Accountants can make valuable
• contribution to this phase.

5
Role of Accountants (contd)

• 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
• Assessed by audit teams where accountants play a
  vital role.
• The teams also include statisticians, economists,
  and other specialists.

6
Limitations of Traditional Budgets

• Budget
• is the most significant of financial documents
• Determines amounts of resources to be received
• Details the financial strategy of the
  organization
• Limitation Budget doesnt provide information on
  the extent the expenditures will enable the
  organization to achieve its objectives.
• Operational objectives
• -Is at the heart of budgeting
• -Signifies specific sought-after results
• -Should be both quantifiable and measurable
• NOTE Please look at the proposed budget for
  Highland Hills Assistance League on pg. 634.

7
Characteristics of Operational Objectives

• Operational objectives
• Are the basis for allocating resources, managing
  day-to-day activities.
• Are not the means to achieve organizations
  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.

8
Adverse Consequences

• Operational objectives
• May give rise to conflict
• Risk of alienating organizations 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.

9
Performance Budgets

• Relate expenditures to operational objectives.
• Used instead of, or as a supplement to the
  traditional object classification budgets.
• Program budgets
• Common type of performance budgets
• Allocate funds by program and not by objects
• Ex. Funds appropriated for fire prevention
  programs, health programs, for public safety
  programs etc.

10
Performance Budgets (contd)

• 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)
• -one variant of program budgeting
• -Requires explicit decisions and judgments
• -Mandates that both current and proposed
  activities be subject to common review.

11
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
• Employment skills, Housing rehabilitation, and
  Teen substance abuse
• Following are examples of activities in the
  employment skills programs
• Job-seeking skills, Computer training,
  Electronics training, and Day care

12
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. 644.

13
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 organizations objectives.

14
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.

15
Disadvantages (contd)

• 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.

16
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
• an organization should periodically report to
  what extent it has achieved those objectives.
• should report results and audit those results.

17
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.

18
SEA Indicators

• Measures of efforts
• resources applied to a service.
• Measures of accomplishment
• include both outputs and outcomes
• Measures that relate efforts to accomplishment
• include efficiency measures
• Cost-outcome measures
• GASB concept statements emphasize that these 3
  types of data be supplemented with explanatory
  information that can help users to understand the
  measures.

19
Limitations of SEA

• SEA measures
• Are unlikely to indicate entitys true
  accomplishments apart from the stated objectives.
• They dont 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.

20
Audits of SEA Reports

• AICPA has separate standards for attesting to
  nonfinancial assertions.
• Auditors
• could be required to assess the adequacy of the
  information
• verify if the data provided are reliable
• Evaluate whether they are fairly presented.
• This could require auditors to review the
  entitys internal control systems and test
  selected transactions.

21
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.

22
Capital Expenditures (contd)

• Capital improvement program (CIP)
• entitys long-term schedule of capital
  acquisitions.
• Commonly associated with infrastructure assets,
  such as buildings, roads, and airports etc.
• Capital budgeting and programming are carried in
  2 stages
• individual projects are screened to determine if
  they should be undertaken by conducting
  cost-benefit analysis.
• 2) projects are ranked.

23
Capital Expenditures (contd)

• 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.

24
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.

25
Benefit-Cost Analysis (contd)

• 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.

26
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 the operating costs are usually overlooked.