AN APPROACH TOWARD THE EFFECTIVE . COMMUNICATION OF INTERNAL ACCOUNTING INFORMATION FOR CONTROL ' ' Thesis for the Degree of PII; O MICHIGAN STATE UNIVERSITY THOMAS G EVANS 1959 , “ TH £316 “a“ I ‘ LIBRARY I? Michigan State University This is to certifg that the thesis entitled AN APPROACH TOWARD THE EFFECTIVE COMMUNICATION , OF INTERNAL ACCOUNTING INFORMATION FOR CONTROL presented by Thomas Giles Evans has been accepted towards fulfillment of the requirements for Ph.D. degree in Accounting fizizwee Major professor Date May 15, 1969 0—169 5.1.? ‘ I I|I3IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII IW’ZI‘IL W ABSTRACT AN APPROACH TOWARD THE EFFECTIVE COMMUNICATION OF INTERNAL ACCOUNTING INFORMATION FOR CONTROL BY Thomas Giles Evans This thesis concentrates on the managerial account— ing function of communicating accounting information needed by the management of responsibility units within business firms in their efforts to achieve financial control, defined as the conformance of actual financial performance of a unit to planned or budgeted performance. An interdisciplinary approach was utilized, based On the subject areas of both I managerial accounting and interpersonal communication. The management information system of a firm is a collectivity of sub-systems whose major function is to supply information needed for problem solving and decision making to the firm's management. One such sub—system is the mana— gerial accounting system, which collects, processes, and transmits financial information to management for its use in planning, decision making, and control. The transmission of data to management for use in control is known as control reporting. The vehicle used is ._. .- ._____.__.___ _ _.__.._.A— . Thomas Giles Evans the control report, containing data concerning the actual financial performance of a responsibility unit, the planned performance, and any difference between the two, known as the variance. The major purpose of this report is to in— form management of its success in achieving control over its resources and to indicate areas under its direction that warrant further efforts toward control. This study sought to provide managerial accountants and the discipline of managerial accounting with a compre— hensive set of guidelines to follow in the control reporting process, recommended to achieve the effective communication of internal accounting information for control. The liter— ature on both interpersonal communication and the communica— tion phase of managerial accounting was examined. A case study of an actual business firm was conducted, concentrating on the control reporting system between the managerial accounting division and an operating division. Two Opinion surveys were conducted by questionnaires, one concerning the control reporting within business firms and the other concerning the views of management service staffmen of national CPA firms on the status of control reporting in modern firms. I per maj Thomas Giles Evans The results of this study indicate that control re- ports and the control reporting process possess certain major weaknesses that block or impair effectiveness as vehicles of communication. The specific barriers associ— ated with the control reporting process are these: too many reports are being prepared and sent to management; a lack of feedback to the managerial accountants about the effectiveness or suitability of the reports; a lack of co— ordination between the accountants and the managers as a group in the planning and development of the control reporting system; a lack of personal contact between the accounting department staff members who prepare the reports or have authority over their preparation and the managers who receive the reports; a lack of flexibility in the control reporting system, often a result of the use of electronic data processing equipment; and finally, a lack of accounting backgrounds in the receivers of the reports. The major weaknesses associated with the reports themselves are that they appear as a mass of data and that they con~ tain poor terminology. The analysis indicates that one major reason for the existence of these weaknesses is the lack of a sound, well—grounded comprehensive set of COII aPI Thomas Giles Evans guidelines for the managerial accountant to follow in his control reporting activities. The general conclusion of this study is that the application of the general guidelines from the subject area of interpersonal communication results in a comprehensive set of guidelines which will contribute toward the effec— tive communication of accounting information for control and will overcome and/or eliminate the barriers to effective communication that now do or potentially exist within the business firm. AN APPROACH TOWARD THE EFFECTIVE COMMUNICATION OF INTERNAL ACCOUNTING INFORMATION FOR CONTROL BY I 0:7 Thomas thEvans A THESIS Submitted to Michigan State University- in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1969 457M? 7—347 Copyright by THOMAS G. EVANS 1969 grat assi It 5 this eIIpI ACKNOWLEDGMENTS I sincerely wish to express my appreciation and gratitude to Drs. Lemke, Wenck, and Hepler for their able assistance, advice, and guidance as my thesis committee. It should be noted that Dr. Hepler agreed to serve on this committee after much work had already been done on the tOpic, and this was greatly appreciated. I also must express much appreciation to Dr. Thomas Farrell, Professor of Administrative Engineering at the University of Iowa, who, while at Michigan State University, contributed much in the early stages of this effort. The financial support of the Department of Account— ing and Financial Administration at Michigan State University and the Certified Public Accounting firm of Ernst and Ernst is gratefully acknowledged. The accountants and managers of the aerospace firm I must be thanked for their co-Operation and assistance dur— ing the case study phase of the research design. Of course, more appreciation than words can express is due my wife, Marilyn, not only for her great support and help during the project, but also for her very able secre— tarial assistance in the preparation of the rough draft. Finally, as a Christian with faith in Christ as my Lord and Savior, I must acknowledge the answer to many prayers concerning this thesis and especially for the assistance of James 1:5. ii Ila i— TABLE OF CONTENTS Chapter I. INTRODUCTION TO THE STUDY. . . . . . . Topic . . . . . . . . . . . . . . I Statement of the Problem. . . . . . i The Importance of Effective Com— ' munication to Accounting . . . Current State of Managerial ’ Accounting Communication . . . I Objectives of the Study . . . . . . Hypothesis. . . . . . . . . . . . . Research Methodology. . . . . . . . Limitations of the Study. . . . . . . Contribution Toward Accounting. . . II. THE NATURE AND ROLE OF MANAGERIAL ACCOUNTING FOR CONTROL. . . . . . . . Introduction. . . . . . . . . . . ’ The Concept and Function of Financial Control. . . . . . . . . ' Management Information Systems. . . The Accounting Information System . The Communication Stage of Managerial Accounting. . . . . . . Control Reporting . . . . . . . ' Purpose of Control Reporting. . General Nature of Communication Situation. . . . . . . . . . . Importance of Control Reporting I General Form and Content. . . . I Examples of Control Reports . . Examples of Control Reporting Systems. . . . . . . . . . . . III. THE NEED FOR SOUND CONTROL REPORTING GUIDELINES. . . . . . . . . . . . . . Introduction. . . . . . . . . . . . Current State of Control Reporting. I Barriers to Effective Control Reporting. . . . . . . . . . . . . ._.—\ o 12 l3 14 21 22 23 23 24 33 38 42 43 65 65 66 72 : sum, :1!”"' Chapter General Communication Barriers. . . Barriers in the Control Reporting Process. . . . . . . . . Barriers in the Control Reports . . Reasons for the Existence of Weaknesses. . . . . . . . . . . Current Reporting Guidelines. Guidelines Currently Used Summary . . . . . . . . . . . . . . . . o o c 0 I o O n o 0 IV. THE GOALS OF INTERPERSONAL COMMUNICATION AND THE GUIDELINES TOWARD REACHING THESE GOALS . . . . . . . . . . . . . . . . . . Introduction. . . . . . . . . . . . . . Goals of Interpersonal Communication. . Guidelines Toward Achieving Communication Goals. . . . . . . . . . Step 1: Observation. . . . . . . . Step 2: Description. . . . . . . . Step 3: Analysis . . . . . . . . . 4: Synthesis. . . . . . . . . 5. Composition. Step 6: Transmission 7: Reception. . . . . . . . . Step 8: Feedback . . . . . . . . . Summary . . . . . . . . . . . . . . . . I o o o o 0 0 V. GUIDELINES TOWARD THE EFFECTIVE COMMUNICATION OF CONTROL INFORMATION. . . Introduction. . . . . . . . . . . . . . The Goals of Control Reporting. Guidelines Toward Achieving the Goals. . . . . . . . . . . . . . . Step 1: Observation and Description . . . . . . . Step 2: Analysis . . . . . . . . . Step 3: Synthesis. . . . . . . . . Step 4: Composition. . . . . . . . Step 5: Transmission . . . . . . . I Step 6: Reception. . . . . . . . . Step 7: Feedback . . . . . . . . I o O 0 iv 89 105 106 108 108 111 116 117 118 119 126 128 135 135 138 144 144 146 150 151 154 162 164 171 172 172 Chapter Ability to Overcome and/or Eliminate Barriers . . . . . . . Evaluation of PrOposed Guidelines Summary . . . . . . . . . . . . . VI. ANALYSIS OF QUESTIONNAIRE SURVEY RESPONSES. . . . . . . . . . Introduction. . . . . . . . . . . Response to the Questionnaires. . Firm Response . . . . . . . . Executive Responses . . . . . Communication Situation Response. Summary of Responses. . . . . Responses to the Managerial Accountant Questionnaire . . . . Responses to the Divisional Manager Questionnaire. . . . . . APPENDICES. . . . . . . . . . . . . . . . . . BIBLIOGRAPHY. . . . . . . . . . . . . . . . . 176 180 187 191 191 192 192 193 196 196 216 229 266 gag Chapter II 1. 2. 3. 4. III 1. V 1. VI 1. LIST OF ILLUSTRATIONS Normal Functions of Controller's Department. . . . . . . . . . . . . Summary Statement of Operations Type. . . . . . . . . . . . . . . . Significant Figure Type. . . . . . . Labor Efficiency Type. . . . . . . . Machine Burst Form Control Report. . . . . . . . . . . . . . . Firm Size and Industry of Managerial Replies to Question Twelve. . . . . Select Characteristics of Firms Responding to Questionnaire . . . . vi 55 58 86 184 194 Ipyendix LIST OF APPENDICES Personal Interivew Outline . . . Business Firm Survey . . . . . . Accounting Firm Survey . . . . . Organization of the Controller‘s Department. . . . . . . . . . . vii 255 261 municati financia SpecifiI functio tion ne units j define 0f a p This s top ic' »—:r /.s H [.5 View CHAPTER I INTRODUCTION TO THE STUDY Topic The topic of this dissertation is the internal com— munication of accounting information needed for achieving financial control over segments of a business firm. More specifically, it concentrates on the managerial accounting function of communicating or reporting accounting informa— tion needed by the management of responsibility centers or units in their efforts and decisions to achieve control, defined as the conformance of actual financial performance of a responsibility unit to planned or budgeted performance. This study utilizes an interdisciplinary approach to this tOpic, drawing from the subject areas of both managerial accounting and interpersonal communication. Statement of the Problem The Importance of Effective ngmunication to Accounting Functionally, the general accounting process can be viewed as essentially composed of a number of different rtivitie to the ef cess. TI view of 2 voIved iI . . .t' muni I'udg mati of mm these: nomic i sion me with t] IISEIS I the da hereai raw d; which M I SIOn activities, the successful performance of which contribute to the effective functioning of the whole accounting pro- cess. The following definition portrays this functional view of accounting and identifies the major activities in- volved in the accounting process: ...the process of identifying, measuring, and com- municating economic information to permit informed judgements and decisions by the users of the infor— mation. Basically, the activities which make up the process of accounting can be separated into two classes. They are these: (1) those activities aimed at generating the eco— nomic information in a form usable in various economic deci~ sion making processes; and (2) those activities concerned with transmitting this transformed information to those users or third parties who rely upon the accountants for the data. More specifically, the first class of activities, hereafter referred to as the generation phase, obtains the raw data, Operates upon it and transforms it into that which is relevant to the user; whereas the second class of Committee to Prepare A Basic Statement of Account— ing Theory, A Statement of Basic Accountinngheory, (Evan- ston. Illinois: American Accounting Association, 1966), p. l. activities a material am through som ofactiviti reporting E hnction 01 ceding pha data is ch Nditional data frcnh adifferex TI Nocess i Phases. t0 their than £111: More In equa has adds \ march, activities accepts the results of the first phase as raw material and conveys it to where it is needed, usually through some form of accounting report. This second class of activities will be referred to as the communication or reporting phase. It is important to note that the only function of this phase is to convey the results of the pre- ceding phase to the users. Basically, only the form of the data is changed in the communication phase. Very little additional data is supplied during this phase—-usually the data from the generation phase is rearranged and/or put in a different form. The effective performance of the whole accounting process is a function of effective performance of these two phases. Hence, unless both phases are being performed fully to their potential, the accounting process itself is less than fully effective, as stated by Schmukler. More succinctly, the accounting function involves knowing, doing, and telling, all important in equal measure. In addition, the communication or reporting phase has added significance. Not only does the efficiency with 2N. Schmukler, "A Program for Effective Communica_ tion in Accounting," New York Certified Public Accountant, (March, 1967) , 189. which it iS accounting for the exi those econc out the cor not fulfil rims and stage, the of perform real util: Sizes the accountin We Ini recor recor name the I for I also Vit hate be \ ME which it is performed affect the efficiency of the whole accounting process, but it also is the only justification for the existence of the accounting process as a service to those economic units in the economy who rely upon it. With— out the communication phase, the accounting information could not fulfill its objective of being useful in economic deci— sions and judgments by third parties. Without the reporting stage, the accounting process would exist merely for the sake of performing its Operations on the data and would have no real utility or value to the economy. The following empha- sizes the importance of effective communication to the accounting process: We might have the very finest set of accounting records, but unless the information which these records contain is transmitted in an appr0priate manner to various individuals or groups, much of the real purpose, much of the real justification for the existence of accounting is lost.3 It must also be recognized that communication is also vitally important to most of the economic units which make up the environment in which accounting functions. Those economic units with a formal organization structure have'been greatly affected by communication. One source 3C. Babcodk, "Accounting Is Communication," QQeOperative Accountant, (Summer, 1964), 30. refers to commu organization ar‘. alarge influer units within tI Manage: that functions provides infor producing proc‘ accounting is nation for th. IiOn phase mu Ionization is needed to mark tion of the I cOdhtant SUCI and the impo tioning: . The “Idlhten; the COM of finer t0 deteI \ 4 INGw York}? ‘ refers to communication as the essential ingredient of organization and notes that communication techniques have a large influence upon the Operation of decision making units within the organization.4 Managerial accounting is the field of accounting that functions within the business firm. Basically, it provides information to be used to determine the cost of producing products and for financial control. Managerial accounting is one of the major sources of economic infor— mation for those units within the firm and the communica— tion phase must be effectively performed if the whole or— ganization is to function efficiently and have the data needed to make correct decisions. The following descrip- tion of the role and responsibility of the managerial ac- countant succinctly explains his importance to the firm and the importance of effective communication to his func— tioning: The accountant is responsible for the form and maintenance of corporate and Operating records, the compilation of statistics and the production of financial and Operating reports. It is his job to determine the information to be collected and the form in which it will be transmitted to the 4H. Simon, Administrative Behavior, Second Edition, (New York: The Free press, 1965), p. 154. supervisors source of i1 tion, perfo together th The su modern busi upon his a1: useful infc accurate, 5 an efficier and proper 0n the within the fir: inaccurate, or cause or great corporations 1 corporate pro] “Ohic informa ventories, ex exPenses, "pa hecisirm makj \ 5 E . ant," (111 Can '- III. & 6 SYSt N. . ens," in Edited by R also J- Broc supervisors and officers of the company. As the source of information, he is the pivotal posi- tion, performing a liasion function and linking together the various segments of the business. ... The success of a company accountant in a modern business organization ultimately depends upon his ability to communicate to management useful information from the records.... Clear, accurate, and timely reporting is essential if an efficient Operating level is to be reached and prOper decisions made. On the other hand, if the financial information within the firm is lacking, not effectively communicated, inaccurate, or handled excessively, these situations can cause or greatly compound many of the major problems that corporations face. Milroy lists the following examples of corporate problems arising from poor communication of eco— nomic information within the firm: over—investment in in— ventories, excessive overhead costs, unproductive selling eXpenses, ”panic buying," high communication costs, and poor decision making in general.6 Thayer declares that inefficient 5Editorial Board, ”Communications and the Account— ant," Canadian Chartered Accountant, LXXXII (March, 1963), 187. N. Milroy, "The Disintegration of an Information Systems," in Management Control Systems, Cases and Readings, Edited by R. Anthony, J. Dearden, and R. Vancil (Homewood, Illinois: Richard D. Irwin Company. 1967): Pa 17; See also J. Brooks Heckert and James D. Willson, Controllership, (New York: Ronald Press, 1963), p. 521. cornunication 1 head costs of < Current State I with a tive communica accounting in How effectivel managerial am In ge communication need inprovir If m( is langue another ; n0 matte: John atement infc Cdtion thror \ 7L. 8 . ‘ D. ' Hepler, communication is probably one of the greatest hidden over- head costs of Operating a business. Current State of Managerial Accounting Communication With a knowledge of the vital importance of effec- tive communication to accounting in general and managerial accounting in particular, the immediate question arises: How effectively is the communication or reporting phase of managerial accounting being currently performed? In general, business communications and corporate communications are not free of charges that they definitely need improving. As Lloyd and Warfel charge: If money is the lifeblood of business, the nerve is language. Every business suffers in one way or another from disease in this nerve. Every corporation, no matter how successful it seems, confesses itself to be in trouble in its communication....8 John Dearden, while commenting on the state of man— agement information systems, the main channels of communi- cation through the firm, declared that all systems can be 7L. Thayer, Administrative Communication, (Homewood, Illinois: Richard D. Irwin Company, 1961), p. 91. 8D. Lloyd and H. Warfel, "The Language of Business," in Dimensions in Communication, Edited by J. Campbell and H. Hepler. (Belmont, California: Wadsworth Publishing Com— PanY. 1965), p. 176. improved and H In accr long been the author conside he“axial pro The ei accounting an< statements ha: Abraham J. Br members of th ndchief fin ndthe accor feSSOrs of a< This t0 deter being fu €0nsensu is direc Process By y and as a \ 9‘]. 0 Rated?" in 10 A Le «On I i | htln ' athn' 196 improved and that some can be improved drastically.9 In accounting, too, the communication phase has long been the subject of criticism. In general, one noted author considers the communication phase of accounting as the "axial problem.”10 The effectiveness of communication in financial accounting and through the published audited financial statements has been the subject of a recent study by Abraham J. Briloff. Based on a questionnaire survey of 138 members of the financial community (i.e. financial analysts . and chief financial officers of publicly owned corporations) and the accounting profession (i.e. practitioners and pro- fessors of accountancy) and library research, he concluded This, then, was the primary thrust of the research: to determine whether there is a common understanding of the accounting function and the way in which it is being fulfilled. As has been demonstrated above, a consensus is absent both within the profession and between the profession and the audience to which it is directing its communication.... The communication process can thus be seen to be seriously deficient. By way of a conclusion to this Opening gambit and as a prologue for that which follows, it is our 9 . J. Dearden, "Can Management Information Be Auto- mated?” in Management Control Systems, p. 533. 10L. Goldberg, An Inguiry_Into The Nature of gflpounting, (Iowa City, Iowa: American Accounting Assoc- iation, 1965), p. 348. view that language 0 ously conf The pi to the communi example, Horng sents the gre; must learn to enthusiasm. " accounting is of management blind leadim Anot? System of ma Sions among I5 di5satisf rsports fror Prehend.l3 \ . llA P- 24, 12 has < Reporting", view that the research has confirmed that the language of accountancy has not been most seri- ously confounded. The picture is no brighter when attention is directed to the communication phase of managerial accounting. For example, Horngren states that the communication phase pre— sents the greatest challenge to accountants in that they must learn to "communicate their techniques with care and enthusiasm." He further declares that although managerial accounting is often considered to be the "seeing eye dog" of management, the actual situation is often that of the blind leading the blindl12 Another reports that the communication or reporting system of managerial accounting has caused heated discus— sions among industry executives. He reports that management is dissatisfied and frustrated by the traditional monthly reports from the system because they are difficult to com- prehend.13 llAbraham J. Briloff, The Effectiveness of Account— lfig Communication, (New York: Frederick A. Praeger, 1967), p. 24. 12C. Horngren, Cost Accounting, Second Edition, Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1967), p. 275. 13A. Bows, "Broadening the Approach to Managerial Reporting," Arthur Andersen Chronicle, XXII (April, 1962L 7. Other I product of man block or impai communication. for writing hi the short com: Other similar counting repo We ha reports t meaningle Weakr tors in I Pele‘ Stating that that make in COSIIYI more \ 14 I. iii. 15 dht,“ 187 El 16W III % M 17 J ahagement’ 10 Other sources concur that the report, the final product of managerial accounting, has many weaknesses that blodk or impair the effectiveness of managerial accounting communication. R. B. Lewis acknowledges that the stimulus for writing his well known text on accounting reports was the short comings of reports in use at that time [1957].14 Other similar charges have been leveled at managerial ac— counting reports: We have all seen accountants submit, with pride, reports that are crystal clear but which are actually meaningless to a large degree, to the recipient. Weaknesses in reports themselves are major fac— tors in the high cost of reporting systems.16 Pelej confirms and supports the above charges by stating that tOp management is very receptive to any ideas that make internal accounting reports simpler, clearer, less costly, more reliable, and more effective. 14R. B. Lewis, Accounting Reports for Management, (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1957), p. iii. 15Editorial Board, "Communications and the Account- ant," 187. 16W. Hilton, "Analyzing Reporting Systems,” Manage- gent Accounting, XLII (January, 1966), 59. 17J. Pelej, "Controller Communication With TOp Management," Controller, XXVII (April, 1959), 203. ...—,i Wherea internal accou efficiency ove that the comma accounting is the over-all source notes successfully This 0f the generz a‘Ierial acco- the trend of Operations p ternal data aimed at mal Stilts of thr new Operate TSed. HOWe reCeived an has instead trial and e \ 18 11 Whereas the techniques and methods of processing internal accounting data have grown in s0phistication and efficiency over time, the above evidence strongly suggests that the communication or reporting phase of managerial accounting is weak and in need of improvements to increase the over—all effectiveness of managerial accounting. One source notes that the reporting stage is perhaps the least successfully performed area of managerial accounting.18 This apparent discrepancy between the effectiveness of the generation phase and the communication phase of man- agerial accounting becomes understandable in the light of the trend of develOpments in managerial accounting. The Operations performed by the managerial accountant upon in- ternal data have been the subject of studies and research aimed at making those Operations more efficient and the re~ sults of the Operations more useful to management or finding new operations that are more efficient than those presently used. However, the communication or reporting phase has not received an equal emphasis in the studies or research and has instead developed through the traditional process of trial and error and, most importantly, lacks a sound basis 18Heckert and Willson, p. 521. or framework . The so phase revealed are critical r porting activ: of comprehens reports and e appointing la hensively app Communicatior lect area to The the decision management c aPplied rese °°hCerned w: Sibility un troll defin formaHCe t0 12 or framework. The survey of the literature on the communication phase revealed that a majority of the articles in this area are critical of the managerial accountants' reports and re— porting activities, while offering very little in the way of comprehensive programs or recommendations to improve his reports and efforts. And more importantly, there is a dis— appointing lack of progress toward finding ways to compre- hensively apply the guidelines toward effective interpersonal communication found in the interpersonal communications sub— ject area to the problems and weaknesses in managerial reports. Objectives of the Study The ultimate objective of this study is to improve the decision making and problem solving efficiency of the management of the business firm, the common objective of all applied research in business.19 This study is especially concerned with those decisions by the managers of respon- sibility units within the firm that lead to financial con— trol, defined as the conformance of actual financial per— formance to planned performance. 19See P. Rigby, Conceptual Foundations of Business ggsearch, (New York: John Wiley and Sons, Inc., 1965), p. 430 More I provide managr agerial accou: to follow in achieve the e information i based on the interpersonai The follows; TI Personal cor athieving e: their disco PCCOunting PrehensiVe effectiVe c and/0r elir Cation 0f I “ht With 13 More specifically, the immediate objective is to provide managerial accountants and the discipline of man- agerial accounting with a comprehensive set of guidelines to follow in the control reporting process recommended to achieve the effective communication of internal accounting information for control. This set of guidelines will be based on the general guidelines toward achieving effective interpersonal communication drawn from that subject area. Hypothesis The hypothesis examined in this dissertation is as follows: That there exists within the subject area of inter- personal communication a set of general guidelines toward achieving effective interpersonal communication and that their discovery, collation, and application to the internal accounting control communication process will yield a com— prehensive set of guidelines that will contribute toward effective communication in this process and will overcome and/or eliminate many of the barriers to effective communi— cation of control information that now do or potentially exist within business firms. This d: efforts: [1] Library re A numd material on ti amined in dept toobtain genI Cdmnnication Within the pr authorities i Phsonal comm asembled inI Ihg them ace. Fdl‘relhzo lo the Ei . ght Mlchi E Tan St 14 Research Methodology This dissertation is based on the following research efforts: (1) Library research on integpersonal communication A number of general texts, articles, and unpublished material on the interpersonal communication process were ex— amined in depth. The aim of this phase of the research was to obtain general information on the nature of interpersonal communications, the important variables or elements acting within the process, and the general guidelines advanced by authorities in the area to reach or achieve effective inter— personal communication. These guidelines were collected and assembled into a comprehensive set of integrating and group— ing them according to the following classification scheme of Farrell:20 1. Observation 2. Description 3. Analysis 4. Synthesis 5. Composition 20T. Farrell, "Principles of Communicating Based on the Eight Essential Components of the Communication Process," Michigan State University, (mimeographed). (2) Laser. W Both the communica ularly manag. depth. The Past decade. following tc (GI 15 6. Transmission 7. Reception 8. Feedback (2) Library research on the communication phase of managerial accounting Both journal articles and textbooks dealing with the communication stage of managerial accounting and partic- ularly managerial accounting for control were examined in depth. The examination covered articles and texts for the past decade. This examination provided information on the following topics: (a) The goals, purposes, or objectives of internal accounting communication for control (control reporting). (b) The importance of effective communication as an element of managerial accounting for control. (c) The general nature of internal accounting information systems and the important vari— ables or elements acting within the systems. (d) The barriers to effective communication that presently or potentially hinder the report- ing process. (3) Field research A case study of an actual firm was made, concen- trating on the control reporting system between the internal or managerial accounting division and an Operating division. This phase 0 cription of an actu information on the search step (2a, b, The techniq the of personal 1 somal interviews we accounting and Oper provided a descript trol reporting sys two groups, the ac related to the con the outline follow: A number 0: ganization charts, by the firm and ex on the operation c formation on the i The organ: aerospace firm. ' the divisions of of electronic equ Space programs at 16 This phase of the research design provided a des— ription of an actual control reporting system and actual aformation on the four topics noted in the previous re— earch step (2a, b, c, and d on page 15). The techniques used to obtain this information were nose of personal interview and observation. Separate per— Dnal interviews were held with the executives of both the :counting and operating division. The interviews not only rovided a description of the actual operation of their con- rol reporting system but also provided the opinions of the MO groups, the accountants and managers, on various topics slated to the control reporting system. Appendix A contains 1e outline followed in the personal interviews. A number of internal firm publications, such as or- anization charts, firm manuals, reports, etc. were provided I the firm and examined to provide additional information 1 the operation of their control system and background in— )rmation on the firm itself. The organization studied was a division of a large :rospace firm. The division studied is the largest of all e divisions of the firm and specializes in the production 'electronic equipment for civilian and government aero— ace programs and vehicles. The study concentrated on their non-standard c between the accounti division. The divis studied as the natui mium on attaining f units. The divisio system in operation sented at the conc (4) Questionnaire Two opinio They were as follo (a) Busin ness firms or divi in these firms. '1 and opinions of me the control repori agerial accountan process and also concepts found dr search phase of i The fort; in the greater D areas . The firm 17 their non—standard cost control reporting system, existing between the accounting and operating department within the division. The division was well suited to the topic being studied as the nature of its activities placed a high pre- mium on attaining financial control over its responsibility units. The division had a modern, computer based control system in operation. A description of this system is pre— sented at the conclusion of Chapter II below. (4) Questionnaire surveys Two Opinion surveys were conducted for this study. They were as follows: (a) Business firm survey, sent to forty—two busi- ness firms or divisions of firms or eighty—six executives in these firms. The survey was aimed at obtaining the views and opinions of members of the two major groups involved in the control reporting communication situation, namely man— agerial accountants and managers, on the control reporting process and also to provide empirical tests of some of the concepts found during and as a result of the library re- search phase of the research design. The forty-two firms used in this survey were located in the greater Detroit, Michigan and Dayton, Ohio industrial areas. The firms were selected from the directory of a national business or colleagues. The tw cally two reasons: dustries and firms; geographically to t work on the questio the firms, their in in Appendix B. As noted e tain the opinions, groups communicati reporting system. managerial account cated with each ot the precise names available, so the tionnaire packet. different questio: accountant and th unit“) was sent 21Called and cover letter: tional business organization and through the advice of lleagues. The two industrial areas were chosen for basi— lly two reasons: (1) both contain a wide variety of in— stries and firms; and (2) both were sufficiently close ographically to the author to make any personal follow-up - rk on the questionnaires convenient. Details concerning e firms, their industries, and their sizes is presented Appendix B. As noted earlier, the aim of the survey was to ob— in the opinions, attitudes, views, etc. of members of the oups communicating with each other through the control porting system. The aim of the survey was to question a nagerial accountant and manager in each firm who communi— ed with each other through the control system. Obviously, precise names of two such executives in each firm was not ilable, so the following procedure was employed: a ques— nnaire packet, containing three cover letters and two ferent questionnaires (one designed for the managerial ountant and the other for the manager of a responsibility t21) was sent to the controller's office of each firm. 21Called "Divisional Manager" in the questionnaire cover letters. The controller' 5 the study and as} utiwes within hi: sealed enve10pes tionnaire to the return to me. A and the question Both the questionnaires \ utive' 5 personal (a) Thl co: tr (b) Th cc (c) Tl ti (d) T] 1111 (e) T r (f) T Out of responses were response of a] e controller's cover letter informed him of the nature of e study and asked him to select the two appropriate exec— ives within his organization and then forward the two aled envelopes, each containing a cover letter and ques— nnaire to the chosen executives for them to complete and turn to me. Appendix B contains a copy of the cover letters d the questionnaires used in this procedure. Both the manager's and the managerial accountant's estionnaires were designed to provide data on the exec- ive's personal views of the following tOpics: (a) (C) (d) (e) (f) Out The importance of control reports to achieving control and to managerial accounting for con— trol. The general effectiveness of their current control reporting system. The actual and potential barriers to effec— tive control reporting. The relative importance of the various ele- ments within the control reporting process. The guidelines currently used in their control reporting system. The ideal or best guidelines to be used. of the forty—two firms contacted in the survey, ponses were received from 18 firms, yielding an overall ponse of approximately 42 per cent. In terms of the individual qu sent out, 16 on the above (10) “Big Eight" 1 questionnair the manageme by telephone his opinions earning the (a) (b) (e) Ad cally eval from this On 2 agerial a each othe sent two packet. dividual questionnaires, out of the 86 questionnaires22 nt out, 16 managerial accountants and ll managers replied the above points. (b) Accounting firm survey, involving four of the ig Eight” national certified public accounting firms. A estionnaire was sent to a staff member in each firm in e management services area (after first contacting each telephone and asking for their co-Operation) to obtain s Opinions and judgments, based on his experiences, con— rning the following aspects of the control reporting process: (a) The general effectiveness of control report— ing systems he is familiar with. (b) The barriers to effective control reporting he has seen. (c) The importance of sound guidelines to con- trol reporting. Additionally, the questionnaire asked him to criti- lly evaluate the comprehensive set of guidelines resulting m this study. Out of the four management services accountants 22In one firm, the author knew of at least two man- rial accountants and managers that communicated with h other through the control reporting system and hence, t two of each type of questionnaire to that firm in the ket. surveyed, two 1 23 per cent. Append naire used to There study. The f: tion. It is qualitative, ltdgment play noted that tr constitute t} ination of h} The ; tiOrinaire an ability to g beyond the P are quite re The eyed, two replied, yielding an overall response of 50 cent.23 Appendix C contains the cover letter and question— e used to conduct this phase of the research design. Limitations of the Study There are three major limitations related to this y. The first is inherent in the topic under investiga- . It is a behavioral topic and therefore necessarily itative, with human opinions, views, attitudes, and ment playing a very important role. It should also be d that these Opinions, Views, attitudes, and judgments titute the strongest available evidence for the exam— ion of hypotheses in this area. The second concerns the samples used for the ques— aire surveys. Neither sample was random and hence the 'ty to generalize the results of the surveys extensively d the present study is limited. However, the results uite relevant and appropriate to the present investi— n. The last major limitation is related to the response 23Due to the small response, this survey is of ed use in the study. to the quest: large and th based on the response bee that a large sions and It It the manager accounting (1‘ important munication (2 the effect COntrol w ( guideline the'lr cor Tomcat-1‘ 22 .he questionnaire surveys. This response was not very m and therefore the conclusions and recommendations d on the surveys are not as strong as could be had the onse been larger. It is the author's Opinion, however, a larger response would have led to the same conclu— s and recommendations. Contribution Toward Accounting It is believed that this dissertation will benefit managerial accountant and the discipline of managerial unting in the following three ways: (1) The identification of and description of the rtant elements Operating within and effecting the com- cation phase of managerial accounting for control. (2) The identification of the barriers that hinder effective communication of accounting information for \ 01 within the business firm. (3) The presentation of a comprehensive set of lines recommended for use by managerial accountants in control reporting activities to achieve effective com— ation and to eliminate and/or overcome the barriers. As study is 1 providing nent of a explore an acCOuntim modern bu A is t0 he] the relex be later tent of geliteratE Sign: aceOunt CHAPTER II THE NATURE AND ROLE OF MANAGERIAL ACCOUNTING FOR CONTROL Introduction As noted in the previous chapter, the scope of this udy is limited to the managerial accounting function of oviding accounting information for control to the manage— nt Of a business firm. The purpose of this chapter is to plore and describe in detail the nature and role of this counting function and the nature of its operation in the dern business firm. Additionally, this chapter has a second purpose. It to help provide a description of the situation to which relevant guidelines of interpersonal communication will later applied. This description is contained in the con— t of this chapter and Chapter III. The content of this chapter is based on the results erated by the following three phases of the research de- n: (l) the library research into the nature of managerial ounting; (2) the case study of management control system 23 and control (3) the ques The within busi: trol. Next sented, fol tion phase asubsysten firm. The and discus control re 0f control in industn 24 and control reporting system of the aerospace firm; and (3) the questionnaire survey conducted on the business firms. The chapter first deals with the concept of control within business firms and the managerial function of con— trol. Next, the concept of an information system is pre- sented, followed by a general description of the communica- tion phase of managerial accounting for control, viewed as a subsystem within the management information system of the firm. The goals and attributes of this phase are identified and discussed, emphasizing the role and importance of the control report. The chapter is concluded by a description of control reports, with examples of the general types used in industry. The Concept and Function of Financial Control In its most basic social sense, the concept of con— trol can be described by the following ...any process in which a person (or group of persons or organization of persons) determines or intentionally affects what another person or group or organization will do. 1Arnold S. Tannenbaum, ”Control in Organizations: Individual Adjustments and Organizational Performance," in Charles P. Bonini, Robert K. Jaedicke, and Harvey M. Wagner, ana ement Controls, (New York: McGraw—Hill, 1964), p. 299. This concept ganization 1 control, de of actual f formance. represents the state < control ten exists, th control."2 He affairs u this statl or Purpos financial “59d effi mined goa \ Them, ll i QOntrol Richard wood: I] also Tar 25 This concept of control, as it is related to the social or— ganization known as a business firm, is called financial control, defined in the previous chapter as the conformance of actual financial performance to planned or budgeted per- formance. In a technical sense, this definition really represents the end or goal of financial control, that is, the state of affairs which is sought through the use of control techniques. When this state has been achieved or exists, the given situation is referred to as being in control." Having defined financial control as a state of affairs to be achieved, it is important to discover why this state of affairs is desired, that is, the main reason or purpose for seeking control. In a general sense, when financial control is obtained the resources of the firm are used efficiently and effectively in reaching the pre-deter— mined goals of the enterprise.3 If control exists, it __________.______ 2Peter F. Drucker, ”Controls, Control, and Manage- ment," in Bonini, Jaedicke, and Wagner, p. 286. 3Robert N. Anthony, ”Characteristics of Management Control Systems,” in Robert N. Anthony, John Dearden, and Richard Vancil, (eds.), Management Control Systems, (Home- WOOd, Illinois: Richard D. Irwin, Inc., 1965), p. 2. See also Tannenbaum, p. 297. usually me: have been ; been carri It management is that 0: their job influence or lead t goals or measureme Pie-dete: Parison methods, in their methods the end 26 usually means that the firm's chosen financial alternatives have been accepted and the plans for achieving them have been carried out.4 It is almost universally recognized that one of management's important functions within the business firm is that of seeking to achieve financial control. It is their job to make decisions and take actions that either influence others to achieve their pre-determined objectives or lead to the accomplishment of their own organizational goals or both. Their actions and decisions are based on a measurement of actual performance and its comparison to the pre—determined plan or budget. This measurement and com- parison is the trigger or stimulus. Various techniques, methods, and tactics have been developed to aid management in their efforts to achieve financial control. These methods are known as controls and represent the means to the end.5 The financial control process can be viewed as a Cycle with the following four steps in it: 4Committee to Prepare A Statement of Basic Account- 'ng Theory, A Statement of Basic Accounting Theory, (Evanston, Illinois: American Accounting Association, 966) I p. 45. 5Drucker, p. 286. (Z. This cyclt can be ap; vidual se T ing or fc standard Step two and thei Both of Westiop and inv< formam Parison Variahc (l) establishing future financial goals to be accomplished; (2) planning operations to achieve the goals; (3) determining actual performance and comparing it to the planned performance; and (4) taking corrective action if necessary.6 is cycle usually Operates over a given period of time and n be applied to the firm as a whole and/or to any indi- 'dual segments within the firm. The first step in the cycle is Often called budget— ig or forecasting and involves the determination of the pi :andard against which actual performance will be evaluated. :ep two involves planning to Obtain the necessary resources 1d their effective utilization to achieve the plan or goals. >th of these steps are taken before the actual period in restion has begun. Step three occurs during the period d involves the determination of the actual financial per— rmance of the unit being controlled and the periodic com- rison to the plan. Such a comparison will often yield a riance, a non—correspondence between actual and planned rformance. Such variances can be either favorable or 6Walter B. McFarland, Concepts For Management , (New York: National Association of Accountants, 75—76. unfavorabl the finan< utilizatin determine the fourt o elimin this fin. not only the unit dso pr< the effs fou the for or [Espgm Sible Variar IOle ;‘ 0f ac 28 avorable, the former referring to a situation in which financial goals were achieved with less time or resource Lization than expected. Variances must be analyzed to ermine their causes. The variances act as triggers to fourth step, the taking of corrective action if possible eliminate the cause of any unfavorable variances. It is 3 final step that essentially leads to control in that it only can often eliminate undesirable variables within unit that act to block the achievement of control but 3 provides the decision maker with an index or idea of effectiveness of his past decisions, as shown by Chambers We admit that past experience is one of the foundations of future actions. It would seem, therefore, that a careful analysis of past per— formance would throw some light on the validity or effectiveness of past decisions.... By and large, management has the greatest role and onsibility in this control cycle. Management is respon- e for steps one, two, and four and for the analysis of ance phase of step three. In contrast, the accountant's is basically limited to step three, the determination ctual performance, its comparison to planned performance 7 . . Raymond J. Chambers, Accounting, Evaluation, and omic Behavior, (Englewood Cliffs, New Jersey: Prentice— . Inc., 1966), p. 313. and show trol 29 lthe computation of the variances. Heckert and Willson 'w the nature of the accountant's relationship to the con— 1 cycle thusly, The management function of control is the measure— ment and correction of performance so that busi— ness objectives and plans are accomplished. Man- agement control seeks to compel conformance to plan or standard. In this function, also, the controller assists. He does not enforce control, except in his own department, but he provides information which the functional executive is expected to use to achieve the required performance.8 An important aspect of the control cycle, and espe— lly important to management's success in performing the le, is the quality of the information that management eives. The control cycle implies a continual flow of Ormation to management, consisting of planned financial formance, actual performance, and the difference, the iance. Through this information, management keeps in— med about those areas out Of control and needing correc— e action.9 The importance of this information is noted McFarland, 8J. B. Heckert and J. D. Willson, Controllership, ond Edition, (New York: Ronald Press Company, 1963), 15. 9McFar1and, p. 76. 30 The degree of success which management has in maintaining control depends in large measure on the relevance and promptness of the informa— tion it receives. Management Information Systems As shown above, management must have information to effectively perform its role in the control cycle. In gen- eral, the problem solving units within any kind of organiza- :ion must have information to perform their jobs effectively. In fact, relevant information is a primary pre-requisite for engaging in decision making and problem solving. According to Rigby,ll problem solving and decision mking can be viewed as a process made up of three activities. The first, called problem analysis, calls for the formulation f the problem and development of alternative courses of ction. In the second step, called prediction, the outcome f each alternative is predicted. The final stage is the ecision, in which the most appropriate alternative is elected. At each stage, the appropriate information is eeded for effective decision making. In fact, information 101bid., p. 90. 11Paul H. Rigby, Conceptual Foundations of Business esearch, (New York: John Wiley and Sons, Inc., 1965), P. 43 and 52. is the problen genera availa These descr: =H—mmor—n3?‘ freq firm who are 80m 31 .s the key element. To Obtain the appropriate information needed for aroblem solving and decisions, systems have been created to generate or secure this information, process it and make it available to those problem solving units requiring it. These systems are called information systems and can be described as follows: An information system may be a simple instrument for collecting observations of the environment, or a complex network (an "organization") of men and machines who make observations, process them, and send messages to each other and finally to those who perform actions impinging on the environ— ment.... 2 The concept of an information system has been used Erequently in regards to the business firm. Within the firm, the problem solving units are the managers, those men vho have been assigned a group of economic resources and ire expected to use these resources to efficiently achieve ome pre—determined goal. Within this context, the concept f an information system exists to serve management and its oal becomes to provide them with the information they need or decisions concerning the utilization of their resources. 12J. Marshak, "Problems in Information Economics," n Bonini, Jaedicke, and Wagner, p. 38. The 32 The information system then becomes a management information system, described by the following: ...a system for accepting data as raw material and, through one or more transmutation processes, generating information as a product. The management information system is composed of a number of functional elements whose activities contribute toward achieving the goal of producing usable information for the management of the firm. In general terms, the operation of this system can be described as follows: data enters the system and is recorded (captured in symbols and signs); the data is stored until it is needed; when the need arises, the appropriate data are searched out and processed to fill the need; the processed data is transmitted through the system to the organizational unit or units requiring it and presented to the unit.14 This information system is usually treated as an entity, but actually is a collectivity, composed of a number of intertwined sub—systems. Each of these sub—systems are specifically concerned with the collection, processing, and l3P. Firmin and J. Linn, "Information Systems and Managerial Accounting,” The Accounting Review, XLIII (January, 1968), 75. l4Ibid., p. 76. _,_i v tra sol man 33 transmission of certain kinds of information to the problem solving unit. All the sub-systems combined constitute the management information system, which when combined with the other information systems of the firm constitute the firm's over-all communications system. The Accounting Information System The financial information system is one of the sub— systems of the managerial information system. In general, this system represents the flow of dollars through the enter- prise.15 The accounting system is the major component of the financial system and has two prime Objectives: first, providing a safeguard over the assets of the firm and noting the changes in these assets over time; and second, providing information to certain groups who have an interest in the firm. These groups include the firm's shareholders, the public, the government, and the management of the firm. The information is provided to these groups through account- ing reports. The reports sent to management are used by it in planning, measuring, and integrating the operations 15J. Dearden, "How to Organize Information Sys— tems," Harvard Business Review, XLIII (March-April, 1965), po 69. oft the int wit? min dCC 34 of the enterprise.16 It must be noted that frequently, the accounting system is the only formal information system . . 17 in the enterprise. That aspect of the accounting system concerned with reporting data to internal management for use in plan— ning, decision making, and control is known as managerial accounting. More specifically, managerial accounting is, ...a composite of the data gathering techniques embodied in a system whose focus is managerial planning, decision making, and control.1 As an element of the management information system, managerial accounting performs the same basic operations (i.e. collection, processing, and transmission of data) ,that were presented earlier regarding the general operation of the management information system. The only differenti— ating characteristics of the management accounting system from other sub—systems are the nature of the data collected and the operations performed upon the data to process it. Management accounting is, in reality, a tool of management 16R. E. Pfenning, "Business Information Systems," Phe Accounting Review, XXXVII (April, 1962), p. 235. l7Firmin and Linn, p. 77. l8Ibid. —_ whose needs guard and o in ti teret cont sibl and the tie 35 whose function it is to furnish management with the data it needs to effectively utilize its resources.19 To accomplish its objectives of providing a safe- guard over the assets and noting the change in these assets and of providing information to the groups who are interested in the firm, the accounting information system is adminis— tered by an internal unit of the firm, usually called the controller's department. This organizational unit is respon— sible for the operation of the accounting information system and has the authority to control its Operation. More specifically, the usual functions performed by the controller's department in fulfilling its responsibili— ties are shown on the following page in Illustration 1. As an examination of this illustration reveals, there are many different functions performed within the controller's depart- ment. The illustration primarily acts as a general indi— cator of these activities. A more detailed presentation of the organization of the controller's department, according to the Financial Executives Institute, is presented in Appendix D, page 263. 19Guy Lambers, "Computers Used As Accounting Tools,” Management Accounting, XLII (January, 1966), P. 29. 36 ILLUSTRATION 1 NORMAL FUNCTIONS OF COEHHUDLLER'S INEPARTMENT Controller __% Staff Routine Systems Taxes and iggisgié Accounting & Internal ther legal Forward ’ Operations Audit Reporting Planning General I B d Cost Financial Systems _ ncome _J P u get iACCount—r—i ccountg. Taxes lanning ing Reports , _ to Mgmt nternal JGOV t C0; BUdBEt Re ”a Stock— Audit mac‘s,” F“ I ports & Payroll t holders negotiation Admin. Accounts L. Misc. Receiv— Legal Forward Property able Reporting Planning Acctg. L Sales Tabu 'IlAnalysis Capital lating H Budget Accounts Payable Etc. M L Etc. Economic Analysis Source: D. R. Anderson and L. A. Schmidt, Practical Controllership. Revised Edition, (Homewood, Illinois: Richard D. Irwin, Inc., 1961), p- 100. 37 Within decentralized business firms, i.e. those firms with separate, semi-independent divisions or plants, the controller's function is often decentralized also, with a divisional controller and staff for each division or plant. There is a great deal of controversy over the operation of this divisional controller function. Basically, the argu- ments can be divided into the following two positions: (1) the division controller and his staff exist primarily to serve the division to which he is attached and therefore report directly to the management of the division; and (2) the divisional controller and his staff are representatives of the controller's department in the divi— sion or plant and hence report directly to that department.20 Managerial accounting, as a basic component of the accounting system, is one of the general functions of the controller's department. As presented on the chart, man-i agerial accounting is composed of the following separate functions: (1) Routine accounting Operations, consisting of cost accounting, reports to management, and sales analysis. ‘— 20Anderson and Schmidt, p. 106. 38 (2) Budgets, analysis, and forward planning, consisting of budget planning, budget reports and administration, and forward planning (including capital budgeting, special projects and economic analysis). A typical modification of this ideal organization deals with the reporting function. As shown in the chart, the reporting function is almost wholly in the Routine Accounting Operations sub—section, with both management and stockholders reports grouped into the same function and probably under the administration of a single manager. Al- though this is most appropriate in a simple and highly stabilized firm, it may well be that separate sections should be created for the management and stockholder reports, with 21 someone in charge of each class of report. The Communication Stage of Managerial Accounting As noted earlier, the basic operations of managerial accounting are the collection, processing, and transmission of data. The final operation, often called the reporting Stage, is the main focus of this study and involves the trans- mission of the processed data to the unit within the organ— ization that requires it and its presentation to that unit. 21Ibid., p. 99. . ' __ '15—.” ‘—‘o..:-v‘.~- w‘.-M-— (7. The n ist inf of des n) 39 The most frequently used vehicle used to transport the data is the accounting report, described as The end result of this process——the accounting report—~is the means by which accounting infor— mation is transferred to management, which then translates this information into action. In general terms, the report is the major source of information from the accounting system and the normal form of output from the system. Its purpose or objective can be described as follows: ...keeping the maximum number of affected members of the organization informed so that objectives can be attained with the greatest amount of speed and the least amount of confusion. The purpose of a report is to enlighten man— agement through a rapid, prompt, and accurate relevation of the facts on hand as the basis for control and corrective action. Most sources consulted on this tOpic would concur with the above that the purpose of an accounting report is to inform 0r educate the recipient and provide him with information 22Gordon shillinglaw, Cost Accounting, Analysis and Control, (Homewood, Illinois: Richard D. Irwin, Inc., 1961), p. 4. 23M. B. T. Davies, ”Communications and Internal Control," Internal Auditor, (Fall, 1964), p. 25. 24Ronello B. Lewis, Accounting Reports For Manage— gent, (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1957). p. 36. sho' act uni 40 or data which he needs for some purposeful activity. As shown above, the data is a necessary pre-requisite for the action to be taken. It is the controllers department and the specific units within it that are responsible for maintaining chan— nels of communication to the units within the firm and are responsible for providing the needed information through these channels. The controllers department is specifically responsible for preparing the reports and sending them to their recipients.25 The various levels of management within the firm need different information from the accounting system and hence have differing needs concerning the content of the accounting reports they receive. In general, the manage- ment of a firm can be divided into two groups, top manage- ment and Operating management and the needs of each de— scribed. Top management is usually concerned with receiv— ing monthly, quarterly, semiannual or annual reports of financial conditions and the results of operations for the firm as a whole and/or major divisions of the firm. 25A. Matz, 0. Curry, and G. Frank, Cost Accounting, Fourth Edition, (Cincinnati, Ohio: Southwestern Publishing Company, 1967), p. 667. See also Anderson and Schmidt, P. 93. Operat: depart: cost a monthl respor sible opera' the s paris taile tighl Conn sary is v for as; 41 Operating management, including foremen, supervisors, department heads, and divisional or plant managers, seek cost and operational data reported on a daily, weekly or monthly basis.26 The needs of both groups follow their responsibilities in the firm: top management is respon— sible for the Operations of the firm as a whole, whereas operating management is responsible for the operations of the smaller units that comprise the firm. A quick com— parison shows that operating management requires more de— tailed data than tOp management and requires it on a tighter schedule. The reporting stage or function of managerial ac- counting has a twofold importance. It is not only neces— sary to the completion of the accounting process but also is vital to the recipients of the reports who need the data for use in the decision making or problem solving process, as shown by the following: Insofar as it concerns internal management, the reporting function is closely related to both the planning and the control functions. Reporting is essential to make planning and control effective.27 _______________ 26Matz, Curry, and Frank, p. 666. 27 Heckert and Willson, p. 16. of th 42 The ever closer identification of accounting as an essential service to and within management has made it clear that the processes of account— ing yield reports, not records, as their prin- cipal product.... Control Reporting One of the most important functions or objectives of management accounting is to provide the managers within the organization with information to aid them in their ef— forts to achieve financial control over the resources under their direction and for which they are responsible. Man— agerial accounting for control is the descriptive term ap— plied to the process which is composed of all of the activ— ities of the managerial accountant to provide this infor— mation. The last step in this process is that of transmit— ting the needed information to the managers for their use in the control cycle and is often referred to as control reporting. The vehicle used to communicate control infor— mation is the control report. 28 National Association of Accountants, Reports Which Managements Find Most Useful, Accounting Practice Report No. 9, (New York: National Association of Accountants, 1960), p. 3. ment aCCC witi spe tha spc 43 Purpose of Control Rpporting The control report is an internal accounting state— ment prepared periodically for management by the managerial accounting staff. Its general purpose is to provide them with accounting information which is needed for control. In a more specific sense, the report shows the manager the specific areas under his direction which are not in control, that is, the actual financial performance does not corre— spond to the planned performance. The report, then, acts basically as a score—card of the success of the control techniques that the manager has used on his areas and it points to the areas under his direction that need his atten— tion, as shown by the following quotes, As the name implies, control reports are intended to assist in the control of operations of the business by indicating areas which need correc— tive action. The report pinpoints an unsatisfactory situation in which actual current or projected near term future Operations compare unfavorably with the bUdget or previous year. The unsatisfactory per— 0 formance suggests the need for corrective action. This function of the control report has led one source to 29Heckert and Willson, p. 526. 30Lewis, p. 35. refer t survey purposl Inflm ial ac reply no ch to pj the I be g pose mane TOaI adVI He] Pet (Ne th Qu 44 31 refer to them as the ”efficiency thermometers of business." The results of the industrial firm questionnaire survey provides additional insights into the nature of the purpose of control reports and the control reporting process. In the questionnaires for both the managers and the manager— ial accountants, the fourth question asked the recipient to reply to the following: 4. In your Opinion, what is the goal or purpose of control reporting? Although this was an open ended question, (that is no choices were given in the question for the respondees to pick) the replies from both groups, the managers and the managerial accountants showed some similarity and could be grouped or classified into five different goals or pur- poses advocated.32 Within the group of replies from the managerial accountants, the following are the five basic goals they expressed and the per cent of the total group advocating each: 31Max Block, ”Practical Cost Controls-—How They Can Help Management Improve Profits," In Hector R. Anton and Peter A. Firmin, Contemporary Issues in Cost Accounting, (NEW York: Houghton—Mifflin Company, 1966), p. 87. 32A complete list of all the specific replies to this question is presented in Chapter VI, ”The Analysis of Questionnaire Survey," pages 200—01 and 219—20. the COD ini In te th 45 (1) To analyze any variation from plan and provide management with the information needed to overcome problem areas and to control his unit (31%) (2) To evaluate and control the performance of a unit in meeting profit objectives (19%). (3) To inform management of areas needing con— trol (19%). (4) To provide information to be used in manage— ment decision making (19%). (5) To plan, supervise operations, analyze vari- ations, and inform management (12%). It is significant to note that approximately 81% of the Opinions expressed advocated that the goal or purpose of control reporting was to inform and in general communicate information in management (goals (1), (3), (4), (5) above). In essence, the replies from these managerial accountants tend to conform to the role of the managerial accountant in the control cycle as it was described earlier in the chapter. Apparently the managerial accountants who replied have accepted the role and adopted the corresponding goal as their goal in control reporting. Within the group of replies from the managers polled, three basic goals or purposes were evident from their replies. They are these: (1) To point out variances, trends, and special concerns (54%). a i L 1 The n total 8011191 ment to b thai wit or ma! th of 46 (2) To provide information to be used in evalua- tion and control of a responsibility unit (18%). (3) To show performance, by responsibility, com— pared to the plan and the trend of performance (9%) . (4) Miscellaneous unrelated goals (18%). The numbers in parenthesis represent the percentage of the total replies advocating each goal. The first two goals listed above, although expressed somewhat differently are basically the same. The first goal mentioned is really an explanation of what information is to be used in goal (2). Hence, approximately 72%, (goals (1) and (2) above), of the managers who replied are agreed that the goal of control reporting should be to provide them with the information they need for control. An examination and comparison of the sets of goals or purposes advocated by the managerial accountants and the managers reveals a great deal of agreement on the point that control reporting should have as its goal the provision of information to management for their use in the control Cycle. Some variation arises as to the exact nature of this information or specific types of information, but all are in general agreement. This agreement also corresponds quite closely to the goals or purposes of control reports and control reporting as presented in the literature and discus Genera vehicl and t repre accou ness natu: comm prc ma] P0 47 discussed earlier. General Nature of Communication Situation The control report represents the major means or vehicle of communication between the managerial accountant and the operating managers in the control cycle. It also :7“— 0.71113le represents the major means of communication between the ‘1',“wa accounting department or controllers unit within the busi— ness organization and the operating management. The general nature of this communication is best described as sideways communication, according to Lloyd and Warfel Within any organization there is always side— ways or horizontal communication, which goes on between persons or units working together on com- mon problems, though on different aspects of them.... The company expects them to co—operate.... Each person involved is a specialist who knows his own job but often little about the other's. The com— munication is thus normally from the specialist to an outsider who is a specialist in another field.33 This description aptly fits the control reporting process. Both the managerial accountant and the operating manager are attempting to improve or further the financial position and operating results of the firm, though each in 33D. Lloyd and H. Warfel, ”The Language of Busi— ness,” in J. Campbell and H. Hepler, Dimensions in Com— munication, (Belmont, California: Wadsworth Publishing Company, 1965), p. 180. his ow: on the sions contrc manag: affec he fu The a atin: tion 11M tie por ant to to co CC 48 his own way. The operating manager has a direct influence on the financial performance of the firm through his deci— sions concerning the utilization of the resources which he controls towards the goals established for his unit. The managerial accountant, on the other hand, has an indirect affect on the financial performance through the information he furnishes to the manager which is used in his decisions. The accountant is a specialist in accounting and the oper— ating manager is primarily a specialist in some other func— tional field. Importance of Control Reporting In addition, the application of the above descrip— tion to the control reporting situation points out the im— portance of control reporting. Both the managerial account- ant and the operating manager must COOperate if control is to be achieved and the firm is to function efficiently. And to achieve COOperation, effective communication through the control report must be achieved and maintained. Unless the control report is a means of effective communication between the accountant and the Operating manager, the accountant Will have fallen short of his goal of providing information to management and the manager will be making decisions with— out all the necessary data. This reveals the three-fold hmorta is impc to the serves manage ports to t1 the} to e mane an \ Vet: in 49 importance of the control report and control reporting: it is important to the firm, to the managerial accountant, and to the manager. The following quote from the literature serves to emphasize the importance of the control report managerial accountant: Techniques for effective communication of data for control are equally as important as are the techniques for producing the data. Unless manage— ment's actions to maintain control are guided by the data it receives, nothing is accomplished by the accountant's efforts.34 Relevant insights into the importance of control re— ports and control reporting can also be seen in the replies to the questionnaire survey. In the questionnaire sent to the managerial accountants, the third question asked them to express their view of the importance of this phase of managerial accounting. The exact form of the question was as follows: 3. In your OpiniOn, how important is the report— ing stage to managerial accounting for control (check one). Very Un— Un- Not Very Neutral Somewhat Very Vital important important Important Important Important The question asks them to rank their view of the importance Of the reporting stage along the scale provided. \- 34McFarland, pp. 92-93. The rep account portan' it “Ve the cc inclu< W inpo role ash: 50 The replies to this question overwhelmingly shows that the accountants regard the reporting stage as being quite im— portant to managerial accounting for control-—50% ranked it “Very Important” and 50% ranked it as ”Vital.”35 Similarly, the manager's views of the importance of the control report to his control process were Obtained by including the following question in their questionnaire: 3. In your Opinion, how important are control reports in determining the degree of control you achieve over your responsibility unit (check one please). Very Un- Un— Not Very Neutral Somewhat Very Vital important important Important Important Important The question seeks to determine the importance or role of the report as a determinant of the degree of control achieved — its practical value, in a sense, to managers. The replies indicate that the managers consider the control report as a very important determinant of the degree Of control they achieve—~36% considered the control report to be a ”Vital” determinant; 45% considered it as being ”Very Important." Hence, grouping these together, a total 0f 81% consider it as quite important in achieving control. E‘— 35See Chapter VI, p. 199. Only one manager : checked 19 per c help but is indet achieve reporti for cor support Genera somewt Which trol in te ratic unifc thret resp 51 Only one manager ranked it as ”Very Unimportant” and one manager ignored the request to check only one rank and checked all the ranks. These accounted for the remaining 19 per cent.36 In summary, the replies to this question cannot arra' help but lead to the conclusions that the control report is indeed an important determinant of the degree of control ‘3..‘.‘ achieved by the individual manager and also that control reporting is a very important part of managerial accounting for control. If the replies are combined, much empirical support for the importance Of the control reports is evident. General Form and Content It was stated earlier that the control report acts somewhat as a score-card for the responsibility unit for which it was prepared. Although the specific type Of con- trol report used in the various firms in our economy differ in terms of their format, style, and even frequency of prepa— ration, the contents of these control reports are sufficiently uniform to merit discussion. In general terms, the normal three elements appearing in the control report for a given responsibility unit are as follows: (1) the actual financial 36See Chapter VI, p. 218. performa: actual C revenues mee by plant or non- fornanc and re\ This i: their ing to is t] of t Dare 0):} Sch 52 performance of the responsibility unit, represented by the actual costs incurred and charged to the unit and the actual revenues earned by or attributed to the unit; (2) the planned or budgeted financial performance of the unit, represented by planned costs and revenues; and (3) the correspondence or non-correspondence between the actual and planned per- formance, represented by the differences between the cost and revenue elements of both sets, called the variances. This is the information needed by management for performing their role in the control process described earlier. Accord- ing to shillinglaw, The medium through which budgets and accounting data are used in the control process is the routine performance report [control report]. ...the per~ formance reports should emphasize deviations between budget and actual so that attention can be devoted to an analysis of the causes of major deviations from plan and to take any corrective action that seems necessary. The source of the information in the control report is the firm's accounting system. The two specific sources of this information are as follows: (1) the budgets pre— pared for all responsibility units is the source of planned or budgeted performance; and (2) an accumulation of the 37Shillinglaw, pp. 4-5. See also Anderson and Schmidt, p. 93. actual vided the ac assoc the r forwa past and 1 mary byt the usu all whe th ef 53 actual costs and revenues along organizational lines, pro- vided by a "responsibility accounting system", provides the actual financial performance. The control report itself has two time dimensions associated with it. It is historical in that it reports the results Of past actions and events. But it also looks forward into the future in the sense that the results of past events and decisions act as guides to the decisions and actions to be taken in the future.38 Control reports can be classified as either sum— mary or current, depending upon the period of time covered by the report and the lag between the period covered and the report's actual preparation. Summary control reports usually cover a long period of time and deal with the over— all financial performance of a given responsibility unit, whether a division or the firm. They have two basic func— tions: (1) to inform higher management of the general effectiveness of financial performance; and (2) to act as a check against current control reports. The latter are prepared more frequently and seek to highlight deviations so prompt corrective action can be taken. They are usually 38National Association of Accountants, p. 3. prepared operatior trol repc Examples classes In 1960 Sixty-o gards a ing Si) that 31 contro Contai and C( Plann 0n th USUa] 54 prepared for Operating management, those responsible for the operations and performance of their units. The summary con— trol reports are usually prepared for tOp management.39 Examples of Control Reports In general, control reports can be grouped into classes by the nature of the activity being reported upon. In 1960, the National Association Of Accountants polled sixty-one authors to determine what reports management re- gards as most useful in performing their jobs. The follow- ing six general classes Of control reports resulted from that survey and are useful as examples of typical kinds of control reports:40 (1) Summary Statements of Operations type, which contains the actual results of operations, both revenue for a given responsibility unit compared to the and costs, planned revenue and costs for that unit. Illustration 2 on the following page is an example of this type. It is usually prepared for tOp management on a monthly basis. 39Heckert and Willson, p. 528. 40National Association of Accountants, pp. 5-27. / M—QNF WZOHB/NmMNnHO rho .szmzmhuANH‘m NEW—25:5“ N ZOHHCJKFWD‘HQH w .Q HUOmm mo :ofluMflUOmmm Hmcofiumz uxnow zwzv .Howmmp umOE ocwm mucoEw mam: coats muuo om .flowma .mucm d HmcoHumz .mucmucsouum wo GOHum ucflouud "wUHDOm AuGoEw mama mo» ou nnnnnuuu mwmilu mnurvi, Iiiiii ma M Home ome m3 H m co m moszmsm smz Anmawpow w wumum .Hmuwowmv . . was; mmwmeH MHMWHH lellr woamw mo w mam H omm mwxms mmoemm moszmuoucm>cH weapon—$55 8. @380: u . m 0.: 05 madam «0 » .pwuflmou you 9:39 33: mam; coo. 85525 $5.230 mmamm 0» one ommw new xna uosaona 0» uwusnauuum q.wH o.ks maamm do w ma ommw .uamume coauananucou an ommmnoww comm one no moa mom.H oop.a mumoo suflommau sauce 88 . . . dogmas? H309 03 omm ome 9:32:95 Aommv oE5H0> pmummowuom oooraa x AMMP Ammv mNN omm m>Humuumwcafip< won oflumu\>\m asymmomuom Hoar ome com acauoxnm: iommc mocmflna> mmamm loco.ac x wmw oauau >\a Hmsuoa ow cam com meansuumuncmz AoHnm«um>V :HmHME coausbauucoo consume Ecum ommouuoc mo mfimhamcm guano Mom AHV memoo >9Ho¢mdo . . AHV . .m moHMm mo w Aucwamumum i irlwommm mommm :kume manning mo Eouuon .t... smommm .333 owwmfimaoxm mm £30: in: Angus :5 com: och.» oom§ m\o wanfiumxy lemuuaao masseuse iwmm.av ooo.aH 086H madam umz . mauom fin umMUQH0h HMSUU4 QUCMMHM> #wmomuom H E mums on new» sumo: ucmuuzo usuaopmuw mmcflcuom MAME mZOHBmmmmO ho BZMZmBflBm >M¢SSDm N ZOHBQmHmDAAH cialize Such i in ter page 5 month? a che physi elect labo tact pres budt 6X31 56 (2) Significant Figure type, which presents spe— cialized information that the firm's management requires. Such information is usually concerned with measuring volume in terms of physical units and dollars. Illustration 3 on page 57 is an example Of this type. It is usually prepared monthly for department heads and plant or division managers. (3) Production Activity type, issued frequently as a check on production levels. It contains data on the physical quantity of output, and is usually prepared by electronic data processing equipment. (4) Labor Efficiency type, used for the control of labor costs. It is usually prepared on a weekly basis for ‘factory managers and foremen. This type of report usually presents comparison Of actual labor costs and hours with budgeted costs and hours. Illustration 4, on page 58, is an example Of this type. (5) Manufacturing Expense type, used to control the expenses associated with the manufacturing activities. Usually this type is prepared on a departmental basis and issued monthly to managers and department heads. (6) Project Cost type, which is used to control the Costs in given independent projects. The focus of the re— Port is a project or task, rather than an organizational unit. DIRECT L Machin Weldin Tote RATIO OI Machir Weldit Tot VOLUME Actua Stand Total Pri Tra DEPARTI m Manufa To OTHER The? (it PE Pur: Matt M EMPLO ‘fi— hir Se; Em; 57 ILLUSTRATION 3 SIGNIFICANT FIGURE TYPE Comparison of Significant Figures December Base Period January February DIRECT LABOR PERFORMANCE Machining D1V151on 00% 00% 00% 00% Welding Division 00% 00% 00% 00% Total Manufacturing Department 00% 00% 00% 00% RATIO OF INDIRECT TO DIRECT LABOR HOURS Machining D1v1sion 00% 00% 00% 00% Welding Division 00% 00% 00% 00% Total 00% 00% 00% 00% VOLUME (in 000's) Actual Direct Labor Hours 000 000 000 000 Standard Direct Labor Hours 000 000 00 000 Total Standard Dollars of: Prime Products Produced 0000 0000 0000 0000 Transfers to Other Plants 000 000 000 000 W DIR. LABOR MR Accounting $ .00 $ .00 $ .00 $ .00 , Manufacturing 0.00 0.00 0.00 0.00 s 0.00 $ 0.00 s 0.00 W OTHER COST INDEXES Sp01lage Due to Defective Labor (in 000's) 5 00 $ 00 $ 00 $ 00 Per Std. Direct Labor Hour .00 .00 .00 ,oo Purchases of Materials & Supplies 0 000 0,000 0,000 0,000 Material Variance (in 000's) 5 00 S 000 $ 000 Material Variance Percent --- 0.01 0.01 00.01 EMPLOYMENT AND HOURS -_HI?€§__"_—__""—‘ 00 0 000 Separations 00 000 o 00 Employment by Department Accounting 000 000 000 000 Manufacturing 0000 0000 0000 0000 Total 0000 0000 0000 0000 Actual Hours Worked (in 000's) Hourly Roll - Direct 000 000 000 000 Hourly Roll - Indirect All Departments 920 929 929 000 Hourly Roll — Total 000 000 000 mm Weekly Roll _29 _22 _22 00 Total Hourly and Weekly Rolls 000 000 0 0 560 Overtime Hours Worked (in 000's) Hourly Roll 0.0 0.0 0.0 0.0 Weekly Roll 0.0 _;2 _;9 .0 Total 007—0 0.0 0.0 670 INVENTORIES AT STANDARD COST (in 000's) Production Stor $0;000 $0,000 $0,000 $0,000 Indirect Inventories and Supplies 000 000 000 000 Prime Product Inventories 0:000 0:00 _9,_9_ .2L29_ Tota 0,000 $00,000 $00,000 $00,000 (Monthly to executive vice-president, plant manager and department heads) Source: National Association of Accountants, Reports which Managements Find Most National Association of Accoun ants, 1960), 15. Eéfifigl, (New York: II \l DBD CWG Direct hrs Ind hrs - é Ind hrs - : Total indi Hourly OVe Direct T Indirect Salaries Salaried \ Current < establisl convmms Thi mil 2nd M. 58 ILLUSTRATION 4 LABOR EFFICIENCY TYPE TO: CMB DED CWG AM CRN Direct hrs Actual Budget Ind hrs - dir men Actual Budget Ind hrs - ind men Actual Budget Total indirect hrs Actual Budget Hourly overtime: Direct hrs Actual Budget Indirect hrs Actual Budget Salaries Actual Budget Salaried overtime Actual Budget Labor Statistics Current Quarter Year to Date Qtr to Date W/E 12—7—58 10th Week 23rd Week % Ind % Ind % Ind to to to Annual Hours Dir Hours Dir Hours Dir Objective 11,800 - 115,500 — 220,000 - - 11,500 — 115,000 - 225,000 - 600,000 1,800 15% 17,300 15% 28,600 13% - 1,400 12% 14,000 12% 27,000 12% 12% 6,100 52% 61,200 53% 123,200 56% — 6,000 52% 60,000 52% 123,800 55% 50% 7,900 67% 78,500 68% 151,800 69% - 7,400 64% 74,000 64% 150,800 67% 62% 1,300 11% 10,400 9% 13,200 6% - 1,180 10% 11,800 10% 13,500 6% 15% 360 3% 5,800 5% 6,600 3% - 350 3% 3.500 3% 4,500 2% 5% $14,400 — $141,500 - $320,000 - — $14,000 - $140,000 — $315,000 — $800,000 $ 1,000 — $ 8,400 - $ 12,000 - — $ 800 — 5 8,000 — $ 10,000 — $ 40,000 established. COMMENTS: (Weekly to operating executives) This week's indirect hours by direct men is high due to relocating 8 milling machines. Actual should not exceed budget during remainder of 2nd quarter as all relocation projects have been completed. Current quarter and year—to—date budget figures are based on quarterly budgets as . 1960), p. 22. SOurce: National Association of Accountants, Reports which Managements Find Most Useful, (New York: National Association of Accountants, The rep usually charge Exampl tion ( that to lo repor portj show upa prov mati 59 The report highlights the financial status of the project, usually on a weekly interval and is sent to the manager in charge of the project. Exgmples of Controlpggporting Syspgmg The examples presented above give a general indica— tion of the form and content of individual control reports that are actually used in industry. It is also important to look at the whole control reporting system, since the reports are not effective alone. A view of the whole re- porting system for managerial accounting for control will show how the various types of reports fit together to make up a unified communication system with the single goal of providing the managers of the firm with the control infor- mation they need. The case study phase of the research design provided a description of the control reporting system of the aero— Space firm that was studied. This description follows and serves as a useful example of a control reporting system that is currently used in industry. It also is helpful in lending practical realism to the study and as a technique for integrating the concepts and ideas presented thus far. The specific control system is called the Non- Standard Cost Control System and has as its goal the control of costs to oust job ord focus f control tion bl of man of the and ti As are 60 of costs on various independent projects being manufactured to customer specifications. The cost system is basically a job order cost system, with each individual project as the focus for the collection of the various cost elements. The control reporting system is the major vehicle of communica— tion between the accounting department and the various levels of management responsible for the completion and manufacture of the projects. The general cost information inputs into the system and their sources are as follows: (1) (2) (3) Direct Material: Materials are acquired by the firm and kept in the storeroom. As materials are requisitioned from the materials storeroom, the cost of the materials is charged to the apprOpriate project. This cost includes the acquisition cost of the material plus any material handling charges. Direct Labor: During each week the hours of the various types and levels Of direct labor are accumulated for each project on time cards. The cost of direct labor per project is com— puted by multiplying the total hours per project by the appropriate rates. Factory Overhead: The amount of factory over- head charged per project is a predetermined percentage of the total direct labor cost. As shown above, both direct material and direct labor costs are traced directly to each project, whereas factory over— head is indirectly applied on the basis of direct labor cost. project project the det ect and ductior to gror ect. ; author tem is ment 1 0n the and a suppo tion by e Port basi Wed and and 61 The actual procedure followed from the birth of a project is basically as follows: at the beginning, each project has a formal authorization prepared for it, giving the details of the operations necessary to produce the proj— ect and an estimate of the costs to be incurred in its pro— duction. Each project is assigned a number, which is used to group and collect all actual costs incurred on the proj— ect. A periodic comparison between estimated costs from the authorization form and actual costs from the accounting sys— tem is the essence of the control system. Primary manage— ment responsibility for the control Of project costs rests on the project manager, who directs the work on the project and also on the cost center managers, who are in charge of supportive Operations such as material inspection, produc- The reports of this system are prepared periodically by electronic data processing equipment. The four major re- ports of the system are as follows: (1) The Weekly Cumulative Cost Report, which is the Dasic control document for the projects. It is prepared veekly and contains the actual direct material, direct labor, and factory overhead cost figures for both the previous week tion tooling, etc. and cumulative totals from the beginning of the month. Both are compar port is pr using res; tion of c< ( weekly f0 labor hou monthly : Cumulati‘ costs. Center n total cw total c PIEpare divis ic Asimi] Prepan 0le ti Per pr Casted 62 are compared to the budgeted costs in the report. This re— port is prepared for the project managers. A similar report using responsibility centers for the collection and presenta- tion of costs is prepared weekly for the cost center managers. (2) The Weekly Labor Report, which is also prepared weekly for the project managers. It shows the actual direct labor hours per project compared to the forecasted hours. (3) The Monthly Project Report, which is prepared monthly for each project and cost center and shows the total cumulative costs incurred to date compared to the forecasted COStS. It is prepared for the project managers and cost center managers. (4) The Financial Monthly Report, which contains the total cumulative actual cost, forecasted cost to complete total cost, and forecasted cost for each project. It is (prepared for the project manager, the department manager, divisional manager, and the vice—president Of the division. ‘A similar report, called the Monthly Status Report, is also 1prepared for the same management levels and contains not only the above information but also the total actual cost per project expressed as a percentage of the total fore— casted cost per project. In terms of the summary and current control report types note< weekly repr designed t cost cente them and z ‘ Monthly R: type cont managemen over-all sion itse ment rec correcti Casted ( vided 0] of this as an e POrting Case 5 was pr infOrn Mill 3 63 types noted earlier, the Monthly Project Report and both weekly reports can be classified as current control reports, designed to aid the operating managers (i.e. the project and cost center managers) attain the financial goals set before them and achieve control over their units. The Financial Monthly Report and Monthly Status Report are both summary type control reports, designed to give the upper levels of management (i.e., department and divisional managers) an over—all view of the status of each project and of the divi— sion itself. It is through these four major reports that manage- ment receives the information needed to note areas needing corrective action to bring actual costs into line with fore— casted costs. In this system, this basic information is pro— vided on a weekly basis, which is a distinguishing feature of this particular system. Otherwise, this description acts as an example of an actual currently used cost control re- porting system. In addition to this description generated from the case study, another description of a cost control system was provided in response to the request for any additional information in the cover letter to the managerial account— ant's questionnaire. One managerial accountant of a consumer durables but alsc control ant 64 durables producing firm returned not only the questionnaire, but also included the following summary description of the control system used by his firm: The first phase of control is utilized in our product planning and engineering [department]. When a new model or product is conceived tooling and piece cost targets are established based on projected selling prices. During the period the product is develOped and readied for production, conformance to these cost targets is reported to management to direct their control efforts. The control of current operations is achieved through the use of a capital plan for capital ex- penditures and their related expenses and a profit plan for Operations. In each of these the primary emphasis is placed upon the planning aspect through the constant analysis and evaluation of regularly projected future variances from these plans. 41From a letter from the manager Of the Budgets and Profit Analysis Department, August 23, 1968. descripti ing for ( importan It was c achieved to the r or Sued and the establi dence, Plies ( TCCOun naires and rE CHAPTER III THE NEED FOR SOUND CONTROL REPORTING GUIDELINES Introduction The previous chapter, in addition to providing a description of the nature and role of the managerial account— ing for control function within the firm, demonstrated the importance of effective control reporting within the firm. It was concluded that the degree of effective communication achieved through the control report was vitally important to the managerial accountant's role, the managers' ability ‘or success in achieving financial control over their units, land the financial success of the firm. With this importance established, the present chapter presents and examines evi— dence, both from the accounting literature and from the re- plies of the managers, managerial accountants, and public accounting firm management service staffmen to their question— naires, which indicates how effective current control reports and reporting systems are as vehicles of communication. This chapter first presents and examines the evi— dence about the general effectiveness of control reporting. 65 This is problems currenti for exi: the maj manager vities. to exam and tht to eli an ex; will Tanag both nesse cont] Ofa 66 This is followed by a presentation and discussion Of the problems and barriers to effective control reporting that currently exist within firms or have a realistic potential for existing. The chapter concludes with a presentation of the major sets of guidelines or principles advocated in the managerial accounting literature for control reporting acti— vities. These sets of guidelines are compared and evaluated to examine their ability to achieve effective communication and the goals of control reporting as well as their ability to eliminate and/or overcome the problems and barriers. Current State of Controlpggporting As noted in the first chapter, pages 9 through 12, an examination Of the literature Of managerial accounting will lead to the conclusion that the communication phase of managerial accounting is not effectively performed and that both the reports and the reporting systems possess weak~ nesses that block or impair the effective utilization of control information by management. This seems to be part of a perennial accounting problem, according to Goldberg: A more obvious problem in communication which faces the accountant today, as it will always face him, is to devise the form and contents of the re- ports he prepares from his records.1 lLouis Goldberg, An Inquiry Into The Nature of Accounting, (Iowa City, Iowa: American Accounting Assoc- lation, 1965), p. 359. A? general er of this s accountan reports. efforts a As far a trol rep budgeted ance. 1 this St! in such tive ut in chal the ma: CIllesti Curren mdtior Thest; Cate trol in CC 67 Although this present study is addressed to the general solution to this problem, it is not within the sc0pe of this study to examine the criteria used by the managerial accountant to determine the specific content of his control reports. This issue has long been the subject Of research efforts and indications are that the research will continue. As far as this study is concerned, the content of the con- trol report will be assumed to consist of actual costs, budgeted or planned costs, and their difference, the vari- ance. Instead, given the content of the control report, this study concentrates on the presentation of the content in such a manner or fashion so as to contribute to its effec— tive utilization by management in the control process. In addition to the quote presented above and those iin Chapter I, "Introduction tO the Study,” the replies Of lthe managerial accountants and managers to the business firm questionnaire survey provide significant insights into the current effectiveness of the communication of control infor— mation through control reports in actual firms. The fifth question in each questionnaire asked the respondee to indi- cate his opinion as to the effectiveness of his current con— trol reports, that is, those he either prepares or receives, in conveying control information. Hence, the replies to this L____—__1 questior their f that a surveys of eacl accoun‘ Very Un effecti Very U effect the e negat port rank ing Effe 68 question provided the over—all evaluation of each group of their firm's control reporting system. It should be noted that a full presentation of the results of the questionnaire surveys is to be found in Chapter VI. The total response of each group are shown below; first the replies of the accountants followed by those of the managers:2 12% 19 50 19 Very Un— Un— Not Very Neutral Somewhat Effective Very effective effective Effective Effective Effective 27% 54 9 Very Un— Un— Not Very Neutral Somewhat Effective Very effective effective Effective Effective Effective As shown, the managerial accountants' evaluation Of the effectiveness of their control reports are somewhat more pnegative than those of the managers who receive these re- l iports. For the accountants as a group, approximately 70% irank their reports as at least "Effective" with the remain— ing 30% confessing that their reports are only ”Somewhat Effective" or worse yet, "Not Very Effective." A priori, it was expected that the accountants would tend to be more Positive about the effectiveness of their reports, since 2The missing ten per cent for the management replies is due to reSpondee's refusal to select one scale when evaluating the control reports. they ar trol re confess cannot lieve i ment t mation their that 1 tiVe" that It sh repo: manar Cont repc isor the ecu iso Sit 69 they are the ones responsible for the operation of the con- trol reporting system and would, therefore, be hesitant in confessing its faults and weaknesses. However, the replies cannot but lead to the conclusion that the accountants be- lieve that current control reports are in need of improve— ment to make them more effective in conveying control infor— mation. In terms of the managers' response to this question, their judgment is somewhat less negative, with 64% stating that the control reports they receive are at least "Effec- tive” in conveying control information, with 27% stating that their control reports are only "Somewhat Effective.” It should be noted that fewer managers ranked their control reports as "Very Effective" than did the accountants. The managerial responses emphasize the need for improvements in control reports. Additional insight into the effectiveness of control reports within the firms surveyed is provided by a compar— ison of the replies from an accountant and a manager from the same firm on this question. Twelve such comparisons could be made from the replies to the survey. Each compar- ison tests the correspondence between the perception of the situation by the two parties involved. If both parties are not in a reportir between based 01 sults 0 ranked least c effecti conside imatelj by thr strong Effect the ff aTers in Cu ment 001119 to Cr Was View lett 70 not in agreement as to the effectiveness of the control reporting system, it suggests that a lack of communication between them exists and that both parties are communicating based on different attitudes toward the situation. The re- sults of the comparisons were as follows: 42% of the pairs ranked their reports identically——the remaining 58% were at least one or two ranks apart in their evaluation of the effectiveness of their control reporting system. In fact, considering only those pairs that did not correspond, approx— imately 70% differed by one rank, 15% by two ranks, and 15% by three ranks. It must be concluded that this evidence strongly indicates that a lack Of communication about the effectiveness of the control reporting system exists among the firms surveyed, and that both the accountants and man- agers have different attitudes toward the system. Additionally, there is evidence that the weaknesses in current control reporting systems are known to manage— ment and that firms are making efforts to eliminate or over- come these weaknesses. Of the three firms that were unable to complete the questionnaire, two stated that the reason was that their control reporting system was either being re— Viewed or overhauled, as the following quotes from the letters show: Additf contrr in th Of re indic repo; effe the ness Jill‘ ing 71 Enclosed is the data which you sent us regard— ing control reports. We regret that we are unable to complete these at this time. Currently we are making a complete revision to our information sys— tem. This includes a computer installation. In addition, we are in the process of making certain personnel changes. In view of the foregoing we feel that informa— tion that we would furnish to you would not be repre— sentative Of what we expect from control reports.3 Our company is in the process of making an ex— tensive review of this same matter Icontrol reporting] with the aid Of a team of management consultants. Additionally, while the case study of the aerospace firm's control reporting system was being conducted, management was in the process of studying the system to provide a program of revisions to make the system more effective.5 In summary, then, all the above evidence clearly Vindicates that the function of control reporting and control reports are definitely in need of efforts to increase their effectiveness in conveying control information and achieving the goals of control reporting and that they possess weak— nesses that block or impair their current effectiveness. 3Letter from the Assistant Corporate Controller on uly 22, 1968. 4Letter from the Controller on July 1, 1968. 5Personal interview with the head of the Engineer— 'ng Administration Department on January 24, 1968. systems tive as problem are blc ports a for the been a‘ with i It is catior t0 prc tion Gener Obstz goal: 72 Barriers to Effective Control Rgporting The fact that control reports and control reporting systems are not achieving their goals and are not as effec- tive as possible indicates that there are barriers and/or problems associated with the communication situation that are blocking or impairing the effectiveness of control re- ports as a vehicle of communication. This is not unusual, for the discipline of interpersonal communications has long been aware of the potential barriers and problems associated with interpersonal communication and communication situations. It is helpful at this point to examine the general communi— cation barriers as presented in the communication literature to provide a background and an introduction for an examina— tion of those in the control reporting system. General Communication Barriers Taylor describes the following three classes of Obstacles that prevent the achievement of communication goals:6 6Hal R. Taylor, "Concepts," in American Association Of Agricultural College Editors, AAACE Communications Hand— book. (Danville, Illinois: The Interstate Printers and Publishers, 1967), p. 14. found i the mes communi poor at those situat with 1 such ; Persc riers rece: the the comm (1011“ Or W0( 73 (1) Personal obstacles which are characteristics found in both the sender of a message and the receiver of the message. Examples of these characteristics are poor communication skills, lack Of knowledge about the subject, poor attitudes toward communication, etc. (2) Situation and resource obstacles, which are those arising out of the nature of the actual communication situation, such as budget, time, and space limitations. (3) Content Obstacles, which are those involved with the characteristics of the material to be communicated, such as its complexity or newness to the receiver. Thayer7 shows the importance of attitudes in inter— personal communication by showing that communication bar- riers can arise from improper attitudes by the source and receiver toward the following items: himself, his peers, the subject, the situation, the means used to communicate, the channel or media used, and the other person involved. The following section is a discussion of the specific communication barriers appearing in the control reporting communication situation. These are weaknesses that block or impair the effectiveness of the communication stage Of 7Leo O. Thayer, Administrative Communication, (Home— wood, Illinois: Richard D. Irwin, Inc., 1961), p. 108. manager either in themse ously, exist be a n major firms the c the 1 some repo of t man: man ask (201‘. 74 managerial accounting for control and can be associated with either the control reporting process or the control reports themselves and will be discussed using this breakdown. Obvi- ously, the compilation of all the communication barriers that exist in all control reports and reporting processes would be a major research undertaking in itself. However, the major barriers are identifiable and have appeared in some firms and have a realistic potential for existing in others. It is important at this point to explain the role of the questionnaire surveys in the following sections. Both the literature and the case study identified and suggested some major undesirable situations arising within the control reporting system that act as communication barriers. The questionnaire surveys were used to identify the actual extent of these barriers' existence in the firms surveyed. Each manager, managerial accountant, and management services staff man was given a list of these undesirable situations and asked to indicate those that currently existed within their later asked to indicate those which in their Opinion had a realistic potential to exist in control reporting systems (the over—all response of the accountants and managers to control reporting system or those of their clients and also this question is presented in Chapter VI, pages 203—04 & 221—22, l l l Both tl in a L existe contro rmlh t barrie the f Barri rier paret abil quan or g rep: art 75 Both the managers and managerial accountants were also asked in a later question to indicate any barriers that currently existed in their firms that blocked the effectiveness of the control reporting system (see page 89 below). Hence, the replies provided much useful empirical data on the actual barriers to the communication of control information among swap the firms. ‘75,”? Barriers in the Control Reporting Process The first weakness or situation that acts as a bar— rier in the reporting process is that of too many being pre— pared and sent to management. Given the increased physical ability to communicate more frequently, it appears that quantity, not quality can become an underlying assumption l . . . *or goal in the control reporting system as well as in all I l . . reporting systems. Hence, the literature has presented many articles charging that too many reports are prepared, such as the following: Yet in much of this activity, it has been too easily assumed that more communication necessarily produces better communication, an assumption that calls for critical scrutiny. It is indeed very doubtful whether the practice of communication has advanced at anything like the rate of technological practice. 8C. S. Deverell, "Communication in Business,“ Accountant, (February 9, 1963), p. 148. L‘_ manager 1 ports. that m they p seems follor 9‘3]. =vaét'tjt‘r. that wide who rent is SEe figs Row 76 Hilton states that too many reports tend to deluge management and block the effective utilization of the re- ports.9 Correspondingly, it has been strongly suggested that many companies need a reduction in the number of reports . . 10 they prepare and send to their executives. The problem seems so common that a cost accounting text includes the following example: The controller of a large concern stated recently that the directors and top management of his com— pany received 72 monthly reports, the contents of which could never be fully appreciated or digested. A study led to the elimination of 34 reports without reducing the operating effectiveness or decision— making Opportunities of management.11 The replies to the questionnaire confirm the charge that too many reports is an undesirable situation that is widely prevalent. Approximately 54% of the managers, th0se who receive the reports, replied that this situation cur- ‘rently existed in their control reporting system and 72% l i 9W. Hilton, "Analyzing Reporting Systems,” Manage— Tment Accounting, Vol. 42, Section 1 (January, 1966), p. 48. ‘See also Norman B. Sigband, Effectivegggport Writing For Business, Industry and Government, (New York: Harper & Row, 1960), p. 137. 10R. H. Van Voorhis, "Operating Reports and Controls,“ in R. Wixon, editor, Accountants‘ Handbook, Fourth Edition, (New York: Ronald Press, 1962), Section 4, p. 35. 11A. Matz, Othel Curry, and George Frank, Cost Accounting, Fourth Edition, (Cincinnati, Ohio: South Western Publishing Company, 1967), p. 674—5. declared existing fourth 0 there we 50% rep] in cont: staffme' in the ness oi sender Reddin' tem th Pr oi SEQkS the 1 Cato YOrk 77 declared that they felt it had a realistic potential for existing within other control reporting systems. One- fourth of the managerial accountants replying stated that there were too many reports currently in their systems and 50% replied that this had a realistic potential for existing in control reporting systems. One of the management services staffmen contacted replied that he has seen this situation in the systems of his clients. A second major weakness that blocks the effective— ness of the reporting process is a lack of feedback to the sender about the effectiveness or suitability of the reports. Redding shows the importance of feedback in a reporting sys— tem thusly: Providing prompt and intelligible feedback is one of the most essential responsibilities of the busi- ness manager, both in his person—to-person communi— cation and in his supervision Of company communica— tions. Without feedback, control is impossible; and without feedback ... morale is destroyed.12 Since the managerial accounting for control system seeks to serve management, the reactions of management to the reports it receives is useful and vital in providing 12W. Charles Redding, ”The Organization Communi— cator," in W. charles Redding and George A. Sanborn, Busi— ness and Industrial Commpnication: A Source Book, (New York: Harper & Row, 1964), p. 32. clues to ant' s cor if the r ability accounti effortsI situati and 45% current was the ants. the ma contrc men re the 1. and t devel manac~ A000 011p 78 clues to the effectiveness of the reports and the account— ant's communication activities. If feedback appears only if the reports are late, the lack of feedback on the suit- ability of the reports and their usefulness can lead the accounting personnel to doubt either the usefulness of their efforts, the value of their reports, or both.13 The replies to the questionnaires indicate that this situation exists in many firms, for 56% of the accountants and 45% of the managers declared that it characterizes their current control reporting system. In fact, this situation was the situation most frequently selected by the account- ants. Seventy-two per cent of the accountants and 62% of the managers felt it has a realistic potential to exist in icontrol reporting systems. Both of the management services men replied that it existed in the systems of their clients. A third weakness pertaining to the process concerns the lack of co—ordination between the accounting division and the operating managers as a group in the planning and development of the control reporting system. Both the managers and accountants surveyed strongly agreed that this 13 Personal interviews with the Manager of the Cost Accounting and Analysis Department of the aerospace firm On February 20 and 27, 1968. is a m with 7 that t spondi report firm' servi clien stage and ' Syst errc the balz tie the CO- 79 is a major potential problem in control reporting systems, with 75% Of the accountants and 72% of the managers stating that this has a realistic potential for existing. Corre— spondingly, 25% of the accountants and 36% of the managers reported that this situation currently existed in their firm's control reporting system. Again, both management services men agreed that it existed in the systems of their clients. If there is a lack of co—ordination in the planning stage, the system will be established by trial and error and the views of only one of the groups involved with the system will dominate in its develOpment. Given a trial and error develOpment or one-sided authority in its planning, the control reporting system will lack the smoothness and balance of a planned and well co—ordinated system. Addi— tionally, the needs Of both groups may not be satisfied by the system. Chambers presents the dangers from a lack of co—ordination in the develOpment Of the system thusly: It is quite possible, indeed it is almost inevit— able that a processor [the accountant] will see, understand, and interpret things in a different light than dOes the actor [the manager]. ... Again, a specialist may well entertain the notion that the products of his services are ends in themselves.... the of 1 It shoul plannin breedin desirab departI author receiv lack o aware in the infon VrOUp the c sona] hers 80 And, again, it may happen that either or both the actor and the processor confuse the functions of the product of an information processing system. 14 It should also be noted that a lack of co-ordination in the planning and development of the system provides a fertile breeding ground for the growth of other problems and un- . . . 15 des1rable Situations. A lack of personal contact between the accounting department staff members who prepare the reports or have authority over their preparation and the managers who receive the reports is the fourth major weakness. Such a lack of contact prevents the accounting staff from becoming aware of the personal and professional needs of the managers in the reports and prevents their accurately predicting the information and communication needs of the managers as a group. The basis for decisions affecting the system and the content and form of the reports then becomes the per— sonal opinions and assumptions of the accounting staff mem— bers which may be biased or invalid. A lack of contact also 14Raymond J. Chambers. Accounting, Evaluation and Economic Behavior, (Englewood Cliffs. N. J.: Prentice— Hall, Inc., 1966), p. 43. 15Personal interview with Manager of the Cost Accounting and Analysis Department of the aerospace firm on February 27, 1968. blocks 1 the meet referral for exi agers a Only 93 that t1 compar expres exist. his c] to th contr the y gathe repo: trol Pear a hi Sea rep‘ 81 blocks feedback and the system may loose its relevancy to the needs of the receivers. This situation is commonly referred to as "desk bound" decisions. This barrier apparently has a much larger potential for existing than its current extent according to the man— agers and accountants replying to the questionnaire survey. Only 9% of the managers and 12% of the accountants reported that this situation currently existed in their systems, as compared to 45% of the managers and 56% of the accountants expressing the opinion that it has a realistic potential to exist. Only one of the management services men replied that his clients had experienced this situation. The next major weakness to be discussed in regards to the process as a whole is a lack of flexibility in the control reporting system. This weakness is often caused by the use of electronic data processing equipment in the athering of control information and preparation of the eports. The trend toward the use of EDP equipment in con— rol reporting is evidently increasing each year and it ap- ears that the use of sophisticated equipment that achieves high degree of accuracy and speed may foster a feeling of ecurity and a belief in the effectiveness of the resulting eports. However, the use of EDP is often accompanied by a lack of changes cult, c tivenes is the system strong ants s is a 1 that : accou bilit Poten this sent 9r0u ing unde the Hm 82 lack of flexibility in the system and reports because changes and revisions in the system and reports are diffi— cult, costly, and hard to make. This undermines the effec— tiveness of the process.16 Another cause of inflexibility is the attitude of upper management toward changes in the system. It appears that the managers as a group feel more strongly about flexibility in the system than do the account— ants since 54% of the managers reported that there currently is a lack of flexibility in their system and 72% replied that it has a realistic potential as compared to 25% of the accountants replying that there currently is a lack of flexi- bility in the system and 56% feeling that it has a realistic potential. One management services staffman reported that this situation exists in the systems of his clients. The final weakness in the process that will be pre— sented and discussed is that of a lack of accounting back- grounds in the receivers of the reports. Without an account— ing background, the managers may not be familiar with or understand the accounting system and Operations that generate the reports and especially the limitations of such operations. Hence, their attitudes toward the reports and the system lexbid. Qfiwfiru*' genera to thi be k1 t1 were curre situ; the with pote pro inh efi ma] 83 generating them can become quite unrealistic. In regards to this, one source observes: Part of the managerial accountant's job should be to educate the users of the data. A lack of knowledge about accounting and the accounting sys— tem erects quite a barrier to the effective use of accounting reports. The replies of the accountants on this situation were quite consistent, with 50% replying that this situation currently exists in their firms and 50% feeling that this situation has a realistic potential. Forty—five per cent of the managers stated that this situation currently exists within their firm and 63% feeling that it has a realistic potential. Barriers in the Control Reports In addition to the major weaknesses in the reporting process presented above, the reports themselves often have inherent characteristics that may also act to block the effective utilization of the content of the report by the managers. Obviously, there are a wide variety of types of control reports in current use in industry and each type may have unique barriers associated with it. However, there are l7Ibid., on February 27, 1968. See also Sigband, p. 310. major creat and t in gl that hard quit meei ace: Th. co Th 84 major problems or areas concerned with reports that have created problems or have a potential for creating problems and these merit discussion. One major area of criticism in accounting reports in general and control reports in particular is their format, that is, they appear as a mass of data which makes them hard to read. The presentation of numerical schedules, quite familiar to and easily read by accountants, often meets with quite different reactions from executives lacking accounting backgrounds, as the following point out: Most executives are not accountants and cannot fully comprehend the mass of data included in typical monthly reports.18 Other reports are magnificently complete, but the mass of figures entirely discourages their use by other than statisticians. The use of electronic data processing equipment can also contribute to the negative impact of control report formats. The use of "machine burst“ forms for the format of the re— port adds to the "mass of data“ appearance and contributes 18A. Bows, ”Broadening the Approach to Management Reporting," Arthur Andersen Chronicle, Vol. 22 (April, 1962), p. 7. 9Editorial Board, "Communications and the Accountant," Canadian Chartered Accountant, Vol. 82 (March, 1963), p. 187. towar on U repo: that rent the rec‘ ren and teI 85 toward making the report hard to read.20 Illustration 1 on the following page is an example of this kind of control report format. The replies of the managers and accountants show that they feel that this is more of a potential than cur— rently existing situation in their firms, with only 18% of the accountants and 12% of the managers reporting that receiver dissatisfaction with control report formats cur— rently exists in their systems. But 36% of the accountants and 50% of the managers felt that this has a realistic po- tential. Both management services staffmen reported observ— ing this situation in the control reporting systems of their clients. Another weakness in the control report itself is that of the terminology used in the report. As a distinct discipline, accounting has its own technical language which is primarily used to express ideas to other accountants. However, these terms are often used in reports and communi— cations to non—accountants and frequently cause confusion in the receivers of the reports. This problem is common to 20Personal interviews with the Manager of the Cost Accounting and Analysis Department of the aerospace firm‘ on February 20 and 27, 1968. CD PROJl NO ED E801 ED E80 ED E8 86 ILLUSTRATION 1 MACHINE BURST FORM FORMAT CONTROL REPORT WEEKLY MONTH-TO-DATE COST, BY CODES, AND PRO. ?ROJECT C M M RES DASH DEPT WE -— C 0 S T -— NO I O I CeC ITEM ASGN DATE HOURS MATERIAL TOTAL 2 4 6 444 913 E593 2—04 16.0 183.24 2 4 6 444 913 C621 2—04 1.3 11.37 2 4 6 444 913 E634 2—11 6.5 65.97 ITEM 23.8 68.20 328.78 MODEL 118.8 68.20 1204.79 CONT-ITEM 569.3 112.20 5659.81 E80219 3 1 1 491 006 E441 2-04 24.5 232.09 3 1 1 491 006 E441 2—11 14.0 132.93 3 1 1 491 006 E442 2—11 8.0 75.96 ITEM 46.5 440.98 E80219 3 1 1 444 904 2—03 132.18 132.18 3 1 1 444 904 2—03 153.38— 153.38— 3 1 1 444 904 E441 2-04 4.0 37.89 3 1 1 444 904 E441 2—11 2.0 18.99 3 1 1 444 904 C621 2—11 .5 4.43 ITEM 6.5 21.20— 40.11 CONT—ITEM 53.0 21.20- 481.09 80219 4 1 l 444 906 2—03 6.22 6.22 4 1 1 444 906 2—03 179.94 179.94 4 l 1 444 906 E441 2—11 14.0 132.93 4 1 1 444 906 C621 2—04 1.0 8.75 4 1 1 444 906 C621 2-11 2.9 25.65 CONT—ITEM 17.9 186.16 353.49 PROJECT 640.2 277.16 6494.39 CODE 3338.6 1383.52 41553.09 many d5 rel fi ac co es if re CUIIE 50% 1 pots? more that rep< ten' it uné dh 87 nany disciplines. Where the originator of a message and the receiver of it are specialists in different fields——in the present case, the actor and the accountant are specialists in different fields-- concensus may not be established or if it is established, it may break down. This will occur if terms are used which have quite different referents in two or more fields. The professional accountant sometimes fails to realize that many technical terms, which he uses with precise understanding, convey little meaning to a manager unskilled in accountancy.22 Only 12% of the accountants reported that there are currently terminology problems in their control reports and 50% replied that they felt this situation had a realistic potential for existing. The managers generally reported a ‘more frequent occurrence for this situation, with 36% stating that this situation currently characterized their control reports and 45% feeling this situation has a realistic po— tential to exist. One management services staffman observed it in his clients. It must be noted at this point that of the eight undesirable situations presented in the questionnaire and discussed above, only 7% of the executives responding stated ZlChambers, p. 143. 2 2Editorial Board, p. l87. See also Sigband, p. 310. 88 that none of these situations currently existed in their firm and only 7% replied that none of the situations had a realistic potential for existing in control reporting systems. This indicates that the undesirable situations listed in the questionnaire are unfortunately common to the firms surveyed. In addition to these two major weaknesses in con- trol reports themselves, a number of more specific weak— nesses have been identified with specific reports in spe— cific firms. Such weaknesses as a lack of comparison be- tween actual and budgetary data; lack of report titles; failure to portray trends; omission of responsible manager; iirrelevant, insignificant, and inappropriately classified data; duplication and lack of correlation among reports; and lateness are some that have been mentioned in the literature.23 Many of these same specific problems were reported by both managers and accountants in reply to an open—ended question asking them to indicate other problems 23C. Griffen and T. Williams, "Ineffectual Account— ing Communication," New York Certified Public Accountant, Vol. 33 (November, 1963), p. 788; Hilton, pp. 60—617 and personal interview with the head of the Engineering Admin— istration Department of aerospace firm on January 24, 1968. 89 Lnd barriers within their control reporting system that >lock the effectiveness of the reports. The actual reply >f each executive to this question is presented in Chapter VI, >ages 205-06 and 222—23 and in general, they correspond :o the specific problems presented at the beginning of the paragraph. Some of the additional problems mentioned by :he executives that were not previously presented are the following: (1) Managements' failure to take apprOpriate action when the reports indicate that it is necessary. (2) A lack of imagination by the accountants and the managers in reference to the con— tent of the reports. 1 (3) Managements' failure to act quickly on the data presented in the reports. (4) Management is not fully responsible for control. (5) Accounting adjustments to the reports and arbitrary allocations within the reports destroy the validity of the content. (6) Accountants do not reply directly to management. easons for the Existence of Weaknesses The underlying cause of these weaknesses that act 5 barriers to the effective utilization of the content of ontrol reports has already been presented in Chapter I, ”Introduction to the Study," but merits repeating at this oint. The evidence suggests that the reporting stage of anagerial accounting for control has been relatively 'gnored as a field of study in managerial accounting, with ihe main emphasis of the research concentrating on the tech— hiques and operations used to generate the content of the reports. In fact, it is only recently that the importance 3f the reporting stage has received the recognition it ieserves. It appears as though managerial accounting, as 1 discipline, has assumed that the reporting phase can be >erformed efficiently and the goal of control reporting realized through the use of natural abilities without any vell grounded or sound theory or guidance for the managerial Lccountant to follow in this area. The accounting literature does contain sets of guide- ‘ines for the reporting phase of managerial accounting. ihese guidelines purport to act as valid guides to the ‘ccountant in his reporting activity and if valid, should rovide him with the guidance to perform his reporting esponsibilities effectively. However, these guidelines ove or show that the reporting area has been relatively nored and lacks well grounded, sound theory, for they isplay the traditional trial and error pragmatic 91 ‘development of accounting thought in this area rather than being well grounded and having a strong foundation in inter— personal communications, the discipline which specifically deals with the achievement of goals through interpersonal communication. The following presentation and evaluation 1 w . . . of the sets of guidelines currently available to the man- agerial accountant will help explain the existence of bar— riers and demonstrate the need for a comprehensive set of guidelines based on information from the interpersonal com— munications subject area. Current Reportinnguidelines The guidelines currently available to the managerial lccountants range from single bits of advice or single :tatements to long lists of directions to be followed. :ach must be examined in the light of its potential ability 10 guide the accountant toward achieving the goal of con— .rol reporting, that is providing management with the ap— trOpriate control information it needs. Each must also wrovide practical guidance and be useful or applicable to he situation at hand. Goldberg advances the following general thought to ‘Ed the managerial accountant in his reporting: Perhaps the only appropriate general criterion that can be laid down is that the accountant should set out to convey relevant information in his reports and either explain the significance of such information or so arrange it that ex— planation should not be impossible or unduly . . 4 difficult. Whereas no one can certainly disagree with this statement, it is questionable as to whether it is of much value as a “117—... guide to the managerial accountant. It is helpful in that 9 it advises one as to the general goal of reporting but it goes little farther than vaguely indicating how to achieve the goal. It assumes that the accountant is first fully aware of the significance of the content of his report and is secondly aware of the effect of various arrangements upon the perceived significance by the receivers. It suffers from its general and abstract nature. Prince also advocates one general guideline for reporting and it is as follows: The primary guidelines followed in designing effective internal reports in a responsibility accounting system are to comply with the desires of the users of said reports (the decision-maker) as to format, content, and frequency. Monetary factors regarding the cost of preparing such accountability reports are secondary considera— tions. 24Goldberg, p. 361. 25Thomas R. Prince, Information Systems for Manage— ent Plannin and Control, (Homewood, Illinois: Richard D. Irwin, Inc., 1966), p. 75. 93 His advice is basically to ask the receivers of the reports for their preferences and then to follow their advice with the cost of following their advice as a secondary considera— tion. It cannot be denied that the report—user's needs are quite important in reporting, but Prince assigns complete importance to them. Following this guideline can lead to the receipt of many different recommendations from the users of the reports which cannot be satisfied with one report. The relegation of cost to a secondary position is somewhat questionable. Pfenning presents three general guidelines in regard to the reports of managerial accounting: Hence, it is my view that if accounting organizations~ are to remain the principal suppliers of management information, they must be sure there is: (l) enough information (2) that it's the kind needed 2 (3) that it's available when needed. 6 1 hhile primarily concerned with the general characteristics 1 1 9f the report, Pfenning shows that reports should not be 1 tate yet does not give any indication of just how to achieve 1 timeliness. In fact, his guidelines are nothing more than 1 1 26R. E. Pfenning, "Business Information Systems," 1he Accountin Review, Vol. 37 (April, 1962), p. 235. 1 1 94 general goals to be aimed for and are hence too general to have much practical importance. In his text on managerial accounting, Li27 discusses control reporting and presents what he calls the "pre— requisites and characteristics of a good management report for control." His pre—requisites and characteristics are as follows: the report should be timely, comparative, analytical, pertinent, and concise. These normative sug— gestions refer mainly to the content of the report and lack any suggested procedures for complying with them. Again, instead of guidelines, general goals are advanced. Another cost accounting text presents the following guidelines which it calls fundamental qualities and char— 1acteristics: (1) reports must fit the organization chart iand authority and responsibility; (2) they must be prompt ‘and timely; (3) they must be issued with regularity; (4) they must contain comparisons of actual and planned cost; (5) they must be analytical; and (6) they should be stated in physical and financial terms.28 Once again, these 27David H. Li, Accounting for Management Analysis, (Columbus, Ohio: Charles E. Merrill Books, Inc., 1964), p. 293. 28Matz, Curry, and Frank, pp. 671—2. 95 guidelines suffer from a lack of potential application to a reporting situation due to their general nature and are really general goals. Block suggests the following guidelines concerning written internal reports to be used as management's major tools of control: (1) they must be on printed forms; (2) be designed to provide the required data in the most useful and efficient manner; (3) be uniform in size if possible and suitable for binders; (4) be signed by the person pre- paring them; (5) be complete; (6) be prompt; and (7) be discussed regularly with the users.29 Although Block's guidelines are much more specific and Operational than those previously presented, they still suffer from being incomplete and too general to be applied. It must be noted, however, that item (7) is a guideline with much merit. Niswonger and Fess, in their popular principles :text, present the principles they feel should be followed in control reporting thusly: In order to be of maximum usefulness, internal reports should be prepared in accordance with the following principles: 29Max Block, "Practical Cost Controls——How They Can Help Management Improve Profits," in H. Anton and Peter Firmin, Contemporary Issues in Cost Accounting, (New York: Houghton—Mifflin Company, 1966), pp. 89-90. 96 (l) The organizational structure and chain of responsibility of the enterprise should be observed. (2) Irrelevant and immaterial data should be excluded. (3) The data should be sufficiently accurate for the purpose. fir——’ r. (4) Terminology should be sufficiently accurate for the purpose. ‘ Liv-J T,<—p~‘ (5) Comparative data should be used to develOp significant trends and relationships. (6) Reports should be timely.30 The general practice of presenting general goals or norma- tive statements rather than operational guides seems to have been adOpted by Niswonger and Fess in the above quote. An— other principle is presented separately in relation to 3special reports only; it advises that special reports be 1 i"designed specifically for the user and the special purpose 1 1 ‘it is to serve."31 Anthony, a noted authority in managerial accounting, disagrees with Niswonger and Fess. He maintains that each control report, not only special reports, "should be tailor 3OC. Rollin Niswonger and Philip Fess, Accounting Principles, Ninth Edition, (Cincinnati, Ohio: South Western Publishing Company, 1965), p. 640. 31Ibid., p. 645. i 97 made for the specific situation being reported on and for the needs of the user." In addition, he follows traditional practice and states that control reports should have the following general characteristics: objectivity, timeliness, clarity, and analysis.32 One Of the earliest sets of guidelines for manage- ment reports was provided by Lewis thusly: ....the ten suggested ways of providing better con— trol in the communication of significant facts to management are these: Follow organizational lines. Give emphasis to important elements. Inter connect the data. Show significant budget comparisons. Avoid prorates [allocations] whenever possible. Use standard costs the easy way. Write off overhead as period cost. Show significant ratios. Show significant trends. Relate investment to Operations. 0 33 OKOWVO‘U'IbUJNH O H In addition to suffering from the usual points, these guide- lines also suffer from the author's inclusion of his opin- ions as to what should constitute the report's content and his view on the absorption vs. direct costing controversy! 32R. Anthony, Management Accounting Principles, (Homewood, Illinois: Richard D. Irwin, Inc., 1965), p. 259, 33Ronello B. Lewis, Accounting Rgports for Manage— ment, (Englewood Cliffs, N. J.: Prentice—Hall, Inc., 1957), 98 Another source of guidelines, AnderSOn and Schmidt, take a general approach to this subject in their text on controllership. They recognize that each firm has some particular aspects unique to that firm and seek only to supply the managerial accountant with general guidelines that he must apply to his situation. Concerning this final step of communication, advice can be offered only in the most general terms. In the following paragraphs a few basic principles are suggested for each controller to adopt and apply to his own particular situation.34 The basic principles they suggest are the following: (1) each report should be aimed at one Objective; (2) each report should emphasize variations from plan; (3) each re- port should be adapted to the need of the recipient; (4) old reports should be supplemented with new material for fresh— ness; and (5) use graphic and verbal presentations.35 These bits of advice are certainly valid and an improvement over the lists of general goals presented earlier. However, they are not related and complete. It appears that Anderson and Schmidt are passing along various 34D. R. Anderson and L. A. Schmidt, Practical Controllership, Revised Edition, (Homewood, Illinois: Richard D. Irwin, Inc., 1961), p. 443. 351bid., pp. 443—45. 99 techniques that have proven themselves rather than present- ing a complete set of guidelines to be followed. Perhaps the most comprehensive treatment of guide- lines for the communication phase of managerial accounting appears in Heckert and Willson's text, Controllership. They present five "basic and overriding" guidelines for the controller to follow and then present eleven supplementary considerations which seek to achieve improved reception from the reader. The five basic fundamental guidelines that the con— troller should follow in preparing effective internal re— ports are these: (1) The report should contain information related to the responsibility unit being reported upon. (2) The reports should emphasize the exceptions from plan. (3) The reports should contain a comparison be- tween actual and planned data. (4) The reports should be sufficiently Summarized for each level. (5) The reports should include interpretive re— marks or be self—explanatory.36 The eleven supplementary considerations are as follows: 36J. B. Heckert and J. D. Willson, Controllership, econd Edition, (New York: Ronald Press Company, 1963), p. 523—24. 100 (l) The reports should be timely, that is, promptly issued when due. (2) They should be simple and clear——designed to minimize reader effort. (3) They should contain language and terms familiar to the reader. (4) A logical pattern should be followed in report presentation. (5) The contents of the report must be accurate. (6) The form of the report must be suited to the executive. (7) The style, design, and size of reports should be standardized whenever possible. (8) The report design should reflect the recipients viewpoint. (9) Reports must be useful, that is, serve a useful purpose. (10) The cost of reports must be considered. (11) The more important a report, the more care should be exercised in its preparation.37 Although this set of guidelines is the most com— plete presentation, it is vulnerable to the same basic criticisms leveled at the previous sets. The five basic fundamentals are really relevant to the content of the eport and how this content should be generated--these oints are fundamental to control accounting rather than 37Ibid., pp. 524—26. 101 specifically dealing with the communication phase. The fifth basic fundamental advising that reports should be interpreted suffers from the same disadvantages mentioned in regard to Goldberg's same principle.38 The eleven supplementary considerations, although comprehensive and containing some rather valid points, are again general bits of advice being passed along. Each of these has basically appeared before as part of the other sets considered and still suffer from the same basic weak- nesses. Most of the supplementary considerations are highly normative and yet need more detail or explanation to make them into Operational guidelines. Their barrenness becomes evident if they are restated as negative suggestions, such as "Reports should not be unclear.f The final set of guidelines to be presented is also the most recent. The Committee to Prepare a Statement of Basic Accounting Theory of the American Accounting Associa— tion in their report prOposed that the following be follOWeg as the "guidelines for communication of accounting informa— tion : " l. ApprOpriateness to expected use. 2. Disclosure of significant relationships. 38Goldberg, loc. cit. 102 3. Inclusion of environmental information. 4. Uniformity of practices within and amogg entities. 5. ConSistency of practices through time. Although these guidelines were proposed for those reports sent to parties outside the firm (i.e. published financial statements) and are expressed in terms of current financial accounting problems, they are also advocated for use in the communication of internal managerial accounting information.40 However, these guidelines are almost ex— clusively concerned with determining the content of the re— port and basically ignore completely the questions concern— ing the form of the reports and the method of presentation and hence are not really apprOpriate for managerial account— ing use, where the content is relatively stable and the form and procedures concerned with transmitting the reports have added importance. In summary, then, it can be concluded that the sets of guidelines currently available to the managerial account— ant in or through the literature can be described in either 39Committee to Prepare A Statement of Basic Account- ing Theory, A Statement of Basic Accounting Theory (Evanston Illinois: American Accounting Association, 1966), p. 14. 4OIbid., p. 14 and p. 55. 103 of two ways: (1) either the guidelines are so vague and generalized so as only to point the accountant in the right direction and give him highly ideal goals at which to strive using his own methods or (2) are concerned mainly with the content of the reports and how it is to be generated, a topic relevant to the generation phase of managerial ac— counting for control. These guidelines are not well grounded in any way to interpersonal communications con— cepts or knowledge, the discipline concerned with the con— veyence of information between human beings, as the follow- ing chapter will aptly demonstrate. It is also interesting to note that although most Of the sets presented above have been available to the man— iagerial accountant for some time, the barriers and problems in the control reporting systems still exist. It is true that some of these sets and some individual guidelines within sets are capable of eliminating some of the minor weaknesses mentioned earlier, such as lateness of reports, poor terminology, to mention a few. In fact, a comparison between the barriers reported to be currently existing in the firms contacted by the survey and the guidelines pre— sented above (pages 91 through 102) reveal the following: (1) Concerning the problem of too many reports 104 being prepared and sent, only Pfenning comments by stating that the accountant should make sure there is “enough" in- formation. (2) Concerning the lack of feedback from users, only Block suggests discussing reports regularly with users. (3) Concerning terminology problems, Matz, Curry, and Frank; Niswonger and Fess; and Heckert and Willson all advise using terms familiar to the user. (4) Concerning receiver dissatisfaction with re- port format, Prince; Block; Anderson and Schmidt; and Heckert and Willson all comment on ways to prevent the occurrence of this problem or warn the accountant of its danger. (5) The remaining four barriers, that is, lack of co—ordination between the managers and accountants in the planning and develOpment of the system, lack of personal contact, inflexibility in the system, and lack of account— ing backgrounds in the managers were completely ignored by the previously mentioned guidelines. And yet, these were not ignored by the managers and accountants replying to the questionnaire. Therefore, except perhaps for terminology and for- at problems, following any one set of guidelines or any 105 combination would not prevent or solve the major weaknesses associated with control reporting systems. Obviously, a set that is Operational and capable of eliminating and/or overcoming these barriers is needed. Guidelines Currently Used Finally, it is also important to examine the evi— dence which indicates what guidelines are currently being used or followed in actual firms in their control reporting systems to determine the form and content of the control reports. The tenth question of the managerial accountant questionnaire asked each accountant if he or his subordin— ates followed any formal or informal guidelines and if so, to briefly indicate these guidelines. The actual replies to this question are presented in Chapter VI, pages 209—10. These replies can be summarized thusly: Reply Per Cent Formally stated guidelines are used 32% Guidelines are used but are informal 50 Neither formal nor informal guidelines are used 11 Guidelines are used but not indicated in reply 5 Although approximately 80% of the managerial accountants 106 replied that they followed guidelines in control reporting, , 1 only 40% of these use formally stated guidelines. \ Additional insight into the nature of the guidelines currently used is provided by the managerial accountants response to a later question in their questionnaire, the third part of Question Eleven. Eight managerial account- ants stated that their current guidelines resembled certain sets appearing in the literature. Seven of these reported that their current guidelines most nearly resemble those presented by Heckert and Willson and one accountant stated that his current guidelines most nearly resemble those pro— vided by Niswonger and Fess. Summary The present chapter has demonstrated the need for a sound set of guidelines for the managerial accountant to follow in his control reporting activities, a set not based on tradition or trial and error but well grounded in the discipline of interpersonal communication. It is the objec— tive of this research effort to generate such a set of guidelines and the next two chapters are specifically con— :erned with this effort, with the first chapter presenting :he apprOpriate general communication concepts and guidelines 107 and the following chapter showing the results of their application to the control reporting situation. CHAPTER IV THE GOALS OF INTERPERSONAL COMMUNICATION AND THE GUIDELINES TOWARD REACHING THESE GOALS Introduction This chapter resulted from research into the inter— personal communication process phase of the research de- sign. It was necessitated by the lack of a comprehensive, codified set of guidelines readily available in the inter— personal communication subject area. The purpose Of this chapter is to present such a set plus relevant concepts and definitions, all of which will be used in a later hapter in develOping guidelines for control reporting. ence, this chapter is not directly related to managerial ccounting for control, but is concerned with the general 'nterpersonal communication situation and the material in his chapter can be applied to human communication as it xists in any subject area. The guidelines, concepts, and efinitions presented here are the basis and support for hose presented later in regard to the control reporting ommunication situation. Hence, this chapter is the means 0 that end. l08 109 As noted in the Research Methodology section of "The Introduction to the Study," pages 14 and 15, the re— search efforts into interpersonal communications were aimed at providing general information on the nature of inter— personal communication, the variables or elements acting within the process, and the guidelines advanced by author— ities in the area to achieve effective interpersonal com— munication. The following presentation is not, therefore, to be taken as a comprehensive discussion of all the aspects of interpersonal communication, nor are the guidelines pre— sented to be taken as exhaustive or all-inclusive, since the collection and integration of all the existing guide- 1lines would be a substantial (and fruitful) research project in its own right. However, through the research efforts in this area, the author believes that the major, generally ccepted, and generally useful guidelines toward achieving ffective communication are included and presented in this hapter. The approach taken to generate the comprehensive et of guidelines was a simple but most realistic and re1e~ ant one. The author assumed the role of a managerial ac— ountant who desired advice in the form of guidelines from he literature on interpersonal communication to help 110 aimself become an effective communicator. Once the guide— lines were identified, they were grouped according to the scheme of Farrell.l This scheme was selected primarily for the following two reasons: (1) it represents a process point of view of the communication process, versus the more static traditional scheme of source, message, channel, and receiver; and (2) it represents the steps that a human being should follow when approaching and acting within the inter— personal communication situation. The eight elements of the Farrell scheme are these: Observation Description Analysis Synthesis Composition Transmission Reception Feedback CO\IG\U'IJ>L~JN1—‘ This chapter first discusses the goals that are ought in communication. Guidelines toward achieving these oals and therefore achieving effective communication, are hen presented and discussed. The chapter is concluded by summary outline of both the goals and the guidelines. 1 Thomas Farrell, "Principles of Communicating ased on the Eight Essential Components of the Communica— ion Process,” Michigan State University. (Mimeographed lass Preparation). 111 Since definitions are a key element of this chapter, they are provided in the context of the chapter. Goals of Interpersonal Communication_ One of the most important distinguishing character— istics of human beings is their ability to think and express their thoughts and ideas to others through communication. Communication as a human activity is a common element in all other human activities. And yet, human beings have a tendency to take com— munication for granted. It has become such a common ele— ment of our activities that we are often no longer aware of the activity of communication itself. Hence, the concept of communication has become hazy and has acquired a wide ‘ange of meanings. To avoid ambiguity, the following defi- ition of communication and descriptive statements of the ommunication process are adOpted as providing the start- ng point of this discussion: Communication may be defined as an attempt to estab— lish a commonness or a relationship between source [sender of a message] and destination [receiver of the message].2 2 David H. Li, ”The Semantic Aspect of Communication heory and Accountancy," Journal of Accounting Research, I 1963), 102. 112 Communication is not something that exists. It is something which occurs. In its broadest perspective, communication occurs whgnever an individual assigns significance or meaning to an internal or external stimulus. The fundamental problem of communication is that of reproducing at one point either exactly or approximately a message selected at another point. These quotes serve to generally describe what is meant by the use of the term "communication" in this chap— ter. The quotes, however, are not very Specific as to who or what may engage in communication. Observation of the real world reveals that the roles of source and destination mentioned by Li may be played by human beings, machines, and animals, or any combination of these. This study, however, is concerned only with the communication between human beings, referred to as interpersonal communication. Interpersonal communication is not effortless——to participate in it requires the use of energy. Man has developed a complex system of Signs and rules for their use in communication called a language, and the use of this 3 . . . . . Thayer, Administrative Communication, (Homewood, Illinois: Richard D. Irwin, 1961), p. 43. 4Claude E. Shannon, ”A Mathematical Theory of Communication," The Bell System Technical Journal, XXVII (July, 1948), 374. 113 language requires, at least at first, a deliberate, pur— poseful act. Human beings engage in interpersonal com— munication for a reason. This reason is that they seek to achieve some purpose or purposes through communicating. These purposes are called the goals of communication. In some Situations, the goals of communicating will be implicit and well known. Hence, the source or communi— cator will not have to specifically define his goals before communicating. In other situations, however, the goals must be precisely determined before communication takes place. In the latter case, the communicator must decide such questions as what he wants the receiver to know after being exposed to the communication or how he wants him to feel.5 Both types of situations exist many times in our daily lives. An example of the first situation is the greeting a friend; of the second situation, composing a letter. It is obvious that the specific, definite reason behind human involvement in communicating with other human beings will differ from individual to individual and situ— ation to situation. In general, however, the reason is 5Thayer, p. 85. 114 Fairly uniform. The primary goal of interpersonal com- mnication for the purpose of this study is as follows: .0 evoke a desired behavior change on the part of the 'eceiver of the communication.6 Furthermore, although the ultimate goal is to pro— 1uce a behavior change, the view is adopted here that com- mnication cannot directly produce this change in the be- Lavior of the recipient-—communication is limited to :hanging some part of the receiver's personality, defined as ...personality defines an individual. It is a structured, an ordered pattern of three facets, each of which is also organized. The cognitive structure is what one knows and how one fits his knowledge together. One's set of feelings and attitudes and the rankings of each constitute one's emotive structure. A goal structure is composed 1 of those ranked values which provide the ultimate I motivations of an individual. Each personality is a mosaic of these three interdependent aspects of one‘s self. The effect of communication is limited to directly hanging one or more aspects of the receiver's personality. py behavior change is based on this personality and is 6J. Campbell and H. Hepler, "General Introduction,” 1 Dimensions in Communication, edited by J. Campbell and . Hepler, (Belmont, California: Wadsworth Publishing Dmpany, 1965), p. 8. See also Thayer,p. 59. 7Thomas Farrell, "Communication Evokes Change," Lchigan State University, (Mimeographed), 1967, p. l. 115 decided upon and initiated by the receiver. Communication, then, can only have an indirect effect on behavior through the receiver's personality which is the basis for behavior.8 Taylor considers this as one of the two groups of goals of communicating, and views it as "...more general 'educating' in terms of influencing attitudes that will lead to a given "9 kind of action later on. Even though communication cannot directly change behavior, if the communication is planned well and accom- plishes the desired change in the receiver's personality, 10 the desired behavior change should result. The concept of effective communication refers to the evoking of the desired change in the receiver's personality, that is, the communicator has accomplished or achieved his goal.11 Berlo's concept of fidelity closely corresponds to this.12 8Ibid., p. 7. 9Hal R. Taylor, "Concepts,” in AAACE Communications Handbook, edited by the American Association of Agricultural College Editors, (Danville, Illinois: The Interstate Print— ers and Publishers, 1967), p. 13. lOFarrell, "Communication Evokes Change,” p. 7. 11Ibid. See also Thayer, p. 83. 12David K. Berlo, The Process of Copmunication, (New York: Holt, Rinehard, and Winston, 1960), p. 40. Fidelity refers to the communicator's achievement of his communication goals. 116 In addition to the primary goal of evoking a be- havior change through changing the appropriate aspect of the receiver's personality, a number of secondary goals are also sought in interpersonal communication. The typical secondary goals that the source usually seeks are the re- 1 ceiver's selection (i.e. attention and interest), compre— hension (i.e. meaning and understanding), acceptance (i.e. belief and attitude), recall and use of his message.13 In addition, the communicator seeks to be efficient in his communicating activities, that is he seeks to achieve the maximum effect at a minimum cost in terms of time and 14 money. These secondary goals are complementary to the primary goal and help to reinforce it. §pigplines Toward Achieving Communication Goals Given definite goals to be sought in interpersonal communication, it is natural to look for definite rules to be followed by the participants to achieve their goals and achieve effective communication. As noted earlier, Farrell's l3From R. Harrison, "Nonverbal Communication: Explorations into Time, Space, Action, and Object,” in Campbell and Hepler, Dimensions in Communication, p. 166; Taylor, p. 13; and Thayer, pp. 113—4. l4Thayer, pp. 92—93. 117 :cheme was chosen to organize the various rules or guide— .ines presented by authorities in the interpersonal com— iunication subject area. The resulting comprehensive set )f guidelines represents the eight general steps that the :ommunicator should wholly follow to achieve his goals in 15 in interpersonal communication situation. These follow: §tep 1: Observation The first step toward achieving effective communi— :ation advises the communicator to observe the communica— Lion situation objectively to identify the important ele— ments within the situation.16 The following are the six important elements that should be identified for each situation: 1 ‘ (1) The originator or source of the message. 1 (2) The actual lines of communication used, ‘ formal and informal, vertical and hori— zontal. (3) The means used for communicating. (4) The direct intended receiver. (5) The probable unintended receivers. (6) The motives or purposes for communicating.17 15Defined as those conditions prompting the communi— ation and providing the environment within which the com— unication occurs. Ibid., p. 57. l6Farrell, ”Principles of Communicating." l7From T. Farrell, "Description of Firm and Its mmunication Situation," Michigan State University (Mimeo— aphed), p. 2; T. Farrell, "Analysis of a Communication 118 This step's objective is twofold: First, it seeks to make the communicator aware of the fact that he is about to engage in interpersonal communication and Should, there— fore, be prepared to use his skills. Second, it provides the communicator with a map of the communication situation, of the environment in which he will act. Knowledge of this map helps him plan, analyze the situation, solve problems, and do a better job, according to Taylor.18 It should also be noted that this step provides the framework for the remaining steps. §ppp 2: Description The second step is a formal extension of the first and suggests that the informal observations of the first step be transformed into a written formal record to be used for guidance and future reference.19 The record should be Situation,“ Michigan State University (Mimeographed); Thayer, pp. 94—95; and M. W. Schutte and E. R. Steinberg, Communication in Business and Industry, (New York: Holt, Rinehart, and Winston, 1964), pp. 220—21, and Robert R. Aurner and Morris P. Wolf, Effective Communication in Business, Fifth Edition, (Cincinnati, Ohio:South-Western Publishing Company, 1967), p. 513. l8Taylor, p. l. 19Farrell, ”Principles of Communicating." 119 updated periodically to reflect the current state of the communication situation and its important elements. The formal record offers two advantages. First, the effect of changes in the elements would be easily noted and recognized from the records. Second, the written record will provide sound guidance to anyone who later be- comes involved in the situation. Step 3: Analysis The third step in this approach to the communica- tion situation requires the communicator to judge the rela— tive importance and effect of certain characteristics of the basic elements within the situation. These character- istics have a great effect on the quality of communication achieved in the situation.20 The elements and their im— portant characteristics are these: A. Congprning the source of the communication: (1) His Skill as a communicator and knowledge of the communication process. The amount of communication skill the source possesses is a key determinant of his ability to communicate, as shown by Berlo: A basic assumption of the communication discipline is that any understanding of the [communication] 120 process, the determinants, and the effect of communication improve a man's basic ability to handle the communication problems that he faces....21 (2) His attitudes. More specifically, those to— ward himself, the value of his message, and toward the receiver.22 Research has shown the influence of attitude toward the receiver largely determines the effect of the communication.23 The communicator's attitude toward his material is important in the following way, For the most part, subject matter attitudes come through. If he does not believe in the value of his subject matter, it is difficult for him to communicate effectively about it.24 (3) His knowledge about the subject matter of the message. The importance of this characteristic of the source is obvious: the source cannot communicate effec— tively what he doesn't know nor understand. Hence, his knowledge and understanding of his material places a con- straint or puts a limit on the effectiveness of communication 21Berlo, p. 7. See also Thayer, p. 71 and 108 and Taylor, p. l. 22Berlo, pp. 46—47; Thayer, p. 89; and Taylor, p. 1. 23Jay M. Jackson, "The Organization and Its Com— munication Problem," in W. Charles Redding and George A. Sanborn, editors, Business and Industrial Communication: A Source Book, (New York: Harper and Row, 1964), p. 120. 24Berlo, p. 47. 121 he can achieve.25 (4) His social background, education, friends, cultural position, social position, and his position within the social and cultural system within which the communica- tion will occur. Taken together, these elements are called the Socio-cultural context Of the communicator and communi- cation. The effect of this context can be seen mainly in the communicator's word choices, purpose for communicating, meanings attached to words, and choice of channels.26 (5) His motives for communicating in the situa— tion.27 This characteristic will often determine the extent and quality of his communication efforts. (6) His relationship to the direct intended re— ceiver. Research has shown this characteristic to become even more important if the relationship is that of superior— subordinate.28 25Berlo, p. 48 and Taylor, p. 1. See also Aurner and Wolf, p. 51. 26Berlo, p. 49 and Taylor, p. l. 27Farrell, ”Analysis of a Communication Situation"; Thayer, p. 51; Howard Dean and Kenneth Bryson, Effective Communication, second edition, (Englewood Cliffs, New JSrsey: Prentice—Hall, Inc., 1961), p. 8; and Jackson, p. 121. 28Jackson, p. 121. See also Farrell, "Analysis" and Thayer, pp. 50 and 52. 122 B. Concerning the actual lines of communication ppr: The important characteristic of the channel used is its directness. It is important to recognize and be aware of the fact that the actual lines of communication need not completely correspond to the formal channels that have been set up, as Frank states: Prediction about communication behavior would be relatively easy if communication always followed the formal lines and these lines alone. However, it rarely does. Therefore, it is not only important for an individual to understand formal communication channels...but also to be aware of the informal channels as well. 1;“ Examples of some other lines of communication that are important, especially within formal organizations, are the social lines between friends, the staff lines between specialist and user, and the lines of decision and influ— ence.30 According to Thayer, the organization of the lines or channels of communication provides the upper limit to the efficiency of communication to be attained.31 29W. Frank, "Social Factors in Communication,” Participant's Notebook Article, (Michigan State University/ AID, 1965), p. 6. 3OIbid. 31Thayer, p. 100. 123 C. Concerning the means used for communicating: This element has two characteristics that Should be ana— lyzed: (l) the circumstances in which various means are used and (2) the purpose for their use in these circum— stances.32 D. Concerning the direct intended receiver: There is a great deal of Similarity and correspondence between the important characteristics of the source and those of the receiver that affect the quality of communication achieved: (1) His communication skill, that is, his knowledge of the communication process and ability to receive and de— code the message. This characteristic is equally important in the receiver as in the sender.33 Concerning his under- standing of the communication process, itself, Berlo notes: If he does not understand the nature of the com— munication process, the chances are good that he will misperceive the messages, make incorrect in— ferences about the purposes or intentions of the source, fail to operate in what may be his own self interest.3 32Farrell, "Description of Firm,” and Thayer, p. 56. 33Berlo, p. 51 and Taylor, p. l. 34Berlo, p. 51. 124 (2) His attitudes toward himself; the source's intentions, expertness and trustworthiness; the message content, completeness and validity; and the message treatment by the source.35 His attitude toward the source is vital, as Shown by Hovland, Janis and Kelly: ...the research evidence indicates that the reactions to a communication are significantly affected by cues as to the communicator's inten— tions, expertness, and trustworthiness.36 (3) His knowledge of the code37 used and resulting ability to understand the message.38 (4) His position within the socio—cultural system. It is very likely that the source's position will differ from the receiver's position, but the factors in each will . . 9 . . be Similar.3 Again, as shown by Frank, this character— istic assumes added importance within formal organizations: 35Berlo, p. 50; Thayer, pp. 54—55; Dean and Bryson, p. 19; and Taylor, p. l. 36C. Hovland, I. Janis, and H. Kelly, "Credibility of the Communicator,” in Campbell and Hepler, Dimensions in Communication, p. 111. 37Defined as any group of symbols that can be structured in any way that is meaningful to some person. From Berlo, p. 57. 38Berlo, pp. 51—52 and Thayer, p. 118. 39Taylor, p. l and Dean and Bryson, p. 17. We are concerned about social factors in com— munication in a number of ways. Primarily, we are interested in social factors as they affect our efficiency in formal organizations. The more we are aware of these factors, which influence be— havior within the organization, the better able we are to effectively predict the behavior of our receivers. E. Concerning other factors Operating in the situation: This involves identifying and analyzing the in— fluence of the probable indirect receivers of the message on the situation.41 These, then, are the important characteristics of the important elements within the communication situation. These characteristics exert a major influence over the de— gree of effective communication achieved and the communi— cator's analysis of the relative importance of these char- acteristics and elements within his situation provides him with a picture of the complexity of the situation and the forces within it that affect his potential success. It is recognized that the communicator's evaluation of these characteristics and their importance is subjec— tive. But this is necessarily so. It is easily accepted that each particular interpersonal communication situation 4OFrank, p. l. 41Farrell, ”Analysis" and Thayer, p. 85. 126 is unique and therefore no statements concerning the uniform influence of the characteristics can be validly provided. Step 4: Synthesis The preceding three steps provide the communicator with relevant insights into the nature of the communica— tion situation and those elements or variables Operating within it and having an influence upon his effectiveness. In a sense, they provide the background and frame of refer— ence necessary for effectively communicating within the situation. The synthesis step provides guidance in the selection of the particular communication goal to be achieved in the situation and the means to achieving this goal. At this stage, the communicator must decide upon the change in the receiver's personality that he desires to accomplish in order to evoke the desired behavior change.42 He should be guided by a knowledge of the receiver's primary concern and relate the change desired to this concern.43 Economy of effort becomes a relative consideration at this point: 42Farrell, "Communication Evokes Change," p. 1. 43T. Farrell, ”Some Do's and Don'ts,” Michigan State University, (Mimeographed). 127 Economy as well as efficiency requires that one apply one's efforts where they will be most fruitful in achieving one's ends. In communi— cating, the focal point is the change to be made in the learned portions Icognitive structure] of an individual's personality. In relation to the decision concerning the change to be evoked, consideration must be given to the communi— cator's knowledge and understanding of the situation at hand and his right to make a change in the personality of the receiver.45 After deciding upon the change to be evoked, the communicator must then decide how he is to achieve this change——i.e. what point will he use to accomplish the de— sired result.46 It must be noted that the point chosen can have three possible outcomes in the situation, which are: (1) No change in the receiver's personality; (2) A regular and well defined change in per— sonality; (3) A revolutionary change in personality.47 44Farrell, "Communication Evokes Change," p. 7. 45T. Farrell, ”Testing for Effectiveness," Michi— gan State University, (Mimeographed); and Schutte and Steinberg, p. 221. 46Farrell, ”Communication Evokes Change,” p. 1. 47Kenneth Boulding, ”Introduction to 'The Image' in Campbell and Hepler, Dimensions in Communication, pp. 29—30. 128 To evoke the desired change, the point chosen should meet the receiver's concerns directly and be stated in terms of his concerns. It should also be in his best interests and be as free as possible from evoking undesir- able changes in his personality.48 Step 5: Composition The composition step is concerned with the actual preparation of the message to be transmitted to the receiv- er. It must be noted here that the sender should be aware that the message is not an end of the communication process 49 but a means to acomplishing his communication goals. The most important emphasis at this stage is the sender's analy— sis of the receiver and the relevant guidelines in the previous steps provided the information needed to compose an effective message. One of the most important emphasis of communica- tion theory is a concern with the fellow at the far end of the communication chain——the receiver. The receiver always has to keep in mind when the source makes deciSiOnS with respect to each of the communication factors we have discussed.50 48Farrell, "Testing,” and ”Do's and Don't's". 49Thayer, p. 222. 50Berlo, p. 52. See also Schutte and Steinberg, pp. 224-25. 129 ...as communicators we can most easily control our own behavior. Therefore, as sources, we accept the major effort and responsibility in encoding our messages. The more important the communication is to us, the more effort we will be willing to expend. Much of this effort will involve analysis of our receivers. The relevant decisions to be made in the composi— tion stage concern the selection of stimuli, their organiza— tion into a message and message content and the presentation of the message.52 Each decision has its own appropriate guidelines and these are as follows: A. Concerning the selection of stimuli: The stimuli selected must first agree or be in accord with the desired change to be evoked in the receiver's behavior and then related to the receiver's concerns. The code chosen Should be known to the receiver and understandable to him. The elements chosen from this code should appeal to the receiver and be easy for him to decode.53 B. Concerning the organization of the stimuli: Within the message itself, the code elements should be 51R. Engbretson, "Communication and Meaning,” Participant's Notebook Article, (Michigan State University/ AID, 1965), p. 3. 52Farrell, "Principles of Communicating," 53Berlo, p. 62; Thayer, p. 120 [Proposition One]; Dean and Bryson, p. 17. 130 structured to minimize the effort required to decode and interpret it; the content should be convincing to the recipient and pertinent to his needs and interests.54 The two general principles of organization are pre— sented by Thayer thusly, 1. Put that first which the receiver needs first in order to comprehend the message, and 2. Put that first which is needed first to affect the receiver in the desired way.55 Additionally, the order of appearance of certain items or the sequence in which items appear becomes important since the receiver may learn to become conditioned to perceive things in certain ways in our messages only.56 In structuring the elements of the message, the pace of the elements is important, as shown by Harrison: Within a message, the communicator also makes deci— sions about timing. Pacing of information and message elements may make the difference between an exciting and boring communique.... 54Berlo, p. 62; Thayer, p. 121 IPrOposition Three]; and Taylor, pp. 3—4. 55Thayer, p. 237. 56M. MacLean, ”Perception and Communication,“ . Participant's Notebook Article, (Michigan State UniverSity/ AID, 1965). 57Harrison, p. 167. 131 C. Concerning message presentation: The presenta— tion of the message will be guided by the previous steps relating to the communicator's analysis of the receiver. The general guidelines for message presentation suggests that it be matched to the estimation of the receiver's personality, attitude, communication Skills, knowledge level, etc.58 As MacLean points out, at this step the sender can aid the receiver perceive the message content. AS communicators, we can help our receivers to perceive things more as we do by increasing certain stimulus energies and decreasing others. Thus, we can emphasize, highlight, Silhouette those aspects or those things we consider im— portant. Again, we can do this more effectively where we know the ways our receivers see things and what their purposes are.5 It is appropriate at this point to note that error in communication is unavoidable and Should be recognized by the communicator during the composition stage. The in— evitability of error is due to the fact that meaning exists in peOple and is not an inherent attribute of the message or message elements. ______________ 58Thayer, p. 58 and Farrell, ”Principles of Com— municating.“ 59MacLean, Op.cit. supra. n. 56. Our previous discussion stated that even though man may have similar meanings for any set of symbols, no two men have exactly the same mean- f ings. Because of this, we as communicators can 1 expect some degree of error in our communication efforts. Since we expect some degree of error, we must ask ourselves, "How much error can I afford?" We are forced to admit that we cannot eliminate error. Step 6: Transmission The sixth step is concerned with the transmission of the message to the receiver; that is, choosing the means used, the channel, to deliver the message. The decision at this stage is not independent Of the previous stages. In fact, the choice of channel is directly related to the in— formation generated by the previous steps: Clearly, we cannot discuss or make decisions about the selection of channels independently of our decisions on message. The content, the code, the treatment Of a message are related to our chOice of channel. At the same time, knowledge of our receiver is related to the choice of channel.... 61 It is very important for the source to be able to recognize the channels that are available for his use in transmitting a message to the receiver. The most easily recognized channels are the formal ones, but Thayer pre- sents seven differing types of channels that usually are 6OEngbretson, p. 3. See also Thayer, p. 70. 61Berlo, p. 67. See also Thayer, p. 56. 133 available for use in an administrative communication situ- ations. They are these: (1) (2) (3) (4) (5) (6) (7) Formal and informal, where the formal ones have been consciously established and the informal ones risen by accident; Organizational and interpersonal, where the former are shown and follow the organization chart and the latter established by the members or by habit; Authority and power, the lines which follow the hierarchy of command within the organ- ization; Intergroup and intragroup, where the former are usually between leaders of two groups and the latter are established within one group; Prestige and common interest, usually hori— zontal channels generated and sustained by mutual interest; Idea and value, which are facilitated by ideological interests; Functional and Situational, where the former handle recurring messages and the 134 latter serve special situations.62 In light of the communicator's decisions about the message, his knowledge of the receiver and of the channels available, it is most important that he choose the most direct channel to use in the given situation.63 In addi— tion, the following seven guidelines are helpful in the choice of the most appropriate channel for given types of messages: 1. The more important, significant, or urgent a message, the more channels Should be used. 2. When speed of transmission is the guiding factor, use informal channels. 3. To be authoritative, an official message must pass through formal, organizational channels. 4. To be influential, the most advantageous are power and prestige channels, followed by intragroup and interpersonal channels. 5. Policies are most effectively transmitted through organization channels but practices are more effectively transmitted through interpersonal channels. 6. A channel which ordinarily ”carries” a cer- tain type of message may ”carry" other types of messages less effectively. 7. Attitudes are best reached through intragroup, interpersonal, and value channels; knowledge best reached through formal and ideological channels.64 [ 62Thayer, pp. 252—54. 63Farrell, ”Principles of Communicating." 64Thayer, pp. 254—55. 135 The timing of message transmission is also vital to achieving effective communication. The communicator will usually have control over the time when the message will reach the receiver and Should seek to have it arrive when the receiver will be most receptive to it and will give it his attention. Useful techniques in achieving receiver attention are to provide lead time or advanced notice of the time of message arrival. Often, delay and off schedule transmission will also command receiver atten— tion.65 Step 7: Reception The reception step advises the communicator to actively attempt to monitor the message being transmitted to the receiver to be sure that it is the message he in— tended to send.66 This step becomes especially important if the activity of transmission has been delegated to a third party, acting in behalf of the communicator. Step 8: Feedback The last step in the suggested approach to the communication Situation is that of the communicator 65Harrison, p. 167 and Thayer, pp. 52 and 55. 66Farrell, ”Principles of Communicating." See also W. Charles Redding, "The Organizational Communicator," in Redding and Sanborn, Business and Industrial Communica— tion: A Source Book, p. 31. 136 receiving feedback from the receiver after the message has been delivered. At this stage, the roles are somewhat reversed——previous to this, the communicator has been active and the receiver somewhat passive. Now the communi— cator becomes somewhat passive and, in fact, more of a receiver than a sender. However, feedback is vitally im- portant in the source's efforts to achieve effective com— munication and there are a number of steps he can initiate to evoke feedback from the receiver. Succinctly, the com- municator Should plan for and provide for feedback, inter— pret the feedback as objectively as possible, and then use his interpretation and analysis of feedback in modifying his behavior and decisions in future communication situations.67 Feedback is important because it informs the com- municator of the effect of his communication on the receiv— er. It can be defined as "...information about any changes in the condition of p [the receiver] attributable to his ll 68 [the communicator] communication. Given feedback, the communicator can then check to determine whether he has 67 Farrell, "Principles of Communicating,” and Thayer, pp. 71 and 95—97. 68B. Westley and M. MacLean, "A Conceptual Model for Communications Research," in Campbell and Hepler, Dimensions in Communication, p. 63. 137 achieved his communication goals, that is evoked the desired behavior change through changing the appropriate aspect of the personality and avoided any undesirable changes.69 Based upon his determination, the communicator becomes aware of his success or failure in achieving his communication goals and can then attempt to modify his future communication activities appropriately, as Engbertson so notes: When the feedback they [good communicators] receive indicates that the receiver did not be— have as they expected, they analyze the situation. They try not to let emotional feelings interfere with the analysis. Two questions are important to ask. First, ”How did the receiver interpret my communication?" Second, "How can I change my com— munication to more accurately indicate the behavior that I wish from the receiver?"70 It must be noted that there are some dangers or negative aspects associated with feedback. If there is too much feedback, the channels which carry it may become clogged and no longer Operate efficiently, that is, either completely block further feedback or distort it. Another danger is that the communicator will distort the feedback through his own prejudices or feelings. Dangers arise 69Farrell, "Communication Evokes Change," p. l. 7OEngbretson, p. 4. See also Thayer, p. 132. 138 from the source's inability to analyze and evaluate the feedback properly.71 A major danger is that feedback will be ignored for fear that it will show someone to be a poor communicator or cause change. These, then, are the guidelines advocated for the communicator to follow to achieve his communication goals in interpersonal communication. They apply to any general interpersonal communication situation. Both the goals and guidelines are presented below in outline form as the sum— mary of this chapter. It must be noted that the sources cited in the chapter are an integral part of this outline summary but are not repeated here. Marx I. Goals of Interpersonal Communication A. Primary Goal: to evoke the desired change in the receiver's behavior through evoking the desired change in his personality structure (his emotive, cognitive, and goal structure). B. Secondary Goals: to obtain selection, compre— hension, acceptance, recall, and use of the message by the receiver in an efficient manner. 71Thayer, pp. 95—96. 139 II. Guidelines Toward Achieving These Goals A. Observation 1. Look at the communication situation objec— tively to identify the following six important elements: a. the originator or source of the message. b. the actual lines of communication used. c. the means used for communicating. d. the direct intended receiver. e. the probable unintended receivers. f. the motives or purposes for communicating. B. Description 1. Record the observations made in the first step for guidance and future reference and use. Keep the record up dated. C. Analysis 1. Determine the relative importance and influ- ence of the following characteristics of the elements on the Situation: a. Concerning the originator or source of the message: (i) his Skill as a communicator and knowledge of the communication process. (ii) (iii) (iV) (V) (vi) 140 his attitude toward himself, the value of his message, and toward the receiver. his knowledge about the subject matter of the message. his position within the social— cultural framework. his motives for communicating. his relationship to the direct intended receiver. Concerning the actual lines of communica— tion: their directness. Concerning the means used for communicating: the circumstances when they are used and the reason for their use. Concerning the direct intended receiver: (i) (iii) his communication skill and ability to receive and decode the message. his attitude toward himself, the source, and the message. his knowledge of the code used and resulting ability to understand the message. 141 (iv) his position within the social— cultural setting. e. Concerning other factors operating within the situation. Synthesis 1. Find your receiver's primary concern and deter— mine the desired change in his personality apprOpriate to his primary concern and to the desired change in behavior. The focal point should be the change in his learned (i.e. cognitive) structure. Relative considerations to this decision about the changes are: a. Are you right about it? b. DO you really understand the situation? Decide upon the point to be used to evoke the desired change. The possible effects of the message upon the receiver's personality are these: no change; regular and well defined change; and revolutionary change. To evoke the change, devise your point to meet the receiver's concern directly, state it in terms of his concerns, and determine if your 142 point will produce any undesirable effects. Composition 1. Select your stimuli in accord with your inten— tions and relate them to the receiver's concerns: a. Choose codes the receiver can understand and are known to him; b. Select elements from the code that appeal to him; and G. Select elements from the code that are easy for him to decode. 2. Organize your stimuli: a. Structure code elements to minimize the effort required to decode and interpret the message; b. Choose content that is convincing to the receiver; c. Choose content that is pertinent to his needs and interests; and d. Pace the elements of the message to achieve attention. 3. Match the presentation of the message to the estimation of the receiver's personality, his attitudes, communication skills, and knowledge 143 level. Present your point positively. Transmission 1. Select the most direct channel in light of the message content, code, treatment, and the receiver. 2. Consider the timing of transmission: is it adapted to the situation? 3. Attempt to have the message arrive when the receiver is most likely to accept it. Use advanced notice or delay to achieve attention. Reception l. Actively try to monitor what is being sent to the receiver. Feedback 1. Plan for and provide for feedback. 2. Interpret feedback objectively. 3. Use the interpretation of feedback in future communication situations. CHAPTER v 1 GUIDELINES TOWARD THE EFFECTIVE 1 COMMUNICATION OF CONTROL INFORMATION 1 Introduction Up to this point, the need for a sound, well grounded set of guidelines for the managerial accountant to follow in his control reporting activities and decisions concerning the form and content of control reports has been demonstrated. Additionally, the information concerning the general communication goals and the guidelines toward 1 reaching these goals in an interpersonal communication situation from the interpersonal communications subject area needed to develOp this set of guidelines has been pre— sented, thereby affirming the first part of the hypotheses to be tested by this study and presented on page 13 in Chapter I. It is the purpose of this chapter to affirm the rest of this hypothesis by presenting the set of guide— lines which resulted from the application of the material in the previous chapter to the control reporting situation and showing that they will eliminate and/or overcome the 144 145 major barriers to effective communication as presented in Chapter III and of achieving the communication goals of con— trol reporting. The chapter first discusses the goals to be achieved through the communication situation between the managerial accountant and the manager concerning the transmission of control information through the control report. The set of guidelines to be followed by the managerial accountant to achieve the goals is next presented and the ability of these guidelines to eliminate and/or overcome the major barriers associated with the control reporting process is demon— strated. An evaluation of the proposed guidelines by the executives taking part in the questionnaires survey is also presented and the chapter concludes with a summary outline of the goals and guidelines. It should be noted that the present chapter is addressed to the managerial accountant, seeking to present him with Operational guidelines he could utilize in fulfill— ing his organizational responsibilities to provide control information to management. This point of View is appro— priate and necessary since the managerial accountant is responsible both to upper management and more broadly to the discipline of managerial accounting to maximize his 146 efforts to achieve the effective communication of control information to management. The Goals Of Control Reporting An awareness on the part of the managerial account- ant of the goals of this stage of managerial accounting for control has a vital influence on his performance as a com— municator. His perception of what he is trying to accomplish or should be trying to accomplish through the control report and reporting process, and his resulting responsibilities, will determine the extent and strength of his efforts in the area. For example, if the managerial accountant's goal is merely the presentation of a schedule of costs and budg— eted financial figures accumulated along organizational lines to management, then he will seek only to achieve this goal and no more. Or, if he has not considered the specific goals that he will seek to attain through the control re- port, his activity will be random and unorganized, and not effective. The latter case, hOpefully, will be rare. Although the general goal of control reporting was discussed earlier, a more detailed treatment is now neces— sary. Since the managerial accountant is engaging in inter— personal communication at this stage of managerial account— ing for control, the goals of interpersonal communication 147 theory apply and should be adopted to guide his activities and efforts. Hence, his main goal is to shape or influence the organizational behavior of the divisional manager in his decisions concerning control. The accountant seeks to reinforce the managers past decisions that are shown in the control report to have led to successful control in certain areas and to inform him of the need for corrective action in other areas that are shown not to be under control. Hence, through the control report and its content, the accountant is Seeking to influence the future decisions and activities of the manager regarding the utilization of the resources that he has authority over and is responsible for. However, the accountant usually has no direct authority to command the manager's activities and cannot directly Specify the future activity of the manager or how to make his decisions. Organizationally, the accountant usually has a staff relationship with the manager, meaning he has the authority to advise the manager and provide him with information that will assist him but cannot force him to use the information in any particular way. The manager alone, as a semi—independent organizational unit, decides his future activity. Hence, the accountant is limited to influencing the manager's decision by providing the 148 information that will be used in this decision. As noted earlier in Chapter IV, it is assumed in this study that this decision will be based on the manager's cognitive, emotive, and goal structures. Therefore, the ultimate effect of the control report and reporting process will be to change one or more aspects of his personality so as to indirectly influence the manager's behavior regarding the utilization of the resources of his organizational unit. In terms of this adOpted structure, the accountant seeks to change the cognitive structure by informing the manager of his success in attaining control of the activities of his organizational unit by presenting factual evidence of the relationship between actual and budgeted financial performance; to change the emotive structure by presenting evidence of the manager's over—all success in performing the control function; and to change the goal structure by highlighting those areas under his control that need immed— iate action and attention to bring them under control. If these desired changes are accomplished, the desired behavior change will be evoked. This is advanced as the managerial accountant's primary goal through his control reporting activities. To accomplish the primary goal, a number of secondary 149 goals concerning the attitude of the manager toward the control report and control reporting process must also be attained. These are attaining his interest in and atten- tion toward the report, his acceptance of the information presented in the report as valid and trustworthy, and his comprehension of the meaning and understanding of the message. These secondary goals must be attained or the primary goals will not and cannot be. In a sense, they set the stage or Open the door to provide the accountant with the Opportunity to change the manager's personality. Obviously, if the manager refuses to accept the control report contents and will not give it any attention, the accountant's attempts to influence his behavior through his personality are blocked and futile. Hence, the primary and secondary goals are inter—dependent and complementary to each other. Economy of effort is another secondary goal that must be considered Since it often acts as a constraint upon the accountant's efforts in this area. In addition to em- bracing the above goals, he must also recognize that he will be expected to be as efficient in his communication activities as possible. In summary, then, the main goal which the managerial 150 accountant seeks to achieve in control reporting is to shape the behavior of the divisional manager toward achiev- ing financial control of his unit. However, due to the nature of the organizational relationship, the accountant is limited to changing the manager's personality, hOping that the desired behavior change will follow. The account— ant also seeks to evoke the manager's interest in the re— port, his acceptance of the report content as valid, and his comprehension of the meaning of the content. In addi- tion, the accountant seeks to obtain these goals with a minimum of effort. All these goals are inter—dependent and complementary to each other. Guidelines Toward Achieving the Goals Given that the managerial accountant has accepted and adopted the above goals, the natural question arises: What can he do to achieve them? To achieve these goals, there must be a definite program of operational steps which the accountant can also adopt to guide his communication efforts. It has already been shown that such guidelines exist for the general communication situation. It is strongly recommended that the managerial accountant follow a similar set of guidelines based on the general guidelines in his communication activity. These guidelines, as they 151 are related to the control reporting situation, are pre— sented below and advanced for the accountant to follow to achieve the above goals. The guidelines are presented as the following seven steps or activities all of which must be followed: Step 1: Observation and Description The first step is that of observing the character— istics Of the control reporting communication Situation and recording these observations. This step is vitally import— ant because it causes the accountant to be aware that he is engaging in a communication situation and is no longer work— ing wholly within the strictly accounting environment. In essence, he is performing two roles, those of accountant and communicator with primary emphasis on the latter. He must become aware of the fact that although communication is a part of the managerial accounting for control process, there is no direct relationship between the content of the two areas and that a superior knowledge and ability in managerial accounting does not necessarily make one an effective communicator of accounting information and yipg versa. Within the control reporting process, a number of reports are prepared, usually differentiated by the frequency 152 of preparation and the level of their destinations. It is suggested that this differentiation be employed as a clas— sificatory scheme for identifying and recording and that each type of report be considered a separate communication situation to be described and analyzed. For example, assuming a firm with three manufacturing divisions and weekly and monthly control reports prepared for each divi— sional manager, two separate communication situations exist: 1) the weekly control reporting situation and 2) the monthly control reporting Situation. Each situation requires sepa— rate identification and description. The following are the important elements to be ob— jectively identified and recorded for each situation.1 (1) The originator of the communication, that is the staff member or members in the accounting department who are responsible for the preparation of the report and also any other men who have the authority to influence the report. 1In addition to the references cited in Chapter IV for this step in the communication literature, see also Hilton, W., "Analyzing Reporting Systems,” Management Accounting, Section 1, Vol. 42 (January, 1966), p. 61 and Pelej, J., ”Controller Communication with T0p Management, Controller, Vol. 27 (April, 1959), p. 203. 153 (2) The actual lines of communication used in the situation, referring to the actual way in which the report is delivered to the direct intended receiver and unintended receivers from the accounting department. (3) The means used for communication, that is, the control report itself. Its title, frequency Of preparation, general content and format Should be identified and recorded. (4) The direct intended receiver(s) of the report, that is the manager or managers for whom the report is pre— pared and transmitted. If the report is sent to a number of managers, they may be grouped by their area, such as engineering division managers or manufacturing division managers. (5) The probable unintended receivers of the re— port; that is, any personnel who might also receive a copy of the report and not use the content directly and may have the power to influence the reporting process. (6) The purposes for communicating in the situ— ation; that is, the Specific reason for the report's prepa— ration. The accountant may find a simple form useful in recording the above information for each communication situation in the control reporting process. Such information 154 should be kept on file in the accounting department for guidance and future reference. Such a file would provide a good description of the communication activities of the accounting department and should be kept up to date by be— ing modified when any changes occur in the above elements. Step 2: Analysis The second step requires the managerial accountant to judge the relative importance of the elements within the situation which have an effect on the quality of the communication that can be achieved. These elements corre- spond to those in the previous step and have certain char— acteristics which have a vital influence on the flow of communication in the situation. The accountant must be aware of the states of these characteristics to be able to communicate effectively, Since their states will often determine how his activity is to be accomplished. 1 An awareness of these elements and their character- istics provide the accountant with relevant insights into the nature of the communication situation in which he is to operate. By judging the relative importance of these elements (i.e., subjectively determining the magnitude of their effect in the specific situation), he is provided with the necessary raw material and frame of reference for 155 use in later steps. The replies by the managerial accountants and man— agers to the business firm survey provides significant in— formation concerning the relative influence Of the various elements in the control reporting communication Situation. The ninth question in each type of questionnaire provided the respondee with a list of the following elements of the situation and asked him to rank the elements in terms of his evaluation of their relative influence on the over—all effectiveness of the control report: (a) The form and content of the report itself. (b) The lines of communication used to transmit the report. (c) The person responsible for preparing the report. (d) The managers who receive the report. (e) The managers who receive the report and do not directly use the information within the report. The actual replies of the managers and accountants appear in Chapter VI. The replies of the managerial accountants resulted in the following ranking of the elements from most influ— ential to least influential: (1) The managers who receive the reports. (2) The form and content of the report. (3) The person responsible for preparing the report. (4) The lines used to transmit the report. (5) The managers who receive the report and do not directly use the content. 156 The replies of the managers resulted in a less clear ranking of the elements, such that a listing in order is not possible. However, the replies clearly indicate that the managers consider the form and content of the control report as the most influential element and that they con— sider the sender and receiver (themselves) as either secondly or thirdly influential. They also concluded that the lines used to transmit the report was the least influen- tial. A comparison of the rankings of both groups Shows agreement on the greater importance of the report, the sender and receiver as major sources Of influence over the effectiveness of the report. This is important in that it indicates that it is these elements and their corresponding characteristics that the managerial accountant should con— centrate his analysis upon. The important characteristics of the elements that merit analysis are the following: 1. Concerning the originator of the control report: The most important characteristic to be judged is his knowledge of the communication process and his ability as a communicator. As the source, the communicator holds the major responsibility for the success of his communication 157 and hence, his operating without a knowledge of the com— munication process presents a handicap to his efforts to achieve any degree of success. It is true that within the control reporting process the source has less flexibility and freedom because of the fixed content of his message (as compared to letter writing, for example) and, hence, is blocked from using more actual personal communication skills. However, the nature and importance of the situ— ation place greater emphasis upon his knowing about the general communication process. Also, as will be shown in later steps, actual face-to—face interpersonal communica— tion in addition to the control report will be needed in the control reporting process and, hence, his ability to communicate will become even more important to his over—all success. The most valid and efficient basis for judging these characteristics is direct personal contact. The source's attitudes also have a vital effect on the quality of communication achieved. The important attitudes are those toward himself, the value of the mes- sage, and the receiver. A communicator must assume a realistic attitude toward himself to be effective. A lack of confidence in himself or over confidence in his ability will block his effectiveness. A confident attitude toward 158 himself as a communicator can only come from a knowledge of the communication process. The source‘s attitude toward the manager is also vital and tends to determine how the source reacts to any aspect of the communication situation. The importance of the source's attitudes toward the managers who receive the reports was emphasized by the results of the questionnaire survey. In response to a question asking the accountant to rank the importance of his attitudes or those of his subordinates toward the managers as an element in the decisions concerning the form and content of the reports,2 82% ranked attitudes at least "Important" with 44% ranking it as ”Very Important.” It often determines how much motivation the Source has to engage in communica— tion. A poor attitude toward the manager or managers as a whole will block the co—Operation that is needed between source and receiver to achieve effective communication. Likewise, the lack of a proper attitude will also block effectiveness. His attitude toward the material will also effect the situation, since if he does not believe in its value, he won't be able to communicate it effectively. For example, a lack of confidence in the accuracy of the 2See Chapter VI, page 207. 159 financial information in the control report will dampen his enthusiasm to communicate it to the manager. The source's knowledge of the material is also important but in the control reporting situation is less of a potential danger since the source is usually an ac- countant and therefore should be familiar with the accumu— lation and processing of the financial information. If not, it would be easy for him to acquire knowledge. The source's purpose or motive for communicating also exerts an influence on his effectiveness. If he views his efforts as only the fulfillment of corporate policy, his efforts will be half hearted. However, if he believes that his control reports are a service and are necessary to help management, his efforts will be highly motivated. Lastly, the relationship between the source and management will also have an effect. Not only their organ— izational relationship but also their actual personal relationship is important, Since it often acts as a basis for their Opinions and attitudes toward each other. A lack of a positive relationship blocks any feedback and does not provide the source with a valid basis for his attitudes toward the management. These, then, are the major influential characteristics 160 of the person responsible for the control report and their possible affects on the communication situation. 2. Concerning the direct intended receiver(s) of the report: There is a great deal of similarity between the characteristics of the source and those of the receiver, the manager, that have an impact on the communication Situ- ation. The manager's ability to communicate and his know— ledge of the communication process are equally important to the situation. His knowledge of the process determines how he views the situation and his awareness of his responsi— bilities in it. A lack of knowledge prevents him from validly acting within the process and will tend to frus— trate the efforts of the Source. Likewise, his attitudes play an important role. His attitude toward himself has basically the same affect as that of the source toward himself. The managers atti— tude toward the source, the managerial accountant, and the control report is a key element which determines the effect of the report. An unfavorable attitude toward the source and his efforts, the control report, can easily nullify the accountant's efforts toward achieving effective com— munication. Correspondingly, the manager's knowledge of the 161 code used (accounting) is vital. Unless he is familiar with the accounting process used to generate the report and its limitations and understands the significance of the costs and variances in the report, he cannot fully rely upon it as a valid basis for decision. Lastly, his relationship to the accountant will often provide the basis for decisions concerning how he reacts in the situation. 3. Concerning the actual lines of communication used in the Situation: Within the control reporting situation the lines to be used are usually fixed, those of the formal organiza- tion. However, the informal lines existing can have an affect and must be considered. The directness of the channel being used must be evaluated also. 4. Concerning otpgr factors pperating within the situation: This element refers to the probable indirect receivers of the reports and their affect on the Situation. The fact that other managers, particularly those higher than the operating managers, receive the control reports also is a valid consideration since they may have an affect on the communication situation. These four major elements and their characteristics are vital to the effectiveness of the communication 162 situation and must be analyzed in each situation. These elements can be viewed as forces within the situation that have a profound effect on the success of any attempts at achieving effective communication. However, since each communication situation is very likely to differ from others, no statements about the uniform effect of these elements and their characteristics is meaningful. Instead, the discussion has identified the major important elements and described the general effect they can have. Hence the need for a subjective analysis of their affect on the spe— cific situation in question by the accountant. Step 3: Synthesis The two previous steps can be considered as data gathering in nature. Their purpose was to provide the com— municator with the necessary information about the situation to properly guide his efforts. The synthesis step is one of examining this information to draw conclusions from it related to the Specific communication goal to be achieved and the means to be used to achieve it. Correspondingly, the accountant must now decide upon the Specific change to be evoked in the manager's personality to produce the desired behavioral change. The accountant must be aware of the control process and the 163 role of the control report within it to satisfy this step. The discussion of the communication goals of the managerial accountant presented earlier on pages 146-150 is also rele— vant at this point in time. As a communicator, the synthesis step is easier to follow for the managerial accountant due to the nature of the managerial accounting for control reporting process than in other communication situations. He is easily aware of the primary concern of the manager and what he can do to fulfill it. Or, if any doubt about the manager's primary concern exists, the accountant can seek it by merely asking and then using the response in this step. As noted earlier, the manager's primary concern which is relevant to the accountant is the manager's responsibility to achieve con— trol and the role of managerial accounting for control in aiding the manager to achieve control has been well defined. Thus, much of the guess-work of this step has been elimin— ated. Additionally, the accountant is not the judge of whether control exists; he only reports the financial evi— dence which itself determines whether control exists or not. And again, the accountant need not question whether he has the right to change the manager's cognitive, emotive, and goal structures—-it is well defined as his organizational 164 duty. At the synthesis step, the accountant, then, should remember that his goal is to change the managers personality by informing him of his success in achieving financial control of his unit through the presentation of a comparison of actual financial performance to budgeted financial performance. The major emphasis is to the man— agers cognitive structure, the learned portion of his per- sonality, Since the manager relies upon the control report to inform him of his success. For example, if the weekly control report were not prepared, it is doubtful whether the management would know its exact success in achieving control. In a large sense, the nature of the organiza— tional relationship between the accountant and the manager aids the accountant in his communication activities by de- fining a number of variables in the process, thus elimin- ating the accountant's concern over them. §ppp 4: Composition The fourth step is concerned with the preparation of the actual message to be sent to the receiver, i.e., the control report itself. It is in this step that the infor— mation gathered in the previous steps and the decisions made then are now utilized. At this step, it is the 165 receiver, the manager, who becomes the focus of interest. This step is basically concerned with three deci- sions concerning 1) the selection of stimuli, 2) their organization into a message, and 3) presentation of the message to the receiver. However, within the control re— porting process, the first decision has already been made by the nature of the financial control process and, hence, the accountant can concentrate on deciding how to organize and present his message to best suit the manager's communi— cation needs. In other words, the accountant need not spend time considering what stimuli to include in the con- trol report——this decision has already been made in favor of actual costs, budgeted costs, and the resulting differ— ence collected along organizational lines. This is the stimuli that the process of financial control requires. In more specific instances, the managerial accountant can easily determine what Specific actual and budgeted costs are to be included in the control report by simply asking management what they want. Thus, the accountant should concentrate an organizing and presenting the content in a manner most suitable to the manager. It must be emphasized at this point that the control report itself is but a means to an end and not the end itself. 166 The format of control reports (i.e., the organiza— tion and presentation) has been a highly controversial aspect of the control reporting process, and as shown in Chapter III has drawn much criticism from others. This criticism has mainly come from non—accountants, which pro— vides the setting for the major guideline of this step: the control report must be organized and presented to meet the communication needs of the manager and him alone. The previous guidelines dealing with the manager provide the necessary information about his attitudes, background, etc. to accomplish this. A note about economy of effort is relevant here. The ideal at this point is to prepare each control report to meet the specific needs of each individual divisional manager and in a sense, tailor made for him. However, given a firm with a large number of managers, it would entail a great deal of effort to produce unique control reports for each. Uniformity in control report formats reduces the cost and time of preparing them considerably. However, uniform formats also means that some communica— tion needs of some managers are not being met. It is suggested that the managerial accountant reach a middle point between these two polar extremes and the suggested 167 technique is to group divisional managers by their major organizational function or background, such as manufactur— ing division managers, or production division managers, and then have one control report format to meet the needs of each group. This "group of managers“ concept is em— ployed throughout the rest of this discussion on composition. The control report for each group of managers should be organized and presented to meet the communication needs of each group. Obviously, to fulfill this, the managerial accountant must be aware or become aware of these communi— cation needs. In general, these needs can be presented thusly: match the format and presentation to the estima— tion of the receiver's personality. Hence, the information generated from the analysis step concerning the receivers to be used. Or, if this information concerning the man— ager's communication ability, attitudes, knowledge of accounting, and organizational position is not readily available, it is advisable that the accountant seek the information directly from the managers. Rather than wait for trial and error to generate it, it is suggested that 3This concept is employed in the format of control reports to the Operating divisions of the aerospace firm consulted in the field of study. 3 168 the managerial accountant poll the divisional managers within each group to provide their likes and dislikes and preferences concerning the format of their control reports. Such empirical evidence would provide a solid basis for decisions concerning control report format and would con- tribute toward the co—Operation of accountants and managers and increase the ability of the managerial accountant to serve his management. An important variable that determines differing communication needs in groups of managers is the differ- ence in backgrounds and experience among them. Not only does this proposition have intuitive appeal, but an account- ing officer consulted presented it as a conclusion from his experience: "Managers with accounting backgrounds usually prefer reports issued as schedules; those with non—accounting backgrounds usually prefer chart form reports. Sometimes, you have to orient the information to the specific person and what his background is.”4 The managerial accountant must be aware of the fact that although it is natural for an accountant to present reports as numerical schedules, (and indeed it has become somewhat 4Discussion with the head of the Cost Accounting and Analysis Department of aerospace firm on February 27, 1968. 169 of a tradition in accounting to do so) other methods exist and can be more successful in terms of making the message easier to understand for managers. The chart form of report stands as the most prom— ising alternative and can be utilized in a number of dif— ferent ways. The advantages and disadvantages are as follows according to Li: Such reports have the advantage of simplicity. They also permit comparison of expected and actual performance or a cumulative basis, thus facilitating the development of trend lines. On the other hand, because of physical limita— tions, graphic reports are not designed to handle clearly several types of data in one report. Nor are they equipped to present data with precision. For those firms using electronic data processing equipment in their control reporting process, no barriers are present to utilization of alternative formats. Numer— ous Software Options exist to plot numerical data and print out charts and graphs. In addition, computer output con— trol reports, called burst forms, are often difficult to handle and file because of their size. To solve this prob— lem, other software options exist to reduce the burst forms 5David H. Li, Cost Accounting for Management Appli— cations, (Columbus, Ohio: Charles E. Merrill Books, Inc., 1966), pp. 289—91. 170 to manageable proportions, usually the standard 8% x 11 inch size pages.6 In addition to these suggestions for alternative formats, it is suggested that the managerial accountant refer to a number of books written on reports, such as Ronello B. Lewis's, Accounting Reports, wherein are offered specific suggestions as to how to add eye appeal to the re- ports. Once again, when deciding upon new or differing formats, it is the manager's communication needs which are vital to guide the process. The differing backgrounds of managers within the firm is also the key to understanding their reactions to the terminology used in control reports. It is understand— able that a manager with no or little accounting background will have trouble understanding some of the terms that are used. Those who need it can easily be provided with a glossary of such terms. A related Solution would be meet- ings to reach agreement on the terms to be used in reports to groups of managers. In summary, the composition stage in essence 6Discussion with the head of the Engineering Administration Department of the aerospace firm on January 24, 1968. 171 requires the accountant to become aware of the communica— tion needs of the various groups of managers using the re— ports and then attempting to satisfy these needs to be the best of his ability. The general methods suggested and illustrated are steps in the right direction and provide the basis for specific actions within specific communica- tion situations within the firm. Step 5: Transmission After composing the message, the next logical step is choosing a channel to be used to deliver it to the in— m tended receiver. Once again, the communication burden of the managerial accountant is lightened somewhat by the nature of his relationship to management within the firm. That is, a formal channel for transmitting control reports usually exists and should be used. AS Thayer points out: "To be authoritative, an Official message must pass through formal, organizational channels."7 When a number of formal channels are available, the formal channel chosen should conform to the most direct channel. The timing of transmission is a vital element in this step and the accountant should seek to have the control 7Thayer, p. 254. 172 report arrive at its destination when it will receive the most attention and be used. Again, consulting the groups of managers to determine when they would be most receptive to the report is suggested and is the best method of get— ting the report to them when they most want it, and can use it. Step 6: Reception The sixth step requires the accountant to monitor the control report sent to divisional management in cases where he is not the one sending it, i.e., when the authority to prepare and transmit has been delegated to others. This step provides a check that the message is being sent as intended. Copies of the reports Should be kept for future reference. Step 7: Feedback The last step in the program is that of obtaining feedback from management concerning the accountant's success in attempting to communicate effectively. The feedback phase of the control reporting Situation is vague, however, because of the nature of the communication situation and the lack of a precise measure of how the control report exactly affected the manager. It would appear that a man- ager's increased success in achieving control after 173 receiving the control report would be the proof that the accountant was successful. However, there can be no pre- cise measure of the relationship between an effective con— trol report and achieving control, since the report is but one factor involved in the control process; that is, the manager's ability to manage, his subordinate's ability, the nature of the resources under his control, the market for the product are but a few of the factors which exert an important influence on the control situation. However, the accountant can effectively determine whether he has made the control report as effective a com— munication device as possible and through the responses of management learn of the effectiveness of his efforts. In the general communication situation, feedback usually occurs naturally as a response to the message. How— ever, within the control reporting process, the accountant must encourage it since communication is but an aspect of the control process and its importance has been hidden. General agreement points to personal meetings, conferences, or discussions with the users of the reports as the vehicle for obtaining feedback.8 8C. Babcock, ”Accounting is Communication," Co-operative Accountant, (Summer, 1964), pp. 38-39; Editoral 174 These conferences can provide the accountant with a wealth of information to aid him in his communication efforts. They should be held with the various groups of divisional managers separately. The frequency of such meetings will depend upon the specific situation and the preference of the individuals involved. The primary function of the conference is to pro— vide the accountant with management's reactions to the suitability of the control reports. Through their response, the accountant will be able to determine what the communi- cation needs of the managers are, how well the control re— ports currently meet these needs, and the manager's sugges- tions for increasing the report's ability to meet their needs. The conferences will also provide the accountant with an opportunity to know the managers and give him a valid basis for predicting or estimating their personality. It can be used to educate the managers in accounting matters and increase their ability to understand the accounting pro- cess that serves them. It will also give the accountant Board, ”Communications and the Accountant," Canadian Chartered Accountant, LXXXII (March, 1963), p. 188; Jbseph Pelej, ”Controller Communication with Top Management,” Controller, XXVII (April, 1959), p. 202; and personal interviews with both accounting and management executives of the aerospace firm revealed agreement on this point. the opportunity to shape or influence the managers attitudes toward the control reporting process. Whereas the Specific format of these meetings will differ from firm to firm, in general it is suggested that each meeting concentrate on a discussion of specific con— trol reports. It is important for the accountant to make management aware that the purpose of the meeting is to in— crease the accountant‘s ability to serve them. The proper attitude will prevent the meetings from becoming “gripe sessions.“ Co—operation toward achieving corporate goals should be the key theme. It then becomes the accountant's responsibility to use the information provided by the conferences in his com— munication efforts. Conceivably, the data provided can be used in all of the steps previously mentioned. The above seven step program is recommended for adOption by managerial accountants to guide their activities toward reaching their goals in the control reporting pro- cess. The basis for this recommendation is that these guidelines are based on the guidelines toward achieving effective interpersonal communication and thus apply to the communication aspect of the managerial accounting for control process and are able to eliminate and overcome the 176 weaknesses in control reports as shown below. The program should be used to modify control reporting systems cur- rently in use and Should be used to guide the development and planning of new systems. It is important that all seven steps be used as an entity, since the selective adoption of some steps and rejection of others will not be effective. Each step is interdependent with others and all are complementary toward achieving effective communication. For example, it is easily seen that the arbitrary adoption of only Step 1, description and observation, would only provide the accountant with an accurate description of the communication situation and yet not provide him with the necessary guidance for efficiently functioning within the situation. Ability to Overcome and/or Eliminate Barriers It was demonstrated in Chapter III that control reports and the control reporting process are not free from weaknesses that block or impair the effectiveness of the communication stage of managerial accounting. Part of the reason for the existence of these barriers was shown to be a lack of soundly based guidelines available to aid the managerial accountants' communication activities and to eliminate and/or overcome these weaknesses and lead to 177 effective communication. The following section will demon— strate the ability of the guidelines of this chapter to overcome and eliminate these weaknesses. The first weakness presented was that of too many reports being prepared and transmitted to management. Through the seventh step, Feedback, the conferences between the managerial accountant and groups of managements would bring this to light and allow both parties to co—operate toward providing management with the proper number of re- ports, through consolidation of the contents of some reports and possible elimination of others. The probable cause of this weakness is the lack of knowledge of the needs of management and the periodic conferences would clear this up. The second weakness mentioned in regard to the con- trol reporting system was that of a lack of feedback, con- sisting of the reaction of management to the effectiveness of control reports in meeting their needs. Obviously, the implementation of the program would overcome this barrier also through step seven, Feedback, and provide the Oppor— tunity and setting for the accountant to receive not only management's reactions but also their suggestions as to how to make the control reports more effective. A lack of co—ordination between the accounting 178 department and operational division management in the plan— ning and development of new control reporting system was the third weakness. Applying the program to the develop— ment of a new control reporting system will overcome this weakness, since at numerous points in the program the accountant and manager are required to co-operate and com- municate with each other on various aspects of the system. In fact, a major advantage of the program is that it pro- vides for co—operation between the source and receiver in the communication situation. This feature also will over— come the fourth weakness, a lack of first hand knowledge or contact with the receiver of the communication. The problem mentioned regarding control reporting systems using electronic data processing equipment can also be overcome through the program. The lack of flexibility can be overcome by knowing beforehand what revisions are necessary in the system, before the system becomes firm and rigid. The use of software options can also eliminate the barriers associated with the machine burst form of control report. The barrier erected by the managers lack of adequate accounting knowledge will be overcome through the feedback step, the conferences between the accountant and his managers. 179 The managers will then be informed or briefed on the accounting process used to generate their reports. Concerning the appearance of the control report itself, the guidelines contained in the composition stage can overcome the barriers associated with the mass of data effect of control reports. These guidelines provide the accountant with the appropriate tools to add to the eye appeal of his reports and to suit them to the specific communication needs of the managers. The guidelines con- cerning the provision of a glossary of accounting terms will also help eliminate the terminology problem. The other specific weaknesses presented as related to specific control reports of specific forms can also be overcome through the co—Operation and communication between the accountant and divisional management that the program calls for. In summary, it has been logically Shown thatthe application of the seven step program has the ability to overcome the weaknesses and barriers to the effective utilization of control reports. It must be noted that the utilization of this program at the planning stage of a con- trol reporting system and continually through its early develOpment would have eliminated these problems before 180 they arise. Evaluation of Prgposed Guidelines Not only can it be demonstrated that these proposed guidelines are able to eliminate and/or overcome the major weaknesses related to control reporting but through the questionnaire survey the various advantages and disadvan— tages, both absolute and relative, of the prOposed guide— lines can also be determined. Certainly, any proposed solution to a problem Should be subject to an evaluation by those involved, and the busi— ness firm survey was employed to achieve this evaluation. The respondees were given three set of guidelines, the pro— posed set and two from the literature and asked to evaluate the sets on the following basis: the managers were asked to indicate the set they personally would prefer the account- ing department to follow in their control reports and second— ly to indicate the set which they thought would lead to the most effective control reporting system; the managerial accountants were asked to indicate the set they personally chose to follow or would prefer their subordinates to follow in control reporting. The two other sets given to the respondees were from the literature — one set presented by Heckert and 181 Willson and consisting of fifteen guidelines and the other from Niswonger and Fess and consisting of six guidelines.9 Both are representative of the traditional approach to con- trol reporting guidelines, with the Heckert and Willson set being the most comprehensive set of this approach and the Niswonger and Fess set being a somewhat shorter version. The proposed set of guidelines was presented in outline form. The response of the managers on a personal prefer— ence basis is below. A majority of the managers indicated a personal preference for the set of Heckert and Willson (hereafter referred to as Set One) with the prOposed guide- lines (hereafter referred to as Set Three) chosen second most frequently and the Niswonger and Fess set (hereafter referred to as Set Two) indicated as the least preferred. The actual percentages are as follows:10 Guidelines Chosen Per Cent Heckert and Willson (Set One) 54% PrOposed (Set Three) 27% Niswonger and Fess (Set Two) 18% The managers preference for Set One is explainable. An ex- amination of this set of guidelines reveals the fact that 9See Chapter III pages 96 and 99e100. 10See Chapter VI, page 224. 182 it basically describes desirable characteristics of control reports — that is, an end that management finds desirable. It is submitted g posteriori that the managers failed to distinguish between the end and the means to achieving the end and advocated a set of goals that they felt the man— agerial accountants should follow in reporting to them, rather than the guidelines which would achieve the goals. The actual reasons given by the managers in support of their choices and presented in Chapter V on pages 225—26 are consistent with this explanation. This explanation is also supported by the replies to the eleventh question, which asked the managers to indi— cate which set of guidelines they felt would lead to the most effective control reporting system. The replies were as follows:11 Set Chosen Per Cent Three 58% One 25% Two 17% The replies to this question are almost the reverse image of the replies to the preceding question concerning the ranking of sets One and Three. In this question, the 11See Chapter VI, page 227. 183 managers were specifically concerned with means and over— whelmingly chose the set of guidelines based on the inter— personal communications concepts and guidelines as the set which would lead to effective communication of control in- formation. This in combination with the presentation in Chapter III concerning the ability of these guidelines to eliminate and/or overcome the major weaknesses associated with the control reporting process and reports tends to prove the validity of the hypothesis of this study shown in Chapter I. Illustration 1 on the following page indicates the firm sizes and industries represented by the managers advo- cating the sets in response to Question 12. As is shown, firms of all sizes were represented in each group. The reasons for the managers' belief that Set Three would lead to the most effective control reporting system are listed below and at the end of Chapter VI. According to the managers, the reports would be tailored to their needs, there would be opportunities to discuss the reports, the reports would be integrated into the system, and finally, these guidelines would lead to the achievement of the goals presented in Set One. The managerial accountants' preferences among the 184 ILLUSTRATION 1 FIRM SIZE AND INDUSTRY OF MANAGERIAL REPLIES TO QUESTION TWELVE Set 1966 Chosen Industry Net Sales Three Paper and wood products 700 million Aerospace systems 244 million Mechanized rubber goods 106 million Business machines and computers 2.5 billion Automotive 12 billion Precision parts and tools 239 million Truck and tractor equipment 50 million One Steel 1.2 billion Paper products 633 million Two Ball and roller bearings 241 million Chemicals 126 million SOurces: Dun & Bradstreet, 1968 Dun & Bradstreet Million Dollar Directory and Middle Market Directory (New York: Dun & Bradstreet, 1967), and Moddy's Investor Service, Inc., Moddy's Industrial Manual, June, 1967, (New York: Robert H. Messner, 1967). three sets were tested by the eleventh question of their ques— tionnaire. The first part of this question asked them to ex— amine the three sets of guidelines and indicate which set they would choose to follow or have their subordinates follow in control reporting activities. The results are as follows: Set Chosen Per Cent One 44% Three 38% Two 19% 185 The results Show that the accountants most frequently chose Set One with Set Three a close second. In fact, a nearly equal number of accountants choose sets One and Three. Additional insight into the reasons for the above choices were provided by the responses to the third part of Question Eleven, which asked the accountants to indicate whether or not they would be willing to adopt and implement the set they chose and if so, to indicate what effect or impact this would have on their control reporting system. The responses to this question clearly showed that many accountants chose the set which most nearly resembled the set they were currently following. In fact, all those accountants who chose Set One indicated that they were cur- rently using this set. Hence, there appears to be a strong bias toward Set One in the accountants which adds Signifi— cance to the relative performance of Set Three. The reasons given by the accountants in support of their choices provides insight into the relative advantages and disadvantages of the proposed guidelines. A few ac- countants explained their choice by describing why they did not choose other sets — hence, the relative disadvan- tages of Set Three were indicated as the following: (1) Too broad and detailed for a small or medium 186 sized firm, although perhaps ideally suited for a large firm. (2) Too formalized. (3) Too cumbersome. It appears that the only disadvantages noted arise from the logical comprehensive approach taken toward communication — the same approach that has been called for by the history of trial and error develOpment in this area. The following relative advantages were attributed to Set Three by those accountants choosing it: (1) It is a comprehensive approach allowing inte- gration of each report into the system. (2) It insures that the reports fill the receivers needs. (3) The lines of communication are kept open. (4) It represents an ideal that should be striven for. (5) It minimizes the effect of changes in personnel or the reporting system. (6) It would most accurately and efficiently pro— vide the required and desired information for the user at the prOper time. (7) It provides a basis for controlling the report- ing system. (8) It permits a follow—up to insure that reports are meaningful. A comparison of the above advantages with those presented by the managers Shows a great deal of agreement between the 187 two groups concerning the relative merit and soundness of the proposed guidelines. Obviously, the advantages out— weigh the disadvantages noted. It is significant to note that of the accountants choosing this set, three stated that they would be willing to adopt and implement it; one accountant claims to be following a set closely resembling it currently (both he and a manager from this firm ranked their current control reports as "Very Effective" in conveying control infor— mation); and two would not adopt and implement, one because he lacks the time and manpower currently. In summary, then, the response of both the managers and managerial accountants concerning the set of guidelines resulting from this research effort indicates not only the ability of these guidelines to lead to the effective com— munication of control information through the control re— port and reporting process but also their relative merit and soundness as well as the favorable reaction of the executives toward them. My The above goals and guidelines of the control reporting process are presented below in summary outline form as the summary of this chapter: 188 I. Accountant's Goals in Control Reporting to Divisional Management: A. Main Goal: To shape or influence the behavior of the manager toward decisions leading to finan- cial control of the resources under his command, by changing the cognitive, emotive, and goal structures of his personality through the pre- sentation of factual evidence of his success or failure to achieve control in the past. Secondary Goals: To obtain the manager's interest in and attention toward the report, his acceptance of the validity of its content, and his compre- hension of the meaning of the content as efficiently as possible. II. Program of Guidelines Toward Achieving These Goals: STEP A: 1. OBSERVATION AND DESCRIPTION Observe and identify the following characteristics of the control reporting communication situation: a. The title, frequency of preparation, general format, and content of the control report. b. The accounting department member who is respon- sible for the preparation of the report. c. The manager or managers for whom the report is prepared and transmitted. d. The specific reason for the report's preparation. e. Other personnel who receive a c0py of the report. f. The actual lines of communication used to deliver the report. Record the above information and keep an up-to—date file of the information. 189 STEP B: ANALYSIS 1. Subjectively determine the effect of the following elements and their characteristics on the situation: a. Concerning the originator of the control re— port: his knowledge of the communication process and ability as a communicator; his attitudes toward himself, the value of the report, and the managers; knowledge of con— trol accounting; motives for preparing the report; and relationship to management. b. Concerning the management: his ability to communicate and knowledge of the communication process; his attitudes toward himself and man— agerial accounting for control; his knowledge of control accounting; and his relationship to the managerial accounting department. c. Concerning the actual lines of communication 1 used: their directness and appropriateness. d. Concerning the indirect receivers: their power to influence the control reporting process. STEP C: SYNTHESIS 1. Determine the specific financial information (actual and budgeted costs) that management needs for control. STEP D: COMPOSITION 1. Organize the control report content to meet the communication needs of the managers by: a. grouping the managers into classes by the nature of their function and background; b. determining the communication needs of each group by asking them for their preferences as to control report formats. STEP E: concerned with the control reporting process. 190 c. using their responses to develOp one uniform format for each group to satisfy their com— munication needs. TRANSMISSION Choose the most direct formal channel available to transmit the control report. Consult the groups of managers to determine when they will be most receptive to delivery of the report and attempt to have it arrive at that time. RECEPTION Monitor the report being sent to management to be sure that it is as intended. FEEDBACK Conduct periodic personal meetings between the accounting staff members concerned with the con, trol report and the groups of managers receiving the reports to: a. obtain the managers; evaluation of the suit- ability of their control reports. b. educate the groups on the accounting process used to generate their reports. Use the information generated from these meetings to make the necessary modifications in the control reporting process. The above goals and guidelines are advocated for adOption by those members of the managerial accounting staff The guidelines Should be adOpted as a whole, since they are interdependent and complementary. CHAPTER VI ANALYSIS OF QUESTIONNAIRE SURVEY RESPONSES Introduction As the title of this chapter states, the purpose is to provide a complete presentation and analysis of the empirical data generated by the business firm questionnaire survey. Much of the results of this research effort and its significance has already been presented in the body of the previous chapters at points where the replies to the questionnaire revealed relevant information or provided insight into the tOpics being discussed. The present chapter seeks to complement these previous discussions by presenting all of the responses within one chapter. This chapter also acts as a reference point for previous chapters and acts as supporting detail for some of the general conclusions resulting from the survey and presented in earlier chapters. It Should be noted here that a complete description of the procedure followed in conducting the survey and the general goals of the survey is presented on pages 17 191 192 through 20 of the first chapter, "Introduction To The Study" and therefore, will not be repeated here. Copies of the actual cover letters and questionnaire forms used in the survey appear in Appendix B. The chapter first discusses the over-all response to the questionnaire survey, followed by a presentation and analysis of the responses of the two groups to each question in their questionnaire. Where apprOpriate, com— parisons between the responses to questions of both groups are presented and relationships explored. Response to the Questionnaires The over—all response to the survey can be examined from the three following viewpoints: firm, executive (in— cluding managerial accountant, and manager), and communi— cation situation. Each basis provides a special insight into the significance of the responses, and is described below. Firm Responses The over—all response, on the firm basis is the most significant of all basis, with eighteen firms out of the forty—two contacted represented by replies, yielding an over—all response of 42%. 193 A complete description of each of the eighteen firms that responded appears in Illustration 1 on the following page. Of the eighteen firms replying, three were unable to complete the questionnaires and returned them with a letter explaining the reason for their being unable to complete it. These letters provided useful in- formation and data and hence, have also been considered as replies. Except for small concentrations in the paper and wood products and automotive industries, the replies covered a wide range of industries and a wide range of firm sizes, using sales as an indicator of size. As noted in Chapter I, the survey was aimed at getting a response from a wide range of firms in various industries since con— trol reports are a common element of most industries, and this was achieved. Executive Regponses In terms of responses from individual executives within the firms, 3I% of these executives contacted re- turned a completed questionnaire. In total, eighty-six executives in the forty—two firms should have received a questionnaire forwarded to them from the controller's office. .stwmwz . . .Ahoma Houww>sm WMMQom .xuow BoZV .homa .wsdb .Hmssmz HafiupmSUCH m.>Opoz ..UQH .o0H>Hmm was Nmmhwmwmm1psm .Ahoma .pwouumUMHm w GSQ uxhow Bmzv mwouoonflm quHmS maopfiz u omen HmHHom cOHHHHS uwoubmpmum m can woma .umouuwomnm w com "moonsom 111111111111111111111111 3 WWW H oooHNH mHHQoEousm ma “av 000 m oHHQoEODS< SH ma one muosoonm poow hsflmp 6cm ummz ma om msfiflmHHQSA ma mm mmm mcflmmxowm .maOOP paw mbnmm Gosmflomnm ca .m 3 33m ms N o om usofimflsqo Houomnu osm MOSHE NH mu m: meoHEoso one Mae msflpcflsm Ha SH Hem mmcflsmwfl Hoaaou can Hamm OH m oNH mamoflaoso m % m vvm mEopwhm ounmpflsm can HOHPCOU oommm0H0< w 1 ©.H mm wboDUOHm 0E0: wHHQoS h m 00H mausooum Hogans cwuflcmsomfi poNHHmfloomm o hm oom.H Hmmum m hm mmo muocflmwsoo .mbosoonm Hommm e um arm mmcflfloma woamwo paw mumpsmaoo m mm con muOSOOHm @003 com Momma N mm mom mbosoosm @003 can sommm H mcoflaaflz wGOHHHHS as posoonm new: so mupmsocH EHHm QH ofioosH moamm coma owz wood mmHnuoweao mo Hoboouwn Houomuwm Mouoouem Hoboonen mo .HHQ mo .CHQ mmwebo mooe>uwm Housmfioo mEOummm mHOHuCOU 6 mCmHm _mHm%Hmo< Hmflocmswm nowmdmz powwow: powwow: Cowman: Q — .gl 0 m _ _ < _ wnmusmfioo o mEoumhm mofloomHm Hmaaouuooo u.mm< umaaonusoo,u.mm¢, Wm _H MOHHouuCoo Position B: l. 264 division general managers to establish such prices by agreement. costs, and expenses Identifies the trends of sales, and appraises the significance thereof. Establishes a plan for identification or products whose earnings have dropped below the rate of return on investment set as the objective of the enterprise and makes special studies concerning the future earn— ings of these products on request. On request, provides services of financial analysis to department heads or to division controllers. Supervises his staff. Manager of Plans and Controls Functions Supervises the work of the units under his respon— sibility. Consults with heads of other responsibilities with respect to the development of plans and controls. Observes the manner of preparing long term plans and proposes improvements tO make these plans more useful. Coordinates the activities of his two unit directors with the manager of systems with respect to the preparation of that part of systems' publications dealing with preparation of long term plans, profit plans, and budgets. Coordinates the activities of his two unit directors concerned with the development of plans for infor— mation systems and forms for accounting statements of transactions of the various divisions and departments of the enterprise. Provides the assistant controller for systems and com— puters with the data needed to establish and maintain an information system and forms for accounting state— ments of the transactions of divisions and departments. Position C: Determines the most effective methods to reduce the cost of accounting, office work, and paper work, wherever performed; develops uniform methods to the extent that it is economically desirable. 1. Position D: 10 265 Manager of Systems Functions Supervises the work of the units under his respon- sibility. Manager of Computer Services Functions Provides services of computers and communications for various prescribed purposes. Confers with manager of systems and with division and functional controllers and arranges for programming of computer Operations wherever it is agreed that com- puters should be used. Coordinates the use of communications with computers to facilitate organization plans for centralization of computer services with decentralization of respon- sibility, and to permit gathering Of information at all locations in the enterprise. Studies operations to determine where computers and communications can be used economically. Supervises the work of the units under his respon— sibility. BIBLIOGRAPHY Books and Schmidt, L. A. Practical Controller- Homewood, Illinois: Richard Anderson, P. R. ship. Revised Edition. 1961. D. Irwin, Inc., Management AccountinggPrinciples. Inc., 1965. Anthony, Robert N. Richard D. Irwin, Homewood, Illinois: Aurner, Robert R. and Wolf, Morris P. Effective Communi— cation in Business. Fifth Edition. Cincinnati, Ohio: 1967. Southwestern Publishing CO., Berlo, D. K. 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