Good Vibrations runs a chain of retail outlets that sells a full range of music CDs. The chain's stores are concentrated in Pacific Rim cities such as Sydney, Singapore, Hong Kong, Beijing, Tokyo, and Vancouver. The company has found that the best way to generate sales, and profits, is to create an exciting shopping environment following a customer intimacy strategy. Consequently, the company puts a great deal of effort into planning the layout and decor of its stores—which are often quite large and extend over several floors in key downtown locations. Management knows that different types of clientele are attracted to different kinds of music. The international rock section is generally decorated with bold, brightly colored graphics, and the aisles are purposely narrow to create a crowded feeling much like one would experience at a popular nightclub on Friday night. In contrast, the classical music section is wood-paneled and fully sound insulated, with the rich, spacious feeling of a country club meeting room.

Managers at Good Vibrations, like managers everywhere, carry out three major activities—planning, directing and motivating, and controlling. PlanningSelecting a course of action and specifying how the action will be implemented. involves establishing a basic strategy, selecting a course of action, and specifying how the action will be implemented. Directing and motivatingMobilizing people to carry out plans and run routine operations. involves mobilizing people to carry out plans and run routine operations. ControllingEnsuring that the plan is actually carried out and is appropriately modified as circumstances change. involves ensuring that the plan is actually carried out and is appropriately modified as circumstances change. Management accounting information plays a vital role in these basic management activities—but most particularly in the planning and control functions.

Planning

An important part of planning is to identify alternatives and then to select from among the alternatives the one that best fits the organization's strategy and objectives. The basic objective of Good Vibrations is to earn profits for the owners of the company by providing superior service at competitive prices in as many markets as possible. To further this strategy, every year top management carefully considers a range of options, or alternatives, for expanding into new geographic markets. This year management is considering opening new stores in Shanghai, Los Angeles, and Auckland.

When making this choice, management must balance the potential benefits of opening a new store against the costs and demands on the company's resources. Management knows from bitter experience that opening a store in a major new market is a big step that cannot be taken lightly. It requires enormous amounts of time and energy from the company's most experienced, talented, and busy professionals. When the company attempted to open stores in both Beijing and Vancouver in the same year, resources were stretched too thin. The result was that neither store opened on schedule, and operations in the rest of the company suffered. Therefore, Good Vibrations plans very carefully before entering a new market.

Among other data, top management looks at the sales volumes, profit margins, and costs of the company's established stores in similar markets. These data, supplied by the management accountant, are combined with projected sales volume data at the proposed new locations to estimate the profits that would be generated by the new stores. In general, virtually all important alternatives considered by management in the planning process impact revenues or costs, and management accounting data are essential in estimating those impacts.

After considering all of the alternatives, Good Vibrations' top management decided to open a store in the booming Shanghai market in the third quarter of the year, but to defer opening any other new stores to another year. As soon as this decision was made, detailed plans were drawn up for all parts of the company that would be involved in the Shanghai opening. For example, the Personnel Department's travel budget was increased, since it would be providing extensive on-site training to the new personnel hired in Shanghai.

As in the case of the Personnel Department, the plans of management are often expressed formally in budgetsA detailed plan for the future, usually expressed in formal quantitative terms., and the term budgeting is generally used to describe this part of the planning process. Budgets are usually prepared under the direction of the controllerThe member of the top management team who is responsible for providing relevant and timely data to managers and for preparing financial statements for external users. The controller reports to the CFO., who is the manager in charge of the Accounting Department. Typically, budgets are prepared annually and represent management's plans in specific, quantitative terms. In addition to a travel budget, the Personnel Department will be given goals in terms of new hires, courses taught, and detailed breakdowns of expected expenses. Similarly, the store managers will be given targets for sales volume, profit, expenses, pilferage losses, and employee training. Good Vibrations' management accountants will collect, analyze, and summarize these data in the form of budgets.

Directing and Motivating

In addition to planning for the future, managers oversee day-to-day activities and try to keep the organization functioning smoothly. This requires motivating and directing people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of a manager's job that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports, are often used in this type of day-to-day activity.

Controlling

In carrying out the controlThe process of instituting procedures and then obtaining feedback to ensure that all parts of the organization are functioning effectively and moving toward overall company goals. function, managers seek to ensure that the plan is being followed. FeedbackAccounting and other reports that help managers monitor performance and focus on problems and/or opportunities that might otherwise go unnoticed., which signals whether operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by various detailed reports. One of these reports, which compares budgeted to actual results, is called a performance reportA detailed report comparing budgeted data to actual data.. Performance reports suggest where operations are not proceeding as planned and where some parts of the organization may require additional attention. For example, the manager of the new Shanghai store will be given sales volume, profit, and expense targets. As the year progresses, performance reports will be constructed that compare actual sales volume, profit, and expenses to the targets. If the actual results fall below the targets, top management will be alerted that the Shanghai store requires more attention. Experienced personnel can be flown in to help the new manager, or top management may conclude that its plans need to be revised. As we shall see in later chapters, one of the central purposes of managerial accounting is to provide this kind of feedback to managers.

The End Results of Managers' Activities

When a customer enters a Good Vibrations store, the results of management's planning, directing and motivating, and controlling activities will be evident in the many details that make the difference between a pleasant and an irritating shopping experience. The store will be clean, fashionably decorated, and logically laid out. Featured artists' videos will be displayed on TV monitors throughout the store, and the background rock music will be loud enough to send older patrons scurrying for the classical music section. Popular CDs will be in stock, and the latest hits will be available for private listening on earphones. Specific titles will be easy to find. Regional music, such as CantoPop in Hong Kong, will be prominently featured. Checkout clerks will be alert, friendly, and efficient. In short, what the customer experiences doesn't simply happen; it is the result of the efforts of managers who must visualize and then fit together the processes that are needed to get the job done.

The Planning and Control Cycle

Exhibit 1-2 (page 8) depicts the work of management in the form of the planning and control cycle. The planning and control cycleThe flow of management activities through planning, directing and motivating, and controlling, and then back to planning again. involves the smooth flow of management activities from planning through directing and motivating, controlling, and then back to planning again. All of these activities involve decision making, which is the hub around which the other activities revolve.