Transcript No Slide Title

MANAGEMENT
AND COST
ACCOUNTING
SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
Part Four:
Information for planning, control & performance
Chapter Seventeen:
Contingency theory and organizational and social aspects of
management accounting
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.1a
Contingency theory approach
• Advocates that there is no one best design of a
management accounting control system (MACS) and
that it all depends on the situational (contingent)factors.
• The contingency theory literature has two strands —
theoretical and empirical.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.1b
Contingent factors can be grouped by major
categories such as:
1. The external environment
• Uncertain and certain
• Static and dynamic
• Simple and complex
• Turbulent and calm
2. Competitive strategy and strategic mission
• Low cost and differentiation
• Defender and prospector
• Product life cycle (Build, hold, harvest and divest)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.1c
3. Technology
• Small batch, large batch, process production, mass production
• Interdependence (pooled, sequential, reciprocal)
4. Business unit, firm and industry variables
• Firm size
• Firm diversification (single product,related diversified and unrelated
diversified)
• Organizational structure
• Industry variables
5. Knowledge and observability factors
• Knowledge of the transformation process
• Outcome (output) observability
• Behaviour (effort)observability
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.2
1. The external environment
•
Evidence to suggest that business units that face higher
environmental uncertainty use a more subjective performance
appraisal approach.
•
The greater the perceived environmental uncertainty the greater the
need for more sophisticated accounting information that has a broad
scope.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.2b
2. Competitive strategy and strategic mission
• Advocated that defenders (Miles and Snow) and business units
pursuing a low cost strategy (Porter) should adopt results measures that
emphasize cost reductions and budget achievement.
• Business units competing on the basis of differentiation (Porter) or those
prospecting new markets should:
1.
Have a more participative decision-making environment
2.
Emphasize rewards based on non-financial factors (e.g. product
innovation, market development) besides secondary financial
measures.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.2c
Evidence to suggest that:
1. Business units following a defender strategy place a
greater emphasis on the use of financial measures for
rewarding managers.
2. Non-financial measures for determining executives’
bonuses increases with the extent to which firms follow
prospector strategies.
3. Businesses following a build strategy rely more on nonfinancial measures of performance for determining
managers’ bonuses.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.3a
3. Firm technology and interdependence
• The nature of the production process determines the type of costing
system (Job or process costing).
• Pooled, sequential and reciprocal interdependencies create the
need for recharging costs to user centres.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.3b
4. Firm size, diversification, structure and industry type
• Positive relationship between firm size and the sophistication of the management
accounting system.
• Related diversification:
1. Elaborate planning and budgeting systems to coordinate activities.
2. Rewards based on group performance
• Unrelated diversification
1. Decentralization and the creation of profit and investment centres.
2. Greater reliance on financial results controls.
• Structure — Interdependence that exists between
responsibility centres determines style of budget evaluation.
• Industry type influences type of control system employed.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.4a
5. Knowledge and observability factors
Four areas examined:
A. Knowledge of the transformation process and the ability to measure
output.
B. Appropriate type of performance assessment in relation to causeand-effect relationships.
C. Influence of programmability of decisions on the type of controls that
should be used
D. Relationship between accounting information and uncertainty about
objectives and uncertainty about cause-and-effect relationships.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.4
A. Knowledge of the transformation process and the ability
to measure output (Source: Ouchi, 1979)
• Above framework draws attention to those conditions where accounting-based control
systems are inappropriate and places MACS within a broader framework of other
organizational control systems.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.5a
B. Appropriate type of performance assessment in relation
to cause-and-effect relationships.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.5b
Assessment situations and appropriate tests
• Efficiency is concerned with achieving a given result with a minimum use
of resources (or achieving maximum output from a given level of input
resources).
• Measures of effectiveness focus on whether or not the action resulted in
the desired goal (i.e.Instrumental tests)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.5
C. Influence of programmability of decisions on the type of
controls that should be used
•
A programmed decision is one where the decision is sufficiently well
understood for a reliable prediction of the decision outcome to be
made:
1. Equivalent to cell 1 in the two previous diagrams
2. Behavioral and output controls are appropriate
•
A non-programmed decision is where one has to rely on the
judgement of managers because there is no formal mechanism for
predicting likely outcomes:
1. Equivalent to cells 2 and 4 in the two previous diagrams.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.6a
D. Relationship between accounting information and uncertainty
about objectives and uncertainty about cause-and-effect
relationships
Figure 17.4 Uncertainty,decision-making and ideal information systems
(Source:Earl and Hopwood,1981)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.6b
• Answer machines – AIS is used to provide solutions to problems (e.g.DCF, LP
and EOQ models).
• Dialogue machines – AIS is used to encourage exploration and debate rather
than providing answers.
• Learning machines – AIS is used to explore problems, ask questions, investigate
the analysable parts of decisions and finally resort to judgement (e.g.sensitivity
analysis).
• Idea machines – AIS used to stimulate and trigger creativity.
• Actual uses:
– Ammunition machines used instead of dialogue
machines (cell 2).
– Answer machines used instead of learning machines
(cell 3).
– Rationalisation machines used instead of ideas
machines (cell 4).
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.7a
Purposes of management accounting
1. A rational/instrumental purpose:
• Assumes that the role of management accounting is to aid rational
economic decision making.
• This role is appropriate when task instrumentality is well understood and
objectives are well understood.
2. A symbolic purpose:
• Accounting information is used to signal to others inside and outside
the organization that decisions are being taken rationally and that
managers in the organization are accountable.
• Managers can find value in AIS for symbolic purposes even when the
information has little or no relation to decision-making.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.7b
3. A political/bargaining purpose:
• Accounting information is used to achieve political power or a
bargaining advantage.
4. A legitimating/retrospective rationalizing purpose:
• Accounting information is used to justify and legitimise actions that
have already been decided upon (i.e.endow past actions and decisions
with legitimacy).
5. A repressive/dominating/ideological purpose:
• Adopts a Marxist perspective and assumes that MAS play a crucial
role in preserving capitalistic and class-based systems of domination.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury