MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY

MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY Management and Cost Accounting, 6 th 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 1 a 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 1 b 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 1 c 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, 6 th 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 2 b 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 2 c 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 3 a 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 3 b 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 4 a 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 cause-and -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, 6 th 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 5 a B. Appropriate type of performance assessment in relation to cause-and-effect relationships. Management and Cost Accounting, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 5 b 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, 6 th 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 6 a 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 6 b • 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 7 a 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury

17. 7 b 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, 6 th edition, ISBN 1 -84480 -028 -8 © 2000 Colin Drury © 2004 Colin Drury