Learning Objectives

1
Learning Objectives

• Revisit the definition of Management Accounting
• Purpose of Management Accounting
• Understand the Management Control Process
• Understand the role of Management Accounting in
  controls
• Understand the underlying assumptions of
  traditional Management Accounting
• Understand the various control theories and the
  role of accounting in controls
• Critical evaluation of the control theories

2
Definition

• Management Accounting is concerned with the
  provision of information to people within the
  organization to help them make better decisions
  and control in order to improve the efficiency
  and effectiveness of the business affairs.

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Main Purposes of Management Accounting

• Provide Information to Business
• Help make better decisions
• Improve efficiency
• Help control business activities
• The main focus of this course understand the
  various approaches to control

4
What Control Means

• Control means monitoring activities. Control is
  concerned with ensuring that what was intended
  actually occurs (p.238, Ashton et al., 1995).
• Many forms of Organisational controls are
  available such as production controls, personnel
  controls, accounting controls etc
• Various control theories have been developed by
  the researchers and also view the role of
  accounting in controls differently

5
Rational Control Model - Anthony et al 2001

• Management Control Process is one of the three
  areas of organisational controls. Those are
• Strategy Formulation
• Management Control Process
• Task Control
• The following cyclical steps for Management
  Control Process in a typical organisation
• Strategy Planning
• Budget Preparation
• Operating and Measurement
• Reporting and Evaluation
• Characteristics of a good control process
• Goal Congruence
• Financial Framework
• Rhythm
• Integration

6
Rational Decision Making Process - Anthony et al
2001

• 1. Identify the objectives of the organisation
• 2. Identify potential strategies
• 3. Evaluate alternative strategic options
• 4. Select course of action
• 5. Implement the long-term plan
• 6. Monitor actual results
• 7. Respond to divergencies from plan
• 1- 5 can be identified as long term decisions
• 6- 7 involve short term decisions

7
The Role of Accounting Information in Controls
and Decision Making?

• Accounting provides quantitative integrated
  mechanisms that are available
• Provides aggregated measures of performance
• Combine and communicate organisational activities
• Provides a financial control system along with
  other organisational controls

8
Problems with the Rational Model

• It assumes identification of problem is given but
  it is itself a problem and not merely given.
• This model assumes alternatives are given.
• It takes rather an inward-looking mechanism.
• Contemporary researchers argue that the
  accounting and control system must give due
  consideration to the social, political and
  economic factors within which it operates
• The technical/rational model fails to consider
  the effect of organisational conflicts and the
  divergence of goals in the organisation upon
  decisions

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Behavioural Aspects of Accounting
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Why the Behavioural Aspects of Accounting is
Important?

• Accounting information is designed to serve the
  basis for many important decisions - to assist in
  planning, co-ordinating and controlling complex
  and interrelated activities to motivate people
  involved in decision making processes at all
  levels
• Accounting is about people when you try to answer
  the following questions
• What type of information would you provide and to
  whom? How would you design information for
  control purposes which fit in with other means of
  influencing behaviour in organisational settings?
  How would you provide information to motivate
  superior performance? And how would you manage
  the process of standard setting, budgeting and
  planning, all of which are essentially social in
  nature?
• Thus, we need to understand full variety of
  forces working within and outside organisation
  which influences accountants and accountings
  activities

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The Social Context of Accounting

• (to be distributed later)

12
Some Examples from the Shop floor

• If you expect to get any kind of a price, you
  got to outwit that son-of-bitch! You got to use
  your noodle while you are working and think your
  work out ahead as you go along! You got to add in
  movements you know you aint going to make when
  you are running the job. Remember, if you dont
  screw them, they are going to screw you!
• Remember those bastards are out to screw you, and
  thats all they got to think about. They will
  stay up half the night figuring out how to beat
  you out of a dime. They figure you are going to
  try to fool them, so they make allowances for
  that . They set rates low enough to allow for
  what you do. Its up to you to figure out how to
  fool them more than they allow for.

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Behavioural Research In Accounting

• Accounting researchers called for research to
  study humans behaviour in an organisational
  settings in order to achieve better performance
• Psychology becomes the main reserve of these
  studies
• Theories of motivation have been repeatedly used
  by the accounting researchers
• Five types of theories have been commonly used by
  the researchers which are as follows
• Need-satisfying theories
• Achievement theories
• Motivation/hygiene theories
• Equity theories
• Expectancy theories

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Need-Satisfying Theories (Maslows theory)

• Within each individual there are various needs
  which influence behaviour
• Where one of the needs is absent, the individual
  motivated to behaviour that will lead to the need
  being satisfied
• Needs do not have equal effect
• In different context, different types of
  motivators are needed
• Different individual will be motivated by
  different types of motivators
• How does this understanding of human psychology
  help accountant or managers in order to design
  better control system?

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Equity Theories

• Job satisfaction is an important aspects of
  motivation
• Job dissatisfaction arises when one individual
  feels his/her position is unfair by comparing
  like with like
• The perceived inequalities lead to motivational
  effects

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Expectancy Theory

• This theory is most used in accounting
• This theory incorporate a wide range of features
  and show their interrelationship
• Motivation of work is comprised of various
  factors such as attainable targets, value of
  achieving targets
• It shows that there are major aspects of
  motivation which cannot be directly affected by
  the company as they are intrinsic to the
  individual
• The company should have a reasonable knowledge of
  its staff to motivate them effectively
• Different types of motivational factors at the
  different levels and parts of the company

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Motivation Theories Target Setting

• Motivation theories are operationalised in Target
  Setting i.e. Budgeting. Several findings re
  Target Setting and Motivation are as follows
• Specific hard goals produce a higher performance
• Hard goals produce less overall task-liking than
  easy goals
• Specific hard goals produce more interest in the
  task

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Target Setting and Performance Evaluation

• Hopwood (1972) identified four styles of
  evaluation
• Budget constrained (BC) style where meeting the
  budget was more important than general cost
  control
• Budget Profit (BP) style where meeting the
  budget and cost control were both important
• Profit-conscious style (PC) where concerns for
  costs rather than meeting the budget was
  important
• Non-Accounting style where neither meeting the
  budget nor general cost control were important
• The managers who were evaluated under the BC and
  BP styles reported a range of dysfunctional
  feelings and behaviour, including higher levels
  of job-related tension deteriorating relations
  with superiors less favourable relations with
  peers etc

19
Participation in Target Setting

• Participation in budgeting process is another
  aspects of motivation
• Participation is seen as a panacea for reducing
  dysfunctional consequences.
• Participation requires that subordinate managers
  and employees have some influence in the setting
  of the budget
• Genuine participation is more than mere
  consultation and requires that lower levels of
  management can have a real effect on the final
  budget
• There are two views re participation. One is
  traditional view and the other is improved model
  of participation

20
Two figures

• (to be distributed later)

21
Some findings re participation in budgeting
processes and motivation and performance

• Becker and Green (1962) argued participation
  itself would not produce maximum motivation and
  efficiency. He argued for four combination of
  Cohesiveness of workforce (High and Low) and goal
  acceptance (Positive and Negative)
• DeCoster and Fertakis (1968) shows Leadership
  style is important for improved performance.
  Leadership style emerged out of the budget
  related pressures
• Hofstede (1968) argued participation in target
  setting is necessary but not sufficient condition
  for high budget motivation. The key ingredient in
  all of these is the game spirit how managers
  play the budget game is far more important than
  participation itself
• Otley (1978) argued that prevailing circumstances
  may have more influence on the use of accounting
  information than does the individuals own
  personality and philosophy of management.
• Otley (1978) concluded that there is a need to
  develop a more contingent theory of budgeting
  control based on differences in organisational
  types, the environment in which they operate, and
  the norms and values current both within the
  organisation itself and within the society in
  which it is set (p.146)

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Main arguments of Behavioural Research in
Accounting

• Accounting is about people and peoples behaviour
  must be understood in order to design better
  control system and improved performance
• Identification of quantifiable and hard goals,
  Reasonable target setting, Genuine participation
  and consultation have been put forwarded as
  panacea to solve dysfunctional behaviour of
  organisational participants.

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Problems and Limitations of Behavioural
Understanding of Accounting

• Hard quantifiable budgets often not possible.
  Often goals and targets are not measurable such
  as quality of service in NHS.
• Organization needs a considerable variety of
  information often informal to survive.
• Assumed correct combination of organization
  structure and considerations of people which will
  provide good budgeting systems
• How about environment? What about the
  interactions of changing environment and
  organization?
• Behavioural theorists fails to incorporate the
  wider context of the organisation, social
  conflicts, politics, organisational conflicts and
  managerial choices in setting modes of control.
• These criticisms have led accounting researchers
  to pursue alternative theories

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More Issues re Behavioural Understanding of
Accounting

• How about managers and employees understanding
  of budgets
• Different people can view budget differently -
  depending on their practical situations
• Meaning of budget could be diverse within
  organisations (Read Ashton et. al., p. 285)

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Example

• The introduction of budgetary systems in NHS was
  failed because, it carries different meaning to
  different people so that bore different
  consequences. Here is the example
• The budget introduced by the Department of
  Health and Social Security in NHS was defined as
  traditional budgeting which set targets for
  efficiency and improved services. However, an
  administrator in the district revealed his
  scepticism of this definition and offered his
  ownThe general view is that this is yet another
  tool for cuts within the district. So no matter
  how cleverly one might attempts to disguise this
  in a language that talks about the improvements
  in services, what we are actually talking about
  in this district is achieving less for less money
  in this district, we want to be doing less by
  1993 at less unit cost than we are doing now.
• For this administrator, budgeting meant
  cost-cutting. For the doctors within NHS budgets
  meant a device which would impinge upon their
  clinical freedom.

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Examples, p. 207, Ashton et al., 1995

• In a Jazz music, the role of an jazz arranger
  My job is to provide a structure and then work
  on it within the band. The music is a collective
  concern with ample room for improvisations and
  individual ideas. Working together we create a
  chain reaction and thats what provide the
  thrills.
• Budgeting in a organisation operating within a
  highly uncertain environment should be like this
  -working within some broad structures but with a
  scope of improvisations and ideas

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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 Various contingent factors
warrant different type of control systems in
different situation
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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.
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2. Competitive strategy and strategic mission
Business units pursuing a low cost strategy
should adopt results measures that emphasize cost
reductions and Budget achievement. Business
units competing on the basis of differentiation
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.
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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.
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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.
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5. Knowledge and observability factors Three
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
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A. Knowledge of the transformation process and
the ability to measure output (Source Ouchi,
1979)
34
B. Appropriate type of performance assessment in
relation to cause-and-effect relationships
(Macintosh, 1985)
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C.Influence of programmability of decisions on
the type of controls that should be used
(Emmanuel Et al. (1990) 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.
Behavioural 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.
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Problems with the Contingency Model

• Correlations between contingent variables and
  organisation design are very small and not always
  consistent. It is problematic to attribute
  causality to variables.
• It is theory-less and often data-dredging.
• This theory ignores issues of managerial choice
  and power.
• It neglects processual issues, for example,
  meaning and culture.
• This theory is actually based on a highly
  technical view of organisational choices.
• This approach views an organisation and its
  environment as separate entities, and does not
  completely specify what constitute the
  environment
• The contingency theory fails to incorporate the
  wider context of the organisation and managerial
  choices in setting modes of control (see also
  Child, 1973 Cooper, 1981 Wood, 1979). These
  criticisms have led accounting researchers to
  socio-political perspectives on accounting.