064 management accounting

MANAGEME
NTNT
ACCOUNTINACCOUNTIN
GG

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.

MAIN PURPOSES OF
MANAGEMENT
ACCOUNTING
Provide Information to
Business
Help make better decisions
Improve efficiency
Help control business activities
The main focus -understand the various
approaches to “control”

MANAGEMENTMANAGEMENT
ACCOUNTINGACCOUNTING
Various control theories have
been developed by the
researchers and also view the
role of accounting in controls
differently

RATIONAL CONTROL
MODEL
Management Control Process
is one of the three areas of
organisational controls.
Those are:
1. Strategy Formulation
2. Management Control Process
3. Task Control

The following cyclical steps
for Management Control
Process in a typical
organisation:
1. Strategy Planning
2. Budget Preparation
3. Operating and Measurement
4. Reporting and Evaluation

Characteristics of a
good control process
1. Goal Congruence
2. Financial Framework
3. Rhythm
4. Integration

RATIONAL DECISION MAKING
PROCESS
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

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

WHY THE BEHAVIOURAL
ASPECTS OF ACCOUNTING IS
IMPORTANT?

WHY THE BEHAVIOURAL ASPECTS
OF ACCOUNTING IS IMPORTANT?

Thus, we need to
understand full variety of
forces working within and
outside organisation which
influences accountant’s
and accounting’s activities

BEHAVIOURAL RESEARCH IN
ACCOUNTING
Accounting researchers called
for research to study human’s
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

NEED-SATISFYING THEORIES
(MASLOW’S THEORY)

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

MOTIVATION THEORIES –
TARGET SETTING
Motivation theories are
operationalised in Target Setting i.e.
Budgeting. Several findings re:
Target Setting and Motivation are as
follows:
1. Specific hard goals produce a higher
performance
2. Hard goals produce less overall task-
liking than easy goals
3. Specific hard goals produce more
interest in the task

TARGET SETTING AND
PERFORMANCE EVALUATION

MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTING
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

PARTICIPATION IN TARGET
SETTING

MAIN ARGUMENTS OF
BEHAVIOURAL RESEARCH IN
ACCOUNTING

PROBLEMS AND LIMITATIONS OF
BEHAVIOURAL UNDERSTANDING OF
ACCOUNTING

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

BEHAVIOURAL
UNDERSTANDING OF
ACCOUNTING
How about managers and employee’s
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)

PROBLEMS WITH THE CONTINGENCY
MODEL

• 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
CONTINGENCY THEORY
APPROACH

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.

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.

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.

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.

5. Knowledge and observability factors
Three areas examined:
1.A. Knowledge of the transformation process
and the ability to measure output.
2.B. Appropriate type of performance
assessment in relation to cause-and-effect
relationships.
3.C. Influence of programmability of decisions on
the type of controls that should be used

A. Knowledge of the transformation process and the ability
tomeasure output (Source: Ouchi, 1979)

B. Appropriate type of performance assessment in
relation to cause-and-effect relationships (Macintosh,
1985)

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.

064 management accounting

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