Module 2 Lecture Notes

MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR Lecture 1 - Contingency Theory in Organisations Contingency Theory: Class of behavioural theory that claims there is no best way to organise a corporation, to lead a company, or make decisions. Instead, optimal course of action is contingent (dependent) upon internal and external situation - Donaldson (2001): Organisational effectiveness results from fitting characteristics of an organisation, (e.g. structure) to contingencies that reflect its situation - organisation adapts to changing contingencies - Otley (1980): 'no universally appropriate accounting system which applies equally to all organisations in all circumstances' - contingency theory considers how accounting systems might be better implemented by considering how internal and external organisational factors impact organisations, and its accounting systems What factors affect performance? How do we map factors interrelate to improve performance? How do we address change in these factors? Contingency Factors Environment * Environmental stability contingency aligns to mechanistic structure of organisations - High environmental stability (low uncertainty) - mechanised/standardised (M&S) - Lower environmental stability (higher uncertainty) - more flexible structure that allows for reflexive decision making (an organic structure e.g. Bayer Pharmaceuticals) - Must be careful when conceptualising uncertainty (i.e. uncertainty at a unitary level may not translate to uncertainty at an aggregate level) Organisation Size * Organisation Size affects bureaucratic structure - level of centralisation - Smaller organisational less formal, less rule governed, more centralised (Microsoft, 1979; Google, 2003) - Larger organisations are more formal, more rule governed and less centralised (Microsoft, 2010; Google, 2010) Organisation Strategy * Organisation Strategy affects divisional structure (i.e. product/service diversification) - Divisional structure suits diversified strategy i.e. focuses on many products/services - efficiency maximised if each division focuses on one product/service (J&J) - Functional structure suits undiversified strategy i.e. only one product/service is offered, - firm yields efficiencies through specialisation (Kia Motor Corporation) Aim is to obtain fit between contingency and structure - if firm experiences change in any of 3 contingencies, corresponding change in structure required. Criticisms of Contingency Theory Critics claim not really a theory but an expression of how theories inter-relate with one another - method for organising theory Core Contingency Theory Paradigm: (1) Association between a contingency and the organisation structure being considered (2) Contingency determines organisation structure - if organisation changes contingency, must change structure (3) There is a desirable fit between different contingencies and each level of structure, which leads to higher performance - Performance can be measured by effectiveness, efficiency, employee/customer satisfaction, innovation rate, goal attainment MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR Areas of Contention in Contingency Theory Research * Technology vs Size - Firm expansion through technology argued to reduce size as removes non-value adding labour, but contingency theory argues big firms more decentralised - more employees - Technology improvement can reduce bureaucratic structures - keep an organisation organic, though it engages in more activity, but contingency theory claims greater size - greater mechanistic controls and bureaucracy * Population Ecology Effect - Does adaptation come from planned change or natural changes in population membership over time i.e. are organisations rationally developed or unpredictably affect by corporate ambitious of key individuals? Types of Contingency Relationships Additive Form * Each independent variable separately and individually affects the dependent variable, (the effect is not dependent on any other independent variable) Intervening Form * The effect of an independent variable (X1) on dependent variable (Y) occurs through X1's impact on another independent variable (X2), and that independent variables' subsequent effect on the dependent variable (Y) Independent Variable Interaction Form * How much one independent variable (X1) affects dependent variable (Y) is conditional on another independent variable (X2). Similarly, how much X2 impacts (Y) conditional on X1 Moderate Variable Interaction Form * When relationship between X and Y is affected by MV, which is unaffected by X or Y Cyclical Recursive * Occurs when X1 today affects the value of X2 in the future, denoted as X2t+1. This change then affects X1t+3 which then affects X2t+4, etc * Often observed in competitive settings, even within organisations e.g. marketing expenditures today impact sales tomorrow, which then allows for an increase in marketing expenditures thereupon, further growing sales, etc Reciprocal Non-Recursive * Exist when causality between both X1 and X2 factors are difficult to distinguish, and do not occur across a measurable time series e.g. does trust between supplier and customer cause profit or vice versa? MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR READING 1: Contingency Theory of MA: Achievement & Prognosis (Otley, 1980) The Contingency Approach * No universally appropriate accounting system that applies equally to all organisations in all circumstances Contingency theory must identify specific aspects of an accounting system associated with certain defined circumstances and demonstrate an appropriate matching * Idea it all depends often used as means to avoid rather than address design implication The Emergence of Contingency Formulation Conflicting results which could not satisfactorily be resolved within a universal framework, have been source of stimulus for development of contingency formulations The Effect of Technology * Different production techniques (e.g. unit production, small batch, large batch) influence design of internal accounting systems - determine which information can be provided - E.g. job-order costing measure of production well defined (i.e. limited cost allocation) whereby process costing requires extensive cost allocation - the level of detail that unit & small batch production provide not available in process production * Complexity of tasks relevant to defining appropriate financial control structure * Task variety & knowledge factors affects design of appropriate management info systems The Effect of Organisation Structure * The structure of an organisation (degree of inter-dependence between cost/profit centres) affects the appropriate style of budget - Low interdependence - budget-constrained i.e. meeting budget most important factor - High interdependence - profit-conscious style LR effectiveness also considered. * Degree of interdependence is influenced by technology and organisation's structure The Effect of Environment * The sophistication of accounting and control systems influenced by intensity and type (price, marketing or product) of competition a firm faces Influence of Organisational Theory * Contingency theory of management accounting based on prior development of contingency theory of organisations The Content of Contingency Theories of Management Accounting Empirical Studies * Budget-related behaviour contingent upon various aspects of structure (centralisation, autonomy e.g. decentralised & structured in stable environment suited for budget control * 3 major contingencies affect performance of sub-units within an organisation: (1) Interdependence (2) Environmental relationships (3) Factors internal to the subunit of interest. * Financial control structure affected by complexity of tasks it faces via the intervening variables of organisational structure * Technology introduced as major explanatory variable of an effective accounting information system - high correlation between technology information system style Theoretical Formulations * Researchers hypothesise different contingent variables - organisational characteristics, decision-making style, environment, technology, degree of structural complexity of enterprise, degree of turbulence A Framework for Evaluation of Contingency Theories of Management Accounting MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR Implications for Research Accounting as Part of a Control System * Difficult to isolate effect of single control in accounting as all act as part of package * Same contingent variables that are likely to be important in organisational design are * 4 characteristics of controlled processes necessary for effective organisational control: (1) Specification of an objective (2) A measure of the degree of attainment of that objective (3) A predictive model of the likely outcomes of control actions (4) The ability and motivation to act Generally (1) & (2) receive sufficient attention, generally negate (3) * Uncertainty as contingent variable is highlighted - unpredictability of factors in control framework are important in determining organisation success Organisational Effectiveness * Objectives are an essential part of contingency framework as form criterion against which effect of different configuration of controls must be evaluated * Vital to question nature of organisation objectives and stuff processes at which they are arrived at/whom they are influence * Neglect of conceptualising and measuring organisation performance on effectiveness * No agreed criteria of what 'effectiveness' is Important in developing contingency theory of AIS effect of information on numerous dimensions of effectiveness is measured rather than arbitrary choice of single one Conclusions * Reservations regarding contingency theory: (1) Nature of appropriate contingent variables not yet been made clear (2) Neglect of explicit consideration of organisational effectiveness (3) Contingency theory of org. design weak - link with org. effectiveness tentative (4) Highly interconnected nature of components of control package suggest MA information systems cannot be studied in isolation from wider context MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR READING 2: Towards Integrated Contingency Framework for MAC Sophistication: Scope of Accounting Instruments on Dutch Power/Gas Companies (Tilemma, 2005) Introduction * Recent push for implementation of sophisticated management accounting systems (MAS e.g. ABC, balanced scorecard) however not always successful * Failure blamed on implementation-related factors but often due to general characteristics of organisations/environment - need to adopt contingency theory perspective * Accounting instrument classified into decision making instruments (e.g. information elements used for decisions on selling prices/capital investment) and planning & control instruments (e.g. budgets, statements of actual outcomes, performance targets) Paper aims to answer questions: (1) Which contingency factors influence the scope of accounting instruments? (2) How these contingency factors interact with each other and with the various characteristics of organisation and their environment? (3) Which mechanisms explain the scope of accounting instruments? Literature Overview * Previous focus on relationship between uncertainty & scope of accounting information * High levels of perceived environmental or task uncertainty associated with use of broad scope accounting information; combination of uncertainty & broad scope accounting information associated with positive organisational/managerial performance * Other studies focused on influence of strategy, centralisation, interdependence span of control but gave inconsistent results Theoretical Framework (Compromised of 2 Parts) (1) Scope of Accounting Information: * Classify accounting instruments according to level of sophistication based on scope * Scope - dimension of focus (events within or outside firm), quantification (financial or non-financial terms), time horizon (historical or future) - Narrow Scope: Retrospective financial information; non-financial information and intuition, predicted future financial information based on past trends - Average Scope: Financial & non-financial information on future events based on plans for internal operating activities - Broad Scope: Financial & non-financial information on future events based on plans for operational activities informed by expectations about (changing) external circumstances (2) Contingency Theory Perspective Used to Explain Scope of Instruments: * 4 Levels of Analysis: (1) Beyond-organisation - national culture, industry market structure (2) Organisation - strategy, structure (3) Subunit - operating-company environment, business-unit strategy, department size (4) Individual - individual knowledge * Contingency factors may influence average scope of accounting instruments used at level (e.g. organisational-level contingency affects average scope of all accounting instruments used in organisation) or any level below (subunit & individual level) * Contingency factors at different levels may be related (e.g. increasing uncertainty at beyond-organisation level may affect organisational structure at organisation level) MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR Results (refer to contingency diagram in paper- much easier to understand visually) 9 Contingency Factors Found (Classified by organisational level analysis) * Beyond Organisation - Accounting innovations & trends (e.g. developments - use of BSC - broad scope) - Regulation (change in regulations - change in scope of accounting used to set electricity tariffs; previously broad scope became average scope) * Organisation and Subunit Levels: - Importance of financial objectives (important - broader scope; degree of financial importance depends on extent to which organisation/subunit is marketdriven, effort it needs to avoid financial difficulty, age - younger, less focus on financials) - Interactions between organisations & organisational parts (use of guidelines) * Operating-Task Level: - Visibility of operating tasks (more visible - broader scope) - Complexity of operating tasks (complex - narrow scope - performed by professionals who are more interested in professional measures than financial) - Dynamism of environment (dynamic - less predictable financial consequences of operational activities - production of average/broad scope difficult but narrow/average scope less effective; complicated relationship) * Accounting-Task Level: - Significance of financial consequences (more significant - broader scope) - Clarity of financial consequences (when whether consequence will be positive or negative is clear - narrow scope) Conclusion * Overlapping average and broad scope requirements: - Institutions that do not impose narrow scope - Financial objectives are important - Simple and visible operating tasks - Significant but unclear financial consequences * Average scope requirements: - Stable environment - Variation in nature and size of operating activities * Broad scope requirements: - Dynamic environment - Operating activities that are well-established * Further research could focus on: (1) Whether the contingency framework developed applies to other organisations (2) Contingency factors on individual level of analysis MODULE 2: MANAGEMENT ACCOUNTING AND HUMAN BEHAVIOUR READING 3: MCS Design Within its Organisational Context: Findings from ContingencyBased Research and Directions for the Future (Chenhall, 2002) * Study limits focus to contingency-based theories developed from functionalist perspective - MCS used to assist managers achieve desired organisational outcomes * Appropriate design of MCS influenced by context (e.g. external environment, technology, organisational structure, size, strategy, national culture) in which they operate Meaning of MCS * Management Accounting (MA): Collection of practices (e.g. budgeting, product costing) * MA Systems (MAS): Use of MA to achieve some goal * Management Control System: Term that encompasses MAS and other controls - Evolved from provision of formal/financially quantifiable information to broader scope - Conventionally perceived as passive tools but sociological orientation sees it as more active - contingency-based research perceives as passive * Organisational Control: Controls built into activities and processes (e.g. JIT) * When studying MCS one of two approaches can be used: (1) Build on existing areas, trying to extend overall theories (2) Researchers may choose to evaluate new and novel ideas as they come into practice * Both approaches important as: - MCS change over time - important to study implementation and success of new tools - Old MCS lose relevance - research may not have significant practical applications - Dangers of studying accounting MCS in isolation - consideration of other organisation control systems imperative given interactive nature of MCS with other systems - One suggestion is to classify organisational controls as organic or mechanistic * Potential issue in MCS research is assignment of dependent and independent variables (1) Classify performance as the DV and MCS as IV - Criticised as given rational economic theory, organisations will always choose the MCS that leads to the highest performance - nullifying meaningful results (2) Consider contextual variables as IV and MCS as DV (3) Examine implementation of MCS and link it to performance - Cautions that adoption does not necessarily lead to actual use - clouds link between performance and implementation of MCS Contextual Variables and MCS External Environment * Propositions: - Uncertainty leads to open/externally focused MCS - Hostility and turbulence associated with reliance on formal controls - Where MCS focused on tight financial controls are used in uncertain environments they will be used together with emphasis on flexible, interpersonal interaction Generic Concepts of Technology * Defines technology as hardware, materials, people, software, knowledge * Most studies examine complexity, task uncertainty (associated with functional departments), interdependence (between functional areas) as contingent factors * Propositions: - When technologies are standardised/automated, more formal and traditional MCS - The more uncertain the task, the less formal and traditional the MCS - More interdependent the technologies, the less formal and traditional the MCS Contemporary Technology * More recent MA technological advances (JIT, TQM, FM) 

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