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Management Control- A Pre-Requiste for Survival

Management Control- A Pre-Requiste for Survival

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Published by Navigators Reunion
An ACCA article on management control
An ACCA article on management control

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Published by: Navigators Reunion on Feb 21, 2014
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Management control - a pre-requisite for survival
http://www.accaglobal.com/en/student/acca-qual-student-journey/qual-resource/acca-qualification/p5/technical-articles/management-control.html by
Shane Johnson
01 Oct 00! "ecent years ha#e witnessed major changes in business structure. $n general% today&s businesses are far more comple' in terms of both structure and operation. $ncreasing recognition is gi#en to satisfying the needs of different sta(eholders who include customers% suppliers% employees% local communities% in#estors% lenders and national go#ernments. )e li#e in a world of change. Organisational success is hugely dependent on how well an organisation is able to predict and respond to changes in technology and the requirements of industrial and consumer-buyers ali(e. *hose organisations that are able to accommodate such changes are li(ely to continue to prosper. Organisations that fail to recognise or respond in an appropriate manner to changes that occur in both technology and the mar(etplace may well lose a large share of their sales #olumes and in the worst case scenario may be forced out of business. +usiness units are larger and more comple'% often spread o#er se#eral territories. *he growth of multinational organisations and increased globalisation is widely ac(nowledged and the business en#ironment itself is subject to rapid change. *herefore it is of paramount importance that organisations ha#e effecti#e control mechanisms that will enable management to ensure the sur#i#al of the organisation. ,anagement need to be able to focus on adopting the right tactics and actions in order to achie#e the goals and objecti#es of the organisation.)hile the need for effecti#e management control has ne#er been greater% one should ac(nowledge how critical the design and operation of effecti#e management control systems are and their interface with accounting information systems. One should also be aware that accounting is one of the many control tools a#ailable to management. )hile it may assume a central position in a control structure it will need to be supplemented by other initiati#es.,any accountants subscribe to the #iew that cash is the lifeblood of an organisation and mar(eteers are often quic( to point out that inno#ation is essential in order to ensure organisational longe#ity. owe#er% while one must ac(nowledge the truth attached to these propositions% from an organisational control #iewpoint% the importance of appropriate information to facilitate the control of the sphere of operations must also be recognised. )ithout a constant supply of rele#ant information an organisation would ine#itably flounder. n organisation&s management information system lies at the heart of the information gathering process and the management accounting system will in#ariably be an important  part of this. *he management accounting system produces pertinent information for use by
Management control - a pre-requisite for survival
management since it measures acti#ities in terms of its base and often other currencies. *he multi-currency capability of today&s management accounting systems enables management to maintain more effecti#e control relating to what are #ery often geographically disparate operations.lthough many commentators argue that the fundamental nature of management accounting systems and practices remains unchanged% in today&s business world management tends to use the accounting systems at its disposal in a far more fle'ible manner than pre#iously and also uses financial reports to an increasing e'tent in conjunction with a range of financial and non-financial performance measures.
Contingency theory of management accounting
*he question arises as to whether or not there is an appropriate accounting-based control system which will suit all organisations in all situations. *he answer to this question must be &no&% as organisations #ary in sie% structure and comple'ity. )hat constitutes an effecti#e management control system therefore depends on the circumstances surrounding its use.*he question that management accountants need to answer is &which is the most appropriate accounting-based control system that will best fit the circumstances of our organisation2& $n order to answer this question they need to gi#e consideration to the identification of the most important contingent #ariables and underta(e an assessment of their impact on the design of a management accounting control system. *hese considerations are encapsulated in what has become (nown as &the contingency theory of management accounting&. Otley has pro#ided the following widely-used definition of contingency theory: &*he contingency theory of management accounting is based on the premise that there is no uni#ersally appropriate accounting system applicable to all organisations in all circumstances. "ather a contingency theory attempts to identify specific aspects of an accounting system that are associated with certain defined circumstances and to demonstrate an appropriate matching.&Otley drew attention to the fact that management accountants% in ac(nowledgement of changing circumstances% ha#e always attempted to adapt systems in order to ma(e them more useful. owe#er% adoption of a contingency approach was no#el because it required management accountants to identify and assess the impact of contingent #ariables on the design of a management accounting control system. Otley concluded that the theory was more successful in identifying contingent #ariables than it was in assessing their impact on the design of a management accounting control system. e suggested that this could be partially e'plained by the fact that the theory focused e'clusi#ely on management accounting controls whereas% in fact% organisations use a much wider range of o#erall controls. ,any studies ha#e been underta(en and these ha#e concluded that the following are considered to be the major classes of contingent #ariable:
Management control - a pre-requisite for survival
3eatures within the e'ternal en#ironment of an organisation that affect the design of an accounting- based control system include its degree of predictability% the degree of competition faced in the mar(etplace% the number of different product-mar(ets faced% and the degree of hostility e'hibited.
*he nature of a manufacturing process determines the type of costing system that is required and the e'tent to which costs can be traced to products. *he growth in the number of ser#ice organisations is also significant since a large proportion of the total cost of the ser#ices pro#ided is in the nature of o#erheads. *his% together with the fact that ser#ices are often consumed at the time of purchase% will influence the type of costing system used and the e'tent to which costs can be traced to ser#ices.
Size and complexity
Organisational sie is an important #ariable which affects both structure and control. $t can be frequently obser#ed that as an organisation starts to grow it will initially be organised on a functional  basis. s further growth is achie#ed #ia di#ersification% and the organisation becomes e'posed to a greater number of product mar(ets% many organisations then choose to re-organise acti#ities into semi-autonomous units. *op management is then able to utilise the accounting control system to measure and compare the performance of its di#isions using similar performance measures as those employed to assess the o#erall performance of the firm. $ncreasing structural comple'ity will also lead to an increase in the number of accounting tools used by an organisation% while en#ironmental discontinuity may require new tools to replace those which ha#e  become obsolete.
,ore recently% attention has been focused on the inter#ention of corporate strategy as a contingent #ariable. ,uch research relating to corporate strategy has centred on classifications proposed by 4orter. *he majority of contingency theory research focused on the strategy #ariables cited by 4orter has concentrated on the differences between business units pursuing differentiation and low-cost

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