The contingency theory of management accounting

MBA CENTER MULTIMEDIA UNIVERSITY

CYBERJAYA

February 2008
Table of Contents
Table of Contents............................................................................................2 Abstract.......................................................................................................... 3 Introduction.................................................................................................... 4 Research Problem...........................................................................................4 Objectives of the Research.............................................................................5 Research Questions.......................................................................................5 Scope of study................................................................................................5 Survey of Literature........................................................................................6 Management accounting ...............................................................................6 Research Methodology ................................................................................23 Discussion, Analysis and Finding..................................................................24 Limitations....................................................................................................25 Conclusion.................................................................................................... 25 References....................................................................................................26

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1 . methodology. definition is discussed. the main intention of this paper is to know more about the new approach in accounting to find a better choice for decision makers in organization. This paper described the contingency theory of management accounting concept as important accounting method. and special for management accounting. Nowadays there is a wider acceptance. growth and investment of this method on management accounting in both manufacturing and service industries and most of the finance managers believe that combine of these methods as powerful business strategy. has been well recognised as an imperative for achieving and sustaining operational and service excellence. The principles.Abstract Just a few years ago. In fact. most finance professionals would have been skeptical if someone had told them that contingency theory as a new method which originating in other area of management could be applied to core financial and accounting processes.

popularity. Many investigations have been made to achieve the best out of these technologies for accounting and finance objectives and their importance and benefits are clear for businesses today and implementing these methods are been becoming more essential and necessary. contingency theory. business leaders across a diverse range of industries and geographies have increasingly recognized and utilized various management methods that help to organizations to achieve better business results. and positive results achieved through the use of these methods and combine of them together in the organizations. Several contingency approaches were developed concurrently in the late 1960s. b) There is no clear definition of the contingency theory of management accounting c) The contingency theory of management accounting implementation take more time and more spend of money for implementing training programs of employees 1 . From the literature reviews. Effectively. with many operating across different cultures. Contingency theory refers to any of a number of management theories. time zones. Today’s global business environment (and that of the future) characterized by increasingly value savvy buyers. and third party partners and suppliers. Finance and accounting as important parts of all businesses is now greatly empowered by utilization of these new methods. regulated operating environments. In this paper I want to describe management accounting and clear its effect on accounting which is concerned with the provisions and use of accounting information to managers within organizations. extended supply chains across multiple organizational functions. it appears that. They suggested that previous theories such as Weber's bureaucracy and Taylor's scientific management had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. and geographies has never been more challenging and critical. the research problems are summarized as follows: a) There are too many available applying solutions for choose a method which make decision making hard to achieve. While the increasing interest.Key Word: management accounting. Research Problem In the new era of business it seems inescapable to apply new methods or combine them together such as management accounting and contingency theory to all aspects of business. Introduction Over the last few years. to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions.

Is it important or necessary for companies to implement the contingency theory of management accounting? Scope of study Organizations should be able to best follow the new technological revolutions. III. IV. 1 . II. To provide a clear definition and understanding of the contingency theory of management accounting for companies and specifically accounting and finance departments. The main focus of this study is to find a framework to help managers choose the best method in their organizations. . To build up a decision making framework for choosing the best improvement technology method. The first step in developing an effective the contingency theory of management accounting in any organization is to decide the appropriate approach towards development. One approach would be simply using an available organization employee and utilizing it for business purposes while another approach would be outsourcing the implementation process or doing the project within the organization by the help of accounting companies who are more specialist and professional in this case. To help companies develop their accounting and financial activities with use the contingency theory of management accounting. To explore the importance of the contingency theory of management accounting for the companies and specifically for accounting and finance departments. Research Questions The purpose of this paper is o answer three important questions: 1. It would widely affect accounting and finance features and accounting would also greatly benefit these technologies. Management accounting is one of the fastest growing aspects of the new industrial era.Objectives of the Research I. What is the contingency theory of management accounting? 2.

state "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization. valuation. managing and reporting risks to the achievement of the objectives of the organization. The Institute of Certified Management Accountants (ICMA). creditors. *Risk Management contributing to frameworks and practices for identifying.Survey of Literature With the growth of new accounting methods. preparation. measurement. Management accounting According to the Chartered Institute of Management Accountants (CIMA). evaluate and control within an entity and to assure appropriate use of and accountability for its resources. which reduces cost and increase profit. the world quickly realized the advantages of these methods. interpretation and communication of information used by management to plan. etc. efficiency auditing. regulatory agencies and tax authorities" The American Institute of Certified Public Accountants(AICPA) states that management accounting practice extends to the following three areas: *Strategic Management Advancing the role of the management accountant as a strategic partner in the organization." Aims 1 . Three issues would be extracted from these articles. They are much more interested in forward looking and taking decisions that will affect the future of the organization. than in the historical recording and compliance (scorekeeping) aspects of the profession. measuring. logistics. Many researchers and papers have been carried out and many articles have been provided regarding to these impacts. (1) to provide a clear definition of the contingency theory of management accounting (2) show the Management accounting practices in selected Asian countries (3) The contingency theory of management accounting implementation strategies. such as information management. Management Accounting is "the process of identification. have created another industrial revolution in industrial and service companies and have greatly influenced all characteristics of business and consequently now all the managers know accounting as the language of business. accumulation. Management Accountants therefore are seen as the "value-creators" amongst the accountants. *Performance Management developing the practice of business decision-making and managing the performance of the organization. pricing. Management accounting also comprises the preparation of financial reports for non management groups such as shareholders. treasury. analysis. marketing.

and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. which are designed with specific aspects of the modern business environment in mind.e.. the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw 1 . and 6. Optimal use of resources. Formulating strategies. the curriculum taught to accounting students) had changed little over the preceding 60 years. in modern factories. subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.g. the number of production runs per month. 2. in the typical modern factory. Lifecycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i. innovative management accounting practices In the late 1980s. since small changes to the product design may lead to significant savings in the cost of manufacturing the product. management accountants’ principal technique was variance analysis. Activity-based accounting is also known as Cause and Effect accounting. despite radical changes in the business environment.1. it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing. and traditionally. Both lifecycle costing and activity-based costing recognize that. even more so. 3. Supporting financial reports preparation. The distinction between ‘traditional’ and ‘innovative’ management accounting practices can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting. 4. most manufacturing costs are determined by the amount of ‘activities’ (e. which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period. perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations. Planning and constructing business activities. before the design has been finalized and production commenced). While some form of variance analysis is still used by most manufacturing firms. Professional accounting institutes. Helps in making decision. Activity-based costing (ABC) recognizes that. Safeguarding asset Traditional vs.. 5. accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and.

2. Consistent with the notion of value creation. The 1 . As a strategic partner and provider of decision based financial information. Role of Management Accountants within the Corporation Consistent with other roles in today's corporation. reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. management accountants are responsible to the business management team while at the same time also have reporting relationships and responsibilities to the corporation's finance organization. The activities management accountants provide inclusive of forecasting and planning. These books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just in time manufacturing and services. such as the provision of a service or the production of a product component. management accountants have a dual reporting relationship. and client profitability analysis. Examples of tasks where accountability may be more meaningful to the business management team vs. sales management score carding. which recognizes the interdependencies of modern production processes and provide managers with a tool that will allow them to measure the contribution per unit of constrained resource for any given product. customer or supplier. see cost accounting). Conversely. the corporate finance department are the development of business driver metrics. Throughput accounting The most significant recent direction in managerial accounting is throughput accounting. The term lean accounting was coined during that period. An alternative view of management accounting A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs. Lean accounting (accounting for lean enterprise) In the mid to late 1990s several books were written about accounting in the lean enterprise (companies implementing elements of the Toyota Production System). One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. (For a detailed description of Throughput Accounting. performing variance analysis.materials. the preparation of certain financial reports. risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. reconciliations of the financial data to source systems. Specific Concepts 1. rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory. management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor.

Management Accounting Tasks/ Services Provided Listed below are the primary tasks/ services performed by management accountants. It is a fundamental principle used in assigning value and revenue attribution to the various business units. Thus. the bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. the business units are able to produce segment financial results which are used by both internal and external users to evaluate performance. Transfer Pricing Management accounting is an applied discipline used in various industries. The treasury department will also assign funding credit or business units who bring in deposits (resources) to the bank. • • • • • • • • Variance Analysis Rate & Volume Analysis Business Metrics Development Price Modeling Product Profitability Geographic vs. Once transfer pricing is applied and any other management accounting entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in the legal entity results). 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. Essentially. 3. The specific functions and principles followed can vary based on the industry. MI. Management accounting principles in banking are specialized but do have some common fundamental concepts used whether the industry is manufacturing based or service oriented.movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn. Industry or Client Segment Reporting Sales Management Scorecards Cost Analysis 1 . Although the funds transfer pricing process is primarily applicable to the loans and deposits of the various banking units. The degree of complexity relative to these activities is dependent on the experience level and abilities of any one individual. transfer pricing is a concept used in manufacturing but is also applied in banking. For example. 520 individuals attended the 2nd annual conference in 2006. transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise. this proactive is applied to all assets and liabilities of the business segment.

the evidence reviewed suggests that the use of contemporary management accounting tools is lacking in the four countries. life cycle assessment and target costing would greatly enhance the ability of corporations to meet global competition. traditional budgeting and cost volume profit (CVP) analysis are no longer adequate to be used as planning and control tools in the present manufacturing environment. traditional budgeting and cost volume profit analysis are said to be less useful in the present manufacturing environment. decreasing emphasis on labor in the production process and global competition may lead to the demise of the above tools. To succeed in the present 1 . The paper concludes with various recommendations for future research.• • • • • • • • • • • Cost Benefit Analysis Client Profitability Analysis Capital Budgeting Buy vs. tools or strategies such as JIT. Through a literature review. Lease Analysis Strategic Planning Strategic Management Advise Internal Financial Presentation and Communication Sales and Financial Forecasting Annual Budgeting Cost Allocation Resource Allocation and Utilization Management accounting practices in selected Asian countries Traditional management accounting techniques such as standard costing and variance analysis. ABC. Various authors have argued that traditional techniques such as standard costing and variance analysis. China and India. advanced manufacturing technologies. TQM. the most important of which is the need for future studies to be grounded in theory. The use of traditional management accounting techniques remains strong. To succeed in the present dynamic business environment. Overall. this study examines the extent to which traditional and contemporary management accounting tools are being used in four Asian countries: Singapore. Further. many have predicted that the shorter product life cycles. process re-engineering. Malaysia.

suggestions for future research and the limitations of a comparative analysis of this nature. Malaysia. Last but not least. Section 2 examines the extent to which traditional management accounting planning and control tools such as budgets. Thus. address Willett’s concern that studies on management accounting practices in this region lag behind studies in financial accounting. Consequently. this study attempts to investigate the management accounting practices in four Asian countries: Singapore. 2. It is hoped that the synthesis of earlier studies will help provide an overview of management accounting practices in the four countries under review. the second objective of this study is to provide a comparative analysis of management accounting techniques used in the four countries. Abdul Rahman and Sulaiman surveyed Malaysian companies.dynamic business environment. the focus of earlier studies examining management accounting practices in these four countries has been on individual countries. tools or strategies such as JIT. This issue is pertinent primarily because it has often been cited that accounting is a product of its environment. the results of this study will shed some light on whether or not the national culture is an important variable in explaining the management accounting practices across the four countries. increased flexibility in meeting customers’ individual requirements. life cycle assessment and target costing would greatly enhance the ability of corporations to meet their objectives. is there a gap between the theory that we teach in our classrooms and management accounting practice? Should a gap exist. activity based costing (ABC). Further. Through a literature review. China. The primary objective of this study is to identify and highlight the management accounting practices in these four countries. For example. process re-engineering. Section 4 concludes with a discussion of the various possible reasons as to why traditional management accounting tools are still being used by a large majority of firms in Asia. thus enhancing the literature in the area of management accounting practices in Asia. companies should link their strategies to quality improvement. If. Firth in China and Joshi in India. standard costing and CVP analysis are used by companies operating in India. Section 3 examines the extent to which contemporary management accounting tools such as ABC. This would. More specifically. reduced lead times. Traditional management accounting tools 1 . It is hoped that the results of this review will help reveal whether or not we are teaching our students what the practitioners actually need. it is not unreasonable to want to examine the extent to which contemporary and traditional management accounting tools are being adopted by companies in emerging economies in Asia. This paper is organized as follows. China and India. TQM. then academics have got to seriously think about restructuring the management accounting curriculum to better reflect the needs of the industry. indeed. then one would expect there to be differences emerging in the adoption of the various management accounting tools by companies in these countries. in part. accounting is shaped by the environment. Ghosh and Chan and surveyed companies in Singapore. Singapore and Malaysia. Thus. target costing and the balanced scorecards (BSC) are used by such firms. inventories and production cost.

the 97 percent indicates an increasing use of budgets by companies in Singapore. over the years. Budgets aid planning and facilitate interdepartmental communication and coordination. Ninety-seven per cent (97 percent) of the multinational firms and 93 percent of the local firms reported that they used budgets. companies are better off without budgets. particularly in the present dynamic business environment. Thus. Further. 97 percent reported the use of budgets. Indeed. In Singapore. as traditionally practiced. an international research consortium of companies. control and performance evaluation tool (to enable managers to make more informed decisions) is widespread in the selected Asian countries under review. especially since budgets can also create a climate of “going by the book” and contribute to a “control by constraint” mechanism. all the 106 companies that said “yes” to budgets reported that they used budgets to evaluate performance. However. for example. As a result. only 83 (76 percent) companies prepared the cash budget. This would. 1 . suppress an individual’s creativity and innovativeness. manufacturing and the hotel sectors. Interestingly. about 95 per cent of the 174 companies surveyed by Ghosh in 1984 used budgets as a financial control tool (Table I). despite the preceding criticisms. budgets may also be used as a tool to evaluate the divisional or managerial performance. the use of budgets. Out of 109 companies surveyed. has not diminished. It is interesting to note that the cash budget is prevalent amongst companies in the retail.1 Budgets Various authors have suggested that there are several advantages to preparing budgets. Another survey conducted in 1996 also revealed similar results. Budgets also provide a means for companies to allocate scarce resources more efficiently. Additionally. the Consortium for Advanced Manufacturing-International (CAM-I). More recently. however.2. They claim that the budgeting process. Ghosh and Yoong’s study comparing the management accounting practices of 64 multinationals and 110 local firms in Singapore also revealed consistent results. argue that the traditional budget acts as a barrier to effective management. management consultants and academics. is simply an exercise in justifying the increase and decrease in the previous year’s spending. in turn. the use of budgets as a planning. overall. there have been numerous criticisms leveled at traditional budgets. In particular.

97 percent of the respondents reported that senior management has the greatest influence and supervisors the least at 29 per cent.Table I Broad areas of management accounting practices in India. Abdul Rahman. on the 1 . only 40 percent (out of the 98 percent who said they used budgets) actually used budgets as a performance evaluation tool. Sulaiman surveyed 61 companies in the industrial and consumer products sectors of the Kuala Lumpur Stock Exchange’s (KLSE) main board and found that 98 percent of the survey respondents used budgets. Malaysia and China Table II Malaysia (all figures in per cent) Malaysian enterprises also report a high rate of use for budgets. Singapore. Abdul Rahman in their survey reported that 98 percent (out of 48 manufacturing firms) of the companies used budgets. With regard to final budget authorization (of a particular department or budget holder). for the Sulaiman survey. In contrast with the Singapore surveys.

there is very limited use of budgets in China. respectively. Table II (Panel A) provides the details. On whether or not budgets should be used as a performance evaluation tool. it must be emphasized that using budgets to evaluate a manager’s performance may lead to dysfunctional consequences. His study also revealed that Indian firms perceived budgeting to be one of the more important management accounting tools in the future. The low percentage may be due to the fact that many 1 . A lower percentage (93 percent) said that they used budgets for controlling costs and 91 percent reported that they used budgets for planning financial position. the figure is relatively high. These results contrast with Drury’s survey of companies in the UK.other hand. Accordingly. firms’ budgeting philosophy and involvement of various levels of managers of 14 firms (seven internationally oriented firms and seven domestic oriented firms) in India. Second. 63 percent of the respondents in both Malaysian surveys agreed that top management should judge a manager’s performance primarily on his/her ability to meet the budget. Anderson and Lanen examined the use of budgeting procedures. When asked to rate its benefits and future emphasis (and subsequently. They suggest that this may be due to the manager’s increased involvement in and understanding of the firm’s strategy as well as decreased government intervention since the liberalization of the Indian economy in 1991. All (100 percent) respondents indicated that they used budgets for planning day-to-day operations and cash flows. In India. Although the percentage from the UK survey is lower than that of the two Malaysian surveys. the only discernible difference between the domestic and internationally oriented firms is the extent to which they used cost data to develop budgets. There. the cash budget had a rank of 5 (perceived benefits) and 1 (future emphasis). Internationally oriented firms seem to put less emphasis on cost data to prepare budgets. Similarly. ranking the means). a mere 23 percent felt that budget holders should not have too much influence in their own budgets. who examined the adoption rate of 44 management accounting techniques. sought the manager’s perceptions on the benefits of such tools and their importance in the future by surveying 60 large and medium size firms. plant managers in their survey tend to be more involved in budgeting than in strategy formulation. Joshi. they appear to be more involved with strategy formulation than budgeting. found only 32 percent of the respondents reported that senior management provides the most important influence in authorizing the final budget. According to Bart. Additionally. While the use of budgets in India. Interestingly. Third. and Singapore remains high. The reverse holds true for divisional managers. the potential for budget games may be high if budget holders are evaluated primarily on their ability to meet their budgets. firms set more accurate budgets in 1996 as compared to 1991. When asked to indicate the extent to which they agreed with participative budgeting. They found that economic reforms and greater selfdetermination on the part of Indian managers had led to an increased use of standard budgeting and planning procedures since 1991. the operational budget was ranked 22 in terms of its perceived benefits and 8 in terms of its future emphasis. An interesting study quoted in Bromwich and Wang on a survey of 81 accountants in China (on the perceived practical value of various management accounting techniques) found a mere 4 percent perceiving operational budgets to be useful. 46 percent of the respondents in Drury’s survey thought so. 58 per cent in the Sulaiman survey and 60 percent in Abdul Rahman’s survey said that budget holders should not have too much influence in determining their own budgets. Malaysia.

respectively. 1 . reported some kind of participation. This is primarily because Chinese state enterprises were essentially production units under the purview of an industrial ministry or an administrative corporation. there will be a heightened interest to evaluate the usefulness of capitalist style management accounting methods and procedures. Only 45 and 49 per cent of the foreign partnered firms and foreign partnered JV firms. as China moves toward a more competitive market economy. is rather limited. 456 foreign partnered JV firms. across the four types of firms. this may not be the case at present.Chinese accountants (before the economic reforms in the late 1970s) did not regard sales or production planning as their responsibility.) Middle management’s participation in the preparation of budgets. He surveyed 535 foreign firms. There is also less attention given to capital budgeting in China amongst Chinese partner firms and SOEs. However. respectively). 432 Chinese partner firms and 370 state owned enterprises (SOE). managers of SOEs have few discretionary decision-making responsibilities. However. The percentages for Chinese partner firms and SOEs remain low (at 20 and 11 per cent. Only about 30 per cent of the 81 accountants in Bromwich and Wang’s survey felt that the capital budget was useful. the cash/working capital budget. Consequently. examining the diffusion of management accounting practices in foreign partnered joint venture (JV) firms. Another study by Firth. Panel A gives the details. the government is the primary provider of capital. This is primarily because in a command economy like China. While the production budget appears to be important to all four types of firms (Table III). also looked at the budget use of various types of enterprises in China. If capital budgeting is undertaken. the sales and profits budgets have moderate use amongst the SOEs and the Chinese partner firms. (Table III. the method most often used is the payback period.

In Malaysia. For example. standard costing is predominantly used for joint product costing and budgeting. in the UK. as an aid to budgeting (74 percent) and for cost control and performance evaluation The results appear to be consistent with Sulaiman et al. Ghosh found that 47 per cent of the Singapore companies surveyed still use standard costing. in the present advanced manufacturing environment. If this is a reflection of the trend in Malaysia.’s (2002) survey. In China. In India. standard costing also aids in product costing. many companies still find standard costing useful for planning and control purposes.2 Standard costing and variance analysis As a result of changes in the manufacturing environment. one would not expect the widespread use of standard costing for planning and control purposes. Added to that is the notion that current production processes are no longer labor intensive. empirical results show otherwise.Table III China 2. As such. standard cost variance reports prepared monthly are deemed less useful as the information provided is stale and out of date for managers to act upon. Similarly. 68 per cent of the 60 firms surveyed still use standard costing. However. This action is inconsistent with the JIT philosophy. the usefulness of standard costing and variance analysis is diminishing. particularly in the current competitive environment. On the basis of the above criticisms. However. the calculation of labor variances may not be as useful today as it was in the past. In the past. Further. About 94 per cent of the Chinese partner firms and 92 per cent of the SOEs use standard 1 . may not hold true. as suggested by various authors. reported that 69 percent of the companies used standard costing. Despite the criticisms leveled at standard costing. in their survey of 214 manufacturing companies. it was reported that 76 per cent of the companies that responded to Drury et al. Though. A later survey by Ghosh and Chan found the percentage to be higher at 56 per cent. Most of the companies used standard costing to compute product cost (74 percent). a material price variance may encourage the purchasing manager to buy in bulk (to take advantage of discounts) which would subsequently result in high inventory holding costs. for example. then the demise of standard costing. standard costing has been regarded as a tool that enhances planning and control and also improves performance evaluation. the percentage is moderately high at 49 per cent in Abdul Rahman’s survey and 70 per cent in Sulaiman’s study. the benefits of operational control are said to be less evident as standard costing may result in dysfunctional behavior. Further.’s (1993) survey said that they used standard costing.

Chinese partner firms and SOEs reported very limited use of standard costing as a control mechanism. selling price and profit. In India. For example.3 CVP analysis CVP is claimed to be one of the most powerful tools that help managers in planning and decision making.4 Performance measurement Performance evaluation is an important function of management accounting. However. The most often cited methods used to measure the divisional performance indicated in our management accounting textbooks are the return on investment (ROI). standard costing has been used to aid budgeting. On the future emphasis of standard costing. perhaps. When asked to indicate the perceived benefits of standard costing on a Likert scale of “1” (no benefit) to “7” (high benefits). Seventy-two (66 percent) companies in the Singapore survey used CVP. CVP helps managers understand the interrelationship between the quantity sold. On the contrary. However. the managers again ranked it 23rd (out of 44) with a mean of 4.37. to the similarities between the standard and normative castings.69. only 36 per cent of Chinese partner firms and 16 per cent of SOEs said that they computed variances as compared to 82 and 70 per cent in foreign firms and foreign partnered JV firms. not just yet! 2. Further. the mean obtained was 4. The latter costing system was adopted from the former USSR in the 1950s. In Malaysia. especially amongst the foreign and foreign partnered JV firms in China. foreign firms and foreign partnered JV firms also indicate high adoption rates (at 87 and 83 per cent.Similarly. the CVP technique may slowly lose its importance. Proponents of the BSC 1 . the assumption that there is no opening and closing inventories of finished goods may also not be realistic. 68 percent of the 60 companies that participated in Joshi’s (2001) survey reported that they used standard costing. standard costing is increasingly becoming a control tool. signal the fact that companies in India are not about to discard standard costing. Ranking the means puts standard costing as 23rd out of the 44 management accounting tools investigated in the survey. however. cost. because of its limiting assumptions. there have been suggestions that relying on accounting related measures is not enough. some managers are of the opinion that the tool may have very little use in practice. the assumptions that selling price and costs remain constant over the relevant range may not be practical in this ever changing business world. Tho reported that 53 per cent of the 214 manufacturing companies in their survey have “often” or “always” used the CVP technique. The calculation of standard cost variances is also prevalent in both types of firms. the residual income (RI) and the economic value added (EVA). More recently. 2. in part. As such. respectively.costing for joint product costing. This may. The high adoption rates for standard costing by both private and SOEs in China may be due. empirical results of the four countries reviewed reveal otherwise. respectively) (Table III). While traditionally. Further. The earlier study by Ghosh reported only a 55 percent adoption rate. Joshi reported a 65 per cent adoption rate amongst medium and large companies in their survey. particularly in companies that have a divisional organizational structure. thus showing an increase of 11 per cent.

Joshi’s study revealed that although 100 percent of the companies that responded to his survey evaluated performance on the basis of ROI. senior corporate managers and chief executive officers. for example. Business enterprises are increasingly focusing on customer satisfaction. Subsequently. Panel B). a sizeable percentage (about 53 percent) also focused on non-financial measures. many companies are currently focusing on both accounting and non-accounting related measures. In India. However. Variance analysis and divisional profit were used to evaluate performance by all the respondents in the survey. 37 percent reported that they also used qualitative measures to evaluate their plant management. Interestingly.have argued that non-financial measures should also be measured. 1 . About 80 percent of the firms surveyed used customer satisfaction to evaluate the performance. financial-based performance measures were still the favored techniques as far as Indian companies are concerned. Eighty percent of the companies reported that they evaluated performance based on customer satisfaction (Table IV.

Of the 61 companies in Sulaiman’s study. As stated elsewhere in the paper. various features of the IBA bear considerable similarity to Western responsibility accounting. may not have significant implications on the techniques used to evaluate managers. Then. Only 17 percent reported that they used ROI to evaluate managers. In China. Additionally. in itself. how the technique is used may differ. Rather. 59 percent of the respondents said they measured customer satisfaction/product quality. This. 26 used share capital and reserves while six companies did not specify the basis used.Table IV India The same is evident in Malaysia. the emphasis is more on the group as a unit rather than the individual orientation of accounting controls of the West. According to Bromwich and Wang (1991). 56 percent (61) of the companies said they used ROI as a management control technique. In Singapore. instead of evaluating the individual using ROI. An interesting feature of the IBA on performance measures and incentive devices within Chinese enterprises is the belief that no individual can perform well without the efforts of his subordinates and colleagues. its use as a performance evaluation tool in Malaysia is rather limited. Out of these. 29 companies (48 percent) reported that ROI was computed for each division/department. The extent to which Chinese firms use responsibility accounting can only be discerned from the survey of accountants cited in 1 . In other words. 32 used net assets. About 76 per cent of the companies in Addul Rahman’s survey reported that they measured customer satisfaction/product quality as part of performance evaluation. As for ROI. the performance of the whole department will be evaluated. there appears to be some kind of traditional responsibility accounting comprising international business accounting (IBA) and normative costing. 13 used gross investment. the latter is a type of standard costing borrowed from the USSR in the 1950s. Thus. The earlier study by Ghosh reported a higher percentage (63 percent) of the companies adopting ROI and 45 per cent of those companies computed divisional/departmental ROI. the two most common bases used were gross investment (45 percent) and net investment (44 percent).

In Malaysia. we have heard criticisms that traditional management control tools are produced too late and at too aggregate a level to be relevant for today’s planning and control decisions. thus indicating a possible increase in its use in the future. Additionally. 3.1 Target costing Target costing is said to provide companies with a competitive edge as it provides continuous improvement both at the design and production stages. 3.2 ABC ABC has gained increasing attention amongst practitioners as a tool to help allocate overheads with a greater degree of accuracy. techniques such as ABC and target costing are said to be more appropriate. It is also said that ABC corrects for the limitations of traditional costing by identifying all the work activities and the costs that go into manufacturing the product. Subsequently. in terms of its benefits. target costing looks promising. The introduction of the BSC helps enterprises to concentrate on both the financial and non-financial aspects of a firm’s activities. target costing and the BSC. The traditional accounting approach where cost allocation is based on 1 . In terms of its future emphasis.Bromwich and Wang. 3. 54 per cent of the accountants perceived responsibility accounting to have practical value. this will help companies. Although only 35 per cent of the firms reported that they have adopted target costing. about 41 per cent of the 214 companies that responded in Tho’s study reported that they had implemented target costing and another 4 per cent said that they would implement target costing in the next five years. amongst the contemporary management accounting tools. The following subsections provide detailed discussions on ABC. Surveys conducted in Singapore and China did not examine the use of target costing. particularly Japanese companies. target costing was ranked number 1. Companies need to focus on non-financial accounting measures too. In that survey. the problems/errors will be perpetuated. to maintain their competitiveness. In India. often when pricing relies on flawed cost data. To better meet the challenges of the present dynamic business environment. survey respondents ranked it fourth. Contemporary management accounting tools Often. the use of accounting measures to evaluate the performance is no more sufficient. The issue of more accurate overheads allocation is pertinent because.

Only 13 percent (eight companies) of the companies surveyed actually used a BSC. In Singapore. For Chinese partner firms and SOEs. does not mean “using more measures”: it means putting a handful of strategically critical measures together in a single report. Recent surveys have reported the increasing use of ABC. the bigger the company. 14 of the 106 companies surveyed said that they used ABC. Atkinson argues that the BSC may be regarded as one of the most significant developments in management accounting. More importantly. the introducers (inventors) of the BSC have focused on four perspectives of a business: the internal business process. In Malaysia. The former reported 15 per cent and the latter 10 per cent. Surveys in Singapore and Chinese did not examine the BSC. . Studies in the West have reported an adoption rate in the range of 6 to slightly more than 50 per cent. This represents 13 percent of the sample. ABC usage was much higher. learning and growth. particularly amongst Western enterprises. It would seem that the use of ABC has not caught on in the four countries surveyed. Thus. Their primary reason for using ABC was that it helped them to identify activities that drive costs. while Abdul Rahman found a mere 4 percent in their sample using ABC. China’s percentage is even lower. 3. an interesting area to address in the future research is the obstacles to ABC implementation in Asian firms.3 BSC The BSC has gained increasing popularity since its introduction by Kaplan and Norton. 1 . Scholars and practitioners alike have argued that relying solely on accounting metrics to evaluate performance may not be adequate.labor hours or machine hours rarely reflects the true cause and effect relationship between indirect costs and individual products. to some extent. customers and financial aspects. Hoque and James found that there is a positive relationship between the size and BSC usage. only 20 percent of the 60 companies surveyed said they had adopted ABC. Joshi’s survey. . in a way that makes cause-and-effect relations transparent and keeps managers from sub optimizing by improving one measure at the expense of the others. In Malaysia. firms need to focus on all the four perspectives. respectively. It has been suggested that the decreasing cost of computing power and the ABC software that complements the software on enterprise resource planning may have contributed to this phenomenon. Thus. the percentage was 40 per cent. the percentage was 2 and 1 per cent. Consequently. Sulaiman had 28 percent of the respondents indicating that they used ABC to allocate overheads. the more practical it is to use BSC to support their strategic decision making. As to be expected. Sulaiman found very little usage of the BSC in the 61 companies that they surveyed. With this in mind. In India. In India. ABC enabled them to understand their activities better. Hoque and James are of the opinion that using a BSC: . Amongst foreign firms and foreign partnered JV firms. He found that large companies tend to use newly developed management accounting techniques to a greater extent than medium sized enterprises. to achieve a balance. supported this contention.

all the studies reviewed here are largely exploratory in nature and the results are generally descriptive. ranking the latter eighth and the former fifth amongst the 44 techniques investigated. (1998) provide various reasons as to why traditional management accounting practices are still widely used in developing countries: the lack of awareness of new techniques.Overall. One primary limitation of this study is the fact that there is limited overlap. there is a need for such studies to be grounded in theory. Similarly. Tho et al. will enable researchers to: . These issues may pose a significant threat to the validity of the results. perhaps. To this end. Finally. Ultimately. Second. detailed case studies on management accounting in practice may have to be undertaken. to conduct each country’s survey using the same instrument and to ensure that the sampling procedures and the sample chosen are consistent across countries. sampling procedures and types of measures may have major implications on the reported findings. it is taking Indians a longer time to adopt new management accounting tools. this is because Indian managers generally avoid risks. This is due to different survey instruments being used in each country. Case studies. Additional factors include the high cost of implementation and the fact that there simply was “no reason to change” from the traditional technique to the new tool. the size of companies surveyed. Thus. As observed in Table IV (Panel B). . describe management accounting systems. Perhaps. Consequently. Another factor may be the high costs involved in implementing contemporary management accounting techniques. 2001). perhaps. standard costing and traditional budgeting over the period from 1987 to 1996. It is time that the exploratory phase of research in this area was minimized. Further. firms across the four countries are consistently 1 . Indian companies perceived that it is rather expensive to implement new management accounting tools (Joshi. explore how those systems are used. a rigorous statistical analysis of the results of earlier studies is lacking. the future emphasis in India is on traditional management accounting techniques. 2001). the evidence reviewed suggests that the use of contemporary management accounting tools is lacking in the four countries studied. the lack of expertise and. in Singapore. future studies should attempt to examine specific factors as to why firms in Asia (with the exception of Japan) are not adopting newly developed management accounting tools such as ABC and target costing. What are the obstacles to implement such techniques? Is culture a predominant factor? As far as this review is concerned. there is an increasing use of CVP. the lack of top management support. more importantly. the respondents envisaged traditional tools such as ROI and variance analysis to be further emphasized in the future. . Results are limited to percentages and frequency. and are quite conservative and tend to be less innovative. according to Scopes. Additionally. attempt to identify best practices and explain the determinants of existing practices. future research on cross-country comparisons should address the matters just discussed. It was perceived by the survey respondents that the benefits accruing to traditional management accounting practices were high (Joshi. For example. One way to circumvent these shortcomings is.

There is no clear definition of the contingency theory of management accounting 2. some textbooks and web sites have been used as well. in order to gain or collect related data. and Google-books databases have been used as well as Yahoo and Google search engines. Important sources for this paper include Emerald. The research framework is shown in figure Main problems: 1. Secondary data have been used in this paper. different sources are used. The contingency theory of management accounting implementation take more time and more spend of 1 money for implementing training programs of employees . the global similarities perspective of management accounting practices is certainly an area that is worth examining. EBSCO. to develop a useful research. 3. Research Methodology Here. Besides. There are too many available applying solutions for choose a method which make decision making hard to achieve. are current management accounting practices being strongly driven by factors at the macro level where considerable global pressures lead to similar practices across countries? Consequently. Thus.taking on board traditional management accounting practices despite the fact that their national cultural values differ (to some extent).

On the other hand. employee numbers. industries vary too much and within each industry organizations are different. organizations. mission. etc and organizations possess different size of activities. For instance. business models and strategies. policy. vision. and many other features. Analysis and Finding There are different sorts of industries. Each company has its own objectives. there are different organizational structures and managerial levels.Need for new accounting method Defined the contingency theory of management accounting To implement the contingency theory of management accounting To reduce the costs of organization and rectify the organization problems Discussion. It is also possible that one organization finds more than one type of accounting methods 1 .

While the original focus of this method was on. 1 . • They don’t combine this method with the other general theory of management used by the organization. beneficial of that to help you to make best decision for your organization. to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions but now we can see the finger print of management accounting in all the area of business andd leveles of management. I think after read of this paper we can have better understanding about management accounting and we will have clear information about the Management accounting practices in selected Asian countries. management accounting lacks a theoretical underpinning and hence it is our responsibility as academicians to bridge the gap between the theory and practice of six sigma.suitable for different objectives of organization and different volume and type of activities are applicable to each of them. • They don’t address policies. Management accounting has made a huge impact on industry and yet the academic community lags behind in its understanding of this powerful strategy. either formal or informal. • They don’t address the organization’s values. Therefore be incumbent on academic fraternity to provide well-grounded theories to explain the phenomena of management accounting in new areas. In other words. Conclusion Management accounting as a powerful accounting method has been well recognised as an imperative for achieving and sustaining operational and service excellence. implementation. Limitations There are major obstacles to the contingency theory of management accounting: • They address management theory as a secondary or tertiary issue. use of accounting information to managers within organizations. This paper defined management accounting as a powerful accounting method and shows the design.

References 1 .

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