MANAGEMENT

AND COST
ACCOUNTING
SIXTH EDITION

COLIN DRURY

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
 Part Four:
Information for planning, control & performance

Chapter Seventeen:
Contingency theory and organizational and social aspects of
management accounting

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.1a

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.

• The contingency theory literature has two strands —

theoretical and empirical.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.1b

Contingent factors can be grouped by major

categories such as:
1. The external environment
• Uncertain and certain
• Static and dynamic
• Simple and complex
• Turbulent and calm

2. Competitive strategy and strategic mission

• Low cost and differentiation
• Defender and prospector
• Product life cycle (Build, hold, harvest and divest)

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.1c

3. Technology
• Small batch, large batch, process production, mass production
• Interdependence (pooled, sequential, reciprocal)

4. Business unit, firm and industry variables

• Firm size
• Firm diversification (single product,related diversified and unrelated
diversified)
• Organizational structure
• Industry variables

5. Knowledge and observability factors

• Knowledge of the transformation process
• Outcome (output) observability
• Behaviour (effort)observability

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.2

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.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.2b

2. Competitive strategy and strategic mission

• Advocated that defenders (Miles and Snow) and business units

pursuing a low cost strategy (Porter) should adopt results measures that
emphasize cost reductions and budget achievement.

• Business units competing on the basis of differentiation (Porter) 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.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.2c

Evidence to suggest that:

1. Business units following a defender strategy place a

greater emphasis on the use of financial measures for
rewarding managers.

2. Non-financial measures for determining executives’

bonuses increases with the extent to which firms follow
prospector strategies.

3. Businesses following a build strategy rely more on non-

financial measures of performance for determining
managers’ bonuses.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.3a

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.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.3b

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.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.4a

5. Knowledge and observability factors

Four 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

D. Relationship between accounting information and uncertainty about

objectives and uncertainty about cause-and-effect relationships.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.4

A. Knowledge of the transformation process and the ability

to measure output (Source: Ouchi, 1979)

• Above framework draws attention to those conditions where accounting-based control

systems are inappropriate and places MACS within a broader framework of other
organizational control systems.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.5a

B. Appropriate type of performance assessment in relation

to cause-and-effect relationships.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.5b

Assessment situations and appropriate tests

• Efficiency is concerned with achieving a given result with a minimum use

of resources (or achieving maximum output from a given level of input
resources).

• Measures of effectiveness focus on whether or not the action resulted in

the desired goal (i.e.Instrumental tests)

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.5

C. Influence of programmability of decisions on the type of

controls that should be used

• 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. Behavioral 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.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.6a

D. Relationship between accounting information and uncertainty

about objectives and uncertainty about cause-and-effect
relationships

Figure 17.4 Uncertainty,decision-making and ideal information systems

(Source:Earl and Hopwood,1981)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
17.6b
• Answer machines – AIS is used to provide solutions to problems (e.g.DCF, LP
and EOQ models).

• Dialogue machines – AIS is used to encourage exploration and debate rather than
providing answers.

• Learning machines – AIS is used to explore problems, ask questions, investigate

the analysable parts of decisions and finally resort to judgement (e.g.sensitivity
analysis).

• Idea machines – AIS used to stimulate and trigger creativity.

• Actual uses:
– Ammunition machines used instead of dialogue
machines (cell 2).
– Answer machines used instead of learning machines
(cell 3).
– Rationalisation machines used instead of ideas
machines (cell 4).

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.7a

Purposes of management accounting

1. A rational/instrumental purpose:
• Assumes that the role of management accounting is to aid rational
economic decision making.
• This role is appropriate when task instrumentality is well understood and
objectives are well understood.

2. A symbolic purpose:
• Accounting information is used to signal to others inside and outside
the organization that decisions are being taken rationally and that
managers in the organization are accountable.
• Managers can find value in AIS for symbolic purposes even when the
information has little or no relation to decision-making.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
17.7b

3. A political/bargaining purpose:

• Accounting information is used to achieve political power or a

bargaining advantage.

4. A legitimating/retrospective rationalizing purpose:

• Accounting information is used to justify and legitimise actions that

have already been decided upon (i.e.endow past actions and decisions
with legitimacy).

5. A repressive/dominating/ideological purpose:

• Adopts a Marxist perspective and assumes that MAS play a crucial

role in preserving capitalistic and class-based systems of domination.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury