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The Impact of Contingencies on Management Accounting System Development

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The management of a company needs to develop cost and management accounting systems which will provide adequate information about main impacts on cost characteristics and companies performance. The cost and management accounting practices of the companies can be described by the traditions and necessity to solve urgent problems of everyday management. Hence the management accounting systems (MAS) of the companies operating in the conditions of transition should provide adequate information, which would help managers take decisions at different management levels. The present study focus on the contingencies that influence companies management accounting systems with a particular emphasis on those operating in the transition economies. The paper aims to describe the stages and tendencies in the development of the management accounting issues in companies, analyzing the impacts on Management Accounting System by means of the contingency approach. 2.0 Contingency Theory on Management Accounting SYSTEM

Contingency theory in management accounting describes the situational factors and portrays that management accounting system is contingent upon such factors in reality. Situational factors or contingent factors vary organization to organization and it is impossible to describe and spell out the character of management accounting in the prevalence of each such factor. The circumstances in which the organizations move are distinctive in nature and largely effect the adoption, mechanism, and sophistication of management accounting system. The question arises as to whether or not there is an appropriate accounting-based control system which will suit all organisations in all situations. The answer to this question must be ‘no’, as organisations vary in size, structure and complexity. What constitutes an effective management control system therefore depends on the circumstances surrounding its use. These contingent factors are major contributors towards non-formation of universally acceptable effective management accounting system. As situational factors are unique in nature and are unfeasible in believe and explain in isolation hence they can broadly be categorized in seven foremost areas according to the dominant characteristics of such circumstances. * The environment

* Strategies and mission
* Technology
* Firm Interdependence
* Business unit, firm and industry variables
* Knowledge and observable factors
* Culture
The differing traits of external environment surrounded by an organization effect management accounting systems to a greater extent and mold it towards prerequisite of exterior conditions. External environment can be uncertain or certain, static or dynamic, simple or complex, and turbulent or calm. I suggest that organization with a stable and certain environment rely on financial performance measures particularly budgetary conformance and other type of monetary variables. The management accounting system does not require greater sophistication in such organizations and it works on presupposed targets expected to remain valid for ensuing performance appraisals.. External factors indicate the features of external environment at the level of business and accounting. Environmental factors impact both on the internal characteristics of an organization and its management accounting practice.

For example, * Where there is intense competition on price, the accounting system needs to control costs very closely; * Where completion is based on production differentiation, information about product quality is vital. * Organisation that is continuously launching new products needs more sophisticated forecasting capability from its system than one that is well established in a stable predictable markets. Internal contingencies are determined as organizational aspects, technology and strategy. The effectiveness of performance measurement and evaluation depends on the internal factors and the management accounting practice. Additionally, feedback from the effectiveness of performance measurement and evaluation of the management accounting practice can be considered features within the environment 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 marketplace, the number of different product-markets faced, and the degree of hostility exhibited. ( ii ) Strategies and mission

The adoption of varying corporate strategies and firms’ strategic mission also determine the level of management accounting system to be in place. The strategies may be to lower the cost or differentiation, defending or prospecting and harvesting or divesting. It is observed that with low cost and defending strategies the firms main focus remains towards standardized or limited product lines, lower costs, economies of scale, and ensuring operating efficiency through cost, quality, and service leadership. This focus, through undemanding management accounting information system, necessitates SOPs (standard, operating, procedure) for employees designed to maximize efficiency and emphasizes on cost reduction and budget achievement to motivate them.

On the other hand prospective and visionary firms with differentiation strategies and competing mission tend towards more participative decision-making process and reward employees and managers based on number of appraisal parameters including financial variables such as budgetary achievements and non-financial variables such as product innovation, market development, and growth. The management accounting information systems in such organizations are relatively more advanced and sophisticated with greater devolution and employees’ participation. ( iii ) Technology

The simplicity and complexity of management accounting information system heavily depend upon the classification of technology either for small batches, large batches, process production, or mass production. A relatively sophisticated management accounting information or control system requires high technology mechanism to perform complex tasks and for information flow in process production and mass production environments. The level of technology an organization is willing to set up demonstrates an outlook towards call for a sound management accounting information and control system. Example computer and software facilitate run the organization smoothly which lead to efficient in production. ( iv ) Firm interdependence

The interdependencies within an organization are categorized as pooled, sequential, and reciprocal interdependencies. Pooled interdependencies prevail when different responsibility centers use common resources and share them collectively. The management accounting information system addresses towards protecting the unrelated managers from responsibilities of inefficiency costs associated with sharing the common pool of resources of which they can not be held accountable. It requires a complex management accounting control system to differentiate among related and unrelated responsibility centers.

Contrarily where pooled interdependencies are low and role of responsibility centers is quite clear an unsophisticated management accounting system has been found through practical studies. Sequential interdependencies exist when output of one responsibility Centre is the input of another. Whereas reciprocal interdependencies subsist when two or more responsibility centers depend upon inputs and outputs of each one and vice versa. Such interdependencies necessitate a multifarious management accounting system to assimilate the costs associated with each responsibility Centre and transfer pricing mechanism among them. ( v ) Business unit, firm, and industry variables

The size and structure of the firm and the type of industry in which it operates has an obvious effect on the unfussiness and intricacy of the management accounting information and control system. Researches divulge that bigger organization have been found with more complex management accounting systems perhaps because such organization are capable of arranging and organizing required resources to develop a relatively compound and innovative kind of management accounting system. Control systems have also been watched different in manufacturing organizations which operate largely on standard costs procedures and depend heavily on variance analysis and other advanced costing and controlling variables. However studies revealed majority in service sector with attributes of different cost and responsibility centers and relatively unsophisticated management accounting and control systems. ( vi ) Knowledge and observables factors

The areas falling under this category require a detailed description and deliberation on each one however in-depth analysis of these areas is out of the scope of this article. Nevertheless, as the four broad areas of study under the knowledge and observable factors are quite related to the contingency theory, therefore, it is appropriate to spell out them briefly here. The first relates to the types of control that are suitable in relation to the manufacturing or transformation process and ability to measure output. It explains the fitting of control type such as behavioral, output, or clan in a matrix form keeping in view the intensity of the ability to measure output and knowledge of transformation process.

Similarly second area of study examines the appropriate type of performance assessment in relation to the extent to which cause and effect and uncertainty to the goals are well understood. Cause and effect usually referred to as task instrumentality means the ability to understand transformation process and measurement of output. Third area relates to programmability of the decisions which means the extent to which a decision is sufficiently well understood with respect to the outcome. It describe that how programmability of the decision affects the type of control to be used. The fourth and last area under knowledge and observable factors examine the relationship between management accounting information system and uncertainty about objectives and process ( vii ) Culture

It is essential that a management accounting system is consistent with the value system of the organisation or with the language and symbols that comprise its culture. If not, resistance may well arise and the management control system will lose its existence as people direct their attention to finding work-around in order to buck the system. In much the same vein, new control systems which are perceived as likely to threaten existing power relationships may be resisted by affected personnel. 4.0 Summary and Conclusions

In drawing conclusions on the contribution of contingency it is important to recognize that the process has been one of the evolution. As understanding improves but the following idea is generated why companies continue to use responsibility accounting in spite of the frequently cited dysfunctional behavior associated with responsibility accounting systems. Recognition that changes in management accounting systems involve re-contracting costs (e.g., costs associated with making the changes understandable and acceptable), and that these changes may also require other changes in the organizations structure related to employment contracts, may help explain why management accounting methods are resistant to change.


Kaplan R.S and A.A. Norton, 2005, Advanced Management Accounting, Prentice-Hall, London. Page 116 C.B. Gupta, Management theory and practice, page 20.9 – 20.10

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