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«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

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It works by shifting the mix of activities from unprofitable applications to profitable ones. The demand for activities is a result of decisions about products, services and customers. Costing was the first application of activity-based management. It attempted to remove the distortions caused by traditional methods of overhead allocation based on direct labour. ABC assigned overhead costs to products/services based on the cost drivers of activities and the resources consumed by those activities for individual products. Product-related actions can reduce the resources required to produce existing products/services. Pricing and product substitution decisions can shift the mix from difficult-to-produce items to simple-to-produce ones. Redesign, process improvement, focused production facilities and new technology can enable the same products or services to be produced with fewer resources.

Strategic ABM extends the domain of analysis beyond production costs to marketing, selling and administrative expenses, reflecting the belief that the demand for resources arises not only from products/services but from customers, distribution and delivery channels. Cost information can be used to modify a firm’s relationships with its customers, transforming unprofitable customers into profitable ones through negotiations on price, product mix, delivery and payment arrangements.

Similarly, strategic ABM can be pushed further back along the value chain (see Chapter 9) to suppliers, designers and developers. Managing supplier relationships can lower the costs of purchased materials. ABM can also inform product/service design and development decisions, which can result in a lowering of production costs for new products/services before they reach the production stage.



In this chapter, we have described budgetary control through flexible budgets, variance analysis and cost control. There are, however, concerns about how well these techniques are able to contribute to organizational effectiveness in practice.

In his landmark study, Hopwood (1973) found that despite the sophistication of management accounting systems, they failed to contribute to achieving effective

operations. Although managers:

made extensive use of the accounting information, they did so in a rigid manner, either attributing too much validity to the information or being unaware of its intended purposes, with the result that again, despite the thought and consideration which went into the design and operation of the system, its final value was questionable. (p. 185) Hopwood differentiated three styles of evaluation of budget information. The budget-constrained manager is evaluated based on the ability to meet the budget continually on a short-term basis. The profit-conscious manager is evaluated on the basis of the ability to increase the general effectiveness of operations to meet long-term objectives. In the non-accounting style, accounting information plays little part in the evaluation of a manager’s performance.

A manager who adopts a budget-constrained style takes budget information at face value, has a short time horizon, considering each month’s variances in isolation rather than the trend or the long-term implications. An unfavourable budget variance is an indicator of poor management performance, even though the standards used by the accounting system may be faulty.

By contrast, managers adopting a profit-conscious style realize that accounting information is not a constraint, and that variances are a meaningful guide to action, even though they may be misleading. The profit-conscious manager is more likely to experiment and innovate even though cost may exceed budget in the short term.

A survey by Armstrong et al. (1996) found that accounting controls were not as evident in business units and that ‘whether or not to use any or all of the apparatus of management accounting is a managerial choice largely devoid of consequences’ (p. 20).

Samuelson (1986) argued that ‘senior management often articulate one role for the budget but budgetees then perceive that another very different role may be intended’ (p. 35). Samuelson contrasted the ‘role articulated’ by management for budgetary control (planning), which may be different to the ‘real role’ and the ‘role intended’ by managers (responsibility).


–  –  –

Buckley, A. and McKenna, E. (1972). Budgetary control and business behaviour. Accounting and Business Research, 137–50.

Hopwood, A. G. (1973). An Accounting System and Managerial Behaviour. London: Saxon House.

Kaplan, R. S. and Cooper, R. (1998). Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Boston, MA: Harvard Business School Press.

Samuelson, L. A. (1986). Discrepancies between the roles of budgeting. Accounting, Organizations and Society, 11(1), 35–45.

Turney, P. B. B. and Anderson, B. (1989). Accounting for continuous improvement. Sloan Management Review, Winter, 37–47.

Part III

Supporting Information

In Part III, Chapter 16 suggests an approach to research in accounting, provides some concluding comments and suggestions for further reading.

Four readings are included in Chapter 17 that cover the spectrum of the accounting academic literature and support the most important concepts in the book.

Each reading has a series of questions that the reader is encouraged to think about and discuss with others.

This part also contains an extensive glossary of the accounting terms used in this book.

Research in Management Accounting, Conclusions and Further Reading Research and theory in management accounting Theory is an explanation of what is observed in practice. The development of theory from practice is the result of a process of research. Practice informs theory, which in turn, via various forms of publication and education, can influence the spread of practice between organizations and countries.

Otley (2001) argued that management accounting research ‘has, in a number of respects, lost touch with management accounting practices’ (p. 255), having concentrated too much on accounting and not enough on management. Otley reinforced earlier arguments that management accounting had become ‘irrelevant to contemporary organizations, but worse that it was often actually counterproductive to good management decision-making’ (p. 243) and that we need to ‘put the management back into management accounting’ (p. 259).

Hopper et al. (2001) argued that there have been few British scholars who have achieved innovation in practice, either because of ‘the anti-intellectualism of British managers and accountants... or the marginal role of academics in British policy making’ (p. 285).

Both issues are important, because an understanding of accounting tools and techniques without an understanding of theory has the same problems as theories divorced from business practice. An understanding of the underlying assumptions of accounting and the limitations of the tools and techniques of accounting is essential. If we ignore those assumptions and limitations, we are likely to make decisions on the basis of numbers that do not adequately reflect any underlying business reality.

Theory has been integrated with practical examples in this book to reflect the importance of taking an interpretive and critical perspective on financial reports.

Theory is not developed by academics in ivory towers divorced from practical business situations. It is developed from research, which typically takes one of

two forms:

ž a quantitative study of a large number of business organizations that yields a large database that can be analysed statistically in order to produce generalizations about accounting practice;


ž a qualitative study of a single organization or a small number of organizations through case studies comprising interviews, observation and documentary research that aims to explain accounting practice in the context in which it is situated.

Both methods are valuable in helping to understand accounting practice. The reader is encouraged to look at some of the literature referred to in the chapters throughout this book in order to understand the context of accounting in organizations.

Hopper et al. (2001) traced the development of accounting research through

four approaches:

ž conventional teaching emphasizing the needs of the professional accounting bodies;

ž the application of economics and management science;

ž history and public-sector accounting;

ž behavioural and organizational approaches.

The first approach is that traditionally taken by students of accounting. The second approach relies heavily on econometric and mathematical models, which are outside the scope of this book. This book has taken the view that managers who use accounting information do not need as thorough an understanding of how to prepare accounting information, but rather that they should take a more interpretive and critical perspective. This implies a concern with the behavioural and organizational approach, rooted in organizational history and the unique circumstance of each organization.

Power (1991) described his own experience of a professional accounting education and argued that ‘the lived reality of accounting education shows that it does

not serve the functional ends that are claimed for it’ (p. 347). He described:

the institutionalization of a form of discourse in which critical and reflective practices are regarded as ‘waffle’... of a cynicism and irony among students towards the entire examination process... and the public game that they are required to play. (p. 350) Power (1991) concluded that this ‘may be dysfunctional for the profession itself and for the goal of producing flexible and critical experts’ (p. 351).

Research in management accounting tends to fall into two distinct categories:

ž The normative view – what ought to happen – that there is one best way of doing accounting, that accounting information is economically rational and serves an instrumental purpose in making decisions in the pursuit of shareholder value.

The normative view has been evident in this book through the presentation of accounting tools and techniques in each chapter.

ž The interpretive and critical view – what does happen – the explanation of how accounting systems develop and are used in particular organizational settings.

This view recognizes that people do not necessarily make decisions based on economically rational reasons but have limited information, limited cognitive


ability and are influenced by organizational structures and systems (including, but not limited to, accounting systems) and by organizational power and culture. The interpretive and critical view has been evident in the theories and case studies presented in the book.

This second – interpretive and critical – view is descriptive or qualitative rather than statistical or quantitative. This is a necessary approach to explain the practice of accounting in both its organizational setting and the wider social context in which it exists. This second view has tended to be developed through case study research.

For example, Kaplan (1986) argued for empirical studies of management accounting systems in their organizational contexts, by ‘observing skilled practitioners in actual organizations’ (p. 441). Kaplan described empirical research methods, especially case or field studies that communicate the ‘deep, rich slices of organizational life’ (p. 445) and are ‘the only mechanism by which management accounting can become a scientific field of inquiry’ (p. 448).

Spicer (1992) argued that case study research is appropriate when ‘why?’ or ‘how?’ questions are asked about contemporary events. He classified two types of case study research: descriptive and/or exploratory, and informing and/or

explanatory, arguing that:

the case method, when used for explanatory purposes, relies on analytical not statistical generalization. The objective of explanatory case research is not to draw inferences to some larger population based on sample evidence, but rather to generalize back to theory. (p. 12) Hopper et al. (2001) emphasized the rise of behavioural and organizational accounting research from 1975. In the UK, a paradigm shift occurred that did not happen in the US (where agency theory remains the dominant research approach), as contingency theory and neo-human relations approaches were abandoned for more sociological and political approaches that drew from European social theory

and were influenced by Scandinavian case-based research. Under Thatcherism:

accounting data and the consulting arms of accounting firms had been central to economic and policy debates, involving privatization, industrial restructuring, reform of the public sector, and worries about de-industrialization...

it appeared apparent that accounting had to be studied in its broader social, political and institutional context. (Hopper et al., 2001, p. 276) Humphrey and Scapens (1996) argued for the capacity of explanatory case studies ‘to move away from managerialist notions of accounting and to provide more challenging reflections on the nature of accounting knowledge and practice’ (p. 87) and to its ‘intricacies, complexities and inconsistencies’ (p. 90).

One problem that has arisen in academic research is the variety of theories used to explain practice, which Humphrey and Scapens (1996) believe excessively dominate the analysis of case study evidence. Similarly, Hopper et al. (2001) argued that ‘the research thrust may lie in attempting to integrate and consolidate the


variety of theories and methodologies which have emerged in recent years, rather than seeking to add yet more’ (p. 283).

For example, case study researchers are:

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