Introduction to Management Accounting - Essay Example

?Discuss, using empirical evidence, the various motivational theories which a management accountant may consider when setting a budget. Which of these theories do you consider to be most relevant to the management accountant? 1. Introduction The use of theoretical frameworks for explaining the conditions in the business environment is a common practice especially when complex issues need to be evaluated. On the other hand, in areas where different theoretical approaches have been established the choice of the most appropriate framework can be a challenging task. The simultaneous use of empirical evidence can increase the credibility of the choices made. Current paper tries to identify the motivational theories available to a management accountant who has to set a budget. The above task has been proved difficult mostly because the existing empirical evidence on this issue is limited – probably because of ‘the lack of publicly available data but also because of the lack of incentives of researchers for studying the specific subject’ (Zimmerman 2001, p.411). In any case, effort has been made so that empirical evidence referring to the particular issue to be incorporated in the paper along with the secondary material available. It has been proved that a management accountant may choose among various motivational theories when having to develop a budget – his choice cannot be restricted or standardized. However, there are certain criteria, for instance the personal characteristics of the management accountant or the characteristics of the working environment that may favour a particular motivational theory compared to another one. 2. Theories on motivation – presentation and analysis In order to understand the potential use of motivational theories in management accounting it would be necessary to refer to the context of ‘motive’, as the basis for the development of motivation, a process causing the willingness of individuals to be engaged or not in a particular activity or to put all their efforts in the achievement of a specific target. In accordance with Singla (2011) motive is ‘the latent power in a person which impels him to do a work’ (Singla 2011, p.243). Different approaches have been developed in literature regarding the explanation of motivation, as a factor influencing the performance of employees in businesses of different characteristics. In accordance with the reinforcement theory, each human is likely to decide considering the consequences of his behaviour (Gitman et al. 2008). Knowing the results (outcomes) of his behaviour in advance, an individual can plan his behaviour accordingly so that the negative consequences are avoided and, if possible, the expected benefits are achieved (Gitman et al. 2008). In the context of business environment, the reinforcement theory could have the following explanation: employees are promised specific rewards if they reach a particular level of performance; from a similar point of view, employees may be given a warning that if they fail to reach a minimum level of performance, they will be punished by a decrease in their payment or the deduction of certain of their common benefits – for instance, the monthly subscription to leisure activities and so on. The punishment when used as a threat for pressuring employees to reach a particular level of performance is a policy based on the reinforcement theory, as explained above. In the study of McKenna (2000) reference is made to the theory of McFarlin and Sweeney (1992) on human motivation; in accordance with the above researchers, within modern businesses the motivation of individuals is depended on the following two factors: the distributive justice and the procedural justice; the former is reflected in the payment of equal salaries of employees reaching the same level of performance within the same organization; the latter means that within each organization the measures taken for the rewarding of employees in all departments are similar (McKenna 2000). The existence of distributive justice and procedural justice within organizations is incorporated in the equity theory, which emphasizes on the promotion of employees’ satisfaction and trust. The basis of the equity theory is the perception of individual (employee) whether he is treated equally to other individuals (employees) working or living in the same environment. The criteria on which the equity theory is based are made clear in Figure 1 – Appendix. The equity theory, as described above, has certain gaps not explaining adequately the potentials of employees to increase their involvement in their organization’s daily activities. The control theory of human motivation, as developed by Lord and Hanges in 1987, can be used for covering the specific gaps. The control theory is based on the following principle: employees’ motivation can be increased only if employees set specific goals; furthermore, employees have to inform – periodically - their supervisors on the achievement of these goals (Lord and Hanges, 1987, in McKenna 2000, p.113). In other words, goals and feedback are the key features for the increase of human motivation within modern organizations. One of the most known theories in the field of human motivation is the expectancy theory of V. Vroom (see Figure 2, Appendix). The specific theory reflects ‘the process people use to evaluate the likelihood that their effort will yield the desired outcome and the degree to which they want the outcome’ (Boone et al. 2009, p.306). In other words, the expectance theory is based on two criteria/ requirements: a) that people can evaluate the relationship between their behaviour and a particular result and b) that people actually want the specific result – otherwise there would be no point for rewards to be established in regard to this result. In accordance with Boone et al. (2009) the expectancy theory is particular valuable, being related to the following benefits: a) managers know in advance which benefits would be welcomed by employees; so that they can propose the rewards which are most likely to increase employees’ motivation, b) the support provided by managers to employees for the development of daily organizational activities is improved since managers are aware of the actual needs and potentials of employees. The relationship between rewards, as motivators for the increase of employee performance, and employee satisfaction has been proved through most theories developed in the particular field – as indicatively presented above. However, the motivation/ hygiene theory of Herzberg (Figure 3, Appendix), developed in 1950, revealed another aspect of human motivation: human motivation is not guaranteed each time that particular factors exist – referring to factors commonly related to employee performance, such as salary or work safety. In the research developed by Herzberg in 1950 it was made clear that certain factors, if exist, they can cause positive feelings to employees; on the other hand, if these factors do not exist, then they do not necessarily result to negative feelings for the employees (Boone et al. 2009). The above research was developed among accountants and engineers (Boone et al. 2009, p.305). Using this finding, Herzberg came to the conclusion that human motivation is likely to be related to two different types of factors: the hygiene factors, the lack of which may not necessarily lead to the decrease of employee performance, for instance, ‘the working conditions, the personal life, the work safety and so on’ (Boone et al. 2009, p.305). On the other hand, Herzberg understood that there are factors, which, when they exist, they are likely to lead to significant increase of employee performance; these factors are called motivational factor, for instance ‘achievement, recognition and responsibility’ (Boone et al. 2009, p.306). A similar theory to that of Herzberg is the Hierarchy of Needs theory of Maslow. In the context of this theory (see Figure 4, Appendix), the needs of each individual can be set in hierarchical order; at the basis of the hierarchy, basic physiological needs (like food and sleep) are likely to be incorporated. As moving higher to the pyramid, other needs appear: the needs related to safety, those related to belonging and those reflecting the esteem – both for one’s self and for others (Figure 4, Appendix). At the top of the pyramid is the self-actualisation; it is that personal status that shows the ability of the individual to achieve his goals. The above theory of Maslow is based on the following principle: the efforts of individuals to cover their needs are alternated while working in a particular organization. First, individual are likely to cover their physiological needs and then all other needs, as explained previously, will be covered, if possible (Parhizgar 2002). As explained by Maslow, the above theory highlights the following fact: the needs of people are likely to be covered gradually; the needs of each stage are addressed only if the needs of the previous stage are covered. In other words, if basic needs – which are located at the bottom of the hierarchy – are not covered then the needs of the upper levels – especially the needs for self-actualisation which are at the top of the relevant pyramid – are not expected to be addressed (Maslow et al. 2000). It should be noted that the response of employees to management policies aiming to enforce employee motivation is not guaranteed; the theories explaining the trends in human behaviour regarding motivation just present a general framework of human reactions to particular organizational practices. There is always the chance that these reactions are differentiated from their common form, especially when the internal or the external organizational environment is characterized by severe turbulences. The above view is reflected in the X Theory and the Y Theory of Douglas McGregor; these theories reflect two different aspects of human behaviour within a particular working environment. The X Theory is based on the view that humans, by nature, dislike work (Pride et al. 2011). Therefore, in order for individuals to perform appropriately in their working environment they need to be closely monitored/ supervised as of all their tasks (Pride et al. 2011). The Theory Y reflects a contradictory view: people do not, by nature, dislike work; however, they are more likely to achieve a high performance when they are committed to certain goals (Pride et al. 2011). 3. Which motivational theories would be most valuable for a management accountant when having to set a budget? The motivational theories presented above can be used for explaining human behaviour within modern organizations. However, the appropriateness of each theory for a particular organization is not guaranteed; rather, the characteristics of the relevant industry have to be reviewed and evaluated, aiming to decide whether a specific theory is applicable or not. The findings of empirical research, as developed in the specific field, can help to identify those motivational theories that are most appropriate for a particular sector. A management accountant who tries to set a budget could primarily use the Herzberg theory – hygiene/ motivational theory; as already explained Herzberg developed this theory based on the findings of a research developed among accountants and engineers. So, the specific theory would be appropriate for increasing the motivation of individuals working in the management accounting sector. In accordance with the findings of the empirical research related to the particular subject, a management account could choose among different approaches for increasing the level of motivation involved in the development of a budget. At a first level, Francis (2001) notes that an accountant has the advantage of choice when having to develop a particular task; this advantage is described as ‘an accounting choice’, meaning the option to choose among different strategies for completing an accounting task (Francis 2001, p.310). From this point of view, the motivation for choosing a particular approach – instead of another, has two different forms: it can be necessarily related to the outcome - when a purely accounting decision has to be taken - or it can be irrelevant to the outcome when the decision involved is not a purely accounting decision (Francis 2001, p.311); the above type of motivation is described as ‘an asymmetry motivation’ (Francis 2001, p.314). On the other hand, Flacke (2005) tried to check the potential influence of entrepreneur on management accounting. It was argued that management accounting could be implemented using different methodologies across SMSs, being influenced by the choices of the leaders. It can be assumed that motivational theories, as part of the strategic process, can be used within each organization at the level that they reflect the leadership style of the entrepreneur involved. An empirical research, survey, was developed between June and August 2004; 167 companies returned the questionnaire completed – a rate of return of 15% from the total companies contacted by the researcher. It was proved that the leadership style but also the leadership characteristics – for instance the high stake holding of the companies’ leaders (Flacke 2005, p.10) – are likely to influence significantly the approaches used for implementing management accounting in SMEs; it is implied that motivational theories used in these firms are also likely to be differentiated influenced by the above factors. In the study of Standalgaard et al. (2011) the following issue is examined: which factors can affect the motivational disposition of bank managers? A survey was conducted among the managers of a Scandinavian bank. It was proved that ‘the effect of increased budgetary participation on budget goal commitment is largest for subordinates with a high need for power or a low need for affiliation’ (Standalgaard et al. 2011, p.7). On the contrary, ‘the subordinates with a low need for power were related to small effect of budgetary participation’ (Standalgaard et al. 2011, p.7). In other words, the personal characteristics of the employees are likely to affect their level of budgetary participation – either in the short or the long term. It is not made clear whether different management accounting activities would be interact differently with the personal characteristics of employees, especially those referring to motivation. On the other hand, the research developed by Baskerville (2005) in enterprises across New Zealand proved that the role of expectancy theory and other similar motivational theories in the development of accounting standards in the particular country couldn’t be precisely estimated. It has been proved that the responses of employees – accountants – to the relevant standards have been differentiated through the decades – as their needs have been increased. 4. Conclusion Based on the characteristics of the motivational theories, as presented above, and the trends developed in management accounting regarding the adoption of particular theoretical frameworks on human motivation – as explored in the empirical studies presented above, the following issue should be highlighted: the responses of a management accountant to specific motivational frameworks is not standardized. When developing a budget a management accountant is free to choose among different strategies; his motivation for preferring a particular strategy – than another one – cannot be explained by using specific criteria, apart perhaps from his personal characteristics. This means that a management accountant could develop a budget based on the Maslow theory or the Herzberg theory – in any case it is not expected to be influenced by the X theory, since he cannot be characterized as not committed to his work because in such case a high risk for severe organizational failure would exist – taking into consideration the effects of accounting on business operations. On the other hand, the equity theory would be difficult to be used for explaining budgeting decisions, since their requirements are not similar to other business decisions, being related – simultaneously – with the past, present and future business performance but also with the internal and external organizational environment. It is in this context that the responses of a management accountant to existing motivational theories would be formulated. References Baskerville, R. (2005) The Role of Expectancy Theory and Observed Constituency Response Levels to Exposure Drafts in Accounting Standard Setting in New Zealand. WORKING PAPER SERIES Working Paper no. 33. Centre for Accounting, Governance and Taxation Research. School of Accounting and Commercial Law. Victoria University of Wellington. New Zealand Boone, L., Kurtz, D. (2009) Contemporary Business 2010 Update. Hoboken: John Wiley and Sons Flacke, K. (2005) Does Managerial Accounting Follow Entrepreneurial Characteristics? Results of an empirical analysis of German SME Arbeitspapier Nr. 8-1 November 2005. University of Munster Francis, J. (2001) Discussion of empirical research on accounting choice. Journal of Accounting and Economics, 31: 309-319 Gitman, L., McDaniel, C. (2008) The Future of Business: The Essentials. Belmont: Cengage Learning Maslow, A., Stephens, D. (2000) The Maslow business reader. Hoboken: John Wiley and Sons McKenna, E. (2000) Business psychology and organisational behavior. East Sussex: Psychology Press Parhizgar, K. (2002) Multicultural behavior and global business environments. London: Routledge Pride, W., Hughes, R., Kapoor, J. (2011) Business. Belmont: Cengage Learning Sandalgaard, N., Bukh, P., Poulsen, C. (2011) The interaction between motivational disposition and participative budgeting. Evidence from a bank. Journal of Human Resource Costing and Accounting. Vol. 15, No.1, pp.7-23 Singla, R. (2011) Business Organisation and Management. New Delhi: FK Publications Zimmerman, J. (2001) Conjectures regarding empirical managerial accounting research. Journal of Accounting and Economics, 32: 411-427 Appendix Figure 1 – Equity Theory on human motivation (Source: http://faculty.css.edu/dswenson/web/OB/VIEtheory.html) Figure 2 – Expectancy Theory of Vroom (Source: http://faculty.css.edu/dswenson/web/OB/VIEtheory.html) Figure 3 – Herzberg motivation – hygiene theory (Source: http://www.provenmodels.com/21/motivation-hygiene-theory/barbara-snyderman--bernard-mausner--frederick-herzberg/) Figure 4 – Maslow, Hierarchy of Needs theory on human motivation (Source: http://www.edpsycinteractive.org/topics/conation/maslow.html) Read More