Comparison of Two Major Concepts of Management Accounting - Essay Example

Comparison of two major concepts of Management Accounting Table of Content I. Introduction II. Evolutionary Theories al Economics) III.Transaction Cost Economics IV. Differing points of view of the theories under consideration and their Comparison V. Conclusions I. Introduction The idea that everyone needs to be checked up on leads naturally to the concept of a hierarchy of supervision within an organization, in which those who do the checking are in turn checked up on by other people. The number of levels of this hierarchy depends upon the span of control. The fewer people any one person can supervise. One of the major consequences of advances in the techniques of management accounting is that the effective span of control has become larger. The average costs of monitoring other people have fallen, and this has permitted firms to reduce their overheads by flattening the hierarchy of supervision. The activities that are managed by organisations are becoming more complex and sophisticated, and so too is the way that these activities are configured for productive purposes. This means that the various component Management accounting is concerned with the provision of information to management, to assist with planning, decision-making and control within the business. Because planning and decision-making are inevitably directed to the future, management accounting often involves making future projections, usually called budgets. Important applications of this are capital budgeting, which deals with the appraisal of investments, and cash budgeting, which deals with the projection of future cash inflows and outflows, and the consequent financial requirements of the entity. Management accounting is also concerned with controlling and appraising the outcome of past plans, for example by analysing costs, and with assessing the economic performance of particular divisions or activities of the entity. Because the demand for management accounting information varies according to the activities, size and management structure of the entity, and because the supply of such information is not subject to statutory regulation or audit, there is a much greater variety both of techniques and of practice in management accounting than in financial accounting. Management has, of course, direct control over the information system of the business, so that formal regulation of the management accounting system is less important. II. Evolutionary Theories (Institutional Economics) Hamilton (2001)'s first major work, Evolutionary Economics, was primarily an exploration of the contrast between the institutionalist view of the economy as evolutionary and the classical static and mechanistic rendition. In his work this exploration primarily was conducted through examination of major areas, the institutional theories of consumption (demand), production, and distribution. (Hamilton 2001 p.745). Burns & Scapens, (2000) describe the background of institutional theory as "in recent years there has been increasing interest in institutional theory across the social sciences". They argue that three such theories have been used in the accounting literature see Miller, 1994 namely: new institutional or transaction cost economics see Walker, 1998 ; old institutional economics see Scapens, 1994 ; and new institutional sociology see Carruthers, 1995 Although these theories have different origins and intellectual roots, they share a concern for institutions and institutional change. All three offer insights which are helpful for conceptualizing management accounting change. They insist that OIE provides a focus on organizational routines and their institutionalization and, as stated above, in studying management accounting change we are studying changes in organizational routines. It also provides a way of dealing with some of the difficulties of using Giddens' 1984 structuration theory in accounting research, and especially in research dealing with management accounting change. (Burns & Scapens, 2000 p.2) Burns & Scapens, (2000) explain that in various types of organizational activity, routines may emerge which either have deviated from the original rules, or were never explicitly set out in the form of rules. In such cases, it may be decided to formalize the established routines in a set of rules, e.g. in a manual of procedures. This may be done to avoid the knowledge being lost when key staff leave, to facilitate the training of new staff, or to exercise control over further modifications. Here the process moves from routines to rules. Thus, there can be a two-way relationship between rules and routines. (Burns & Scapens, 2000 p.4) Burns & Scapens, (2000) further argue that in structuration theory, Giddens used the notion of modalities to link the knowledgeable capacities of human actors to the structural properties of institutions. He identified three inter-related dimensions of signification, domination and legitimation, each with its own modality which is drawn upon in the reproduction of systems of interaction, thereby reconstituting the structural properties. Macintosh and Scapens 1990 explored the usefulness of structuration theory in studying management accounting and argued that management accounting can be theorized as modalities of structuration in each of the three dimensions of signification, domination and legitimation. Although important for understanding the nature of management accounting, structuration theory is not particularly helpful for exploring processes of change. (Burns & Scapens, 2000 p5) III. Transaction Cost Economics The theory of transaction costs sets the problem of economic organisation as a problem of contracting. Economic activity could be organised following different alternative modes, for which are associated specific costs: transaction costs. A transaction is generally defined as a transfer of a good or a service between two processes, separated technically. Organisation theory on the other hand suggests that uncertainty is an essential issue for the determination of organisational forms. The concept of uncertainty appears therefore as common to a transaction costs economy and organisation theory. From a theoretical point of view, the question of outsourcing of intangibles is related to the problem of an organisation's frontiers, and therefore, to the trade-off between markets and hierarchies. Vosselmann (2002) argues that processes of concentration and centralization encompass changes in the organization's structure as well as changes in management control relationships. In order to enhance the efficiency and effectiveness of activities in shared service centres, management control relationships will have to be reshaped: who will be influencing the performance of the centre and what mechanisms and devices will be used to manage performance from outside the unit In many cases centralization keeps pace with the adoption and implementation of horizontal management control systems: client supplier relationships. Vosselmann, G.J. (2002) Vosselmann (2002) further interprets TCE as management control systems. The main decisions in a project of centralising facilities services and of changing management control systems can be interpreted in terms of transaction cost reasoning. The reasoning will clarify the differential consequences of centralization and different archetypes of management control in terms of production costs (economies of scale) and transaction costs. As these consequences heavily depend on the degree of asset specificity, following Williamson (1979) and Spicer (1988) a distinction is made into (1) standardized products and services with a low level of asset specificity, (2) customized services and products with a medium level of asset specificity and (3) highly specific (or idiosyncratic) services and products with a high level of asset specificity. Vosselmann, G.J. (2002) IV. Differing points of view of the theories under consideration and Comparison Burns & Scapens, 2000 explain that in institutional economics, the rules and routines become simply the way things are, i.e. institutions. These institutions will then be encoded into the ongoing rules and routines and will shape new rules, and so on. In this way, the routines themselves can be institutionalized. In other words, they become the taken-for-granted way of behaving; disassociated for their particular historical circumstances. They become the unquestioned and unquestionable way of doing things. The institution is the taken-for-granted assumption that these routines represent the appropriate behaviour for the particular social group, and the routines themselves are the local instantiation of the institution. The more widely and deeply the institution is accepted, the more likely it is to influence action and to resist change. As such, institutions are the structural properties which comprise the taken-for-granted assumptions about the way of doing things, which shape and constrain the rules and routines, and determine the meanings, values, and also powers of the individual actors. As they are disassociated from the particular historical circumstances, they exist only in the understandings and stocks of knowledge of the individuals and groups. (Burns & Scapens, 2000 p.11) According to Roberts and Greenwood, (1998) TCE does not pay any attention to elements from outside the organization that influence changes in management control systems inside the organization. Roberts and Greenwood (1998) in this regard suggest, that although people making decisions on organizational forms seem to be engaged in processes of purposive and deliberate choice, the process is institutionally constrained. Purposive, efficiency-seeking behaviour guides the decision maker's motives to evaluate the existing archetype of management control and to search for possible alternative archetypes, because they are forced to do so by competitive forces in the market or by the institutional pressure of powerful actors. But during the process there will be preconscious institutional constraints. These constraints imply that the complete set of known archetypes may contain several that are not assessed by decision makers, because they do not match the 'taken-for-granted' values and beliefs about appropriateness in that organizational field or in those organizational contexts. To put it differently: the set of 'legitimated' alternative archetypes is smaller than the full set of known archetypes. Furthermore, decision makers tend to emulate successful archetypes in the organizational field (mimetic isomorphism). So, organizations may have a bias towards archetypes with a high level of cognitive legitimacy. Decision makers tend to assess the efficiency of different archetypes of management control against the overall performance of observed organizations in their field and to imitate the actions of organizations that are perceived as being successful. Furthermore, the evaluation of the selected set of control archetypes will be dependent on normative requirements, i.e. the existing norms and values, within the organizational field. The decision to adopt a certain archetype of management control will also be made in the presence of post-conscious institutional constraints. These constraints consist of coercive pressures or normative pressures to select from the subset of designs those designs currently either endorsed by or adopted by legitimated institutional leaders, consultants or other influential professionals. If decision makers do not act within these constraints, they run the risk of losing legitimacy, which may outweigh any expected efficiency gain. As such, 'it is possible that post-conscious institutional constraints may forestall the adoption of an otherwise more efficient organizational design' (Roberts and Greenwood, 1998, p. 361) Vosselmann, G.J. (2002) Coad and Cullen (2006) argue that it may be expected that purposive efficiency seeking choice behaviour will continue to be present in organizations. Professional practitioners like controllers with the responsibility for the economic rationality of the organization will have to try and take some rational decisions on the adoption and (re)design of management control systems. Coad, A.F. and Cullen, J. (2006) Spekle (2000) thinks that TCE approach is able to incorporate considerable contextual detail by studying the transactions in relation to the patterns of activities, beliefs and intentions of which they are part in an effort to interpret the concrete transactions in terms of their role and meaning in the organization's endeavours. The resulting insights enter the analysis as elements of the contractual problem, for they either co-define desired performance or influence the characteristics of the transactions that need to be governed. But the approach ignores the question as to the overall effectiveness of these transactions in light of the ultimate objectives of the organization. Spekle (2000) further says that An organization depends on the contribution of a large number of individuals to achieve its aims. TCE suggests that MC-structures can usefully be analysed as (implicit or explicit, formal or informal) contracts between the organization and its members that serve to govern the contributions. More specifically, TCE suggests that MC-structures can be understood as efficient solutions to the incentive and enforcement problems that arise in contracting for and controlling these contributions, and that these problems are predictably associated with the characteristics of the desired contributions. However, to tailor this general idea to the domain of MC, both the variables and the implications that can be derived from these need to be rethought to increase the level of resolution. (Spekle, R.F. 2000) V. Conclusions Because of increasing use of computer management accounting work might become automated, issues of managing data integrity and basic information retrieval. Current entry-level management accounting jobs in large organizations involve a considerable amount of 'just reporting'. Through carrying out such tasks management accountants develop an intimate knowledge of idiosyncratic local processes and how to accommodate them. Over time, and as higher levels of professional examinations are passed, management accountants work progresses onto systems dealing with new areas of a business and ultimately onto more analytical work that offers opportunities for greater interpretation of information as well as its provision. A clear aspect of contemporary career structures within large organizations is that trainee management accountants frequently move through a variety of placements. Coad and Cullen (2006) argue that evolutionary theories have a long tradition in the literatures of socio-economics and strategic management, and have influenced recent studies of the evolution of management accounting systems (e.g.Scapens, 1994; Burns and Scapens, 2000; Burns, 2000). Seminal works by Veblen (1898, 1909), Penrose(1959) and Nelson and Winter (1982) formed the foundations of theories that today are also described as resource-based or capabilities-based theories. It should not be assumed that these theories form a uniform or entirely consistent view of organisations. They are themselves still evolving, and there is as yet incomplete consensus regarding key terms and concepts. Nevertheless, the outlines of this perspective are visible. Evolutionary theories of economic phenomena often make use of the analogy of biological theories of evolution to study the processes out of which novelty is generated. For example, Foss (1994) defined evolutionary economics as: that body of economic theory in which the transformation of already existing structures and the emergence and possible spread of novelties are investigated (Foss, 1994, p. 21) A review of the literature of evolutionary economics indicates that three main concepts are at the core of evolutionary thinking: institutionalisation, capabilities, and learning and change. We recognise our choice of these concepts is parsimonious, but we believe it captures the main elements of evolutionary theory. Moreover, the concepts themselves are overlapping and interrelated, and we suggest no clear boundary exists between them. A brief overview of these concepts is given in the sub-sections below. How they are interrelated will be examined during the explanation of our skeletal framework in Section Coad, A.F. and Cullen, J. (2006) Institutional economics rejects the dualism posited by orthodoxy, insisting upon the essential unity and interrelatedness of factors that orthodox theory sees as distinct such as theory and practice, thought and action, knowing and doing, and means and ends. Proper practice requires correct theory. But accurate theory also requires good practice. It requires a willingness to experiment so as to gain understanding of "what works" in a world in which indisputable and universal answers such as the laissez-faire dogma that orthodox economics supplies are unreliable, if not harmful. Economics is considered a problem-solving discipline and as policy oriented. Some grasp of reality is helpful, if not downright essential, if economics is to try to help make of the world a better place. Bibliography/References Burns, J. and Scapens, R. (2000), Conceptualizing management accounting change, Management Accounting Research, 11, 3-25. Burns, J. (2000), The dynamics of accounting change: Inter-play between new practices routines, institutions, power and politics, Accounting, Auditing and Accountability Journal, 13, 566-596. Coad, A.F. and Cullen, J. (2006), Inter-organisational cost management: Towards an evolutionary perspective, Management Accounting Research, Article in Press. Covaleski, M.A., Dirsmith, M.W. and Samuel, S. (2003), Changes in the institutional environment and the institutions of governance extending the contributions of transaction cost economics within the management control literature, Accounting, Organizations and Society, 28, 417-441. Hamilton, David. "The Political Economy of Poverty: Institutional and Technological Dimensions." Journal of Economic Issues 1, no. 4 (December 1967): 309-320. Roberts, P.Wand Greenwood, R., 1998. Integrating transaction cost and institutional theories: toward a constrained-efficiency framework for understanding organizational design adoption, Academy of Management Review, 22, 346-373. Spekle, R.F. (2000), Explaining management control structure variety a transaction cost economics perspective, Accounting Organizations and Society, 26, 419-441. Vosselmann, G.J. (2002), Towards horizontal archetypes of management control a transaction cost economics perspective, Management Accounting Research, 13, 131-148. Read More