I
I

71-18,157

AWAD, Saber All Mohamad, 1938ACCEPTANCE OF CONTEMPORARY MANAGEMENT ACCOUNTING
TECHNIQUES IN SMALL MANUFACTURING FIRMS: A
STUDY OF SELECTED MEDIUM AND SMALL MANUFACTURING
COMPANIES IN THE STATE OF MICHIGAN.
Michigan State University, Ph.D., 1970
Accounting

University Microfilms, A XEROXCom pany, Ann Arbor, Michigan

®

Copyright by
SABER ALI MOHAMAD AWAD
1971

ACCEPTANCE OF CONTEMPORARY MANAGEMENT ACCOUNTING TECHNIQUES
IN SMALL MANUFACTURING FIRMS

A Study of Selected Medium and Small
Manufacturing Companies In the State of Michigan

By
Saber All Mohamad Awad

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Accounting and Financial Administration

1970

ABSTRACT

THE ACCEPTANCE OF CONTEMPORARY MANAGEMENT ACCOUNTING TECHNIQUES
IN SMALL MANUFACTURING FIRMS

A Study Of Selected Small and Medium Manufacturing Companies
In the State of Michigan
By
Saber All Mohamad Awad

In order for businesses to compete, grow, or even to survive,
current and relevant information Is needed for management decision making.
In serving management's information requirements, the management
accountant must apply the appropriate modern concepts and techniques
in processing and communicating economic data.
The specific problem of this study Is:

to what extent are

modern management accounting techniques really applied In current prac­
tice?; why are they applied?; and what are the reasons which prevent
their application where they are not applied?

Therefore, the first

step in this study hasu.been to find out the extent of application of
management accounting techniques in practice.

The second step is to

investigate the process of diffusion of management accounting innova­
tions, to identify the environmental conditions which influence this
diffusion process.
The scope of this research study has been limited to eight
selected management accounting techniques.

They are:

1) Cost-Volume-

Profit Analysis; 2) Contribution Reporting; 3) Standard Costing;
4) Operating Budget; 5) Responsibility Accounting; 6) Capital Budgeting;
7) Linear Programming; and 8) Network Techniques (PERT/CPM).

Personal

Saber All Mohamad Awad
interviews have been conducted with the chief management accountants of
35 small and medium manufacturing companies in the State of Michigan.

A

guiding questionnaire has been used to collect the required data through
these interviews.
The analysis of the empirical data reveals the following find­
ings:

1) Modern management accounting techniques are not widely prac­

ticed among small and medium companies.

2) The acceptance of the "non-

traditlonal" quantitative techniques; i.e. linear programming and PERT/
CPM, in current practice, is very low.

3) The average company in the

sample Is found to be applying only 3 of the eight techniques surveyed.
4) There is a relationship between the size of a company and the extent
of application of these techniques, but this relationship is not statis­
tically significant.

5) Top management and its attitude toward the

value of management accounting information system have the primary impact
on acceptance of management accounting Innovations.

6)

The management

accountant's attitudes toward change and his professional competency to
effect change, represents the second most important environmental condi­
tion that influences the diffusion process of management accounting
innovations.

7) The nature of business operation, the availability of

human and physical resources required, the relative value and cost of
information, the type of ownership and the degree of competition are
also Important conditions In a company's environment that tend to influ­
ence accounting innovation; but their importance seem to come after top
management's attitudes, the accountant's competency and attitude toward
change, and the size of business.

8) Small and medium manufacturing

Saber All Mohamad Aw®d
companies made very little use of outside consultants service in manage­
ment accounting.
This study concludes that:

1) knowledge of modern accounting

techniques, alone and by itself, does not necessarily guarantee the
adoption and application of these techniques in practice.

2) Salesman­

ship, persuasiveness and communication accessibility seem to be essential
characteristics that the management accountant should acquire beside
mastering the technical and theoretical aspects of these techniques to
become an effective agent of change in management accounting.

3) A need

for continuing education, on the part of the management accountant is
apparent especially in the new non-traditlonal quantitative techniques,
to meet the challenge he faces in this era of information technology.
Accounting professional associations should increase their active
efforts in continuing education.

TO MY FATHER, MY MOTHER, AND MY WIFE.

ACKNOWLEDGMENTS

This dissertation results from efforts of the dissertation com­
mittee , the Department of Accounting and Financial Administration, the
United Arab Republic, and many others too numerous to directly acknow­
ledge whose contributions, however, are gratefully appreciated.

The

dissertation would never have been completed without the sincere guidance,
counsel, and Interest of the dissertation chairman, Dr. Gardner M. Jones.
My deepest appreciation extends to him.

To the other committee members,

Dr. Bruce P. Coleman and Dr. Floyd W. Windal, I express my sincere
appreciation.

Also, 1 acknowledge Dr. George C. Mead for his editorial

contribution on the first three chapters.
To Professor James Don Edwards, Chairman, Department of Accounting
and Financial Administration, I thank for his personal interest and
encouragement during my doctoral program.

And to Dean Kullervo Louhi

1 thank for making available the financial support to enable me to com­
plete my doctoral studies.

Use of the Michigan State University computing

facilities was possible through support, in part, from the National
Science Foundation.
My deep appreciation to my country, the United Arab Republic, and
to my Government, especially the Department of Missions, for their five
years of financial support without which the opportunity for continuing
my education would have never been fulfilled.
1 also thank the forty-one management accountants who partici­
pated in the field research culminating in this dissertation.

In

addition, I wholeheartedly thank Mrs Jo McKensle and Mrs. Donna Ford
for their patience and expertise in typing the final draft and final
manuscript.

To my wife. Fatma* for har continuous cooperation* sacrifices*
encouragement* and understanding* my sincerest appreciation.
To my children; Amany, Elman, and Elhab* to whom I promise to
devote more time to somehow repay them for the contributions they made
in their own special way.

iii

TABLE OF CONTENTS
Page
ACKNOWLEDGMENTS

ii

LIST OF T A B L E S .....................................................

vii

LIST OF FIGURES.....................................................

xi

Chapter
I.

I N T R O DUCTION..............................................
1.1
1.2
1.3
1.4
1.5
1.6

II.

2.3

2.4
2.5
III.

Background
The Objectives of the Study
Related Studies
Statement of the Problem and
Significance of the Study
Scope of the Study
Plan of the Study

METHODOLOGY OF THE RESEARCH STUDY....................... .
2.1
2.2

3.5

14

A Matter of Definition
The Research Methodology
2.2.A The Library Research
2.2.B The Empirical Research
Description of the Research Sample
2.3.A Some Characteristics of the Companies
Included
2.3.B Some Characteristics of the Manage­
ment Accountants Interviewed
Limitations of the Study
Summary

MANAGEMENT ACCOUNTING AND THE FUNCTION
OF MANAGEMENT..........................................
3.1
3.2
3.3
3.4

1

Introduction
The Functions of Management
Information Need for Planning and Control
The Role of Management Accounting in
Planning and Control
Management Accounting Techniques
3.5.1 Coat-Volums-Proflt Analysis
3.5.2 The Contribution Reporting Technique
3.5.3 Standard Costing
3.5.4 Operating Budgets
3.5.5 Responsibility Accounting
3.5.6 Capital Budgeting

36

Page

3 6
IV.

Linear Programming
Network Techniques (PERT/CPM)

THE EXTENT OF APPLICATION OF MANAGEMENT ACCOUNTING
TECHNIQUES IN PRACTICE ................................
4.1

4.2
4.3
V.

3.5.7
3.5.8
Summary

Survey of the Current Practice of
Management Accounting Techniques
4.1.1 Cost-Volume-Proflt Analysis
4.1.2 The Contribution Margin Reporting
Technique
4.1.3 Standard Costing Technique
4.1.4 Operating Budgets
4.1.5 Responsibility Accounting
4.1.6 The Capital Budgeting Technique
4.1.7 Linear Programming
4.1.8 Network Techniques (PERT/CPM)
The Extent of Management Accounting
Techniques In Practice
Conclusions

THE ENVIRONMENTAL CONDITIONS WHICH INFLUENCE THE
ACCEPTANCE AND APPLICATION OF MODERN MANAGEMENT
ACCOUNTING TECHNIQUES IN PRACTICE.....................
5.1
5.2

5.3

5.4

5.5

5.6

76

Introduction
The Function or Objective of the Management
Accounting System According to Company
Policy and Its Effects on the Acceptance
and Application of Modern Management
Accounting Techniques
The Relationship Between Size of a Company
and the Management Accounting System Employed
5.3.1 The Relationship Between Size of a
Company and the Application of any of
the Eight Management Accounting
Techniques in Practice
5.3.2 The Relationship Between Size of a Com­
pany and the Number of Management
Accounting Techniques Applied by the
Company
The Relationship Between the Nature of Business
Operation and the Application of Management
Accounting Techniques in Practice
The Effects of Top Management Attitudes on the
Acceptance and Application of Modern Management
Accounting Techniques in Practice
The Effects of Management Accountant's Attitude
on Management Accounting Innovations

v

131

Page
5.7

5.8
5.9
5.10
VI.

DIFFUSION OF MANAGEMENT ACCOUNTING INNOVATIONS IN
SMALL AND MEDIUM MANUFACTURING FIRMS .................
6.1
6.2
6.3
6.4
6.5

6.6
6.7
6.8
6.9
VII.

* Extent o £ hcdern Management Accounting
r~hniques and the Availability of the
N< :
Lv. .art and Physical Resources
Required
The Cost and Value of Information and its Effect
on Changing Management Accounting System
Other Environmental Factors
Conclusion

Introduction
The Need for Innovation In Practice
Diffusion of Accounting Techniques in Practice
The Adoption Process
The Agents of Change In Management Accounting
6.5.A The Management Accountant
6.5.B The Top Management
6.5.C The Outside Consultant
The Occasions of Management Accounting Innovations
When Did Change In Management Accounting Take Place
What Do Innovations of Management Accounting
Contribute
Summary

SUMMARY, CONCLUSION AND RECOMMENDATIONS FOR
FURTHER RESEARCH ......................................
7.1
7.2
7.3
7.4

177

215

Summary
Findings
Conclusions
Rscommendat ions

APPENDIX A
APPENDIX B
APPENDIX C

225
233
234

BIBLIOGRAPHY

235

LIST OF TABLES
Table
1-1

Page
Some Cases for Success or Failure
in Small Business......................................

3

II-l

Size Standard Classification......... , ................

17

11-2

Geographical Distribution of the Companies
Included In the S a m p l e ................................

22

II-3

Industrial Classification of the Sample.................

23

II-4

Average Employment Distribution of the Sample...........

24

II-5

Average Annual Sales Distribution of the Sample.........

25

II-6

Total Assets Employed Distribution of the Sample . . . .

26

II-7

Number of Product Lines Distribution ...................

27

II-8

Number of Producing Department Distribution.............

28

II-9

Formal Organizational Titles of
Management Accountants ..............................

11-10

.

30

Formal Education of Accountants
Included In the S a m p l e ................................

31

11-11

Accountants' Service Period In the Present Firms . . . .

32

11-12

Accountants' Membership in Professional Associations . .

32

II-13

Accountants' Approximate Age Distribution...............

33

III-1

Fundamental Management F u n c t i o n s ........................

37

IV-1

Number and Percentage of Companies
Studying Cost-Behavlor ................................

78

Distribution of the Sample According to the
Application of Cost-Volume-ProfIt Analysis ..........

79

IV-3

The Presentation Methods of C-V-P Relationships.........

80

IV-4

The Major Application of the C-V-P Technique
Ranked According to Frequency as Reported by
Companies Applying the Technique .....................

81

Relationships Between Determination of Cost Behavior
and the Application of the C-V-P T e c h n i q u e ...........

83

IV-2

IV-5

vii

Table
IV-6

Page
Business Segments Used for Contribution
Margin Reporting ......................................

86

The Relative Importance of the Contribution
Reporting Goals........................................

87

Distribution of the Sample According to the
Use of Standard Costing Technique.....................

88

The Bases of Establishing Standard Costs
in Practice............................................

91

Use of Variance Analysis Among Those
Applying Standard Costing..............................

93

Comparison Between the Percentages of Those Applying
Standard Costing in Process Costing and in JobOrder Costing..........................................

95

IV-12

Major Applications of Standard Coating ...................

97

IV-13

Distribution of the Sample According to
Budgeting Practices......................................

98

IV-7

IV-8

IV-9

IV-10

IV-11

IV-14

The Organizational Levels for Which Operating
Budgets are Established.................................... 102

IV-15

The Extent of the Flexible Budget in Practice................ 105

1V-16

The Operating Budget Applications Ranked According
to Their Relative Importance ...........................

107

IV-17

Number and Percentage of the Extent of
Organization Charts in Practice............................ 109

1V-18

The Extent of Using Responsibility Accounting
Technique in Practice...................................... Ill

IV-19

The Existence of Organization Charts and the
Application of Responsibility Accounting.. ..............

112

1V-20

The Measures of Capital Investment Worth
Applied in Current Practice................................ 116

IV-21

Distribution of the Sample According to theNumber
of Investment Criteria Considered Before
Making a Decision...........................................117

IV-22

Number and Percentage of Companies Applying Each
Technique and its Rank in Todays Practice................. 124

w4 4 4

' Table
IV-23

V-l

V-2

V-3

V-4

V-5

V-6

V-7

V-8

V-9

V-10

V-ll

V-12

Page
Distribution of the Relative Extent of Application of
Management Accounting Applied in Practice.............

126

The Objective of Management Accounting System
as Reported in the Field Research.
.................

134

Sample Distribution According to Size Standard
Classification Established in Chapter II ............

139

The Relationship Between Company Size and the
Application of any of the Eight Accounting
Techniques Under Study ................................

140

Number and Percentage of Management Accountants
Indicating that Size is a Factor in Determining
the Applicability of Management Accounting
T e c h n i q u e s .............................................

144

The Number of Management Accounting Techniques
Accepted and Applied by Each Size Classification
and Their Mean and Standard Deviation.................

148

Number and Percentage of Companies Not Using
Management Accounting Techniques Because of
Their Business N a t u r e .........................

151

The Average Number of Management Accounting Techniques
Accepted and Applied by Durable and Non-Durable
Goods Manufacturing Companies.........................

152

Number and Percentage of Accountants Indicating
Resistance of Top Management Against Change is
the Main Condition Behind Unability to Apply
Modern Management Accounting Techniquea...............

154

Number of Management Accounting Techniques Applied by Each
Company and the Number of Times Top Management
Resisted Application of a New Technique...............

159

Comparison Between the Number of Times the Accountants
is Satisfied Without Applying Management Accounting
Techniques and the Extent of Modern Management
Accounting in His Company.......................

163

The Degree of Formal Education and the Extent of
Modern Management Accounting Techniques...............

166

The Accountants' Professional Membership and the
Extent of Management Accounting Techniques
in Practice* . . . . . . . . . . . . .
...............

167

ix

Table
V-13

Page
The Accountant'a Service Period and the Extent
of Management Accounting Techniques...................

168

The Accountant's Age and the Extent of Management
Accounting Techniques In Practice.....................

169

The Lack of Human and Physical Resources and
the Application of Modern Management
Accounting Techniques.............................

171

Cost and Value of Information and the Extent of
Management Accounting Techniques . . . . . . . . . . .

173

The Adoption Process of Management Accounting
Innovation In Practice ................................

182

VI-2

Agents of Changing the Management Accounting Systems

. .

185

VI-3

The Management Accountant's Role in the Actual
Application of Management Accounting Techniques.

. . .

188

V-14

V-15

V-16

VI-1

VI-4

The General Types of Services Rendered by
Outside Consultant ....................................

196

VI-5

The Occasions of Management Accounting Innovations

205

Vl-6

Management Accounting Techniques and the
Purpose of Their First Applications...................

208

Relative Ages of Management Accounting
Techniques In Practice ................................

210

Contributions of Management Accounting Innovations

213

VI-7

VI-8

x

. . .

. . .

LIST OF FIGURES
Figure

Page

III-I

The Management's Planning and Control Functions.........

40

III-2

Coat-Volume Profit Relationship Graph...................

54

III-3

PERT - Network With Expected Time and Critical
Path I n d i c a t e d ........................................

73

Distribution of the Relative Application of
Management Accounting Techniques Applied
In P r a c t i c e ..........................................

127

The Environmental Conditions Which Influence
the Acceptance and Application of Management
Accounting Techniques In Small and Medium
Manufacturing Firms...........................

176

IV-1

V-l

CHAPTER I

INTRODUCTION

This is an empirical study.

Its main objective is to Investigate

the current practice of "modern management accounting concepts and tech­
niques" to pinpoint the environmental conditions which affect the diffu­
sion of such concepts and techniques in practice.

1.1

Background
There are an estimated 5,420,000 separate entities now engaged

in conducting business on the American scene.*

The small companies,

as measured by the standards of the Small Business Administration comprise about 95 percent of the total business entities.

2

The economic

welfare of the mlllJ ons of owners and employees engaged in the small
business sector will be determined, almost entirely, by the extent to
which small business can survive and prosper in a continuously growing
and changing economic system.

It is estimated that in recent years
3

between 350,000-400,000 business entitles go out of business annually.

^Office of Planning, Research, and Analysis, Small Business
Administration, Quarterly Economic Digest, Winter 1969, p. 18.
2
Definition of small business will be somewhat modified for
the purpose of this dissertation in Chapter II*
3
Dun and Bradstreat Inc., The Failure Record Through 1967,
New York, 1968, p. 2.
(Combining four factors together:
lack of
experience in the line, lack of management experience, unbalanced
experience and incompetence.)
-

....

1

2
An extremely high percentage of small business failures and discontinu­
ances may be attributed to costs associated with Inadequate management.
Evidence of the important role which management plays in small business
success or failure can be derived from enumerating the causes for busi­
ness failures given by Dun and Bradstreet.
m

It is estimated that over

4
90 percent of the business failure may be attributed to poor management.
The University of Pittsburgh's Bureau of Business Research in a
study to emphasize the importance of business management, with its two
functions of planning and control, to the success or failure of small
companies, has compared ten small manufacturing companies that had
failed with ten other companies that were successful.

Similarity of

product lines, locations and time span of operation was a main character­
istic of all companies studied.

The study concluded that the reason for

business failure was poor management, exemplified by poor financial
planning, poor sales management and poor general administration which
culminated in expenses exceeding income.^
The companies studied were scored on the basis of how well they
measured up to ten basic principles of sound management.
is reflected in Table I-l.^

The scoring

Four of the ten issues (#1, 2, 3, and 5)

directly involve accounting information.

This study provides ample

evidence that today's executive, if he la to be successful, must rely
heavily upon a variety of management accounting information to formulate

4Ibid.
^Elizabeth Marting (ed) , Management for the Smaller Company
(New York: American Management Association, 1959), p. 5.
6Ibid.

3
plans, establish controls and guide the activities for which he Is
responsible.

TABLE 1-1
SOME CASES FOR SUCCESS OR FAILURE
IN SMALL BUSINESSES
Principles of Sound
Management

Successful
Superior Average

Poor

Unsuccessful
Superior Average

Poor

1. Simple adequate
records

81%

19%

0

0

27%

73%

2. Cost and performance
standards

64

36

0

0

22

78

3. Informed management

81

19

0

0

26

74

4. Sound organisation

70

28

2%

0

60

40

5. Balanced finances

81

14

5

2

53

45

6. Proper sales organ­
isation

78

22

0

0

34

66

7. Sound labor relations

58

31

11

0

81

19

8. Effective plant and
equipment

74

26

0

8

60

32

9. Research and product
development

72

23

5

0

28

72

73

27

0

0

35

65

10. Community and Industry
relations

In another study, the Stanford Research Institute has investi­
gated the characteristics of 210 companies that have had exceptional
growth performance and another 169 companies where growth histories
have been below average.

The conclusion of the study was that, In the

typical fast growing companies, the entire organisation is aware of the

4
significance of the planning and control functions.^
The spreading of competition, the Increasing size of business
enterprise, the growth of industry requiring heavy investment, the grow­
ing complexities of production operation, and the separation between
ownership and management, are all factors which tend to force a transi­
tion from management based on an individual's memory of past historical
experience and Intuition to management heavily dependent on objective
judgment based on relevant Information.

Management information require­

ments have risen sharply and will continue to rise as the pace of this
dynamic change accelerates.

In order for businesses to remain competi­

tive and to progress, or even, in a relatively large number of cases,
to survive, more information is needed for management decision making.
Processing of the economic part of the required information is
the function of accounting.

Accountants measure and communicate the

economic data to the Intended decision makers.

In their measurement,

accountants collect, classify and analyze economic data related to their
business entities.

Accountants through their processing of economic

data serve basically two groups of users, internal management, and the
business owners and other outside parties.

Plnancial accounting has

been mainly concerned with external reporting to owners, government and
other Interested parties; and has traditionally been oriented toward
the historical stewardship aspects of accounting.

Management accounting

objective is to provide Information to persons within an organization
that enables them to make informed judgments and effective decisions

^See Robert B. Young, "Keys to Corporate Growth," Harvard
Business Review (November-December, 1961).

5
which further the organization's goals.

Management accounting is defined

by an American Accounting Association Committee as:
The application of appropriate techniques and concepts in
processing the historical and projected economic data of an
entity to assist management in establishing plans for reason­
able economic objectives and in the making of rational deci­
sions with a view toward achieving these objectives.®
It is the responsibility of the management accountant to utilize the most
appropriate technology available to produce the relevant information
needed by management for its planning and control functions.

9

In serving^management's requirements for relevant Information
the management accountant should go beyond both the conventional models
and historically valued transaction data.

This changing emphasis of

management accounting is quite noticeable in the literature on management
accounting.

Professors Crowingshield and Battista, in an article about

four years ago indicated that a revolution in management accounting is
taking p l a c e . T h e y

indicated that, until the early sixties, cost

accounting textbooks and most coat accounting courses were primarily con­
cerned with the mechanics of cost accumulation, while a large portion of
today's cost accounting textbooks are devoted to an extensive treatment
of cost behavior Including statistical measures, cost-volume-proflt
analysis, profit planning, decision making cost and return on investment.

£

American Accounting Association; Committee on Management
Accounting 1958. The Accounting Review. April 1959, p. 210.
q
____________ ; Committee to prepare, A Statement of Basic
Accounting Theory (A.A.A. Evanston, 111. 1966), p. 43.
R. Crowningshield and G. L. Battista, "The Accounting
Revolution," NAA Management Accounting (July 1966), p. 37.
U Ibid.

6
Still In a related article another author saya:
If you are reluctant to view (management) accounting as a
changing art; you need only to reflect upon the terms used
in many articles In recent issues of Management Accounting.
The reader encounters such terms as regression analysis,
learning curves, linear programming, sequential sampling,
game theory, probability theory and PERT. These are addi­
tions to the language of the "new accountant", who has no
intention of losing some of his most challenging functions
to his colleagues in engineering, research and development,
management sciences, e t c . ^
In fact, a reader of management accounting literature finds that
many authors are strongly supporting and enthusiastically defending the
usefulness of the newer techniques such as PERT or Critical Path Method,
Linear Programming, statistical regression and other non-traditional
mathematical techniques, along with some more established (traditional)
techniques such as Responsibility Accounting, Contribution Margin
Reporting, Flexible Budgeting, Capital Budgeting, and Cost-Volume-Proflt
analysis.

However, the need exists for empirical evidence as to the

actual extent of acceptance of these techniques in practice, and for an
identification of the surrounding conditions governing the diffusion
process of these techniques into practice.

1.2

The Objectives of the Study:
The objective of this study is to investigate empirically the

extent of the current practice of "modern management techniques" and
to identify the surrounding conditions which tend to influence the
diffusion process of management accounting innovations.

The specific

objectives of the study can be enumerated as follows:

l^Danlel Rorth, Jr., "The Changing Role of the Accountant,"
Management Accounting (January 1967), p. 36-37.

To determine the extent to which the selected management
accounting techniques are currently accepted and applied
in a selected sample of small and medium manufacturing busi­
nesses In the State of Michigan.

This will also point out

any significant differences In the extent of application
between traditional accounting techniques and non-traditional new quantitative techniques in the practice of
these companies.
To examine the extent to which management accounting tech­
niques which are applied in current practice differ from
what are considered " m o d e m management accounting techniques"
as advocated by current literature on management accounting.
To study the process of diffusing management accounting
innovations in small and medium manufacturing firms.

The

environmental conditions which influence such diffusion
process will be examined.

This would explore the surround­

ing conditions which prompted, as well as those which
hindered, the acceptance and application of m o d e m manage­
ment accounting techniques in practice.
To find out the relationship between the sise of a manu­
facturing firm and the extent of m o d e m management account­
ing techniques accepted and applied in the firm's management
accounting information system.
To find out the "agents of change" in diffusing management
accounting innovation in the practice of small and medium
manufacturing firms, and their respective role in the
success of the diffusion process.

8
6.

Deducing from 1, 2, 3, 4, and 3 some general observations
about the diffusion of innovation processes as they are
applied in management accounting.

1.3

Related Studies;
Among the main empirical studies which were written around the

subject, I have selected the following because of their relevance to my
topic.
Professors Sord and Welsch published their study on "Business
Budgeting:
in 1958.

13

A Survey of Management Planning and Control Practices,"
The purpose of their study was to appraise the budgeting

policies and practices employed by a select group of "Large and
Leading" American and Canadian companies, as the means of imple­
menting the planning and controlling functions of management.
Their study is based on a selective sample of companies that they
knew, in advance, were reputedly doing a "better-than average" job
in budgeting.

They disclosed in their study that 89% of these

selected companies were using a formal budget program and that
there was a substantial amount of agreement between the practices
of these companies and the techniques as described in texts and
periodicals.
Gary Luoma'a doctoral dissertation on accounting information
in managerial decision making for small and medium manufacturers^

h. Sord and Glenn A. Welsch,
Business Budgeting:
A
Survey of Management Planning and Control Practices. The Controllership
Foundation (Hew York 1958).
^Barnard

1^Gary A. Luoma, Accounting Information in Managerial DecisionMaking for Small and Medium Manufacturers. A Doctoral Dissertation, the
subatance of which was published in NAA Research Monograph No. 2,
National Aaaociation of Accountants. N. Y. 1967.

9
gave particular attention to the utilisation of accounting in the
decision areas of; (1) capital equipment analysis;
profit analysis; (3) financial budgeting;

(2) cost-volume-

(4) inventory control;

(5) make-or-buy decisions and (6) product pricing.

He conducted

his research with six in-depth case studies, plus a mall question­
naire.

This study disclosed that accounting data are generally not

being used in a sophisticated, informative manner by decision makers,
and in certain instances accounting information might not be cur­
rently beneficial or necessary to management.
Dr. Ronnld Wright's doctoral dissertation titled, "An Inquiry
into Budgetary Planning and Control Techniques" in small business
environment with emphasis on small manufacturing companies is
another related and relevant empirical study.1^

One of Dr. Wright's

conclusions is that the use and non-use of a budget and the method
of constructing and using a budget can be related to the character­
istics of small business.
The American Institute of Certified Public Accountants' Committee
on Management Services in its Bulletin No. 2, disclosed that Planning
and Control is the slogan of progressive m o d e m management in the
largest and most successful companies.

16

This slogan works for small

as well as large companies; however, "...the smaller and simpler a

^ R o n a l d M. Wright, An Inquiry into Budgetary Planning and
Control. Techniques in the Small Business Environment with Emphasis on
Small Manufacturing Companies. Unpublished Doctoral Dissertation,
University Microfilms Inc. (Ann Arbor, 1963).
^Committee on Management Services, Budgeting for Profit in
Smsll Business. Bulletin No. 2 (The AICPA, New York 1959), p. 5.

10
business, the simpler Its budget.

The larger and more complex a

business, the more elaborate Its budgets.
A major source of related studies Is found In the National
Association of Accountants' report series which contributes significantly
to the understanding of management accounting theory and practice.

How­

ever, some special characteristics of the NAA studies should be mentioned
here.

First, the NAA's reports describe the theory behind the concepts

or techniques under study, and tell how they are being applied in those
businesses where it la known in advance that they are in use.

The objec­

tive of these studies Is to give "good examples" of how others could
apply them, rather than what conditions should exist before they could
be applied.

Second, most of the participating companies in the NAA's

samples represent the large and leading companies.

Third, most of these

studies were done a long time ago and a more current assessment of
today's management accounting practices should be desirable.
An important source of studies concerned with the diffusion of
innovations is available in areas other than management accounting.

The

diffusion of innovations studied range from new drugs among physicians
to hand tools among primitive tribes, and from driver training among
primary schools to hybrid corn among farmers.

However, 1 could not find

any such studies explicitly made on the diffusion of management account­
ing Innovations.

Professor Rogers has done many studies on the diffusion

of innovations In the agricultural area.

His process of diffusion will

constitute a framework for this study.1®
l7Ibid.
1®Dr. Everett M. Rogers, Michigan State University; especially
his textbook, Diffusion of Innovations. The Free press, New York (196Z).

11
1.4

Statement of the Problem and Significance of the Study;
The preceding brief review of the relevant literature indicates

that the rapidly growing companies are characterised as being forward
looking, with management devoting time and effort to planning and con*
trolling the business.

The studies further emphasize the relationships

between the size and complexities of business enterprises and the extent
of application of budgeting.

However, none of these studies has tried

to explore the extent of acceptance of a wider scope of modern manage­
ment accounting techniques in the current practice of small and medium
manufacturing concerns.

Therefore, a study to acquire more understand­

ing of what today's practicing management accountant is doing, to face
the challenge raised against him to justify his role as a member in the
management team, is in order and is needed, and this study intends to
fill this gap.

In addition, moat of the related studies reviewed are

concerned either with stating the extent to which the particular tech­
nique is applied or with the description of how these specific techniques
are generally applied.

Very few attempts have been made to explore the

why's of the question from its two sides, which this study is intending
to fulfill as Its major objective.

The surrounding conditions which

tend to prompt or inhibit acceptance and adoption of management account­
ing techniques will be a major emphasis of this study.

This study

further will attempt to determine the "change agents" in these companies
and their role of diffusing management accounting innovations.
As to the significance of this study, the evidence obtained by
this empirical research should be useful to accounting educators and to
the National Association of Accountants, as a measure of the success of
their extensive continuing educational efforts in the area of management

12
accounting.

Exploring the diffusion process of management accounting

Innovations should prove very useful for increasing the efficiency of
their educational efforts.

This study is also very significant to me

personally, since I am expected to be assigned the responsibility of
teaching management accounting upon the completion of this doctoral
dissertation.

An insight into the theoretical foundations as well as

the practical application of management accounting will give me a more
comprehensive understanding of the prospective usefulness as well as a
logical appreciation of the limitations of applying modern management
accounting techniques in the real world of business.

1.5

Scope of this Study:
To set boundaries on such wide scope, eight techniques were

chosen on the premise of their usefulness and applicability as tools of
managerial planning and control.

These selected techniques are not com*

pletely exclusive in the sense of the ability to apply each one separate
from the other; instead they are interrelated as will be shown in Chapter
111 of this dissertation.

The term "modern management accounting tech­

niques” in this study is set to mean "contemporary” and includes some
well known techniques as well as some more recent and less known.

19

The selected management accounting techniques are:
1.

Cost-Volume-Profit Analysis

2.

Contribution Margin Reporting

i^Walter B. McFarland in his Concepts for Management Accounting.
National Association of Accountants, New York, 1966, has defined
"accounting concept” as "a mental expression" consisting of the charac­
teristics associated with terms such as entity, period, cost, revenue
and profit." He has defined "accounting techniques" as ways to imple­
ment concepts. 1 am adopting the same definition in this thesis.

13

1.6

3.

Standard Costing

4.

Operating Budget

5.

Responsibility Accounting

6.

Capital Budgeting

7.

Linear Programming

8.

Network Analysis - Program Evaluation and Review Technique
(PERT/Cost) or the Critical Path Method (CPM/Cost)

Plan of the Study:
The aecond chapter of this study Is devoted to the research

methodology and description of the characteristics of the companies and
of the management accountants In the research sample.
The :;hird chapter will Include the theoretical foundation of
management accounting.

The logical foundations of modern management

accounting will be the subject of this chapter.

The extent of accept­

ance of management accounting techniques In current practice will be the
subject of the fourth chapter.

The surrounding conditions necessary for

diffusing new Ideas In management accounting practice will be discussed
in the fifth chapter.
The sixth chapter of this study will be devoted to the remain­
ing part of the diffusion process of management accounting innovations;
who are the agents of chsnge and when, why and for what purpose did the
change take place?

Chapter VII will include the study's summary, con­

clusions and recomc end at ions.

CHAPTER II

METHODOLOGY OF THE RESEARCH STUDY

2.1

A Matter of Definition:
A definition of what constitutes a small, a medium, or a large

company is a due matter at this point of the dissertation.

Many

researchers would agree that one of the difficulties in gaining signifi­
cant information about small business practices is the lack of agreement
on any definition of small business.1

One study will base its definition

on total sales, another on total employment, still another on total *
assets, but seldom will studies agree with one another.
According to the Department of Commerce Standards of 1941, firms
were considered small businesses in manufacturing if they had 100 or
fewer wage earners.

In 1951, this ruling was amended to recognize that

size standards would vary from one type of manufacturing to another and
a range of 100 employees to 2500 employees was set as small business in
their specific manufacturing classifications.
The Small Business Act of 1953 provided that a Small business
concern is "one which is independently owned and operated and not
dominant in its field of operation."

The Act also authorized the Small

Business Administration, in making a more detailed definition, to use

^Albert K. Hlckeaperg, Organizational Relationships in the
Growing Small Manufacturing Firms. Small Business Management Research
Report -- The University of Minnesota, Minneapolis, Minn., April 1961,
p. 2-3.

15
•uch criteria as number of employees and sales volume.
definitions would differ from one purpose to another.

The SBA detailed
However, a range

up to 1500 employees would be considered small business according to the
employment size standards set forth in the legislation.

2

Two general characteristics of the size standards adopted by the
SBA or any other organization can be
management of

small business.

observed by reviewing literature on

First, the size standard is classified

into two categories, either small or large, nothing in between.

Second,

in most cases, size is classified according to only one criterion, either
sales volume,

employment or assets.

No study was found which defines a

size class by

multi-criteria. These

definitions might be appropriate for

the objectives they were set for; no attempt will be made here to argue
against this.

However, neither of these definitions alone would best

serve the objectives of this dissertation; one of which is to find out
whether or not there is any relationship between size of an enterprise
and the degree of elaboration of its management accounting system.

Size,

as seen in this dissertation, is regarded aa a measure of relative com­
plexity of operation, in addition to its usual meaning of relative big­
ness of the firm Itself.
The basic general premise concerning the need for and the possi­
bility of applying management accounting concepts and techniques is the
growth in the degree of complexity of a company'a operationa.

In the

very small company, where the organic functions of organization are

2

Code of Federal Regulations, Title 13, Business Credit and
Assistance, Revised as of January 1970, Part 121 - Small Business Size
Standards.

16
performed by « single individual or a few partners, the owner-operators *
accounting information needs are minimal.

This owner-operator can be

well-enough Informed through first hand information acquired from direct
contact with operations.

Increasing business volume as measured in terms

of sales brings s need for separating the organic functions one from the
other, and the managerial tasks of planning and controlling are separated
from the purely operative tasks.

The owner-operator, in this case, might

have to sacrifice his role as operator to become more involved as a
manager, thereby losing some of the first hand information he used to
acquire directly.

Thus the need to substitute more formal means of in­

formation begins.

Further, as the managerial duties Increase In volume

and become more complex, the accounting function typically achieves a
separate organisational status to help management manage the business.
Similarly, the other functions, like production, marketing, personnel,
research and development and others, are given separate organizational
status.

Information generated at the operating levels becomes beyond

the reach of heads of these organizational segments, increasing the
need for more accounting information.

Thus, the general premise would

be that the more complex a business becomes, the more sophisticated the
management accounting system should be, to live up to the increasing
demands for more relevant information to plan and control.
A size standard based on sales volume alone might be an illusory
measure of business complexity.

The same observation could be made

regarding a size standard based on average employment or total assets
alone.

A more representative measure of complexity of an operation

could be a standard based on several rather than a single variable.
Such an approach will be taken in this dissertation because of its

17
relevance to the study objectives.
mentioned here.

However, a word of caution should be

Any definition of size will be arbitrary at most, and

its appropriateness should be viewed in terms of its usefulness in
achieving the objectives it is set for.

The size standard set here Is an

attempt to classify companies into very small, small, medium, large and the
largest.^

Total average employment, total sales volume, total assets

invested, number of major product or product lines and number of producing
departments, are the criteria used for this clasaification.

The following

table shows the boundaries of each size class in the manufacturing
industry.
TABLE II-l
SIZE STANDARD CLASSIFICATION

Sales
(in $
million)

Assets
(in $
million)

Major
Product
Linea

Producing
Depart­
ments

Less than 100

Less than $2

Leas than $1

1

1-2

Small

100 - 500

2-10

1- 5

2 - 5

3 - 5

Medium

500 - 1000

10 - 50

5-25

6 - 10

6-10

Large

1000 - 2500

50 - 100

25 - 50

11 - 15

The Largest^

More than
2500

More than
100

More than
50

More than More than
15
15

Size Class
Very Small

Employment

11 - 15

^The 500 largest Industrials as reported by Fortune. May 1970,
p. 194-200.
A

Consistency with the boundaries set forth by the 500 largest
Industrials is observed to the greatest extent possible.

18
2.2

The Research Methodology
In order to achieve the objectives specifically stated In Chapter

I, the methodology of this research study has been designed to Investi­
gate the practical dimensions of the problem against established con­
ceptual foundations as they exist In current management accounting
literature.

Two stages of research were set forth to accomplish this

end, library and empirical.
2.2.A

The Library Research:
The first stage includes an intensive library study, the objec­

tives of which are as follows:
1.

To provide an understanding of what "modern management
accounting" concepts and techniques are as they exist in
current literature.

2.

To create an appreciation of the prospective role of manage­
ment accounting as the core of an information processing
system for management decision-making.

3.

To get a total view of the applicability of quantitative
techniques in management accounting as advocated in con­
temporary writings in the field.

4.

To provide a review of prior empirical studies on management
accounting related to the subject under consideration.

Chapter 111 of this thesis is a major product of the efforts
given to library research.

The theoretical foundations of management

accounting are the center of discussion in that chapter.
2.2.B

The Empirical Research:
Personal interviews were chosen instead of mall questionnaires

as the method of collecting empirical data for this study, primarily in

19
an effort to overcome some of the communication problems Involved In the
mall questionnaire.

A "guiding questions" list was first constructed.

Testing of this primary guide was done by interviewing two different
company's controllers.
made accordingly.

Changes and reorganization of the questions were

The intermediate questionnaire guide was further

tested in interviews with two more controllers and a few final modifica­
tions were made.
The final guiding questionnaire is included in Appendix A of
this study.

It consists of a four question series.

The first series,

group A, covers general data about the company and the management
accountant interviewed, as well as the objective of management accounting
from the standpoint of the company policy.

Group B of the questionnaire

consists of a major question on each of the eight techniques chosen as
the scope of this study to get data on how each technique is applied.
The third series, group C, consists of ten questions repeated for each
of the eight techniques to get data on the diffusion process of the
technique in each company.

The last series of this guiding question­

naire, group D, deals with the role of outside management consulting
services in the diffusion process of modern management accounting.
The population of this empirical research was chosen to be the
manufacturing industry.

Availability of much theoretical writings on

manufacturing accounting, larger range of operational complexity and
large share of the industry in GNP are among the factors for this
choice.

The state of Michigan provides the geographical boundaries of

this research; time and financial resources available were behind this
geographical decision.

We can find no plausible reason to believe that

the environment for management accounting is any different in Michigan

20
than elsewhere.
A sample of 30*40 companies was considered to be sufficient for
studies based on personal interviews.

A sample of 40 small and medium

manufacturing companies was the original size target of this study.
The sample subjects are companies' management accounting systems
as described by the management accountant in each company.

Management

accountant is defined here as the officer in charge of the internal
accounting function in a company
izational titles of this man.

There is no uniformity in the organ­

In one company, he may be named the

secretary and treasurer, in another, he may be the controller, still in
a third company he may have another title.

However, "management

accountant" is used in this study as the more general title.
Selection of management accountants for possible psrtlcipation
was made from the rosters of Certified Public Accountants and of chapters
of the National Association of Accountants In Michigan.^

The accounting

systems of companies selected were completely unknown to the researcher
at the time of sample selection.

Randomness of these accounting systems

in this sense of selection without prior knowledge of the accounting sys­
tems is one major characteristic which clearly differentiates this study
from others which were undertaken with some advance knowledge of the
accounting practices of the subject companies.
The companies whose management accountants were selected for
interviews were checked for appropriate size and industry classification
in both "The Directory of Michigan's Manufacturers" and the "Dun and

^A word of deep acknowledgement to Professor Gardner M. Jones,
the chairman of the dissertation committee, is due here, for initiating
contacts with interviewees.

21
Bradstreet $1 Million Business."
selected.

Sixty-five management accountants were

Twelve of them were contacted directly by telephone calls, and

53 by covering letters and then telephone calls for appointments.
covering letter is included in Appendix B.

The

Forty-one accountants agreed

to participate in this study and later were interviewed.

Each interview

lasted between one and three hours, with two hours as an average dura­
tion.

Six companies of those interviewed were later disqualified because

they were found not to fall within either the desired population charac­
teristics or did not fit the size standards as defined in this study.
Two companies were found to be mostly involved in non-manufacturing
operationa.

One company waa found to be very amall on every meaaure.

Two companies were found to be subsidiaries of two of the largest indus­
trials and their accounting practices were dictated by the central
accounting offices.

One firm was known to be a subsidiary of another

company included in the atudy and its management accounting system is
similar to that of its parent.

Thla left 35 companies out of the 41

interviewed to be a usable sample for thia study.

Out of the 65

accountants originally selected, 24 could not participate for various
reasons.

Seven accountants hsd changed Jobs, and no attempt was made

to contact the new accountants in charge because of the possibility of
getting incomplete lnformstion about management accounting development
in the particular company.

Twelve accountanta declined to participate

indicating that management policy does not sllow giving the required
data.

Still three other companies were outside the size limits of this

study snd were not interviewed.

I could not contact another three

accountanta within the time of the survey.

Considering the participants

plus only those declined to participate to measure the particlpstlon

22
ratio, this would make 41 against 12 or about 77 percent.

The usable

sample is about 84 percent of the participants.

2.3

Description of the Research Sample

2.3.A

Some Characteristics of the Companies Included:
1.

Geographical distribution:

Collecting the empirical data took about four months.

Within

this period an effort was made to cover most of the industrial concentra­
tion centers in the State of Michigan.

Table 11-2 shows a distribution

of these Industrial areas grouped according to their geographical loca­
tions from west to east.

TABLE II-2
GEOGRAPHICAL DISTRIBUTION OF THE COMPANIES
INCLUDED IN THE SAMPLE

No.

Geographical Location

No. of
Firms

% of
Sample

1

Muskegon, Coopersvilie and Grand Haven

3

8.50

2

Grand Rapids and vicinity

3

8.50

3

Battle Creek and Kalamazoo

4

11.00

4

Hastings, Odessa and Bellding

3

8.50

5

Lansing and Mason

2

6.00

6

Alma

I

3.00

7

Jackson and Addison

7

20.00

8

Owosso, Corunna and Durand

4

11.00

9

Howell, Ann Arbor, and Manchester

3

8.50

_5

14.00

35

100%

10

Detroit (and greater vicinity)
Total

23
2.

Industrial Classification:

Table 11-3 shows the classification of the firms Included in the
sample, according to the U. S. Census classification of manufacturing
Industry.

TABLE 11-3
INDUSTRIAL CLASSIFICATION OF THE SAMPLE6
Major
Code
Number

Manufacturing Industry - Major Groupa

No. of
Firms

% of
Sample

Durable Goods Manufacturers
19

Ordinance and Accessories

1

3.00

25

Furniture and Fixture

1

3.00

32

Stone, Clay and Glass Products

1

3.00

33

Primary Metal Products

2

6.00

34

Fabricated Metal Products

7

20.00

35

Machinery Except Electrical

9

25.00

36

Electrical Machinery, Equipment & Supplies

4

11.00

37

Trsnsportatlon Equipment

2

6.00

Non-Durable Goods Msnufacturers
20

Food and Kindred Products

2

6.00

27

Printing and Publishing

1

3.00

28

Chemical and Allied Products

2

6.00

30

Rubbers snd Miscellaneous Plastic Products

1

3.00

39

Miscellsneous Msnufacturlng Industries

_2

6.0P

35

100%*

Total

^Classification is made according to the principal product line
of the firm.
*May not add up for rounding effect.

24
The sample Is covering both durable and non-durable manufacturing firms,
with about 77 percent devoted to durable goods manufactuers and 23 per*
cent for non d u r a b l e goods.
3.

Size Standards Classification of the Sample:

Size standards, as It was argued earlier In this chapter, are
viewed as measure of complexity of operations and an Indicator of the
degree of need for detailed management accounting information.

In the

following tables the 35 sample firms are classified in terms of:
(a) average annual employntent; (b) average annual sales; (c) total assets
employed in the business; (d) number of major products or product lines;
and (e) number of producing segments in the firm's organization.

Sizes

are classified In this section according to the boundaries outlined in
Table II-l.
a.

Average Annual Employment:

TABLE II-4
AVERAGE EMPLOYMENT DISTRIBUTION
OF THE SAMPLE
N o . of
Firms

% of
Sample

1

3.00

100 and leas than 250 (S)

14

40.00

250 and less than 500 (S)

13

37.00

4

11.00

_3

9.00

Aversge Annus1 Employment
Less than 100 employees (v.s)*

500 and less than 1000 (M)
1000 and above (L)
Total

35

100%

*(Very Small • V.S; Small - S; Medium » M; Large • L; Largest ■ Let.

25
Table 11-4 above, ahowa that only one firm was "very small*',
when measured In terms of average total employment.

About three fourths

are claasified as small, about 11 percent as medium and less than 9 per­
cent as large companlea.
b.

Average Annual Sales:

TABLE II-5
AVERAGE ANNUAL SALES DISTRIBUTION
OF THE SAMPLE
N o . of
Firms

Average Annual Sales (In $ million)

Less than 2

(V.S.)

% of
Sample

0

0

2 but less than 3

(S)

3

8.00

3 but less than 5

(S)

10

29.00

10

29.00

5 but less than 10

(S)

10 but less than 20

(M)

5

14.00

20 but less than 50

(M)

6

17.00

_1

3 f0Q

More than 50

(L)

Total

35

100%

As shown in Table 11-5 above, no company with average annual
sales less than $2 million is included in the sample.

About two-thirds

are small companies, as measured by sales of $2 to $10 million.
31 percent can be considered medium companies.
classed as "large".

About

Only one company is

26
c.

Total Assets Employed:

Total aaaeta employed la defined for the purpose of this study
as the total asset side of the financial position statement less any
investment in other companies.

TABLE 11-6
TOTAL ASSETS EMPLOYED DISTRIBUTION
OF THE SAMPLE

Total Assets Employed (in $ million)

Less than 1

(V.S.)

No. of
Firms

X of
Sample

1

3.00

1 and less than 2

(S)

6

17.00

2 and less than 5

(S)

14

40.00

6

17.00

5 and less than 10

(M)

10 and less than 25

(M)

7

20.00

25 and less than 50

(L)

1

3.00

_0

0

50 and above

(Lst)

Total

35

100X

According to the table above, only one company is considered very
small in terms of this measure.
sent sbout 57 percent.

Small companies ($1 to $5 million) repre*

Medium companies constitute about 37 percent;

leaving only one company classified as large in the sample according to
this classification.

27
d.

Number of Major Product* or Product L i n o :

The number of mejor products or product lines was given by the
management accountants Interviewed.

There is a possibility of different

perceptions to this question by different persons.

However, the point

was made to get an answer according to the company's internal reporting
system when its reports are broken down by product lines.

In the same

time,mutual discussions between this researcher and his interviewees
were made to assure that product lines constitute major classifications
of what the subject company is manufacturing.

This question was made

with an eye for the potential need for more complex product profitability
report ing.

TABLE II-7
NUMBER OF PRODUCT LINES DISTRIBUTION
No. of
Firms

Sample

(V.S.)

3

8.50

2-5

(S)

18

51.00

6-10

(M)

7

20.00

11-15

<L)

2

6.00

More than 15

(Lst)

2

6.00

Job Orders

<M)
35

100X

Number of Product Lines

1

Total

X of

According to the table above, leas than 9 percent of the sample
are considered very small when measured by the break down of major
products.

About 51 percent are considered small companies from this

28
respect.

Medium sized companies represent 20 percent; end about 6 per­

cent are considered large companies.

In this classification standard,

about 9 percent are producing according to special Job orders and the num­
ber of major products can notbe obtained because of continuous changes
from one order to another; they are classified here as medium,
e.

Number of producing Departments:

Again here, as in the previous classification, perception of
what la a producing department and differing organizational structure
may affect the comparability of the data obtained for this matter.
However, due care has been taken to relate answers of this question to
Internal accounting reporting system in each company, especially the
potential need for responsibility accounting.

TABLE 11-8
NUMBER OF PRODUCING DEPARTMENT DISTRIBUTION

Humber of Producing Dept..

(V.S.)

1 or 2

p“ra°'

smple

3

9.00

3-5

(S)

12

34.00

6-10

(H)

13

37.00

11-25

(L)

7

20.00

More than 25

(Let)

J)

0

Total

35

100X

Very small companies constitute less than 9 percent of the sample,
when measured by this measure of complexity.
about 34 percent.

Small companies represent

Medium companies are about 37 percent.

Twenty percent

29
of the sample are classified as large companies.
Taking the five size criteria into consideration, an attempt
to get an average size measure for each company is done by giving equal
weight to each of these criteria and computing the average size for each
company.

This computation resulted in 25 companies classified as small

and 10 companies classified as medium, on the average.

Details of this

classification are included in Appendix C.
2.3.B

Some Characteriscics of Management Accountants:
In this section, a description of the management accountants

interviewed and included in the sample is presented.

Data about their

formal organizational title, education, service period in the present
companies, professional membership and their approximate age, has been
gathered through the personal interviews.
1.

Formal Organizational Titles:

Most of the management accountants interviewed, and included in
the sample, are the heads of the accounting function in their firms.
However, as it is known from other studies, there is no uniformity of
7
the formal titles or their assigned duties.
Assertion of such lack of uniformity la apparent in this sample.
However, two titles are predominant; the treasurer and the controller.
In most of the sample firms the treasurer supervises the controller.

In

many cases, however, the chief financial officer in a company was the
controller.

Table 11*9 shows that about 29 percent of the individuals

in the sample carry the treasurer title, while about 46 percent hold the

^"Development in Financial Organization 1915-1965" - A Supple­
ment to Financial Executives. September 1965.

30
TABLE I1-9
FORMAL ORGANIZATIONAL TITLES
OF MANAGEMENT ACCOUNTANTS
N o . of
Accountanta

No. of
Sample

V. P. of Finance

2

6.00

Treasurer

6

17.00

Treasurer and Controller

2

6.00

Secretary and Treasurer

4

11.00

Secretary

1

3.00

Controller (or Assistant to)

16

46.00

Chief Accountant

_4

11.00

35

100X

Title or Position

Total

controller title.

In eleven percent of the temple, "the chief

or "the accountant" were the title of the financial officer

eccountent"

in the com-

pany.
2.

Accountants' Formal Education;

Accountants interviewed and Included in the sample differ greatly
in their formal education as shown in Table 11-10 below.
The moat significant characteristic of this sample,

is that 75

percent of the accountants included have formal education of bachelor's
degree or more in bualneaa.
degree.

Only 20 percent have leas than a bachelors

Most of that 20% have junior business school diplomas.

persona in this sample had no formal education in accounting.

Only 2

31
TABLE 11-10
FORMAL EDUCATION OF ACOOUNTANTS
INCLUDED IN THE SAMPLE
N o . of
Accountanta

X of
Sample

Less than high school diploma

1

3.00

High School to Junior College degree

6

17.00

B.A. or B.S. in Business

17

48.00

B.A. or B.S. and M.B.A.*

10

29.00

Others**

_l

3.00

Formal Educational Status

Total

35

100*

*One accountant Included In this category has his B.S.
In Chemistry.
**ThiB accountant has his formal education In Physics.

3.

Service Period in the present Company:

Accountants interviewed also differed In the period of service
they spent in their present firms.

As it is shown in Table 11-11 below,

60 percent of them have spent less than 5 years in their present firms.
About 26 percent have service period between 5 and 10 years.

Only 14

percent of the sample have spent more than 10 years in their companies.
4.

Accountants' Professional Memberships:

The management accountants included in the sample are either
Certified Public Accountants, members of the National Association of
Accountants or both.

As shown in Table 11-12 below, 71 percent hold

membership in the American Institute of Certified Public Accountants
alone or along with Michigan Association of CPAs membership.

About

32
TABLE 11-11
ACCOUNTANTS' SERVICE PERIOD IN THE PRESENT FIRMS
Service Period
(In years)

No. of
Accountants

% of
Sample

6

17.00

15

43.00

9

26.00

_5

14. Q0

35

100%

Less than 2
2 but less than 5
5 but leas than 10
10 and above
Total

TABLE 11-12
ACCOUNTANTS' MEMBERSHIP IN
PROFESSIONAL ASSOCIATIONS

Professional Association.

American Institute of Certified
Public Accountants (with or without
Michigan Association of CPA's) alone
National Association of Accountants alone
Both AICPA and NAA
None
Total

Accountant.

X of
Sample

14

40

9

26

11

31

1

3

35

100%

33
57 percent of the sample are members of the National Association of
Accountants, and more than half of them hold CPA certiflcate(s) at the
same time.

Only one accountant Included In the sample Is not a member

of either organisation.
Association.

He Is a member of the National Management

Six accountants have, In addition, memberships in Finan­

cial Executives Institute, Planning Executives Institute, Tax Executives
institute or American Accounting Association.
5.

Approximate Age of Accountants

Accountants interviewed also differed widely in their ages.
About 23 percent of them are younger than 35 years old.
cent are between 35 and 45 years of age.
are older than 45 years.

About 37 per­

Forty percent of the sample

The youngest accountant Interviewed was 29

years of age, and the oldest one was 62 years old.

TABLE 11-13
ACCOUNTANTS’ APPROXIMATE AGE DISTRIBUTION

Age (In years)

No. of
Accountanta

% of
Sample

Younger than 35

8

23.00

35 and younger than 40

6

17.00

40 and younger than 45

7

20.00

45 and younger than 50

7

20.00

_7

20.00

35

100%

50 and older
Total

34
2.4

Limitations of the Study:
1.

The fundamental and inescapable limitation of interviewbased research is that its conclusions depend on the degree
of perception and interpretations of both the Interviewer
and the interviewees.

However, a basic introduction to each

aeries of questions was made by this researcher to every
accountant interviewed, to try to assure mutual understanding
of the techniques and terminology, to reduce the probability
of this limitation.

However, it must be acknowledged that

there ia no way to eliminate the possibility of different
conceptions.
2.

The second limitation of this study is also attributed to
its type of research.

Conclusions and findings of this study

will not be susceptible to generalization about management
accouting in all the U.S.A.

Rather, they will only represent

the practice of management accounting in those companies par­
ticipating in the study and included in the sample, though
one might expect the findings in non-represented companies
to be similar.

We have seen no evidence that would suggest

the environment of management accounting in Michigan small
manufacturing enterprises to be different from that of manage­
ment accounting In «uch enterprises elsewhere.
tion could be made, however:

One observa­

inasmuch as the companies and

accountants selected are those where the accountant-in-charge
is sufficiently advanced in outlook to be active in profes­
sional organizations, one might expect them to be more
progressive in the adoption of "new" techniques than those

35
companies and accountants who are not professionally active.
Sample populations in social science research must be chosen in
part by the criterion of availability,so some unintended and unmeasurable
bias may be introduced in the process of selection.

There appears to be

no genuinely workable solution for this dilenma; we recognize It and
live with It.

2.5

Summary:
The main objective of this chapter is to describe the research

methodology of the study.

In the first part of the chapter, a definition

of company size was selected to suit the purpose of this dissertation.
This definition is based on several rather than a single variable as a
measure of operational complexity.
dology is discussed in detail.

In section II, the research metho­

A description of the companies included

In the empirical research is made according to the size definition
adopted in this study.

In addition, the characteristics of the account­

ants interviewed and Included in the sample are also shown in the third
part of this chapter.

CHAPTER III

MANAGEMENT ACCOUNTING AND THE
FUNCTIONS OF MANAGEMENT
3.1

Introduction:
With the exception of mees production methods and other tech­

nological advances, the evolution of management science Is perhaps the
most significant factor In the economic development of the United States.
Management Science Is baaed on the idea that a scientific approachinvestlgatlon, analysis and decision making —
managerial problems.

should ba used to resolve

Probably the moat significant characteristic of

management science Is its increasing reliance on Information instead of
relying on intuition and imagination in making decisions.
From a potentially unlimited variety of economic data, the man­
agement accountant selects data that are particularly relevant to prob­
lems facing the managers in his company.

By applying concepts and tech­

niques of measurement, classification and communication, the management
accountant converts raw data Into relevant Information.

By helping to In­

terpret this Information, he participates in decision-making processes.

3.2

The Functions of Management:
The meaning of management has been expressed in a number of dif­

ferent ways.

Management has been defined by Terry as "the accomplishing

of a predetermined objective through the efforts of other people."^

^George R. Terry, Principles of Management, Revised Ed.,
Richard D. Irwin, Inc., Homewood, 111*, 1956, pp. 18-19.

Professor MePerland expressed the sane meaning In different words:
"management Is the process by which the executives of an organization
combine scarce resources in achieving given ends."
was defined In another way:

Still management

"managing is a social process which com­

prises of a series of actions that lead to the accomplishment of

TABLE III-l

£

1

i

FUNDAMENTAL

FUNCTIONS

Henry Fayol

W.H. Newman

G.R. Terry

Koontz &
O' Donnell

D. McFarland

Forecast &
Plan

Planning

Planning

Planning

Planning

Organise

Organizing

Organizing

Organizing

Organizing

Control

Assembling

Actuating

Directing

Assembling
Resources

Coordinate

Directing

Control

Control

Controlling

Command

Control

Coordination
(as the
essence of
manager­
ship) .

Representing
Coordinating
Deciding
Delegating
Evaluating
Creating
Leading, etc

(Source:

Previously cited textbooks)

^Dalton E. McFarland, Management:
Principles and Practices.
2nd E d ., The Macmillan Co., Mew York 1964, p. 57.

38
objective*."

3

Koontz end O'Donnell considered management to be the pro­

cess of creating the internal environment for organised effort to accomplish group goals.
It is clear, from the definitions cited above plus many more
similar in substance though differing in wording, that they all agree
that management is a social process.
common elements:

The definitions also show two more

an objective or purpose to be accomplished and working

with resources, especially human.

However, agreement is lacking when we

try to find what are the elements of this process or what are the func­
tions the managers perform.

Table I1I-1 shows the fundamental functions

of management, as advocated by a respected group of management scholars,
as an illustration of the lack of such agreement.
Although the words differ, the same basic thread of planning,
organizing and control runs through all of these definitions.

Regardless

of the different functional aggregations, management is seen without ex­
ception as performing three bssic functions of planning, organizing and
control.*
However, the management accountant can make his greatest contribu­
tion in the planning and controlling functions.
apparent in the organizing function.

His contribution is less

Accordingly, in this study we will

^William H. Newman, Charles E. Summer and E. Kirby Warren,
The Process of Management - Concepts. Behavior and Practice. 2nd Ed.,
Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1967, pp. 9-12.
^Harold Koontz and Cyril O'Donnell, Principles of Management:
An
Analysis of Management Functions. 3rd Ed., (McGraw-Hill, 1964), p. 26.
5American Accounting Association - Committee to Prepare A State­
ment of Basic Accounting T heory. A.A.A. (Evanston, 111, 1966), p. 43.

39
concentrate on the management accountant's contribution In only manage­
ment planning and controlling.

We vill not deal with the organizing

function in thia atudy.
Professor Anthony, however, recognizing the interrelationship
between planning and control, classified the functions of mansgement as.
"strategic planning", "management control", and operational control.

6

He defined strategic planning as "the process of deciding on objectives,
and on the policies that are to govern the acquisition, use and disposi­
tion of these resources."

Management control is defined as "the process

by which resources are obtained and used effectively and efficiently in
the accomplishment of the organization's objectives."

Operational con­

trol is defined as "the process of assuring that specific tasks sre car­
ried out effectively and efficiently."7

A look Into Dr. Anthony's frame­

work would lead the reader to believe that planning and control exist in
his three classifications with planning dominant in strategic planning;
in management control, the emphasis is on both planning and control,
while in operational control, the control function is dominant with little
planning.
The planning and control functions of mansgement can be depicted
as a circle as shown in Figure 111-1.
In actual practice, these functions of management are inextric­
ably Interwoven and Interrelated.

The performance of one functions does

not cease entirely before the next function starts.

One can say, however,

^Robert N. Anthony, Planning and Control Systems:
A Framework
for Analysis. Division of Research, Graduate School of Business Adminis­
tration, Harvard University (Boston 1965), p.
7Ibid., p.

40
FIGURE III-l
MANAGEMENT'S PLANNING AND CONTROL FUNCTIONS

I
%

I
%

$
Motivating
%

%
Coordination
Eeti

Developing •b °rt
>lana anc

Future

Planning

obJectiv

t* /

%

(Source: Glenn A. Welech, Budgeting: Profit Planning and Control, 2nd
Ed. Prentice-Hall, Inc., Englewood Cliffs, N.J. 1964, p. 8 with some
modification).

41
that unleaa the planning functions is performed, the control function
vould not be able to operate.
in a continuous manner.

Beyond that they are normally carried on

Thus, planning and control are Inseparable on

any ground except for the purpose of analysis.
3.2.A

The Planning Function:
Change and economic growth bring opportunities, but they also

bring risk.

It is the task of planning to minimise such risk while

taking advantage of opportunities.

Planning is considered to be the

most basic function of management.

Terry defined planning as:

the selecting and relating of facts and the making and using
of assumptions regarding the future in the visualisation and
formulation of proposed activities believed necessary to
achieve desired results.®
Planning Is the selection from among alternatives of future
courses of action for the enterpriae as a whole and for each segment
within it, with the view toward achieving the desired objectives.

Every

manager plans and the performance of his other functions depends on how
well he plans.
management.

However, the extent of planning varies with the level of

Top management haa a much broader planning responsibility

than lower management, yet each level ahould have definite planning
responsibility.

Planning is deciding, in advance, what to do, how to

do it, when to do it, and who is to do it.

It includes both long-range

planning as well as annual planning.
Planning Involves making choices between alternatives, and thus,
it is primarily, if not entirely, a decision-making activity.

The

planning function, as it is conceived in this dissertation, can be

®Terry, op.cit., p. 184.

42
broken dovn Into the following six stages:

3.2.B

1.

Conceiving business opportunities and forecasting business
environment.

2.

Establishing broad objectives of the firm.

3.

Developing formal long-range plans to achieve the estab­
lished objectives.

4.

Developing short-range plans and profit objectives.

5.

Developing detailed budgets within the framework of plans.

6.

Establishing standards of performance for activities, groups
and individuals.

The Control Function:
Control, the other basic function of management, has been defined

by Argyris as follows:
(1) Continually sensing what is going on throughout the organ­
isation at all levels, (2) Continually collecting data on the
activities within the firm; (3) Continually analysing the re­
sulting data; (4) Continually comparing the data with pre­
determined standards defined to judge whether the firm is
doing well or not; (5) asking line to issue orders (or issuing
it themselves) to correct any negative conditions; and
(6) sensing the result of the action that starts the control
cycle of events over again.®
Control presupposes that objectives, plans, policies and standards
have been developed and communicated to those individuals having assigned
responsibilities.

It contributes to the accomplishment of objectives by

detecting deviations from plans and standards in time and in a manner to
make corrective action possible.

An essential ingredient in an effective

control subsystem is the existence of a set of organisational responsi­
bilities which have been defined with reasonable clarity and which allow

^Chris Argyris, Interpersonal Competence and Organisational
Effectiveness (Homewood, 111., Richard D. Irwin, Inc., 1962), p. 35.

43
individual member* of the organization to define with reaaonable preci­
sion the area* over which they can exercise control and to see the con­
tribution they are expected to make toward achieving the company's over­
all objectives.

Control is

for the execution of plans.
ization structure.

exercised only by the managers responsible
Thus, itmust be designed to reflect organ­

Effective control requires objective, accurate and

suitable standards, against which actual performance can be measured.
Efficient control enables managers to manage by the exception principle
through attracting attention only to significant deviations.

Another

characteristic of efficientcontrol is itsability to incorporate suffi­
cient flexibility to remain

, ,

of plans.

effectivedespite over or under attainment

10

To sum up, Jaedicke observes that:
A survey of the accounting and management literature seems to
Indicate that the control process is generally thought of in
three ways.
Pirst, control is sometimes defined as the analy­
sis of present performance in the light of some standard or
goal in order to determine to what extent accomplishment mea­
sures up to the plan or standard -- An intermediate sort of
concept defines control as a process of securing conformity
of a plan. This concept holds that after the variance or
deviation from the plan is discovered, the next step is to
take corrective action -- A third concept of control stresses
the idea of information "feedback"
That is, data collected
as part of the control process might be systematically re­
ported and used in future planning decisions.*1
Accordingly, the control function can be broken-down into the
following six stages:

*^Harold Koontz, "Management Control:
A Suggested Formulation
of Principles," California Management Review (Winter 1959).
J. Jaedicke, "Accounting Data for Purposes of Control,"
Accounting Review (April 1962), p. 181.

44

3.2 .C

1.

Measuring actual performance.

2.

Comparing actual performance with objectives, plans,
policies and standards.

3.

Analysing the deviation from auch objectives, plans,
policies and standards.

4.

Taking corrective actions as a result of the analysis.

3.

Following up to appraise the effectiveness of the correc­
tive action.

6.

Feeding information back to improve future planning.

Declaion-Making Process Defined:
A decision may be defined as the choice among alternative coursea

of action to resolve a specific problem or toward achievement of a par­
ticular end.

Decisions are made at every phase of the management cycle.

Everymanager in his dally work faces
is planning or controlling.

the problem of choice, whether he

In other words, though plsnnlng at its core

is basically decision making, since it involves selection among alterna­
tives to achieve company'a objectlvea, the process of decision-making
does not restrict itself only to the planning function, instead it pervades the entire management process.

12

It is useful, therefore, to define the decision-making proceas
in terms of the following steps:
1.

Recognition and defining the problem.

2.

Searching for possible and available alternatives capable
of solving the problem or achieving objectives.

3.

Evsluating sacrifices and benefits of each alternative to
arrive at its net vslue.

^ H . A. Simon, Administrative Behavior. New York:
Co., 1957, p. 1.

The Macmillan

45
4.

Selecting the alternative which yields the highest net
value as the best alternative.

5.

Following up to appraise the effectiveness of the decision
taken.

6.

Feeding back information to improve future decision making.

In this definition of the decision making process, steps 2
through 4 can be considered mainly in the realm of the planning function,
while steps 5 and 6 are in the control function.
link between planning and control.

Step 1 is the tying

Recognition of the problem, in most

instances, may be the product of control, while defining a problem may
be the start for planning its solution.

3.3

Information Need for Planning and Control:
As indicated above, both planning and control entail decision

making.

Decisions tend to be more fruitful when they are based upon con­

sidered judgment rather than hunches, intuition or guessing.

Considered

judgment requires the availability of timely and relevant information in
the right form.

Information for planning and control decisions is diverse

and there is no single source of all information required.

Planning may

require social and political, in addition to economic, information.
Economic information may be related to the internal economic considera­
tions of the firm, or related to the external economic environment,
local, national and international.

Internal economic information in­

cludes both quantitative as well as qualitative information.

Management

accounting has been charged with the responsibility of providing quanti­
tative economic information to management for effective and efficient
decision making in both the planning and control functions.
In an interview with the Editor of Management Accounting.

46
the Secretary of Commerce, Mr. Maurice H. Stan*, stated:
there are few areas of top management decision-making which
are not influenced by the availability and the quantity of
financial information.
Almost all business decisions have
a direct or indirect effect on the profit potential of the
organisation, and these cannot be made without adequate
financial data.1'’
It is important to emphasize that management informational needs are
satisfied by means of the total information system which include all
other information subsystems.

Management accounting information is pro­

vided by one of these subsystems:
subsystem.

the management accounting information

However, for the sake of simplicity we will designate it from

now on as the management accounting information system.
3.3.1

Information for Planning:
Management executives need relevant information at each stage of

planning.

The information leading to the recognition of problem situa­

tions often comes through the control system.

Searching for alternative

courses of action requires information on the structure and processes
involved in the particular problem area and on the interaction of this
area with other parts of the organization.1^

Evaluating the alternatives

involves detailed and explicit considerations of the effects of each
alternative on the organization's goals and objectives.

It is at this

particular stage that quantitative information plays its moat important
role and where quantitative techniques are applied to convert available
"data" to relevant "information" for planning.

Management accounting

^ Editor of Management Accounting. "An Interview with the
Secretary of Commerce, Maurice H. Stans," Management Accounting, the 50th
Anniversary Issue, June 1969, p. 13.
1^A.A.A.

A Statement of Basic Accounting Theory, p. 46.

47
plays an Important role in this stage.

Although the final decision

must rest vlth management executives, the management accountant has the
responsibility to provide them vlth a range of the most attractive
alternatlvea.

Analysis of expected economic benefits and aacrifices of

each alternative is provided through the management accounting aystem
and related apecial analyaes.

After management executlvea have made a

decision on vhich alternative is to be followed, the management account­
ant still has a very important part in the planning process.

He must

express the final decision in the form of a financial and operating plan.
The plan should include the over-all objectives of the decision, and a
budget vhich shows the results expected from the plan, the resources to
be used in carrying out the plan, and the financial effecta of Such plans
on the firm.
3.3.2

Information for Control:
Just as in the planning function, in order

to control properly,

managers must make decisions from among alternative cholcea.
decisions should be based on relevant information.

These

One of the most

valuable resources of information in thia regard la the accounting infor­
mation system.
To achieve the aim of control, namely to insure conformance of
actions to objectives, plans, or goals, information for control must
focus both on the action taken and on the selected plans and objectives
they are suppoaed to accomplish.

This focus on planned accomplishments

provides a framework for the collection of control

data. Control is not

limited, merely to collecting data relating to the

past. The

comparison

of what has happened with a atandard of what should have occurred is of
great importance.

This comparison is fundamental for control and is the

48
basis of the principle of management by exception.

With a variable

environment, the exception directs attention not only to the appropriate­
ness of the action but also to that of the standard aa veil.

The role of

predetermined standards in controlling performance in an organisation de­
pends largely on the nature of the activities undertaken and on the
environment in vhich they operate.
To summarise this section on management's need for information;
the Simon research team found that three types of information, each
serving a different purpose often at various managerial levels, raise
and help to ansver three basic questions:
1 doing veil or badly?;

(1) score card queation--am

(2) attention-directing question--vhat problems

should I look into?; and (3) problem solving question--vhat are the
several vays of doing the job, and vhich is the b e s t ? ^
According to the analysis presented in this section, ve can say
that information for planning

can be beat obtained through ansvering the

third question, vhile control

can be served through ansvering the first

two questions.

3.4

The Hole of Management Accounting in Planning and Control:
Accounting, as indicated in Chapter I, ia conceived as the func­

tion of processing quantified economic information.

Information proces­

sing can be defined as measurement and communication of economic data.
Measurement in this definition includes the collection, classification
and analysis of economic data
Management accounting

of the firm.
is charged vlth the application of

l^Simon, op. cit.. p. 20.

49
appropriate techniques and concepts in processing Internal economic data,
both historical and projected, to assist the executives of an organisa­
tion in making rational decisions vlth regard to both planning and
control .***
An "Accounting Concept" has been defined as "a mental expression"
consisting of the characteristics associated with terms such as entity,
period, cost, revenue and profit . ^

Carefully defined concepts are use­

ful to the accountant because they define things that he seeks to measure
and communicate and enable him to distinguish these things from others
that are irrelevant to the purpose at hand.

18

An individual term may

have different definitions because different purposes call for different
concept s .
When the concept relevant to a purpose has been defined, the next
step is to select or to devise practical techniques for measuring and
comnunicating desired Information.
to implement concepts.

Accounting techniques are merely ways

19

In providing the information required by managers, the management
accountant has the responsibility of utilising the most appropriate tech­
nology available to produce information.

Whenever this requires measures

and techniques based on other disciplines, the management accountant must

l^A.A.A. Committee on Management Accounting 1958, The Accountina
Review (April 1959), p. 210.
17Walter B. McFarland, Concepts for Management Accounting.
National Association of Accountants, New York, 1966, p. 4.
18lbid., p. 5.
l9Ibid., p. 6.

50
be prepared to use them to discharge his responsibility efficiently.
The techniques which may be used in msnagement accounting are
many and various.

A complete listing of these techniques is beyond the

•cope of this dissertation.

However, to set practical boundaries, eight

techniques were chosen on the premises of their usefulness and appli­
cability as tools to provide information for both planning and control.
These selected techniques are not completely mutually exclusive, in the
sense of the possibility of applying each separately and independently
from the others; Instead they are often interrelated and there are over­
lapping areas between them.

As will be seen through the brief descrip­

tion of these techniques some of them may be used jointly to produce a
more useful information medium for managerial decision making.

They are

also Interrelated in the sense that, though some of them are basically
planning techniques and others are mainly control techniques, most of
them are used simultaneously in both planning and control.

The eight

•elected techniques were chosen to represent the most advocated tech­
niques in modern management accounting in current literature.

Another

reason for their selection is the increasingly relative usefulness as
advocated by so many authors.

3.5

Management Accounting Techniques:
The eight techniques selected for this study are:

(1) cost-

volume-proflt analysis; (2) contribution margin reporting; (3) standard
costing; (4) operating budgeting; (5) responsibility accounting;
(6) capital budgeting; (7) linear programming and (8) network techniques
PEKT/CFM.

At this point one can say that standard costing, contribution

margin and responsibility accounting are mostly control techniques.

51
Cost-volume-profit analysis, capital budgeting, linear programming and
network analysia are basically planning techniquea.

An operating budget

could serve equally both planning and control functions.
A brief description of each of these techniques would be useful
at this point.

The objective of such description is to provide basic

understanding of their meaning, operation and applications.

This con­

ceptual framework will provide the yardstick against which current prac­
tices of management accounting, obtained through the empirical research,
will be evaluated.
3.5.1

Cost-Volume-Profit Analysis
The Cost-Volume-profit analysis has received Increasing recogni­

tion during the last twenty years though cost accounting historians trace
its evolution to a long time ago.

The importance of such analysis was

indicated by Gleason more than 20 years ago, in the following quotation:
Although management cannot be the arbiter of which products
or models the public will buy in a free competitive market,
it should know which products or models carry the most
profit margin, which the least profit margin, the effect a
proposed reduction in sale price will have on profits; the
effect changing volume or mix of products will have on
product cost and profits; the breakeven point of opera­
tions; and the expected Increases in wages or other oper­
ating costs. Knowing these facts, able management will
endeavor to direct policy so as to realise, as nearly as
possible, the mix and volume which will earn the maximum
profits from utilisation of plant and equipment
Prom the preceding paragraph, it Is clear that the analysis of the rela­
tionship between cost, volume and profit is one of the managementaccountant's paramount responsibilities.

The knowledge of patterns of

^Charles H. Gleason, "The Profit-Volume-Relationship,"
K.A.C.A. Bulletin. July 1, 1947, p. 1330.

52
coat behavior offers insights valuable in planning and controlling short
and long-run operations.

The first step in cost-volume-profit analysis

la a careful study of the behavior of costs in order to classify them
according to their variability with volume into variable and fixed costs.
The difficulty, of course, is that not all costs are easily identified as
variable and fixed.
not two, categories:

Actually, costs in the short run fall into three,
(1) fixed costs, (2) variable costs, and (3) semi-

variable or semi-fixed costs.
long run.

However, all costs can be varied in the

In the short run, the problem of separating costs into fixed

and variable components is encountered primarily in connection with the
semi-variable category;

because it contains a mixture of fixed and vari­

able elements that cause them to react to volume changes but not in pro­
portion to changes in volume.
Some of the methods available for separating both variable and
fixed elements Include the high-low method, the graphical approach and
the formula approach.

21

It should be emphasized at this point, however,

that the company's chart of accounts may not reflect this variable-fixed
classification^ Often this segregstion process is made by separate
analyses for specific management executives' requests and left outside
the company's books rather than attempting to effect the various classi­
fication schemes in the regular accounts.
Cost-Volume-profit relationships can be studied in two different
approaches.

The first approach Is called the formula method, either by

«

21

Illustration of these methods can be found in most management
or cost accounting textbooks; for example, see Charles Horngren, Cost
Accounting: A Managerial Emphasis. 2nd Ed., Prentlce-Hall, Inc.
(Englewood Cliffs, New Jersey, 1968).

53
the equation method or the contribution margin method.

In the equation

method (Sales « variable expenses + fixed expenses + desired profit)
given any three known variables, one can derive the fourth.
margin is the excess of sales revenue over variable expenses.

Contribution
Sales

volume, in units, required to achieve any desired level of profit can be
figured out according to the following formula:
Sales (in unit.) - F1ne<»
fDe.lred Net Income
'
*
Unit Contribution Margin
Sales volume, in dollars, can be derived by this formula:
Fixed Expenses -f Desired Profit ^ ^here contribution margin ratio
Contribution Margin Ratio
is unit contribution divided by unit selling price.
The second approach is the Graphic method; coat-volume-profit
relationships are illustrated either on C-V-P graph or profit graph.
Exhibit III-2 is one type of C-V-P graph.

As Indicated in the chart,

costs can be plotted along with total revenue to Indicate the breakeven
point as well as the areas of profitable operations and areas in which
loss would be Incurred.
The profit-graph is another way of Illustrating the relationships
between cost, volume and profit.
Exhibit 1II-3 shows the profit structure based on profit plan
data for the period in the profit-graph form.

The advocates of this

profit graph argue that it is an effective technique in the internal
reporting system through which the results of actual performance in comparlson with planned operation can be explained.

22

^^Wllllam M. Schofield, "An Effective Internal Management Report­
ing System," Management Accounting (September 1966), p. 17-26.

54
FIGURE III-2
COST-VOLUME-PROFIT RELATIONSHIP GRAPH

Net Income
Area

Cost
And
Sales
in
Dollari i

Sales

Contribution
Margin

Breakeven
Point
Net Loss
Area

Variable
Expenses

Volume in Units

FIGURE III-3
THE PROFIT GRAPH

T»

Planned
Salea
Breakeven
Point

Fixed Expenses

Sales in Dollars (per period)

Planne
Profit

55
Cost-Volume-Profit analysis as briefly described above, is bssed
on the following assumptions;
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

The behavior of costs and revenues nas been reliably deter­
mined and is linear over the relevant range.
Costs may be resolved into fixed and variable elements.
Fixed costs remain constant over the volume range
on the
C-V-P chart.
Variable costs fluctuate proportionally with volume.
Selling prices are to be unchanged.
Prices of cost factors are to be unchanged.
Efficiency and productivity are to be unchanged.
Sales mix will be constant.
Revenue and costs are being compared with a common activity
base.
All factors have been established on a going concern basis.
Changes in beginning and ending inventory levels are insig­
nificant in amounts.^

A whole book is available on the breakeven (cost-volume-profit
analysis) as a tool for profit planning.^

In this comprehensive work,

the analyses of C-V-P in more than 40 different decision situations were
studied.

However a more general list of applications would Include using

this technique to provide useful information for decisions as to
(1) pricing and bidding; (2) cost alternatives; (3) sales mix; (4) chan­
nels of distribution; (5) addition or deletion of product line;
(6) acceptance of special orders and (7) budgeting, specifically estab­
lishing the flexible or varleble budgets.
3.5.2

The Contribution Reporting Technique
As orgsnisatlons become more complex, various responsibility

centers evolve and multiple products and services are generated inside
and outside the orgsnlsation.

^Horngren,

op

One of the most difficult duties of the

. clt.. p. 48.

^Spencer A. Tucker, The Bresk-Even System - A Tool for Profit
Planning. Prentlce-Hall, Inc., Englewood Cliffs, N. J. 1963.

56
accountant ia to devise a convincing scheme for assigning costs to the
various segments of an organization.
a general reporting framework for:

The contribution approach provides
(a) operational control - evaluating

the performance of a manager, a product group, a sales territory, etc.;
(b) product costing and price setting; (c) profitability comparisons; and
(d) executive compensation.25
Contribution reporting could be a very useful management account*
Ing technique to alleviate the problems of providing relevant information
to the responsible managers in different segments as well as the top man­
agement for their decision making.

Two major differences between the

traditional and the contribution approaches are of importance.
ferences are concerned with cost allocation.

Both dif­

The traditional approach of

reporting is based on the absorption costing method which does not regard
cost behavior as an essential element in Income reporting.

Internal in­

come statements show net Income based on arbitrary allocation of the com­
pany's overhead costs.

The traditional reporting also emphasizes the

functional cost classification; i.e. according to manufacturing, selling
and administrative expenses.

The contribution reporting approach on the

other hand does emphasize the behavior and relevance of cost in reporting
operating results of each and all segments of a business concern.

A

distinction between variable and fixed costs and between separable and
Joint cost is important for the contribution reporting technique to
operate.

A separable cost is directly identifiable with a particular

segment (i.e. dependent solely on that segment's operations); a joint
cost is common to more than one segment and is not clearly or practically

25Horngren, op. cit.. p. 300.

57
allocable except on some questionable basis.

Contribution margin report­

ing technique overcomes the joint costs allocation problem by simply not
allocating, i.e. by charging them to organization's performance as a
whole, instead of using arbitrary bases for their allocation.
The advantages of the contribution reporting technique have been
discussed by many writers.

Professor Horngren has argued that contribu­

tion margins are superior to the traditional absorption costing method
for measuring the effects of utilization of capacity on net income.

26

Professor Ferrara has related contribution margin reporting to respon­
sibility accounting and direct costing to answer the question:
we are measuring a contribution t o ? " ^

"what

Defending contribution margin

analysis Dr. Kemp said;
. . .it is illogical to assume that it is possible for company
segments to earn a profit or sustain loss, since they are,
after all, not dependent operating units but merely parts of
the overall enterprise. Thus, if one thinks the situation
thoroughly, he frequently comes to the conclusion that the
best that can be done to represent segment performance is to
reflect a positive or negative contribution made to cover the
overall costs and the net income of the business as a whole.28
Another writer, discussing product contribution analysis for
multi-product concerns went as far as to conclude that:
What is really significant in pricing decisions is neither cost
nor price but rather the present value of the contribution
that the product makes toward the recovery of period costs and
profit over each product's life cycle. The simulation of

Charles T. Horngren, "A Contribution Margin Approach to the
Analysis of Capacity Utilization," The Accounting Review (April 1967),
p. 254-264.
^ W i l l i a m L. Ferrara, "The Contribution Approach," NAA Bulletin
(December 1964), p. 19-29.
28Patrick S. Kemp, "Contribution Margin Analysis by Company
Segment - Three Uses," NAA Bulletin (November 1962), p. 29.

58
price-cost-volume contribution by life cycle yields conse­
quences which can be anticipated and used in strategic
planning geared toward achieving a specific corporate
objective.29
3.5.3

Standard Costing
With the management science came the development of industrial

production standards for use in both planning manufacturing operations
and in later evaluating their actual effectiveness and efficiency.

These

early standards were engineering or physical standards expressed in
methods of operation, units of material and hours of labor.

However, it

was soon discovered that the same approach could be used in the control
of manufacturing costa.^®

This process developed in two directions:

1.

Translation of physical standards into unit cost standards
to be used in accounting for direct material and direct
labor costs.

2.

Development of budgets (flexible budgets) as a basis for
controlling indirect costs which were not controllable
by unit cost standards.

Standard costs are defined as "carefully predetermined costs;
they are target costs, costs that should be attained under efficient
operations.

31

Physical standards sre usually developed by the engi­

neering or operating personnel.

In order to be effective, the standards

must be accepted by the people whose performance will be, in large part,
measured against those standards.

Acceptance may be attained through

their participation in the process of setting the standards.

The

29yixiiam S. Kallimanis, "Product Contribution for Multi-Product
Pricing." Management Accounting (July 1966), p. 11.
30NAA BulletIn-Research Series No. 9 . 'Trends in Cost Control
Practice,» (March 15, 1947), p. 697.
^Horngren, op. cit. , p. 149.

59
management accountanta price the physical standarda and report actual
operating performance with the standards.
Three different types of standarda can be mentioned here.
"Basic** standard cost provides the base for comparing actual cost through
the years with the same, unchanged, standards.

''Ideal'* or "theoretical"

standard costs are the absolute minimum costs which are possible under
the best conceivable operating conditions using existing specifications
and equipments.

"Currently attainable" standard coats are costs that

should be Incurred under forthcoming efficient conditions.
Management's control of operation is aided through performance
reports which Include actual coata incurred compared with standard costs,
emphasizing unusual variances from standard.

The next step in effective

cost control is analysis of these variances to pinpoint their causes,
along with any personal responsibilities, so that corrective action can
be taken.

Effective control system usually requires that these perform*

ance reports and the analysis of variances be on a regular, formalized
basis, which is normally aided by their integration into the budgetingcost accounting system.
Generally, standard coata provide a framework for (1) gauging
performance, (2) building useful budgets, (3) guiding pricing, (4) meaningful product coating and (5) bookkeeping economy.
3.5.4

32

Operating Budget
Budgets are management plans that Include all the expected oper­

ations and results of a future period.

These plana cover all segments

of the organization structure of an enterprise.

32Ibld.. p. 149.

Budgets state formally -

60
in terms of expected transactions - the decisions of all levels of man­
agement about the resources to be acquired, how they are to be used, and
what ought to result.

Budgets put the details of management plans for

operation in financial terms, so that the results may be projected into
expected financial statements.

Budgeting, in a broad sense, is any

planning, coordinating or control activity related to the development
and implementation of a budget.
A Dictionary for Accountants describes kinds of budgets in these
terms:
Budgets assume varying forms, depending on the operating
methods, scope and complexity of the enterprise. They may
be divided into two main classes:
(1) capital budgets,
directed toward proposed expenditures for project activi­
ties, and (2) operating budgets, directed toward planning
and controlling program activities
A comprehensive budget la an integrated and coordinated plan for
all phases of the operations of the firm expressed in quantitative
(mostly financial) terms and summarizing the expected results of the plan
in financial terms.

By this definition comprehensive budgets would in­

clude both operating and capital budgets.

Any budget which falls short

of this comprehensive budget would be called a partial budget, i.e.
does not cover all phases of operation.
A comprehensive budget would include the following sub-budgets:
I . The Master Budget
1.
2.
3.
4.

33

Sales budget with all necessary schedules and sub-budgets
Production budget with sll necessary schedules and subbudgets
Administrative Expense budget
Selling Expense budget

Eric L. Kohler, A Dictionary for Accountants. 4th Ed.,
Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1970, p. 67.

61
5.
6.
II.

Capital Expenditure budget
Cash Budget

Porecaeted Financial Statement
1.
2.

Budgeted Income Statement
Budgeted Financial Poaitlon Statement

Any aub-budget may include all the achedulea and/or aub-budgeta
neceaaary for Ita operation.
Almoat every definition or explanation of budgeta lncludea both
the planning and control aapect of the management function.

Uhen admin­

istered wiaely, budgeta compel management planning, provide definite
expectationa that are the beat framework for Judging aubaequent perform­
ance and promote communication, motivation and coordination among the
varloua aegmenta of the bualneaa.
Support of the top management for the budgeting program and the
participation of all membera affected by the budget In developing and
preparing the budget are two eaaentlal factora for lta aucceaa.
In the remainder of thla aection, our diacuaeion will concentrate
on operating budgeta, deferring the capital budget to a aubaequent aec­
tion for aeparate dlacuaalon.
The operating budget can be fixed or flexible.

A fixed budget,

alao referred to aa atatlc budget, la a budget which la prepared for a
particular level of activity, and la not altered during lta life time,
even though the actual level of activity during the period provea to be
different from the level for which the budget waa prepared.

A compari-

aon of budgeted revenuea and expenaea at one level of activity with
actual revenuea and expenaea reaultlng from aubatantlally different level
of activity doea not provide a good baaia for evaluation and control.

62
Formerly, this type of budget was quite popular, but currently, the
static budget la loalng lta popularity to the flexible budget.
The flexible budget, alao referred to aa variable budget, la now
generally recognized aa necesaary for an effective budget program.

Hoat

buaineaaea have become more complex and their volume of activity often
fluctuates In an unpredictable vay.

Flexible budgeta are prepared in

such a way as to provide for meaningful comparisons of actual versus
plan at various levels of activity.
Flexible budgeta are usually considered most useful In the budget­
ing of manufacturing overhead (because the volume level is usually
readily measurable).

However, some theorists are beginning to suggest

their use for selling and administrative budgets as well (where volume
of "output" is less readily defined and measured).
It should be emphasized here, that the success of budgeting in
achieving its objectives depends primarily on the interpersonal aspects
of administrative control.

It must be accepted and used by members of

the firm at all levels of administration and operation.

Participation

or Involvement of all levels of management In the preparation stage of
the various budgets is very helpful in committing people to the budgeted
objectives and motivating them toward achieving the objectives.

Many

excellent studies on the human and behavioral aspects of budgeting are
available in literature.^

^ F o r example see Chris Argyris, The Impact of Budgets on
People. (New York, Controllershlp Foundation, Inc. 1952) and Edwin
H. Caplan, "Behavioral Assumptions of Management Accounting," The
Accounting Review (July 1966), p. 496-509.

63
3.5.5

Responsibility Accounting
Responsibility sccounting is defined as:

A technique of accounting which is tailored to an organisa­
tion so that costs are accumulated and reported by levele* of
responsibility within the organization. Each supervisory
area in the organization la charged only with the cost for
which it is responsible and over which it has c o n t r o l . 35
The impetus for development of responsibility accounting and the
growing use of it by progressive enterprises, sprang from several sources,
among which are:

(1) increased complexity of business operations;

(2) ^centralization of management in attempting to deal with this com­
plexity and to provide a more flexible and dynamic organization structure;
(3) the importance of raising productivity and of tight cost control in
the current competitive situation; and (4) growing recognition of the
vital role of planning and control in the success of business.

36

Responsibility accounting depends heavily on fairly specific and
precise recognition of the individual supervisor's area of responsibility,
as specified by the
A clear and

firm's organization structure.
precise assignment of responsibilities among the

management team is a basic prerequisite for applying the responsibility
accounting technique.

Such assignment of responsibilities is done through

grouping the activities of the company, classifying them into organiza­
tional units, be it

a production center, a department or

assigning each organizational unit to a supervisor be it

a division, and
a foreman, a

^ J o h n A. Higgins, "Responsibility Accounting," The Arthur
Anderson Chronicle (April, 1952).
^ E . W. Netten, "Responsibility Accounting for Better Management,"
The Canadian Chartered Accountant (September, 1962), pp. 164-65.

64
manager or division vice-president.

This organization structure is

normally charted on an organization chart.

Organization charts may be

formal ones, specific, published, and known to every member in the organ­
ization structure.

Or they may be informal, where responsibllity-

authorlty relationships are unclear and imprecise.

Often every member

la able to know who his supervisor is and who he supervises.

The essence

of responsibility accounting Is the accumulation of costs and revenues
according to areas of responsibility in order that deviations from
standard cost and budgets can be identified with the person or group
responsible.

37

Implicit in the responsibility accounting technique la

the idea that it is appropriate to charge to an area of responsibility
only those costs which are subject to the control of the person in charge
of each area.

The costs which are not controllable by one individual or

group are always controllable by another individual or group.

36

Practically, however, there are difficulties in assigning responsibility
to control cost, because few, If any, elements of cost are the sole
responsibility of one person.

The following are devised as guides to

deciding the appropriate costs to be charged to a person (responsibility
center) :
1.

If the person has authority over both the acquisition
and the use of the service, he should be charged with
the cost of such service.

2.

If the person can significantly influence
of cost through his own action, he may be
such costs.

the amounts
charged with

^ W i l l i a m L. Ferrara, "Responsibility Accounting - A Basic
Control Concept," NAA Bulletin (September, 1964), pp. 11.
38Ibid.. p. 11.

65
3.

Even if the person cannot significantly influence the
amount of cost through his own direct action, he may
be charged with those elements with which the manage­
ment desires him to be concerned, so that he will help
to influence those who are responsible.39

Under the responsibility accounting technique, each supervisor
will receive a performance report which includes the summary of cost con­
trolled by levels under his supervision plus the details of the controll­
able costs charged to his responsibility center.
may Include

The president's report

summaries of controllable costs by all levels under him plus

details of the corporate

office costs which are not controllable except

by him.
Responsibility accounting is tied with standard costing and
budgeting through its reporting aspect.

The performance report submitted

to each supervisor would include the actual controllable cost of the
responsibility area under that level in comparison with the standard or
budgeted cost, showing the variances between expected and actual perform­
ance subject to that supervisor's control.

Professor Ferrara, in one of

his articles, through a series of hypotheses, incorporated the contribu­
tion margin technique with responsibility accounting, showing that there
is no conflict between the two techniques.

Instead they can be incorpor-

ated together in the management accounting system.
3.5.6

40

Capital Budgeting
Capital budgeting is concerned with planning and controlling the

addition of capital assets, choosing the best way of financing them, and

^"Report 0 f Committee on Cost Concepts and Standarda,"
Accounting Review (April, 1956), p. 189.
^ W i l l i a m L. Ferrara, "Responsibility Reporting versus Direct Cost­
ing - Is There a Conflict?" Management Accounting (June, 1967), pp. 43-54.

66
evaluating those decisions by review of subsequent results.

Capital

expenditures Involve large amounts of money which will be committed for
long periods of time and will affect operations over a series of years.
Therefore, specific capital budgeting decisions and capital expenditurefinancing budgets typically cover a number of years.
Because of the relatively fixed and often large commitment of
funds made in such capital projects, plans and proposals, these expendi­
tures should be carefully examined by management executives and directors.
An essential starting point in capital expenditure planning and control
is the Identification of project proposals consistent with the longrange objectives of the company.
Capital expenditure proposals must be sufficiently specific to
permit their identification with plans for expansion and development,
coat-reduction, Improvement or necessary replacements.
The second step is the evaluation of each capital expenditure
proposal.

Generally, the evaluation process Involves:

(1) the tech­

nical feasibility and validity of assumptions about production volumes,
market potential and engineering consequences, and (2) the financial
profitability evaluation.

The first step is outside the management

accountant's competency.

However, management accountants do assist

management executives in the financial aspect of choosing the best
feasible proposal(s).
A number of different approaches or inveament criteria are used,
all of which involve careful selection of relevant (prospective) finan­
cial (cost and revenue) data.

Among these approaches are the following:

(a) the payback period; (b) average rate of return; (c) the Investor's
rate of return on investment (R01); and (d) net present value of cash flows.

67
a.

The Payback Period Method. This is the simplest and prob­

ably the oldeet method used in analyzing propoaala of acquiring or
replacing fixed aaaeta. The purpoae of thia analyala la to determine
how long it will take to recover the inveatment through profita (con­
tribution margina) to be earned or coata to be eaved reaultlng from the
uae of auch equipment.

Generally, companlea ualng thia method adopt

declaion rulea for approval of projecta in terma of the number of years
required to recover the Inveatment; the ahorter the payback period the
more advantageous is the investment.
the payback period are:
vity to liquidity risks.
are:

Briefly stated the advantages of

(1) simplicity of computation; and (2) sensiti­
However, the basic disadvantages of this method

(1) its failure to consider the earnings after the Initial outlay

haa been recovered; (2) ita undue emphaais on liquidity; (3) failure to
recognize capital obsolescence or wastage and (4) failure to recognize
the time value of money.
b.

The Average Rate of Return (The Accounting Method).

By this

method, the return is computed as the average profit or coat savings per
year, after taxes, throughout the life of the project, dividend by the
cost.
c.

The Investor's Rate of Return on Investment.

This approach

expresses each project's estimated value as a single over-all rate of
return per a n n u m . ^

This rate is equal to the rate of interest at which

the present value of expected capital outlays is exactly equal to the
present value of expected cash earnings on that project.

If the rate of

41Ezra Solomon, 'The Arithematic of Capital-Budgeting Precisions,"
Journal of Business (April 1956), p. 125.

68
return on • project Is grester than the company's coat of capital, then
the project should be accepted.
d.

The Net present Value Approach (NPV).

Under this method t

net present value of each project's cash flow is computed, using the com­
pany's cost of capital or any other target rate of return chosen by man­
agement as a discount rate.

If the net present value of a project is

positive, i.e. the present value of cash inflow is grester than the
present value of cash outflow, the project should be accepted.

If net

present value of the project is negative, the decision will be to reject
the project proposal.
Both the R01 and the NPV approaches overcome the theoretical defi­
ciencies which exist in the payback and the average rate of return methods.
They consider the time value of money and the project's whole life
performance.
Using some or all of these screening methods would result in
accepting the best feasible project proposal available.

The planning

function would be completed by constructing a capital budget which is the
financial expression of the capital expenditure plan.

Such budget would

show all the financial details for implementing the accepted capital
expenditure proposals.
3.5.7

Linear Programming
We have indicated that it Is the primary responsibility of the

management accountant to use the latest techniques to make the task of
decision making by management executives easier and more objective.
Linear programming is one of these techniques which has been developed
sufficiently for practical use by accountants and business managers in

69
general.^2

There ere other "operations research" techniques that are in

use besides linesr programmlng, particularly statistical techniques, and
it might have been possible to list them here.

But linesr programming is

one of the best known, and is widely employed in one form or another; it
is taken as a surrogate for a class of non-traditional techniques.

If a

firm has reached any degree of mathematical sophistication, it will
almost certainly be familiar with this technique, even if not with others.
Linear programming is a mathematical technique by which the best
(optimum) solution is chosen from among various alternatives.

It is an

effective technique for computing problems that have interacting vari>
ables, which essentially involve selecting the combination of resources
that maximizes profits or minimizes costs.

The primary application of

linear programming is in the general class of allocation problems.

43

All explicit analytical methods of linear programming are based
upon certain assumptions.
and (2) certainty.

The two central assumptions are (1) linearity

Linearity means that all problem relationships can be

expressed in the form of linear equations.

The term certainty indicates

that no significant variations are expected in the numerical value of a
problem factor.
The mathematical computational procedures of linesr programming
depend on which of the several programming methods is adopted for a
particular problem.

The basic or general case is called the Simplex

^ R o b e r t B. Sweeny, "Business Use of Linear Programming,"
Management Accounting (September 1965), p. 39.
^ R . Stsnsbury Stockton, Introduction to Linear Progr*™«<ng
Allen and Bacon, Inc. (Boston, 1963).

70
method, since It Is bssed upon the simplex algorithm.

Another, a

graphical method, is limited in application to certain types of ele­
mentary two-dimensional problems.

The suggested procedure for the

graphical method Is as follows:
1.

Determine the objective function. Usually this takes
some form of either maximisation of profit or minimisa­
tion of cost.

2.

Determine basic relationship In the situation, especially
the constraints.

3.

Determine available feasible alternatives.

4.

Compute the optimum solution.

5.

Modify the solution to take account of those factors
in the problem that are not included in the quantitative
analysis.^

The orderly solution of problems using the simplex foremat re­
quires the performance of a series of carefully defined steps so as to
produce the desired result with minimum computational effort.

However,

the invention of the electronic computer and its use in business appli­
cations overcame this compute*, oral problem.
Complex allocation problems having certain characteristics may
be solved by a special highly simplified version of the simplex method
referred to as the t ranaoort at ion. distribution, or stepping stone
method of linear programming.

It is especially appropriate for source-

to-destlnation situationn such as the transportation of goods from
plants to dlstinatlon facilities.

The same solution framework, however,

may be applied to a wide variety of problems.

^Charles Horngren, Cost Accounting - A Managerial Emphasis.
2nd Ed., Englewood Cliffs, M. J., Prentlce-Hall, Inc. 1967, p. 829.

71
Examples of linear programming applications include:

determining

optimum product mix, material mixes, machine and manpower combinations,
utilizing storage or shipping facilities etc.
Professor Onsi has applied linesr programming to provide accounting information to management executives for their decision making process.
He has described how the operating budget could be based on a linear pro­
gramming model to provide relevant, accurate and timely planning and control information for each responsible manager.

45

He argues that linear

programming information is a part of the accounting information system.
This view is also shared by other accounting writers.

46

I believe that

if the accountant would like to meet the challenge he is facing by the
development and implementation of the modern decision-making techniques,
he should prepare himself to apply these techniques in his accounting
Information system.
3.5.8

The Network Techniques - PERT/CPM
The network technique for planning and scheduling is one of the

most interest-provoking developments in recent years.

The systems which

use network analysis and critical path methods for planning and scheduling
the completion of a given task are variously referred to as PERT (Program
Evaluation and Review Technique), CPM (Critical Path Method) or PERT/CPM.
Although the origin of CPM is industrial and PERI is military, the basic
concepts are similar.

There has tended to be a merging of the two

^Hlohamed Ons1, "Linear programming - An Accounting Information
Model," Management Accounting (December 1966), p. 46-52.
^ F b r example see Y. Ijlrl, F. Levy and R. Lyon, in their
"A Linear Programming Model for Budgeting and Financial Planning,"
Journal of Accounting Research (Autumn, 1963), pp. 198-212.

72
systems although a distinction which remains

is the use of probabilities

by PERT and not by CPM.^7
PERT and CPM both make use of the two basic tools; the network
description and the critical path.

Together, these tools constitute a

single management control technique for defining and integrating events
and activities necessary for the timely completion of program activities.
A program or project can be thought of as consisting of a number
of specific results to be accomplished in a certain sequence so that an
objective may be attained; they

are referred to as e v e n t s . E v e n t s

typically are s h o w as modes or

circles in a network.

culminating in an event is described by an arrow.

The activity

Since the events are

Interdependent, the arrows also show the sequence In which events must
be accomplished.

The events, themselves, occur at a point in time; they

do not require time.

Time is occupied by the activity necessary to

proceed from one event to the succeeding one.

The network description

consists then, of arrows which represent activities and modes (or
circles) which represent events as shown in Figure 111-3.

47

Gordon B. Davis, "Network Techniques and Accounting with
Illustration," NAA Bulletin (May, 1963), p. 11-18.
^®For a aummarlsed text see, A Programmed Introduction to PERTProgram Evaluation and Review Technique by ITT Federal Electric Corpo­
ration, John Wiley & Sons, Inc. (New York, 1965).

73
FIGURE III-3
PERT - NETWORK WITH EXPECTED TIME
AND CRITICAL PATH INDICATED

O

t - Time
Source:

Planned
Event

Activity

---

Critical Path

Adapted from An Introduction to the PERT/Coet Svatem for
Integrated Project Management, Special Projects Office of the
Navy, Washington, D.C.

The next step is to find the critical path through the network.
An event is on the critical path if, when it is not completed on time,
the entire project is delayed by the amount of time that the event is
delayed.

In other words, the sequence of events which can not be

delayed without delaying the entire project, constitutes the critical
path.
The PEST approach to time estimates provides a means for-in­
cluding within the analysis the uncertainty which is part of most time
estimates.

This is done by obtaining three separate time estimates for

each activity - the optimistic, pessimistic and most likely.

These

74
estimates are then ueed to construct a probability distribution for the
occurrence of the events or completion of the activity.
The CPM approach on the other hand, uses a single time estimate.
CPM becomes a satisfactory and simpler approach when time estimates are
reasonably precise.

49

Time is the key element in network techniques.

It is used as a

basis for describing progress and evaluating performance.
considered in the basic structure.

Cost is not

However, a logical extension of the

technique is to include the cost element, so as to be able to keep cost
low and, at the same time, meet the completion date.

Basic PERT(cm)

cost is intended to assist the project managers by assigning costs to
the responsibility levels in the detail needed for planning schedule and
coats, evaluating schedule and coat performance, and predicting and con­
trolling cost during the operating phase of the program.^®
PERT/Cost estimates are a new way of looking at the expense
budgets.

If properly conceived, they can become an integral part of the

comprehensive budget program.
In concluding his article DeCoster says:
The accountant is charged by management and society with pro­
viding financial information for all levels of decision
making.
If the accountant is to serve the managers effec­
tively, he will have to broaden his Influence beyond the
confines of historical data to Include all areas of the
firm and the future. PERT/Cost offers him one challenge
in this direction.

49perdlnand K. Levy, Gerald L. Thompson and Jerome D. Wlest,
'•The ABC's of The Critical Path Method," Harvard Business Review
(September-October 1963), p. 102.
50Don T. DeCoster, "PERT/Cost - The Challenge," Management
Services (May-June, 1964), p. 13.
51Ibid.. p. 17.

75
This same challenge haa induced me to select the network analysis
technique to be Included among the modern management accounting techniques
subject of thia study.

3.6

Summary:
This chapter has been divided into two main sections.

The first

is to explore the role of management accountant in the management process.
The second section is concerned with the modern tools available to the
accountants which he can utilise to perform his functions; providing
timely and relevant financial information to help managerial levels in
their decision making process.

Every manager in the organisation struc­

ture is making decisions to plan or/and control the operations under his
responsibility.

In fulfilling his role, the management accountant as

the man most identified with financial information, uses accounting
techniques of which eight were selected to provide the needed informa­
tion for planning and control.

Cost-volume-profit analysis, contribu­

tion margin reporting, standard costing, operating budgeta, responsibility
accounting, linear programming and network analysis were chosen for this
study.

A brief description of each of these techniques is Included in

the second section of this chapter.

This conceptual description will be

used as a framework to compare the actual application of these techniques
in practice.

CHAPTER IV

THE EXTENT OF APPLICATION OF
MANAGEMENT ACCOUNTING IN PRACTICE

In Chapter II, eight management accounting techniques were
selected as the scope of this study.

Such selection was based on two

grounds; (a) their popularity In current management accounting liter­
ature, and (b) their purported usefulness to provide all levels of
management with relevant information for the planning and controlling
functions of management.
In Chapter III, a survey of the management accounting liter­
ature was made to provide a conceptual or theoretical description of
each of the eight techniques selected.

In addition, their prospective

applicability to assist management in the decision-making process was
introduced briefly.
A survey of the management accounting practices with regard
to these techniques, in a sample of thirty-five small and medium manu­
facturing companies in the State of Michigan, will be the center of
discussion of this chapter.

The objective of this survey is to show

the extent of application of these modern management accounting tech­
niques in today's practice.

Discussion based on this survey will start

with a synthesis of the objectlve(s) of management accounting as seen
and perceived by the management accountants interviewed for this study*
A section on the practice of each of the eight techniques will follow.
Finally an over-all view of the extent of application in current

77
practice will be provided.
At this point, I am presenting only the results of survey data.
In Chapter V, there will be discussion of reasons why or why not partic­
ular techniques, and the battery of managerial accounting techniques in
general are adopted by firms in the survey sample.

4.1

Survey of the Current Practice of
Management Accounting Techniques;
This section pertains to the current state of management accounting

techniques as they are applied in today's practice as found In my survey.
The extent of applying each technique will be investigated.

However,

the discussion of environmental factors necessary for adopting and apply­
ing these techniques will be withheld at this stage to be analysed sepa­
rately and In detail in the next chapter.
4.1.1

Coat-Volume-Proflt Analysisi
Undoubtedly, business profit depends on a proper balance of sell­

ing prices, mix of product, volume and costs.

The extent to which a

company can achieve a degree of this balence is what determines its profit
structure and forms a basis for its future profit planning.

Thus, the

cost-volume-profIt analysis portrays to management whet the profit struc­
ture of their compeny la now and what It could become In the future under
various proposed alternatives In a way which aids management In selecting
the best possible course of action now and In the future,
a.

Study of Cost Behavior in Practice:

For the determination of profit at any time, at any volume, at any
price level, and for any condition of product mix, proper cost classifi­
cation and analysis Is required.

As It has been Indicated-In Chapter III,

some costs vary closely with changes In volume whereas others remain

78
unchanged In total amounts regardlesa of changes In salea activity or
production volume.

Coats which change with volume are usually called

variable costs, and those which do not are referred to as fixed costs.
In analyzing the cost-volume-proflt relationships, variable and
fixed coat components must be separated.

The sole determinant for

deciding the fixedness or variability of a cost Is Its behavior with
volume.

Thus, the first question Included In the C-V-P section of the

guiding questionnaire was designed to ask each management accountant
interviewed whether or not cost behavior has been studied and costs have
been classified Into fixed and variable In his company.

Table IV-1 shows

how well the companies Included In the sample are doing In determining
the variability of costa with regard to volune changes.

TABLE IV-1
NUMBER AND PERCENTAGE OF COMPANIES
STUDYING COST-BEHAVIOR

No. of
Companies

% of
Sample

Yea - Cost behavior studied

23

66%

No - Cost behavior not studied

12

36

35

100%

Cost Behavior

Total

In twenty three companies, about two-thirds of the sample of the
management accountants interviewed Indicated that cost behavior has been
studied.

Cost patterns have been determined and costs elements have been

classified Into fixed and variable costs.

However, about one-third,

79
twelve of the companies did not study the behavior of their business
costs and their cost accounts are left without segregation Into their
fixed and variable accounts and any attempt to obtain cost elements
separated Is done In an informal way when need for It arises,
b.

The Use of Cost-Volume-ProfIt Analysis:

The results of the empirical research show

that companies Inter­

viewed are approximately equally divided on the use of the C-V-P analysis.

TABLE IV-2
DISTRIBUTION OF THE SAMPLE ACCORDING TO THE
APPLICATION OF COST-VOLUME-PROFIT ANALYSIS

Use of C-V-P Analysis

No. of
Companies

X of

Sample

Yes - We Use C-V-P

18

No - We do not

17

_42

35

100*

Total

51*

*with some rounding effect.

Eighteen companies, about 51 percent, of the sample are using CostVolume-Proflt analysis In their decision making proceas, elthar formal­
ly or Informally.

However, seventeen companies, little lass than 49

percent, of the sample are not using the C-V-P technique in any form;
neither formally, nor Informally.
c.

The Form of C-V-P Analysis:

Amont the eighteen companies that are using the C-V-P technique
°nly 5, 28 percent of them, are reporting the results of the relationships
between cost, volume and profit periodically on formal reports to

80
management and on a continuous basis.

The other thirteen companies,

about 72 percent of those which are using the C-V-P technique, are
using it on an informal basis.

Reports illustrating the relationships

are made Infrequently and according to the demands of top management.
This happens each time top management, or a member thereof would feel
that C-V-P illuatratlon is needed before taking a specific decision or
reviewing the results of specific action.
d.

Methods of Analysis and Presentation:

As it has been stated in Chapter III, the relationships between
cost, revenue, volume and profit can be presented either by the graphical
approach, the formula approach or both of them at tile same time.

Teble

IV-3 shows the results of the empirical data.

TABLE IV-3
THE PRESENTATION METHODS OF C-V-P RELATIONSHIPS

No. of
Companies

X of
Sample
(18)

2

11

Formula only

11

61

Both graphical and formula
together

_5

28

18

100X

Method<s) of Presentation

Graphical only

Total

It is clear, as indicated in the table above, that the dominant
method of preeenting the C-V-P relationships is the formula method.
61 percent are using the formula approach only for such presentation.

About

81
Twenty-eight percent of the companies using C-V-P technique use both the
graphical and the formula approaches combined In presenting C-V-P rela­
tionships to management.

Only two companies, 11 percent, Illustrate

such relationships through the graphical approach only.

This would Indi­

cate the popularity of the formula approach over the graphical approach
in current practice of these companies.
e.

The Major Applications of the C-V-P Technique;

The companies Included In the sample have portrayed varied views
on the applications of the cost-volume-proflt technique.

A list of six

broad areas of application was presented to each management accountant
Interviewed to select those which his company la using.

The results are

given In Table IV-4.

TABLE IV-4
THE MAJOR APPLICATION OF THE C-V-P TECHNIQUE
RANKED ACCORDING TO FREQUENCY AS REPORTED BY
COMPANIES APPLYING THE TECHNIQUE

frequency

Rank

Application

1

Pricing and/or bidding (including costing)

2

Sales mix (or product mix)

8

2

Budgeting and forecasting

8

3

Addition or deletion of product lines

7

3

Acceptance of special orders

7

4

Selecting channels of distribution

1

20

Using the technique for product pricing and bidding was cited as
the most Important application of the C-V-P technique.

Both determination

82
of the moet profitable sales mix and the use of Cost-Volume-Profit
relationships in forecasting and establishing operating and capital
budgets were stated as the second major two applications of the techni­
que.

Addition or deletion of a product line or any business segment along

with using the technique in accepting special orders to utilise the
available capacity came third in order.

However, using the C-V-P

technique in selecting the best channels of sales distribution was only
mentioned by one company and is rated the least used application accord­
ingly.
f.

The Relationship between Determining tha Company’s Cost
Behavior and the Application of C-V-P Technique

The empirical results confirm what almost all the textbooks say,
that it becomes easier and more probable to apply the C-V-P once the cost
behavior has been determined and cost elements have been classified.

Among

the eighteen companies that apply the C-V-P technique only 14 companies,
about 78 percent, have made a study of some sort to determine the behavior
of their costs and are classifying their costs Into fixed and variable
elements.

This leaves 4 companies, about 22 percent, who are using the

C-V-P technique without making formal cost classification.

However, the

following characteristics become clear from the empirical data:

(1) they

all use the C-V-P technique Informally; (2) they all use only the formula
approach as a basis for coet-volume-profit analysis; and they all but
one do not uae tha graphical method in presenting tha C-V-P relationships.
Meanwhile, among tha seventeen companies that do not use the C-V-P techni­
que, nine companies have determined their cost behavior and their charts
of accounts segregate between variable costs and flxad costa.

Factora

lying behind the inability or desire to apply the C-V-P technique will be

83
discussed In Chapter V,

The relationships observed and discussed in the

last two paragraphs are summarized In Table IV-5 below.

TABLE IV-5
RELATIONSHIPS BETWEEN DETERMINATION OF COST BEHAVIOR
AND THE APPLICATION OF THE C-V-P TECHNIQUE

No. of
Companies

X of
Sample

14

40

Companies determine cost behavior but do not
apply C-V-P

9

26

Companies do not determine cost behavior but
apply C-V-P

4

11

_8

23

35

100X

The Relationship

Companies determine cost behavior and apply C-V-P

Companies do not determine cost behavior and do
not apply C-V-P
Total

A .1.2

The Contribution Margin Reporting Technique:
It is important to know the relative profitability of the various

segments of the business to guide management toward which segments to
emphasise, which to improve and which to drop.

Profit analysis applied

to different segments of the business can reveal broad areas of strength
and weakness in its divisions or departments, products or product lines,
Job orders, sales territories and salesmen and any other segments of the
business.
These strengths and weaknesses are best evaluated by their rela­
tive contribution margin toward covering the joint costs and profit.

Under

the contribution margin technique cost and revenue concepts are those that

84
differentiate between what can be attached to specific segments and
what are joint and are Incurred (or earned) foT (or from) the business as
a whole.

In the traditional segment Income statements, all costs are

fully allocated, so that the segments show final *'~t Incomes that can
be summed to equal the net Income for the

company as a whole.

The contri­

bution margin reporting technique, on the

other hand, realises

the high

degree of subjectivity of cost allocation

Involved In the traditional

approach, especially with regard to joint

costs where

they are not Incurred

for any specific segment and any allocation of such costs is arbitrary at
most.

The contribution margin reporting technique distinguishes between

various degrees of objectivity In cost allocations and differentiates
between separable and joint costs with regard to each segment and reports
Its contribution margin accordingly.
a.

The Use of the Contribution Margin Reporting in Practice

A rather small number of companies are found using the contrl^
button margin reporting technique in practice.
only ten companies, 29
fined In this study.

The survey shows that

percent, are applying the technique as it is de­
This finding Is rather a significant one, since It

Indicates that the majority of the companies Included In this study did
not yet put this technique into practice.
However, two interesting observations can be seen from analysing
the empirical data collected during the survey.

The first indicates a

strong relationship between determining the company's coot behavior and
the ability of the company to apply the contribution margin reporting
technique.

Nine companies out of the ten applying this technique, have

studied their cost behavior patterns and have classified the fixed and
variable elements in their companies' chart of accounts.

Only one company

85
was reported that it determines the patterns of Its costs Informally
and especially for the purpose of reporting the relative performance
of Its segments.
The second observation reveals the strong relationship between
the ability to apply the contribution margin technique in thoae companies
which are already using the C-V-P analysis.

Eight of the ten companies

that apply the contribution margin reporting are in the same time apply­
ing the C-V-P analysis.
The

two relationships can be explained onthe ground that both

techniques,

the C-V-P and contribution reporting, need a careful study

of the company's cost patterns.

Though the C-V-P technique requires

classification of costs according to their variability with volume of
activity, the contribution reporting requires classification of costs
Into separable and joint costs.

The cost concept differs slightly be­

tween the two techniques but awareness and ability to determine the
cost behavior according to one concept makes it easier and more probable
to determine it
b.

according to the second concept.

The Segments for which Contribution Margin is Reported:

The empirical findings with regard to the practice of contri­
bution margin reporting indicate that even those companies which apply
the technique did not use most of its potential.

This observation appears

from information illustrated in Table IV-6 below.
As it is illustrated in the table below, no company is analysing
and reporting contribution margin according to more than two classifica­
tions of business segments.

The majority, 7, companies, applying the

contribution margin reporting technique are reporting contributions

86
TABLE IV-6
BUSINESS SEGMENTS USED FOR CONTRIBUTION MARGIN REPORTING

No. of
Companies

Reporting Segment(s)

X

Product lines and Job orders only

2

20

Product lines and sales territories only

1

10

Product lines and division (or departments)

1

10

Product lines only

3

30

Divisions (or departments) only

2

20

_1

10

10

100X

Job orders only
Total

primarily by product lines.

Only one company reports contribution margins

according to sales territories*
by divisions or departments.

Three companies analyse their contribution

One company only reports contribution margins

by Job orders.
c.

The Major Objectives of the Contribution Margin Reporting;

Management accountants interviewed have cited at least four
major goals for which they are applying this technique.

These goals

are 1) profitability comparison of various segments of the business 2)
product pricing and pricing policy under competitive market conditions,
3) controlling of segments operations and 4) executive compensation.
However, the relative importance of these four goals differs
gteatly when measured by the frequency of the interview responses and
Importance attached to each of them as indicated in Table IV-7 below.

87
TABLE IV-7
THE RELATIVE IMPORTANCE OF THE
CONTRIBUTION REPORTING GOALS

Rank

Objective

No. of
Companies

1

Profitability comparison

10

2

Product pricing

4

3

Control of segments' operation

3

4

Executive compensation

1

Profitability comparison of business segments whether it is product
lines, divisions, sales territories Job orders etc. was cited as the most
important goal of the contribution margin reporting.

Product pricing

occupies the second place of Importance measured in this sense.

Control

of segments operation and executive compensation programs were cited as
third and fourth In importance.

The accountants feel the profitability

comparison is the primary objective of this technique, while the other
three uses are secondary and by-products of the first.

4*1.3

Standard Costing Technique:
As it is explained In more detail in Chapter III, standard costs

are the scientifically pradatarmlned costs of manufacturing a single unit,
or a number of units of product, during a specified period in the inter­
mediate future.

Standard coats are the planned costa of a product under

current and/or anticipated operating conditions.

They should be estab->

llshed as accurately -as possible because the effectiveness of controlling
and reducing costs and promoting and measuring efficiencies depends on

88
the quality of the etenderda.
A survey of the current practice of the standard costing technt**
que reveals several Important observations which will be treated separate­
ly in the following subsections.
a.

The Use of the Standard Costing Technique;

Companies studied for the purpose of this dissertation represent
a diverse experience as far as the use of one type of standard costing
or another.

The number and percentage of those companies which are using

standard costing techniques are shown in Table IV-8 below.

TABLE IV-8
DISTRIBUTION OF THE SAMPLE ACCORDING TO
THE USE OF STANDARD COSTING TECHNIQUE

No. of
Companies

Costing Basis

X of
Sample

Standard Costing

19

54X

Actual Costing

16

46X

35

100X

Total

Nineteen companies. about 54 percent of those interviewed,
applying a costing technique which resembles more or less some of the
characteristics of standard costing as it is described in relative de­
tail in Chapter III.

On the other hand we found out through the inter­

views that sixteen companies, about 46 percent, do not utilise any version
of the standard coating technique; instead they are still using actual
costs for costing their products and valuing their inventories.*

-in rtia

Among

*Thls with the realisation that allocation of overhead cost even
..t'li.i
t--tno m n r n A e h u v be baaed on a predetermined overhead

89
the nineteen comepnlee using standard costing techniques only fourteen
companies use standard cost for all the manufacturing cost elements,
material, labor and factory overhead.

At least five companies use stan­

dard costing techniques on a partial basis.

Three of them use standard

cost for labor, predetermined or budgeted cost for overhead, but they
use actual cost for material.

The two comapnles use standard cost for

material, predetermined cost for

overhead but actual cost la used for

labor.
The standard costs used In practice also differ appreciably on
how current the applied atandards are.

In some companies, standards

established as far back as 1951 are still applied today especially for
material costing and inventory valuation.

A management accountant in

one of these companies indicated during the interview that his company
uses two different sets of costs for two different decision areas.

They

use standard labor costs and actual material cost in addition to a pre­
determined rate for factory overhead, based on standard labor hours, for
pricing their products.
Inventory valuation.

However, they use 1951 basic standard costs for

In another company, the management accountant inter­

viewed Indicated that the material standard cost used in his company has
not been changed since 1959.

In all the nineteen companies applying

standard costing technique, at least five management accountants stated
clearly that their standarde are basic type of standards as opposed to
current standards, and are not updated since a long time.

At the same

time most of them demonstrated signs of dissatisfaction for having to
work according to non-current standard costing system.
b.

The Basis of Establishing Standard Coating in Practice:

The success of a standard costing system depends, among other

90
things, on the reliability and accuracy of the standards to be used
in that system.

Then extreme care must be taken to assure that all factors

have been considered in the establlshement of standard costs.

Theoreti­

cally standard cost has been defined, in Chapter III, as the scientific
predetermination of what cost should be in the near future period(s).
Material standard cost consists of price and quantity standards.
Labor Btandard costs consists of rate and time standards. Thus, according
to the standard's definition adopted in this dissertation, material price
and labor rate standards should be based on expected future prices and
rates which are expected to prevail in the period during which these
standards are to be applied.

Similarly, material usage and labor time

should be based on technical engineering studies according to the nature
of the products, its production process and the time and motion studies.
Surveying the current practice of the companies Included in the
study revealed that most of those which apply the standard costing tech­
nique rely, in one way or another, on the scientific approach of estab­
lishing the standards.

However, they differ greatly on the other bases

they use to establish their standard costs.

This observation is demon­

strated in Table IV-9.
In twelve companies, about 63 percent, of those using standard
costing, the technical engineering studies approach Is used as basis
for establishing standards.

However, only six of these companies use

estimated future coats In addition to the technical engineering studies.
Generally, they do this by projecting any foreseeable changes in current
prices and rates and incorporating these expected changes Into their
standards.

The standard costs In these six companies completely conform

to the standard costs, theoretically defined in this study.

91
TABLE IV-9
THE BASES OF ESTABLISHING STANDARD COSTS
IN PRACTICE

No* of
Companies

X

Technical Engineering Studies and Estimated
Future Costs

6

32X

Technical Engineering Studies and Average
Historical Costs

4

21

Technical Engineering Studies and Actual
Current Cost

2

10

Average Historical Costs and Estimated Future
Costs

3

16

_4

21

19

1001

Standard Cost Bases

Average Historical Cost Alone
Total

But this theoretical basis Is not applied everywhere, and It is
not the only basis found In practice for establishing standard costs.
Four companies of those using technical engineering studies to establish
aaterial usage standards and labor time standards are, in the same time
relying on past historical records and are using average past costs as
bases for aaterial price standards and labor rate standards.

Any de­

viation of actual costs from these averages would be reflected in material
price and labor rate variances.

Still, in this category, there are two

companies which use technical engineering studies to establish the stan­
dards, but cost these standards at actual current costs of material and
labor.
On the other hand, the study shows that the other seven companies,
37 percent, that use standard costing, at least by name, did not subject

92
their operations to any kind of engineering or technical studies.
Three of these companies are using a hybrid of average historical cost
plus estimated future cost to get what they call standard costs.

The

other four companies are basing their "standard costs" on merely past
historical cost.

They do not use engineering and technical studies,

nor do they use any sort of expected future costs.

But they still have

a kind of predetermined cost by which they cost their products and value
their inventories.

For example, in one of these four companies, labor

standards are based on the best performance reported last year.

Any

deviation from that standard is reflected in some labor cost variances.
c.

Analysis of Variances:

Deciding to use standard costing, choosing the bases on which
standards are to be established, establishing the standards themeelves,
and measuring actual performance according to the established standards
are but parts of the standard costing technique as perceived here.

Com­

paring actual performance with standard performance is another part of
this technique.

However, the most Important part of all, from the

control function point of view, is the determination and analysis of
the variances resulting from the comparison between actual and standard
performances.

Such analysis provides Information needed to pinpoint

any deviation from the standards, the probable causes for their occurrence
and the possible measures necessary to eliminate or reduce such occurrence.
Yet the actual practices of the companies using standard costing
greatly vary on how elaborate their variance analyses are.

Table IV-10

shows the divergence of the current practice regarding this point.
Eight companies, 42 percent, of those which apply standard costing
for measuring performance, costing products and valuing Inventories, are

93
TABLE IV-10
USE OF VARIANCE ANALYSIS AMONG
THOSE APPLYING STANDARD COSTING

No. of
Companies

2

Material, Labor and Factory Overhead Variances

8

422

Material and Labor Variances only

4

21

Labor and Factory Overhead Variance only

2

11

Labor Variances only

1

5

_4

21

19

1002

Variances Analyzed

No Variances are Analyzed
Total

using the standard costing technique to Its ultimate potential from the
control aspect.

They determine variances for all the three elements of

manufacturing cost, material, labor and factory overhead.

However, the

number of variances they use for their analysis differs from one company
to another.

On the one hand, two or more variances were used for each

cost element.
these elements.

On the other hand, only one variance was used for each of
In some companies this one variance represents the total

variances for a cost element.

Still in some other companies, it represents

only a part of the total variance of that cost element, absorbing the
other part in the measuring process and ignoring it, for the time being,
until the end of the financial period.
Four other companies, 21 percent, analyse only material and
labor variances during the period, leaving any factory overhead under-orover application until the end of the period to be adjusted in the books

94
with or without final remarks on the cuaaes of such variances*
Still two other companies, using standard costing, analyze labor
and factory overhead variances only.

One of them, is using standard

costs for only labor and factory overhead.
material.

It works on job order basis.

It applies actual costs to

The other company is using

standard costs for the three cost elements, but it analyzes the variances
of only labor and overhead.
One other company, in the group, though it applies standard costs
to all manufacturing cost elements, considers that labor variances are
the only important variances to deserve regular analysis.
However, analysis of the empirical data shows that four of the
nineteen companies using standard costs, do not analyze any variances b e ­
tween their actual and standard costs during the physical period, but
rather they leave these variances to accumulate until the end of the
period when the probable causes may be pinpointed.

In this way they lose

the possibility of knowing the reasons for these variances shortly after
they occur, sacrificing their ability to take any effective corrective
action during the period to remedy them.
d.

Integrating the Variance Accounts in the Formal Books:

Practices of those companies using standard costs, varied also
as to whether or not the variance accounts are included in their general
or coat books.

Among those nineteen companies, eleven are integrating

their variance accounts into the formal books.

Their variance accounts

are considered regular accounts like any other account.

However, the other

sight companies consider the variance accounts as special accounts.

Vari­

ances are accumulated outside the formal books until such date when they
adjust their regular accounts by these variances.

95
e.

The Costing Syitta B w d in Practice:

Costing systems described in any cost or management accounting
textbook are process costing and job order costing.

Generally most of the

textbooks state the conditions under which each of the two systems could
be applied.

Theoretically, the textbooks frequently maintain that stan­

dard costing is more plausible under the process costing system than under
the Job order costing system.
The analysis of the empirical results confirms this point.

Table

1V-11 compares the percentage of these using standard costing technique in
a process costing system with the percentage of those using standard
coating technique in a job order costing system.

TABLE IV-11
COMPARISON BETWEEN THE PERCENTAGES OF THOSE APPLYING STANDARD
COSTING IN PROCESS COSTING AND IN JOB-ORDER COSTING

Costing System

No. of
Companies
in the
Sample

No. of
Companies
Use Standard
Costing

X

Process Costing Only

17

9

53X

Job Order Costing Only

11

4

37

Hybrid Costing (mixture of both)

-1

_b_

86

35

19

-

Total

One comment is in order at this moment to put the results Included
in the table above in proper prospective.

Moot of those companies which

adopt a hybrid costing system, though their operations Include both process
produced products and specially ordered products, the relative weight of

96
the process operations is more than that of their job order operations.
While 53 percent of those companies which adopt process costing
are applying the standard costing technique, only 37 percent of the
companies using job order costing are applying the standard costing techni­
que.

These percentage would change in favor of those using the process

costing if we distribute the hybrid-costing group among the process cost­
ing and job order costing groups.
However, the same data does not, at all, indicate that standard
costing is only possible under process costing system.

To the contrary,

two observations became clear through the personal interviews.

The first

is that standard costing is possible under both process and job order
systems, though empirical evidence indicates that it is more probable
under process costing than under job order costing.

The second signi­

ficant observation related to this point is that most of those companies
which use job order costing use the standard costing in partial, in­
complete manner.

Some of them use standards for only labor and overhead

costs and actual cost for material.

Some others apply standard for

material and overhead but actual cost for labor.
f.

Major Applications of Standard Costing:

Standard costing in practice has been applied to many different
decision situations.

However, for the purpose of this study only the

five applications most repeated by the management accountants interviewed,
are shown in Table IV-12.

They are ranked according to their relative

importance measured by the frequency of answers.
Using standard costs for product costing and Inventory valuation
was reported by 90 percent of management accountants who apply standard
costing, as the most important application of the technique.

Control of

97
TABLE IV-12
MAJOR APPLICATIONS OF STANDARD COSTING

Rank

Major Applications

Frequency
X

1

Product Costing and Inventory Valuation

90S

2

Cost Control

74

3

Pricing

68

3

Measurement of Performance

68

4

Building Budgets

52

*Some participants gave more than one answer and therefore, the percentage analysis will total more than 100 percent.

costs through variance analysis was repeated as the second in importance.
Utilizing the standard cost of a product as a factor in determlng the
product's selling price was reported by thirteen companies, 68 percent.
Measuring managers' performance was repeated by the same number of com­
panies.

Using the standard costs as the block in builldng operating

budgets was reported by little more than half those which apply standard
costing and ranked the fourth In Importance.

*•1.4

Operating Budgeting Technique:
In Chapter III budgetary planning and control has been defined as

the act of preparing and applying budgets in both planning and controlling
business operations.

A comp rehens ive budget has been defined as an inte­

grated and coordinated plan for all phases of operation of the firm, ex­
pressed in financial terms.

98
By this definition, a comprehensive budget includes both operating
and capital budgets.

Operating budget, in turn, could be a comprehensive

operating budget covering all and every aspects of operation or it could
be a partial operating budget covering only some aspects and leaving
other phases of operation not budgeted.
a.

U s e ‘of Budgets in Practice:

The personal interviews conducted, show that twenty-five about 63
percent, of the companies studied are using budgets in one way or another.
Only ten companies, 37 percent, indicated that they did not use any form
of budgets yet.

Table IV-13 Includes the details of current practice with

regard to budgeting.

TABLE IV-13
DISTRIBUTION OF THE SAMPLE ACCORDING
TO BUDGETING PRACTICES

Budgeting Practice

Companies Using Comprehensive Budgets (both
Operating and Capital Budgets)

No. of
Companies

17

X of
Sample

49X

Companies Using Only Operating Budgets

5

14

Companies Using Only Capital Budgets

3

8

10

29

35

100X

Companies have no Budgets at All
Total

Seventeen companies, 49 percent of those included in this study
are using comprehensive budgeting including budgets for both operations
and capital expenditures.

Five companies, about 14 percent, establish

99
and apply only operating budgets.

Three other companies indicated

through the Interviews that they do not apply operating budgets but they
do have capital budgets for their future capital expenditures.

However,

little less than one third, 29 percent, of the companies included in
this sample do not apply any budgetary planning and control technique and
do not have any kind of budgets in their companies.
In this section we will discuss some characteristics of the
operating budgets in practice, deferring the discussion of practice of
capital budgeting to a later section in this chapter.
b.

The Bases of Establishing Operating Budgets:

Usually, establishing an operating budget for the company as a
whole or any segment thereof, starts with setting the objectives for
which the budget will be the financial translation.
one of the basic objectives of any business.

Profit is considered

Once a profit objective has

been selected, the planning process to achieve such objective starts.
Expected profit is a
and costs.

product of expected sales, sales prices, production

Normally, as a starting step in building an operating budget,

a study of sales forecast takes place to determine sales projection or
expected sales.

Then production is coordinated with the sales projection

to build the production subbudget with all the schedules of production
requirements, material, manpower and services.

Selling expenses and ad­

ministrative expenses subbudgets are established accordingly.

Cash

budget is prepared from the information included in these subbudgets to
find financial sources to support the expected operations.

Then fore­

casted financial statements will summarize the results of operations and
shows the budgeted financial positions at the end of the budget period.

100
This procedure for preparing operating budget was also the
normal procedure of most of the companies applying the operating budget
technique In practice.

However, the management accountants Interviewed,

in at least two companies, Indicated that sales is not the crucial limiting
factor In their business operations, and thus they do not base their
operating budgets primarily on their expected sales.

In fact, they said,

one of the problems they are facing Is the backlog of customer orders that
are unable to meet.

Their productive capacity presents a limiting factor

in their businesses and thus it constitutes the starting point in estab­
lishing their operating budgets.

Sales estimates are consulted, but Just

for coordinating the various parts of operation together to prepare a
coordinated master plan for the whole company.
c.

The Extent of Operating Budget Coverage

Operating budgets should cover the whole business in both its
horizontal and vertical dimensions.

Horizontally, the budget should

cover all aspects of operation In the company; sales, production, admin­
istration and finance.

Vertically, on the other hand, an operating budget

should cover every level In the company's organizational structure.
Operating budgets could be established at the foreman or cost
center for each center; at the departmental level for each department to
Include the budgets of all cost centers under its supervision plus its
own headquarter budget; at the divisional level for each division to in­
clude the budget of all departments under the division's supervision plus
its own headquarter budget; then at the company's level to include the
budgets of all divisions plus the company's headquarter budget.

Of course

degree of such detail will depend on the environmental factors which will
be center topic of the next chapter.

101
Throughout the interviews, it appeared that there is no uniform
practice with regard to the coverage of the operating budgets now in
operation.

With respect to the horizontal coverage, most of the companies

applying operating budgets could be considered having comprehensive oper­
ating budgets.

They establish their budgets in such a way to cover every

aspect of their operation. Including sales, production, administration
and finance.

Required resources as well as the means to provide these

resources are included either in the subbudgets or in supporting schedule.
However, in some other companies, the practice of operating
budget is not that comprehensive.

Their operating budget could be

described at most, a partial operating budget, in the sense it excludes
some aspects of operations.

In one of those companies operating budget

was established for almost every business aspect except the production
area.

The management accountant realizing the shortage of such budget

indicated that this situation is due to the unpredictable nature of their
Job or business, the production operation could not be completely deter­
mined until a Job is ordered.
Another example of partial operating budgeting practice was seen
in those companies which face no sales limitations.

Sales budgets are

considered less important and therefore, attention given to their construc­
tion and elaboration is limited.
Similarly, current practice of operating budgets indicates
variations with respect to the organizational level for which an operating
budget is established, as indicated in Table IV-14.
Nine out of the twenty-two companies applying operating budgets,
prepare their budgets to cover every and all organizational levels.

Five

of them, prepare subbudgets for each production center, sales territories-

102
TABLE IV-14
THE ORGANIZATIONAL LEVELS FOR UHICH
OPERATING BUDGETS ARE ESTABLISHED

Operating Budgets Prepared For

All Levels Starting From Cost Center up
to the Company Level
Only the Division (or Departmental) Level
Total

No. of
Companies

X

9

41X

13

59

22

100Z

department and division before Integrating theae subbudgeta Into an
overall company budget.

Four companies do not classify their sales bud­

gets by sales territories, but they prepare budgets for each production
center and each division or department.
On the other hand, the empirical research reveals that thirteen
companies, about 59 percent of those using operating budget establish
their budgets only for each of their divisions or departments.

They do

not prepare subbudgets for any organizational level below that.
Companies using operating budgets show lesser variation in their
practice with regard to operating budget period.
an annual operating budget.

All of them establish

However, some of them break their budgets

by quarters and then each quarter broken by months.

The shorter the

period covered the more the budget becomes detailed and specific,
d.

Participation in Setting the Operating Budget

At this moment, an Important point should be emphasized.
and stanards do not plan, neither do they control.
for planning and controlling operations.

Budgets

They are merely tools

People, on the other hand, plan

103
future operations and exercise control over other people performing
these operations.

To insure the effectiveness of budget as a tool

for planning and control, people affected or judged according to the
financial information it includes should participate in setting the
budget.

Participating in setting the budget commits people who parti-

cipate in that budget and conjoins the objectives of the budget with
their own personal objectives in such a way that achievement of the
budget objective would be considered a success for the participants.
When budgets work in this sense, they work as a means of motivation
rather than as a restrictive handicap for those people affected.
Participation could be real or could be a gimmick which in reality
does not carry more than the name.

Real participation means that every

member in the managerial hierarchy responsible for a responsibility canter
or a function for which a budget is to be prepared, should actively
be involved in the development and review of at least the area under his
supervision.

This way budgets would be developed from the bottom of the

organizational structure up to the top management who formulate the
planning objectives and finally coordinate and approves the overall
planning program.

The management accountant, as the budget couulttee

chairman or budget director has the responsibility of providing the re­
quired management accounting information, the technical advising and
takes the role of the coordinator who consolidates all plans into a
master plan of operation to be presented for review and approved by top
management.
Budget participation in today's practice as evidenced through the
personal interviews, is to a great extent, at variance from participation
as defined above.

Generally, participation is practiced on a partial

104
basis in most companies.

Real participation Is Indicated by few cases.

In most companies interviewed the development of the budget start from
the top of the organizational structure and proceed downward to the lower
levels rather than otherwise.

The budget is Imposed from above, as some

management accountants interviewed indicated.
with lower levels was done.
without consultation.

In some cases, consultation

In some other cases budgets are done even

All that the operational supervisor will know Is

that "this is his budget and he must operate according to it."

It

becomes the basis on which his performance is to be judged.
Twelve companies let their middle management members participate
in one way or another, in addition to top management and management account­
ing representatives to develop the operating budgets.

However, in the

other ten companies, middle management is not allowed to be involved in
the development stage of the operating budget.

Rathex; the budgets are

established by top management with the management accounting representa­
tives

help and then imposed
e.

Flexible Budgets

on the operating people from above.
in Practice;

The operating budget discussed above, includes expected sales
and production with the related expected revenues and expenses.

When

budget is used as a control tool, the actual performance of sales, pro­
duction, revenue and expenses is compared against the budget.
get may be static in nature,

Thisbud­

in the sense that a projection of sales

or

production activity level is projected and all other subbudgets are
established according to this one level.
budget.

It is also called the fixed

The danger of such rigid budget comes once the expected volume

is not materialized and a higher or lower volume is realized.

Then the

comparison between actual and expected performances becomes ineffective,

105
and In fact, misleading*

Because the comparisons, in such case, will

be between two sets of figures which are based on two different levels
of activity.

As one management accountant put it:

"....because it is a fixed budget not a flexible budget
it loses its effectlvesness.
It is a tool to keep an eye
on sales, but it does not give us a tool for controlling
operation once sales fluctuates beyond expectations, and it
usually happens...."
The flexibility budget (also

called variable budget) came into

beingto remedy this deficiency of the static budget.
tive technique that may be utilized to relate

It is

an effec­

budgeted performance,

especially budgeted expenses to various levels of activity in a cost
center, a department, a division, or the company as a whole.
The number and percentage of

the companies using the flexible

budgeting technique is shown in Table IV-15 below.

TABLE IV-15
THE EXTENT OF THE FLEXIBLE BUDGET
IN PRACTICE

No. of
Companies

%

8

37%

Static (Fixed) Budget

14

63%

Total

22

100%

Type of Budget

Flexible (Variable) Budget

The results of the interviews lead one to believe that the flexi­
bility concept of the operating budget technique is still not widely
•pread in the budgeting practice of the small companies.

Only eight com­

panies. 37 percent, of those using operating budgets are applying the

106
flexible budgeting technique in establishing their expenses budgets.
However, fourteen companies, 63 percent, do not use the flexible bud­
geting technique, rather they use the static budgeting instead,
f.

The Ma.1or Advantages and Application of Budgets

Management accountants who are using operating budgeting tech­
nique cited that budgets can serve as an effective tool in the following:
1.

planning the future course of a business or a sector
thereof.

Budgets formulate expected performance, they

express managerial targets.

Without such targets, oper­

ation lacks direction and future problems are not
foreseen.
2.

Controlling operation and reeponsbllity center by
comparing the actual performance with the budgeted
or expected performance.

Any significant deviations

are analyzed and causes for such variance* can be found.
Timely corrective action can be taken either by im­
proving performance, budgets or both.

However, this

control aspect of the operating budget is most effec­
tive when the flexible budget is used.
3.

Budgets were also cited as a means of communication
in the business.

It communicates the business objec­

tives and targets to all levels of management.

Where

real participation is exercised during the development
stage of the budget, it serves as a means of communica­
tion in both ways from the bottom of the organizational
structure up to top management and from top management
down to the lowest affected by the budget.

107
4.

Motivation waa alao cited as one advantage of using
budgets.

It is most apparent where real participation

in establishing the budget takes place.

According to

the literature on participative management, people
sharing the responsibility of preparing the budget
and setting the business targets are motivated to
achieve such targets and to meet the budgeted perfor­
mance.
The importance of the operating budget advantages or applications
as measured by the frequency of answers chosen by management accountants
interviewed, is indicated in Table XV-16.

TABLE IV-16
THE OPERATING BUDGET APPLICATIONS RANKED
ACCORDING TO THEIR RELATIVE IMPORTANCE

Rank

Budget Applications (or advantage)

Frequency
of choosing
the advantage

1

Control

22

2

Planning

19

3

Communication and Coordination

5

4

Motivation

3

Control of operations appeared to be the most significant appli­
cation of the operating budget technique.

All the twenty-two companies

using operating budget apply it as a control tool.
the second place as far as budget use is concerned.

Planning comes in
Nineteen of the

108
twenty-two companies using operating budget apply It as a planning
device In addition to being a control device.

In fact only 19 companies

indicated that budget Is used for both planning and control simultaneous­
ly.

While three other companies used operating budgets as a tool for

control only, none of the companies used It for planning alone.
Five companies consider budgeting as a tool for communication and
coordination.

Motivation was cited by only three companies, as an advan­

tage of budgeting.

This observation indicates the role the operating

budgets is taken to play.

It still, at least, In these people's view,

Is a tool of control to greater extent and plays lesser role In both
communication and motivation to which the attention has been directed
recently.

4.1.5

Responsibility Accounting Technique;
Responsibility accounting technique is defined In Chapter III

as a technique by which the management accounting system will be tailored
to the organization structure, in the company.

Costs are accumulated and

reported by levels of responsibility within the organization.

Performance

reports designed according to the responsibility accounting technique are
prepared to measure how well a supervisor has fulfilled his responsbllltlea in terms of the cost and revenue elements under his Influence.
Clear and precise assignment of authorlty-responsbllity relation­
ships for all and every member in the organization Is very important pre­
requisite for applying responsibility accounting technique.

Without this

clear cut in the responsibility boundaries of each supervisor in the or­
ganization, assigning cost by responsbllity centers becomes a very diffi­
cult task, if not impossible.

The second requirement to apply responsibil­

ity lecountlno la the choice of the cost concept which best fits this

109
control technique.

The cost concept appropriate for this purpose is

to classify cost items into those costs which are controllable by a specific
responsibility level to be accumulated and reported to it, and those costs
which are not controllable by that responsbllity level, and thus, are not
reported to that level.

Costs which are not controllable by one respon-

sibllity level are controllable by some other higher levels in the organ­
ization structure and may be reported to them.
a.

Clarity of the Organization Structure in Practice

During the survey of current practices of the companies included
in this study a guiding question was asked about whether the company inter­
viewed has an organization chart or not and whether this chart, if any,
is formal or Informal.

The aggregated details of the answer to this

question are Illustrated in Table IV-17.

TABLE IV-17
NUMBER AND PERCENTAGE OF THE EXTENT OF
ORGANIZATION CHARTS IN PRACTICE

Organization Structure
Clarified by

No. of
Companies

X of
Sample

Formal Organization Chart

18

52

Informal Organisation Chart

11

31

No Organization Chart

_6

17

Total

35

100X

Eighteen companies, about 52 percent, of the sample indicated
that their organization structure is specified and Illustrated on formal
organization charts.

AuthorIty-responslbillty relationships were clarified

110
and specific assignment of duties was implied.

Eleven other companies,

about 31 percent, of the sample, pointed out, that although they do not
have formal organization charts, they do have a somewhat clarified organi­
zation structure that is maintained in an Informal form of organization
chart.

Authorlty-responsibility relationships are designated but in a

less clear cut way and the existence of some grey areas of responsbillty
conflict were mentioned during the interviews with the management accoun­
tants in these companies.
On the other hand, six other companies, 17 percent of the sample
were found to have no organization chart what-so-ever.
slblllty relationships are not clear.

Authority-respon-

The hazard of authorlty-responsl-

blllty conflict is greater than in the other two categories mentioned
above.

Examples of ambiguity and confusion of the exact responsbllitles

are indicated by management accountants in this group.
b.

Cost Concepts for Responsibility Accounting

The results of the guiding questionnaire shows that only 16 com­
panies, about 46 percent of the sample, classify their costs into controll­
able costs and uncontrollable costs according to each responsibility
center.

However, 19 companies, about 54 percent of companies interviewed

and included in the sample do not classify costs according to the con­
trollability concept and do not differentiate between controllable and
uncontrollable costs.
c.

The Extent of Applying Responsibility Accounting Technique

The study, further shows that not all companies which differenti­
ate between controllable and noncontroJlable costs apply the responsibil­
ity accounting technique.
regarding this point.

Table IV-18 shows the details of the survey

Ill
TABLE IV-18
THE EXTENT OF USING RESPONSIBILITY
ACCOUNTING TECHNIQUE IN PRACTICE

Performance Reports are Prepared
in such a way as to

Report only Controllable Costs to Each
Level of Responsibility
Report both Controllable Cost and
Noncontrollable cost to Each Cost Center
Report Total Absorption Cost to Each Cost Center
Without any Regard to Controllability
Total

X of

No. of
Companies

Sample

10

29

6

17

19

54

35

100X

Ten companies, about 29 percent of the sample, are applying
responsibility accounting as it is broadly defined in this study.

Their

performance reports are tailored to their organization structure, and only
controllable costs are charged and reported to each responsibility center.
On the other hand, a majority, 54 percent, of the companies inter­
viewed do not apply the technique.

In the performance reports of these

companies, cost is charged to each cost center according to absorption
costing method without any differentiation between controllable and noncontrollable cost; total cost is reported.
However, an intermediate group is found during this survey.

Six

companies, about 17 percent of the sample indicated that they classify
costs according to their controllability and differentiate between controll­
able and noncontrollable costs for each responsibility level.

But in

their performance reports prepared for each of these responsibility centers,

112
total coats are reported separated Into two subgroups:

coats controll­

able by the responsibility level the report Is prepared for and costs
uncontrollable by him.

They base their practice on the Idea that In

this way each responsibility level Is made aware of the total cost In­
curred In his center.

However, It seems to me that this practice is Just

an Intermediate stage between the traditional performance reporting
according to the absorption approach and the modern performance reporting
according to responsibility accounting technique.

TABLE IV-19
THE EXISTENCE OF ORGANIZATION CHARTS AND THE
APPLICATION OF RESPONSIBILITY ACCOUNTING

Combination of Organization Chart and
Responsibility Accounting

No. of
Companies

Companies having Formal Organization Chart and
Applying Responsibility Accounting

7

Companies having Formal Organization Chart and
No Responsibility Accounting

11

Companies having Informal Organization Chart and
Applying Responsibility Accounting

3

Companies having Informal Organization Chart and
No Responsibility Accounting

8

Companies having No Organisation Chart and
Applying Responsibility Accounting

0

Companies having No Organization Chart and
No Responsibility Accounting

_6

Total

35

113
d.

Relationship Between the Degree of Clarity in the AuthorltyReeponeibility Relationship and the Application of Respon­
sibility Accounting Technique

Empirically, it appears that there is a strong relationship be­
tween the degree of clarity in the authorlty-responslbllity relationship
in the organization structure of a company and the possibility of adopting
the responsibility accounting technique in the company's accounting system.
The analysis of the information illustrated in Table IV-19 above
indicates the following:
(1)

Seven companies, about 392 of those which have formal organ­
ization charts constitute 70 percent of those companies which
apply the responsibility accounting technique.

(2)

Three companies, 27 percent, of those which have informal
organization chart, constitute the other 30 percent of
those who apply the technique in question.

(3)

None of the companies which have no organization chart
apply the responsibility accounting technique.

e.

The Ma_1or Applications or Objectives of
Responsibility Accounting

Controlling the operations of each responsibility center, measuring
the performance of each supervisor, and motivating the company managerial
levels are the three most repeated objectives of the responsibility account­
ing technique.
However, the interviews indicate that not all the ten companies
applying responsibility accounting see these objectives in the same way
or assign to them the seme importance.

Five companies using the techni­

que indicated that it achieves all of the three objectives, control, mea­
surement of performance and motivation.

Three other companies used the

114
technique ae a

tool for only control and measurement of performance.

Another company used as a device for both measurement and motivation.
A last company used it only for control purposes
When these objectives are ranked according to the frequency of
responses to measure their relative importance as seen in current practice,
control ranks first with all companies using the technique citing it as
an objective of this technique.

Measurement of responsibility levels

performance ranks second with eight management accountants selecting it.
Motivation ranks the third with six companies use the technique for it.

4.1.6

The Capital Budaeting Technique:
Capital budgeting is defined as the long term planning for

making and financing proposed capital expenditures.

Most expenditures

for plant, equipment and other long-lived assets affect operation over
a series of years.

These expenditures, usually are large, permanent

commitments that influence the long run flexibility and earning power.
Capital budgeting includes two basic decisions:
1.

The first decision involved in capital budgeting is an invest­
ment decision; which of the projects or alternatives avail­
able to the company should it select and invest its resources
in it.

There are many approaches or criteria for selecting

the best feasible alternative on which the investment
decision may depend.

Most of the measures of the invest­

ment worth are described in Chapter III.
2.

The second is a financial decision concerned with from where,
how, and when the company will obtain the money required
to finance its capital investment decision.

This decision

involves the financial considerations of which financial

source or combination of sources and which financial
institution the c o m p a n y will rely upon to get the required
finances.

This aspect of the financial decision is beyond

the scope of this study.

The financial decision also in­

cludes long range planning for acquiring and financing the
capital Investment*

The capital budget would serve to

translate these long range plans into financial terms*
The capital budgeting technique is defined in this study to
include both of the two decisions described above.

To make the invest­

ment decision without constructing a capital budget is not considered
to be applying the capital budgeting technique because every company has
to make its Investment decision one way or another.

The controlling

factor here is whether or not the company establishes a capital budget
for its capital expenditures.
b.

The Investment Decision in Practice

Table IV-20 shows the results of the personal Interviews regarding
the current practice of the capital Investment decision making of the
companies Included in this study.
The current practice of the companies included in this study indi­
cates that the criteria considered the most theoretically correct to
measure the worth of capital investment are the least applied and adopted
in practice.

Twenty six companies, 74 percent of the sample, cited that

urgency and need for the capital expenditure is a factor in evaluating
investment worth.
practice.

It is also considered the most popular measure in

However, only three companies of them, use the measure as the

sole criterion for deciding whether or not to invest in capital expenditure.
Twenty two companies, 63 percent of sample, indicated that
evallabllity of cash necessary to finance capital expenditure is a measure

116
TABLE IV-20
THE MEASURES OF CAPITAL INVESTMENT WORTH
APPLIED IN CURRENT PRACTICE

No. of
Companies

Investment Criteria

X of
Sample

Urgency and Need

26

74%

Availability of Cash

22

63

Payback Period

20

57

Accounting Average Rate of Return

8

23

Net Present Value

3

9

Discounted Rate of Return on Investment

2

6

on which they base their investment decision.

The following is a typir tl

quotation of one management accountant of these comapnlea.
The decision we face is how much money we have and where are
we going to spend It. Each departmental manager has to sub­
mit a request for capital.
Needs are measured against cash
resources just for the sake of appropriating cash available
to capital expenditure needs according to the degree of urgency.
Again, only three of these companies use the availability of cash
criterion as the only Justification for investment.
Payback period method for measuring capital investment worth was
reported by twenty companies, 57 percent of the sample.

Two of these

compsnles do not apply any other measures in addition to the pay back
period.
Eight companies, 23 percent of sample, are using the accounting
average rate of return to determine the profitability of capital projects.
However, none of these companies use this measure alone.
an<M n»h«r ■aaaitraunti of investment worth.

They uae it in

117
Net present velue method, the one considered by many academicians
as the most theoretically sound measure of Investment profitability has
been applied by only three companies, 9 percent, of the sample.

All of

these companies, are using more than one measure for the Investment de­
cision.
Only two companies are applying the discounted or internal rate
of return on Investment (ROI) measure.

One of them Is using the net

present value and the payback period at the same time to determine the
profitability of its Investment proposals.
One major observation derived from the results of the empirical
data collected on this point, is that most of the companies use more
than one measure in making the capital investment decision.

Table IV-21

shows the details of this observation.

TABLE IV-21
DISTRIBUTION OF THE SAMPLE ACCORDING TO THE
NUMBER OF INVESTMENT CRITERIA CON­
SIDERED BEFORE MAKING
A DECISION

Number of Investment Criteria

Only one measure
Two measures

No. of
Companies

8
12

Three measures

8

Four measures

6

Five measures

_1

Total

35

118
It Is significant to note that any of the companies which use the
net present value or the discounted ROI use more than one measure for this
decision*

Even one company of them use five measures, all the measure

considered in this study except the availability of money criterion.
c.

The Extent of Using Capital Budget in Practice

As we mentioned earlier in this section, every company has to
make its decision regarding its capital investments whether they are merely
for replacement or for expansion, and whether it uses one measure or more
to determine the feasibility and profitability of its decisions.

However,

not all the companies interviewed fulfill the second part of the capital
budgeting technique as it is defined in this study.

Only 20 companies,

57 percent of the sample are found using capital budgets in planning their
capital expenditures.

The other 15 companies, A3 percent of sample, do

not establish capital budget for their capital outlays.

Seventeen of

these companies applying capital budget also apply operating budget at
the same time and integrate both budgets in a comprehensive over-all
budget.

However, three companies use capital budget alone without having

an operating budget*
d.

Time Coverage and Purposes of the Capital Budgets in Practice

One significant observation, indicated by the results of the
personal interviews is concerned with the period the capital budgets
cover in practice.

Twelve companies, 60 per cent, of those companies

establish a capital budget which covers only one year.

While only the

other ten companies, AO per cent, use capital budgets which cover a period
more than one year.

This period ranges between 2 and 5 years.

Capital budgets are used basically for planning capital expendi­
ture necessary for both expansions and replacements.

Eighty percent of

119
the comapniee having a capital budget use It for both applications.

Only

20 percent use It for expansion only.

4. 1.7

Linear Programming:
Linear Programming, as stated earlier In Chapter III, Is one of

a number of quantitative analytical techniques that have proved useful
In complex allocation problems.

These quantitative methods of problem

solving, like many employed In operation research are based upon mathe­
matical and statistical concepts.

Much of the credit for demonstrating

the applicability of linear programming methods In business problems be­
longs to those people engaged in operations research.

However, many

accountants have written on the applications of linear programming In
areas where traditional accounting techniques have been ised for a long
tlme.^
The linear programming technique has been seleected, for the
purpose of this study, from among many operation research techniques, and
is taken as a surrogate for a class of non-tradltlonal techniques, on
the presumption that, if a firm has ever reached any degree of mathemati­
cal sophistication, It will almost certainly be familiar with this tech­
nique, even If not with others.
a.

Linear Programming in Practice

If the above presumption is true, then we could say, according
what

to

we have found in practice, that the level of mathematical sophis­

tication, among the small and medium manufacturing companies Included in

For example, see A. C h a m e s , W. W. Cooper, and G. Ijlrl, "Break­
even Budgeting and Programming to Goals,"
Journal
of A c c o y t i n g Research.
Vol. No. 7 (Spring, 1963), pp. 16-43; and
Mohammed Onsl, "Linear Programmlng - An Accounting Information model," Management Accounting (Dec­
ember 1966), pp. 46-52.

120
this study, Is rather very low Indeed.

Among the thirty-five companies

interviewed, only one company reported using linear programming In
management decision making process.

The other thirty-four companies

have Indicated that they never used the technique yet.
should be qualified.

This conclusion

Since the personal interviews were conducted with

only the management accountants in these companies, there is a possi­
bility that a company has used linear programming in its engineering
or research and development departments and that the management accountant
does not know of such application.

In this case his answer would be a

negative one to the contrary of the facts.

But, though such a possi­

bility exists, we do not believe that its outcomes would significantly
change our conclusion that the degree of mathematical sophistication of
the small and medium companies is very low.
In the company where linear programming is used, it was found
that the technique is not used by the management accounting department,
but rather it has been an operating department —
ment.

the engineering depart­

The company's president, an engineer, used to apply it with the

operating people.

However, as the management accountant has indicated,

the information necessary to apply the technique is provided by his
department.

The management accountant, an M.B.A. graduate, has indicated

that he knows the technique and even sometimes participates with his
president in solving a problem by linear programming.

But still, the

responsibility of applying the technique is located in the engineering
department for which the president acts as the head; "it is still the
president's toy."
Linear programming is used in this company in the area of produc­
tion.

Finding the optimum product mix, the optimum production scheduling

121
and machine loading were the three applications the technique waa uaed
for.

4.1.8

Network Technique;
Network analysis is used in both forms:

PERT (Program Evalua­

tion and Review Technique) and CPM (Critical Path Method).

In PERT

(or CPM)/Time, a network representing all the individual events and the
activities necessary to achieve these events, required to complete a
specific project, Is constructed.

The network Is then analyzed to

determine which activity or activities are critical, that Is, take the
longest time.
PERT (CPM)/Cost, an extension of PERT (CPM)/Time, is Intended to
assist the project managers by assigning costs to the working levels In
the details needed for planning and controlling their projects on the
basis of time and cost in the same time.
a.

PERT (CPM) in Practice:

The analysis of the empirical data Indicates that the popularity
of PERT(CPM) in current practice is also at a very low level, though it
is much higher than that of linear p r o g r a m i n g .

Six companies, about

17 percent of the study sample, indicated that they have used PERT (or
CPM) at one time or another.

The other twenty nine companies have not

used it at any time.
In addition, the application of PERT(CPM) is only made on an
occasional baals.

The technique has been used whan a specific nead for

its application has arisen.

Once the need is fulfilled, the technique

is put out of application until another need would arise.
Most of these companies, five of them, used the PERT(CPM) on time

122
basis rather than coat baals.

PERT (CPM) /Time waa actually uaed for

scheduling to meet a specific project completion target date.
/Cost was used by only one company.

PERT(CPM)

However, the management accountant

of this company Indicated that the results of applying the technique were
not too Impressive, due to the cost estimates which were sometimes "out
of line."

During the same Interview, he Indicated that this error

was coiq>letely due to the unreasonable time and cost estimates rather
than to the technique itself.
Another significant observation regarding the extent of applying
PERT (CPM) In practice can be mentioned here.

The technique was used by

most of these companies for only one application and is used only one or
two times to date.

Only two companies reported that they have used this

technique twice In two different applications.

The technique Is rather

new to all companies Interviewed.
PERT(CPM) has been used by these different companies In six dlfferem
applications.
1.

Three companies have applied the technique for production
scheduling to meet delivery date stated by customers.

2.

Another company used CPM to move their large production
equipment from an old plant to another location where they
have built a new plant, with the least possible Interrup­
tion of the production process.

3.

One other company used the technique to combine two separate
plante In one plant after a merger and reorganization
operation.

4.

The fourth application was reported by one company using the
CPM in planning for computer installation.

123
5.

One company has used the technique to plan Its products
development and marketing.

6.

The last application was reported by one company which
used the CPM In planning for budget Installation and for
closing the accounting books.

4.2The Extent of Management

Accounting Techniques in Practicei

In the survey part of this chapter* the extent of applying each
of the eight techniques selected for this study* has been analyzed
individually in a separate section.

The number of companies and percen­

tages of those which apply the technique and those which do not apply
it gave us a micro-picture of the practice of each of these techniques.
In this part* we will deal with the extent of management accounting
in practice on a macro-basis.
a*

Popularity and Acceptance of Management
Accounting Techniques in Practice

Table IV-22 shows the eight techniques ranked according to the
number of companies* included in this study sample* which apply each
technique.

This would show the extent of these techniques in practice

today.
Analysis of the results of this empirical research reveals that
management accounting techniques are not highly popular among the small
and medium companies subject to this study.

The most applied technique

in current practice as evidenced from this research* is the operating
budget.

Sixty-three percent of the companies interviewed and included

in the sample are found applying the operating budgeting technique.

How­

ever* only 23 percent of the sample apply the flexible operating budget.
Capital budgeting* the second most applied in practice* is used by about

124
TABLE IV-22
NUMBER AND PERCENTAGE OF COMPANIES APPLYING EACH
TECHNIQUE AND ITS RANK IN TODAYS PRACTICE

Management Accounting Technique

No. of
Companies
Applying It

% of
Sample

1

Operating Budgeting

22

63%

2

Capital Budgeting

20

57

3

Standard Costing

19

54

4

Cost-Volume-Proflt Analysis

18

51

5

Contribution Margin

10

29

5

Responsibility Accounting

10

29

6

Network Technique (PERT/CPM)

6

17

7

Linear Programming

1

3

57 percent of sample.

Nineteen companies» fifty-four per cent are apply­

ing standard costing technique in their management accounting system.
Cost-Volume-Proflt analysis has ranked the fourth most popular technique
practiced.

Eighteen companies, 51 percent, are found using CVF technique

In their decision making process.

Operating budgeting, capital budgeting,

standard costing, and Cost-Volume-Profit analysis are considered by many
academic authors and writers as the most traditional management accounting
techniques.

The results of this research study confirms this assertion,

though the level of popularity Is much less than these academic authors
suggest in their discussion on the subject.
There are two newer management accounting techniques which this

125
study has Included, and which the empirical data collected indicated that
they are not very popular In current practice.

These two techniques are

the contribution margin reporting and responsibility accounting.
of them ranked as the fifth most popular in the current practice.

Both
Each

of the two technique has been applied by ten companies, 29 percent of the
sample.
In this study 1 have included two techniques which first originated
as operation research technique, then gained acceptability and popularity
in many decision-making areas.

Recently a huge number of articles, on

their application where traditional accounting technique use to •ppiy.
is available in management accounting literature.
are Network Analysis and Linear Programing.

These two techniques

Practicing these two tech­

niques in the companies included in this research is found to be at a
rather very weak level.

They are not very popular in current practice

of these small and medium companies.
between the two techniques.

However, this popularity differs

Network analysis (PERT(CPH) have been used

by six companies, 17 percent, while only one company, about 3 percent
of sample, has applied llnear-programming.

The network analysis la more

popular in current practice than linear program though both of them are
not very popular.
The distribution of the relative application of the management
accounting techniques applied in practice is shown in both Table IV-23
and Figure IV-1 below.
The average company of the sample included in this study is
applying only three of the eight techniques selected for this research.
As it is indicated In both Table IV—23 and Exhibit IV—1 above, the current
practice does not represent a normal kind of distribution.

Two companies,

126
TABLE IV-23
DISTRIBUTION OF THE RELATIVE APPLICATION OF
MANAGEMENT ACCOUNTING APPLIED IN PRACTICE

No. of
Companies

Number of Techniques Used

X of
Sample

6X

Companies Using None of the Techniques

2

Companies Using Only One Technique

9

26

Companies Using Only Two Techniques

4

11

Companies Using Only Three Techniques

8

23

Companies Using Four Techniques

2

6

Companies Using Five Techniques

4

11

Companies Using Six Techniques

5

14

Companies Using Seven Techniques

1

3

Companies Using Eight Techniques

0

__ 0

100X

35

Total

about 6 percent, used none of the eight techniques in their accounting
system.

Well above one fourth of the sample, nine companies, used only

one of the eight techniques.

Eleven percent, four companies, are found

using two of the techniques in their accounting system.

Little less

than one fourth of the sample, eight companies used three techniques at
the same time.

These companies are considered, according to the empiri­

cal results of this study, to represent the average companies from
applying modern management account techniques point of view.
Forty-three percent of the sample are applying only less than
three techniques.

However, on the other hand, 34 percent are using four

127

FIGURE IV-1
DISTRIBUTION OF RELATIVE APPLICATION OF MANAGEMENT
ACCOUNTING TECHNIQUES APPLIED IN PRACTICE

7.

Nuaber

of Companies

Applying

Each

Group

10 .

0

1

2

5”

6

Nunbar of Techniques Applied In Practice

128
or moe of the eight selected techniques.
techniuqes together in their system.

Only two companies use four

However, four companies were

found Incorporating five techniques in their management accounting system.
The analysis of the empirical results Indicates that, five companies, 14
percent, are applying six out of the eight techniques considered.

Four

of these companies are applying all the six "traditional" management
accounting techniuqes included in this study.

One company, however, is

applying five of them in addition to one of the quantitative techniques,
the network analysis.

The maximum number of techniques applied in current

practice of the companies Included in this sample is seven techniques.
However, only one company among the 35 included in the sample, is found
applying seven techniques: all the techniques considered except the con­
tribution margin technique.

None of the management accountants inter­

viewed, Indicated that his company is applying all the eight techniques
in their management accounting system.
Another set of observations can be made, at this moment, about
the distribution of the management accounting techniques as applied in
practice.

Considering all the possible combinations of applying more

than one technique by more than one company at the same time, we found
that only two of such combinations csn be observed in the practice of
this sample.

The first combination is applied by four companies.

This

combination Includes all the techniques considered except Linear Pro­
gramming and Network analysis techniques.

The second combination is

applied by three other companies and it Includes standard costing, oper­
ating budget, and capital budgeting.

Beyond that, all the other com­

panies are grouping these techniques in different combinations.

129
The same analysis shows that only four techniques, each of which
is used separately, and by itself, by a number of companies.

C-V-P

is used only by Itself without combining it with any of the other techni­
ques by three companies.
companies.

Standard costing is used along by another three

Operating budget is used in two companies without any of

the other techniques.

Finally capital budgeting is used alone in only

one company.

4.3

Conclusions:
The results of the analysis of the empirical data collected during

the personal interviews, led to the following conclusions:
1.

Management accounting techniques generally are not widely
popular among small and medium companies.

The average

company in this sample is applying only three of the eight
techniques under study.
2.

Management accounting techniques taken for this study can
be divided into three subgroups as far as the degree of
their extent in practice is concerned.

Relatively old

traditional accounting techniques (C.V.P., Standard Costing
and Budgeting), relatively new traditional accounting
techniques (Contribution Margin Reporting and Responsibility
Accounting), and new quantitative Techniques (Net Work
Analysis and Linear Programming).

The degree of applying

these techniques in practice is related
age of these techniuqes.

to the relative

More than 50 percent are found

applying the relatively old traditional accounting techniques.

130
While only 29 percent ere applying the relatively new
traditional accounting techniques.

However* a very low

proportion apply the quantitative techniques.

CHAPTER V

THE ENVIRONMENTAL CONDITIONS WHICH INFLUENCE
THE ACCEPTANCE AND APPLICATION OF MODERN
MANAGEMENT ACCOUNTING TECHNIQUES IN PRACTICE

5.1

Introduction:
The extent of the acceptance and application of modern manage­

ment accounting techniuqes In the current practice of small and medium
manufacturing companies in the State of Michigan, has been shorn in
Chapter IV of this study.

The environmental conditions which tend

to influence the acceptance and then the application of these techni­
ques will be the subject of this chapter.
Acceptance and application of managment accounting techniques
are a product of a complex change process in which many environmental
factors, inside and outside a company, take place.

These factors or

conditions act and react individually and collectively toward or against
the acceptance and application of modern management accounting techniques
in these firms.

Though the relative effect of each of these environmen­

tal conditions, taken separately, may differ in direction and/or magni­
tude, they still work together in the same environment of a business
concern and thus they affect everything in it.

In this sense management

accounting is no exception.
Throughout the empirical research of this study a complete sec­
tion of the personal interview guiding questionnaire has been devoted
to find out the environmental circumstances and causes which enhance the
acceptance and application of modern management accounting techniques
131

132
acceptance end application of modern management accounting techniques
in the practice of those companies included in the study.

The questions

were also devoted to provide more understanding of those factors which
hinder such acceptance and application of these techniques.
In summary, the major environmental conditions which tend to
influence the acceptance and application of modern management accounting
techniuqes are as follows:
1. The definition of the function or objective of the management
accounting system according to the company policy.
2.

The size of the company or the
complexity.

degree of its operation's

3.

The nature and peculiarity of company operation.

4.

The top management attitude toward changing the managment
accounting system or any component thereof.

5.

The attitude of the management accountant toward adopting
new techniques into his company's accounting system.

6.

Availability of the human and physical resources required
to carry on the desired change.

7.

The relative value of accounting information derived from
application of new technique or techniques, as compared to
the cost of providing such information.

8.

Other environmental conditions such as competition and out­
side pressure for changing the accounting system.

It is important to emphasize that these factors work in the
environment of each business concern.

The final decision whether It is

toward modernising the accounting system or against It is a product of
all these factors together.

Similarity of all conditions but one between

two companies may account for the difference in their accounting systems.
However, isolating each of these environmental condition and discussing
it separately will be just a matter of convenience for the sake of study
and analysis, but the fact remains, that they all exist In the environment

133
of a business and cannot be completely Isolated from each other.

5.2

The Function or Objective of the Management Accounting System
According to Company Policy and Its Effect on the Acceptance
and Application of Modern Hanagement Accounting Techniques
One of the first necessary steps in developing a management

accounting system is a clear and precise statement of the objective(s)
of management accounting in the company.

This statement may be included

explicitly or implicitly in the Internal company policy.

The responsibil­

ity of stating such objective may lie on either top management and the
management accountant in charge of the accounting function in the firm,
or management may give complete authority to its management accountant
to state it and then approve it, or it may be dictated by top management
and the management accountant becomes responsible only to adopt top
management's policy toward the function of accounting.
Regardless of who has the authority of delineating and defining
the objective of internal accounting, once such objective(s) is clearly
stated, the appropriate concepts and techniques necessary to fulfill it
should be selected, accepted and integrated into a management accounting
system and applied to provide the relevant information consistent with
the objective determined.

The type and extent of the appropriate techni­

ques will be governed by the other environmental factors which are taking
place at a specific time as well as by the detensinatlon of the accounting
function.
At the beginning of each personal Interview conducted, I asked
the management accountant Interviewed the following question:
"From the standpoint of your company's policy, what do you
believe is the single most Important purpose or objective
of the management accounting system of your company?"

134
a.
b.
c.
d.

To
provideInformationfor profit planning only
To
provideInformationfor control only
To provide Information for both planning and control
To keep accounting recorda for preparing periodical
financial statements.

The analysis of the data collected from answering this question
Is shown In Table V-l below.

TABLE V-l
THE OBJECTIVE OF MANAGEMENT ACCOUNTING SYSTEM
AS REPORTED IN THE FIELD RESEARCH

Objective of Management Accounting System

a.

To provide Information for profit planning
only

b.

To provide Information for control only

c.

To provide information for both planning
and control

d.

To keep accounting records for preparing
periodical financial statements
Total

No. of
Companies

X of
Sample

-

-X

2

6

29

83

_4

11

35

100%

None of the accountants Interviewed has Indicated that the single
most Important objective of management accounting Is only to provide In­
formation for profit planning.

In the same time, only two accountants

have stated that according to their company policy, the need for control
is the principal factor for the existence of the accounting system
employed in their firms.

Therefore, In these two companies, the objec­

tive of accounting Is only to provide information to help management
control business operations.

Management accounting system is not considerec

135
helpful In providing Information for planning.

However, further data

obtained about the management accounting practices of these two com­
panies does not Indicate wide acceptance of modern management account­
ing techniques appropriate to perform the control part of management
accounting function.

Each of these two companies Is using only one

out of the eight techniques considered.

In fact one Is applying a limited

version of cost-volume-profit analysis and the other is using basic
standard costing technique.

Beyond that, they do not apply any of the

modern techniques which are available and appropriate to provide useful
information in the control part of the management function.
On the other hand, four accountants in four different companies
Indicated that the only objective of the accounting systems, In their
companies is to keep accounting records to enable them to prepare the
periodical financial statements which show the results of operation and
the financial position of their companies.

Viewing the objective of

management accounting as to process financial data for preparing periodi­
cal financial statements leads to the conclusion that accounting in
these companies is perceived in its financial role rather than its mana­
gerial role.

Preparation of periodical financial statements and re­

porting these statements to interested parties is the function of finan­
cial accounting as defined in this study.

Top management may use the

information included in the periodical financial statements to evaluate
its own performance in managing the business as a whole, but such a
limited viewpoint of the accounting role discounts the needs of the
management team at all levels for much more detailed and relevant infor­
mation (which these periodical statements do not include in ready to use

136
form) to manage, plan and control tha operation of each segment of the
business.
The empirical findings regarding the practices of these com­
panies confirm their views with regard to the function of accounting.
None of them is applying more than one of the eight management accounting
techniques under study.

In fact, one of them does not use any of the

accounting techniques considered here.

Two of them apply only cost-

volume-prof it analysis and the fourth company uses a partial operating
budget.

The other management accounting techniques have not been

accepted by these four companies.

Though their accounting practice is

consistent with their objective of accounting, their perception of the
function of accounting, in my opinion, is rather narrow and very limited.
The great majority of the management accountants Interviewed, 83
percent of the sample, Indicated that the most important objective of
their management accounting systems, according to companies' policies,
is to provide relevant information for both planning and control func­
tions simultaneously and on a continuous basis.

The reason for the

existence of their management accounting systems Is perceived as to
assist all management members to manage on an informative and intelligent
basis.

Management accounting function in these companies, at least in

definition, is not restricted only to the financial aspect of accounting.
At the same time, these accountants, according to their replies, do not
utilise management accounting on a partial basis either to assist only
in planning or only in control.
to the process of managing*
data to help in this process.

But they see it as a function related

Its stain objective is to process economic

137
However, although the management policies

<f these companies

properly seem to be In agreement on what Internal accounting should do,
the management accounting practices of these companies exhibit a wide
range of difference In their acceptance and application of modern manage­
ment accounting techniques.
It Is clear that the 111-perceptlon or mal-deflnltlon of what
management accounting should do has a direct effect on the accounting system
and the type and number of techniques used In the system.

However, the

relationship between the proper definition of management accounting and
the extent of modern management accounting techniques In practice Is not
that clear or definite.

Data collected for this study shows that compan­

ies In this group use 3 management accounting techniques, on the average,
as compared to at most only one technique used In the other two groups,
those which define accounting as a control tool and thoae which desig­
nate It as record keeping function.

But at the same time, analysis

Indicates that there are other factors, besides the proper perception
of what internal accounting should do, that play a major role in the
acceptance and application of modern management accounting techniques.
The right definition of the function of management accounting Is just
one of these factors which influence management accounting Innovation.
Though It is very Important, It Is just a start on the right road.

5.3

The Relationship Between Siae of a Company and
the Management Accounting System Employed
The relationship between the slse of a company and the type and

number of management accounting techniques applied by It, has been
tested statistically from two dimensions.

The objective of the first

test Is to show if there Is any relationship between the else of a

138
company aa maaaurad In terms of amploymant, sales, assets, major products
and manufacturing departments, and its ability to apply "any" of the
eight managament accounting tachniquaa subject to thla atudy.

Tha second

statistical test Is taken to show tha relationship* If any, between the
slse of a company as measured In terms of an average of the five siae
criteria mentioned above*, .and the number of management accounting techni­
ques accepted and applied by that company.
The Chi-square statistical test is used in both tests.

The

hypothesis to be tested in the first test Is that the use of any of the
management accounting techniques subject to this study Is
of the size classification of the company.

Independent

Acceptance of this hypothesis

would indicate that the application of any of these management accounting
techniques is possible for any company -size and is not dependent on the
size of the buslneas concern which .applies it.

While rejection of the

hypothesis means that there is a significant statistical dependency rela­
tionship between using any of these technique* and the size of the company.
The hypothesis taken in the second chi-square test is that there
Is no significant statistical dependency between the size of a company
and the number of management accounting techniques applied by that company.
The chi-square formula is programaed on a computer routine designed
2
by a Staff of the Computer Institute for Social Science Research.
Both
test were run on the MSU*s CDC 6500 Computer.

XSee Sidney .Siegel, Honparametrie-Statistics for the Behavioral
Sciences. McGraw-Hill (New York, 1956), pp. 3-59, and John R. Stockton,
Business Statistics, 2nd Edition, South-Western Publishing Co. (Cincinnati
27, Ohio 1962), p. 271-275.
2Alan M. Leagold, Bob Zerby .and Glen Foster, Analysis of Contingen­
cy Tables - Technical Report No. 141. Computer Institute for Social Science
Research, Michigan State University, Revised, July 1969.

139
5.3.1

The Relationship B e t w e n Size of a Company and the Application
of Any of the Bight Management Accounting Techniques In Practice
The size of a company haa been defined in Chapter II, as a measure

of business operation complexity.

Companies included in the study sample

were classified into very small, small, medium and large according to
five size criteria, average annual employment, average annual sales, total
assets employed, number of major products or product lines and number of
manufacturing departments.

Table V-2 summarizes the sample distribution

according to each of these size criteria.

TABLE V-2
SAMPLE DISTRIBUTION ACCORDING TO SIZE STANDARD
CLASSIFICATION ESTABLISHED IN CHAPTER II

^ " ^ ^ ■ ^ ^ C r i teria
C las si ficatioSB-'*^.^^

Very
Small

Small

Medium

Large

Total

Employment

1

27

4

3

35

Sales

-

23

11

1

35

Assets

-

21

13

1

35

Products

3

18

10

4

35

Departments

3

12

13

7

35

The chi-square test was run to find out the relationship between
the size classified according to each of the five criteria, and the use of
any of the eight techniques.
this test.

Forty contingency tables were produced by

Table V-3 shows the x

2

values as computed by the chi-square

formula, compared with the corresponding values obtained from the "Distri­
bution of Chi-square Table" at the appropriate degree of freedom and under

TABLE V-3
THE RELATIONSHIP BETWEEN COMPANY SIZE AND THE APPLICATION
OF ANY OF THE EIGHT ACCOUNTING TECHNIQUES UNDER STUDY
Chi-Square
(Formula
Results)

Relationships Tested

D-l C-V-P and size defined by E*
S
A
P
D

Chi-Square (Table Values)
at significance levels
30 Z
10X
20Z

2.640
1.107
1.097
2.796
1.669

6.251
4.605
4.605
6.251
6.251

4.642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.665
3.665

2 Contribution Margin and

E
S
A
P
D

.473
.448
1.256
2.524
2.226

6.251
4.605
4.605
6.251
6.251

4.642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.666
3.666

3 Standard Costing snd

E
S
A
P
D

4.815
10.313
5.745
6.614
6.774

6.251
4.605
4.605
6.251
6.251

4.642
3.219
3.219
4.642
4.641

3.665
2.408
2.408
3.665
3.665

4 Operating Budgeting and

E
S
A
P
D

2.797
1.445
3.008
2.757
4.704

6.251
4.605
4.605
6.251
6.251

4.642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.665
3.665

5 Responsibility Acctg and

E
S
A
P
D

2.651
.797
1.256
2.524
9.939

6.251
4.605
4.605
6.25^.
6.251

4.642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.665
3.665

6 Capital Budgeting and

E
S
A
P
D

3.392
1.171
4.188
.859
4.693

6.251
4.605
4.605
6.251
6.251

4.642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.665
3.665

7 Linear Programming and

E
S
A
P
D

4.753
.373
.190
.766
1.958

6.251
4.605
4.605
6.251
6.251

4 t642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.665
3.665

E
S
A
P
D

.683
4.121
1.621
2.118
1.918

6.251
4.605
4.605
6.251
6.251

4.642
3.219
3.219
4.642
4.642

3.665
2.408
2.408
3.665
3.665

8 Network Analysis
Techniques and

* E • Employment; S * Sales; A ■ Assets; P *■ Products, and D “ Departments

141
three different levels of significance;

This comparison is made for

each of the eight techniques by each of the five size cirterla.

Signi­

ficant values are underlined in the table.
Analysis of the results of this test indicates the following
observations:
1.

Generally, with only two exceptions, the null-hypothesis of
this test is to be accepted at a significance level up to
10 percent.

In other words, data collected during this

study Indicates that statistically there is no significant
dependency relationship between the size of a company measured,
in terms of any of the size criteria chosen, and the applica­
tion of any of the techniques under study except standard
costing and the responsibility accounting techniques.

A

company of any size may apply any of the other six techniques
after adapting the technique to its own operation.
2.

With regard to standard costing, the results of the test re­
ject the null-hypothesis Indicating that application of the
technique is statistically dependent on the company size, 90
percent of the time.

In fact, this conclusion holds true

even at 99 percent when size is classified according to the
average annual sales criterion.

However, such strong re­

lationship does not hold when company size Is defined by
average annual employment.

The conclusion will be true only

at 80 percent of the time, i.e. at 20 percent significance
level.
3.

Both the cost-volume-proflt analysis and the contribution mar­
gin reporting techniques are found to be statistically

independent of the company alee at significance levels up
to 30 percent, which means that there Is no significant re­
lationship between the probability of applying these tech­
niques and the size of a

business concern.

The relationship between application of responsibility
accounting technique and the company size is found to be sta­
tistically insignificant when size is measured by employment,
sales, assets or products.

However, when size is measured

according to the number of manufacturing departments or major
manufacturing organizational segments in a company, the result
of the chi-square test shows that there is a significant rela­
tionship between size measured in this sense and the applica­
tion of responsibility accounting even at 2 percent signifi­
cance level.

In other words, the application of this techni­

que would depend on the size of the company 98 percent of the
time when size is measured according to organizational
complexity.
The relationship between company size and each of the operating
budget, capital budget, linear programming and network analysis
is found to be statistically insignificant at up to 10 per­
cent significance level when size is measured by any of the five
criteria.

However, the results of the test indicate a weaker

relationship between size measured by one or two particular
criteria and the application of these techniques but at 20
percent significance level.

Such level of significance is

regarded by statisticians as rather high, since there is 20%

143
probability that the conclusion will not hold.
that the relationships are not that determinate.

This implies
At 20

percent significance level, the application of operating
budget and capital budgeting are related to size defined
according to total assets employed or number of manufac­
turing departments.

Linear programming is found to be related

to the number of employees.

Net-work analysis is related

to average annual sales volume.

But again, it should be

reemphasized that such relationships are at a rather high
significance level and thus they are less significant than
the relationships which exist between standard coating and
responsibility accounting and the size of a company.
These statistical results may seem contradictory to the views of
some of the management accountants interviewed who claim that size is one
of the major environmental conditions which Influence the application or
non-application of any of these techniques.

Table V-4 shows the number

of management accountants and percentage of those who do not apply the
technique becuase of their company size.
The following are some of the typical comments given by the
accountants with regard to why not a specific company is not using a
specific technique.
One management accountant expressed his views by saying:
"we do not feel that the C-V-P technique is applicable to our size...
Our average job-order is $45.00. We are price followers.
It would
cost a lot more to apply the technique on such small scale than it
would give in terms of more relevant information for decision making...
Another comment on the application of contribution margin report­
ing says:

144
TABLE V-4
NUMBER AND PERCENTAGE OF MANAGEMENT ACCOUNTANTS INDICATING
THAT SIZE IS A FACTOR IN DETERMINGING THE APPLICABILITY
OF MANAGEMENT ACCOUNTING TECHNIQUES

Management Accounting Techniques

No. of
Accountants

X of Those
Who Do Not
Apply The
Technique

Cost-Volume-Profit Analysis

3

19Z

Contribution Margin Reporting

5

20

Standard Costing

2

13

Operating Budget

3

22

Responsibility Accounting

5

20

Captlal Budgeting

4

27

Linear Programming

7

20

Network Analysis

4

14

"....because this la a small company, the relationship between
management team Is still on personal basis....the president
still have access to first hand information....he is able to
figure out what he needs on a rough form even before complete
accounting data are accumulated in the controller's office...."
A typical comment on standard costing:
"....I keep considering the application of this technique, our
company is getting larger over time....the time will come when I
will not be able to keep my fingers on everything....then we will
need controls....and will use standard costing...."
As to the reaction of those who are applying a specific techni­
que the next three comments are typical.
"....we used operating budget as a result of our growth.... the
company was expanding....broadening its product lines...."

145
"we have not been budget conscious'for very long, because
we were a small company, and the larger the size the company
becomes the more budget conscious Its people get...."
"....we reached the point where capital commitments became
so great that managing capital Investment became necessary..,
then we used capital budgeting.
"
Though the statistical results may seem to contradict somewhat
with the views expressed In the above comments about the effect of size
on the application of any of the management accounting techniques under
study, It seems to agree with the conclusion of a major study conducted
on budgeting.

Sord and Welsch concluded their study with the following

remark:
....the diversified types and size of companies revealed
by the survey as using budgets or operating plans of specific
nature demonstrates the fact that budgeting can be adapted
to fit the planning and control needs of practically any type
and size of business....3
However, to put this conclusion In the proper perspective, we
must emphasize two facts about the scope of Sord and Welsch study;
(1)

Host of the companies Included In the survey lie In
larger sizes than those Included In this study.

Ninety

four percent of the personal Interviews were conducted
with companies employing

1000

or more employees.

While

only 9 percent of the companies Included in this study
exceed the 1000 employees.

Eighty two of S & W's

study

have sales exceeding $50 million while in this study only
3 percent have exceed that sales level.

Then this study Is

concerned with much more smaller companies than S & W's.

3
Barnard H. Sord and Glsnn A. Welsch, Business Budgeting: A
Survey of Management Planning and Control Practices, Wew Vork, Controllership Foundation, Inc. (1956)7 p* 36.

146

(2)

No classification of size Into small, medium and large had
been attempted In their study.

They used employment only

as size criterion In their personal Interviews data, but
employment and slaes in their mail questionnaire data.
Also the statistical results of this current study confirm the
introductory remarks of a study by the American Institute of Certified
Public Accountants regarding the applicability of budgeting in small
companies.

It concludes that budgeting is applicable to any size of

business and "...the smaller and simpler a business, the simpler its
budget.

The larger and more complex a business, the more elaborate its

budget."^
However, it is very significant to emphasize that the statistical
results of this study do not apply only to budgeting but the conclusions
derived are applicable to all management accounting techniques subject
of this study.

Size is statistically insignificant to the applicability of

any of these techniques except standard costing and responsibility account­
ing in the sense mentioned earlier in this section.
5.3.2

The Relationship between Size of the Company
and the Number
of Management Accounting Techniques Applied by the Company
The second chi-square test is taken to find

out if

statistically significant relationship between the size

there isany

of the companies

included in the study, and the number of management accounting techniques
accepted and applied in practice by these companies.

For the purpose of

this test the composite size mode of each company is determined as a

4
Committee on Management Services, Budgeting for Profit in Small
Business. Bulletin No. 2 (New York: American Institute of Certified
Accountants, 1959), p. 5.

147
measure of operation complexity.

This classification has resulted In

25 small companies and 10 medium companies.

There Is no large company

in the sample when size is taken as the mode of the five size criteria.
Coverage of the practices of large and largest companies manufacturing
companies Is beyond the designated scope of this study.
Table V-5 shows the distribution of the number of management
accounting techniques used by each size classification as well as the
mean and the standard deviation from the mean.
The analysis of the results of the average number of management
accounting techniques used by each size stratum indicates that there "is"
a relationship between the average size of a company and the number of
techniques it is using.

The results show that the small companies are

using, on the average, 2.68 techniques and the medium companies are
applying 3.90 techniques.

However, the standard deviation results

decrease the significance of such relationship since it indicates a wide
range of dispersion of the performance.
The chi-square test is sensitive to this phenomenon.

When the

test is applied to the same data, the conclusion derived from its results
indicates that there is "no statistically significant dependency rela­
tionship" between the size of a company and the number of management
accounting techniques used by the company, at any significance level up
to 30Z which considered to be too high by statisticians.
x

2

The value of

computed according to the formula ■ 8.295 at 7 degrees of freedom.

The x

2

distribution of 10 percent significance level “ 12.017, at 20

percent - 9.803 and at 30 percent - 8.383.5

^Ibid., Stokton, p. 625.

This means, statistically,

TABLE V-5
THE NUMBER OF MANAGEMENT ACCOUNTING TECHNIQUES ACCEPTED
AND APPLIED BY EACH SIZE CLASSIFICATION AND
THEIR MEAN AND STANDARD DEVIATION

Six

Seven

Eight

Total

The Mean
of the
Nwiber
of Tech­
niques
Used

2

-

-

25

2.68

1.77

3

1

-

10

3.90

2.38

35

3.03

2.01

Nuaber of Management Accounting Techniques Applied
S ize

Class

Saall

None

2

Mediue

Total

One

Two

Three

6

4

6
2

3

2

9

4

8

Four

Five

2
-

3
1

2

4

5

1

The
Stand­
ard
Devia­
tion

149
acceptance of the proposition that size and the nuaber of techniques
used are independent to a high degree.
However, the results from both the mean distribution and the
chi-square test taken together indicate that "there is a relationship
between size and the number of management accounting techniques accepted
and applied, but this relationship Is not powerful enough to be statis­
tically significant."

This result confirms our main proposition that,

though size of a company may influence the nature of the company1a
accounting system and the type and number of accounting techniques used
in the system, the company size is not more than only one condition
among others which exist in the environment of each business and which
all together affect by one way or another the final decisions of whether
to apply a specific accounting technique or not.

5.4

The Relationship between the Nature of Business Operation
and the Application of Management Accounting Techniques in Practice
The type of industry to which a company belongs and the peculiar

nature of operation in which it conducts its main business were cited by
different management accountants, during the personal interviews, as one
of the environemental conditions which influence the acceptance and appli­
cation of a specific technique in practice.
An accountant in a dairy products producing company gave this
reason for the application of the coat-volume-proflt analysis in his
company.
"....in our particular Industry (Dairy), we do not sell
our products at constant prices. Instead, our prices
vary according to the changing economic conditions and trend
and strength of competition within our Industry. Therefore,
we have to continuously consider the effect of the business
volume on costs, prices and profit margin to be able to adapt
our operation to any change...."

150
However, this seme accountant has given the following reason
regarding why responsibility accounting la not applied in his company:
"....it is very difficult to attempt to get actual coat
for each responsibility center in our particular operation,
becauae even raw material coat and labor coat are the respon­
sibility of all operating managers and the alllocation of
these costs to separate responsibility centers encounters
a great deal of arbitrary judgement which at best will not
please anybody concerned...."
In another company, where the business volume has tripled
during the last five years, a management accountant expressed the following
comment as one major reason for not being able to apply operating budget
in his company:
"....we will apply this technique when we will be enough estab­
lished and have a more predictable growth pattern. We can not
forecast the expected volume of our business for a fairly long
period....we are expanding so fast.... things are changing so
rapidly that no basis can be set for budgeting to operate...."
A third accountant, who is applying the C-V-P technique has
expressed the following comment:
"....our total existence is based on bidding on job orders.
Particularly now, when competition is at its most, and busi­
ness is based on marginal pricing...when our volume starts
to fall-off, we lower our prices to get enough volume to cover
fixed cost and maintain capacity. This technique has proved
to be very helpful in this situation because it shows where we
can make price conccesslons and when we will suffer a net loss
if we bid lower than specific level...."
In a small frosen vegetable producing company, the accountant
has indicated that his company is operating on a seasonal production
operation.

They used to have idle capacity a part of the year and

therefore they do not care very much about applying any of the morsrn
management accounting techniques subject to this study.

When one

thinks that the application of at least some of these techniques may
help management recognise other opportunities to maintain company's

151
capacity all year round, one can see that the peculiar nature of
a business operation nay be one factor but certainly It Is not the
main, nor the only factor which should govern the application of modern
management accounting technique to help management even In changing
this adverse peculiar nature.
The analysis Included In Table V-6 below shows the number and
percentage of those accountants who do not apply a technique and have
cited

peculiarity of business as one of the reasons for their In­

ability to apply it.

Standard costing and cost-volume-profit enalysis

seem to be the two techniques most affected by this condition.

TABLE V-6
NUMBER AND PERCENTAGE OF COMPANIES NOT USING MANAGEMENT
ACCOUNTING TECHNIQUES BECAUSE OF THEIR BUSINESS NATURE

No. of
Companies

Percentage

Cost-Volume-Profit Analysis

4

24%

Contribution Margin Reporting

1

4

Standard Costing

7

43

Operating Budget

2

15

Responsibility Accounting

1

4

Capital Budgeting

1

7

Linear Programming

2

6

Network Analysis

-

-

Management Accounting Techniques

The analysis of the research data also Indicates that there Is
some difference in the average extent of modern management accounting

152
techniques between the durable goods and the non-durable goods manu­
facturing companies included in the study.

Table V-7 summerises the

results on this point.

TABLE V-7
THE AVERAGE NUMBER OF MANAGEMENT ACCOUNTING TECHNIQUES ACCEPTED
AND APPLIED BY DURABLE AND NON-DURABLE GOODS MANUFACTURING COMPANIES

No. of
Companies

Average
Number
of Techniques
Used

Durable Goods Manufacturers

27

3.26

Non-durable Goods Manufacturers

_8

2.25

35

3.03

Total

Though the average extent of the application of management account­
ing techniques in the durable goods Indus try is greater than in the non­
durable goods industry, there is quite a range of dispersion of the
performance of each major product group within each classification of the
Industry,

The primary metal companies Illustrate the highest average of

nuaber of techniques used.

The Chemical and Allied products companies

shoe the highest average in the non-durable Industry.

However even

within each classification the extent of modern management accounting
technique differs from one company to another for reason explained in
this as well as previous sections snd for reasons that will be discussed
in the following sections.

153
5.5

The Effect of T o p Management Attitude on the Acceptance and
Application of Modern Management Accounting Techniques In Practice
An exhaustive and extensive study of the behavioral aspects of

management accounting is beyond the scope of this study.

However, the

lnq>ortance of top management attitude toward change has been expressed
as the most Important environmental condition influencing the acceptance
or rejection of the application of a specific technique or techniques in
the management accounting system of a company.

More specifically, twenty-

four different accountants Interviewed have indicated that one or more
techniques have not been applied In their companies because of top manage­
ment’s resistance against changing the management accounting system and
their negative attitude every time a recommendation to apply a specific
technique was introduced.
An attitude has been defined by many sociologists, psychologist,
Boclal psychologist and others.

Allport has defined attitude as:

"....a mental and neural state of readiness, organised through
experience, exerting a directive or dynamic Influence upon the
individual's response to all objects and situations with which
it Is related.
Attitudes refer to the stands the individual upholds and cherishes
about objects, issues, persons, groups or Institutions.
not be observed directly.^

An attitude can

It denotes a variable within the individual

that affects his behavior in a pertinent situation together with other
motives operative at the time and the properties of the situation itself.
Attitude is Inferred from Individual's behavior, his words and deeds.

^G. W. Allport, In C. A. Murchison (Ed), A Handbook of Social
Pcycholosv (Worcester, Mass., Clark University Press, 1935), p. 798.
^Carolyn W. Sherlf, Musafer Sherlf and Roger E. Nebergall, Attitude
mid Attitude Chanye: The Social Judgement - Involvement Approach (W. B.
Saunders Co., Philadelphia 1965), p. 18-20, Ibid.

154
The Influence of top management attitudes on the acceptance or
rejection of management accounting innovations, is Indicated through the
personal interviews with management accountants in charge of the account­
ing systems of the companies included in the study.

No attempt has been

made to determine or measure the attitude of top management themselves
toward change.

Rather the analysis in this section represents the manage­

ment accountants viewpoints regarding the main factors which works with
or against Innovation in accounting.

Table V-8 shows the number and

percentage of those companies which do not apply management accounting
techniques, mainly, because of the top managements' resistance against
changing the accounting system.

TABLE V-8
NUMBER AND PERCENTAGE OF ACCOUNTANTS INDICATING RESISTANCE OF TOP
MANAGEMENT AGAINST CHANGE IS THE MAIN CONDITION BEHIND
UNABILITY TO APPLY MODERN MANAGEMENT ACCOUNTING TECHNIQUES

Management Accounting Techniques

Cost-Volume-Proflt Analysis

No. of
Companies

Percentage

8

47X

10

40

Standard Costing

9

56

Operating Budget

6

47

13

52

Capital Budgeting

7

47

Linear Programming

3

9

Network Analysis

-

-

Contribution Margin Reporting

Responsibility Accounting

155
The analysis of the findings Included in the above table, indicates
that top management resistance to change is certainly one of the major
environmental conditions which hinder the application of at least six of
the eight techniques considered.

Taking in consideration the frequency

of giving this condition as a reason for not applying m o d e m management
accounting techniques leads to the conclusion that top management attitude
may be the most, though not the only, factor which Influence accounting
innovation In practice.

However, as it is clear from the empirical

results included in the table above, top management influence is not
clear in the case of the two quantitative techniques, linear programming
and network analysis, where there appear to be more lnfluenctial factors
besides management attitude affecting their application.

Such factors

will be discussed in the next section of this chapter.
The following are some typical comnents concerning top managements
resistance against change as expressed by management accountants inter­
viewed:
One said:
"....the top management of this company are running it by
the (seats of their pants)... .most of them are not highly
receptive to new changes....most of them do not go to manage­
ment seminars.... they resent any attempt of pointing fingers
on them regardless of whether they are performing good or
bad...."
Another has commented that:
"....top management la not Interested in this technique
(flexible budget).... they think it is a waste of time....
I do not agree with them, but I could not do anything about
it now....maybe after changing our top management, especially
the key people who do not want their performance to be
measured and evaluated....then we may be able to apply the
technique...."

156
A third comment:
"....three years ago, there were no financial officers
in this company.... it was run by the (seats of the pants
approach)....it was a family owned company..*.anything
connected to financial data was classified as highly
confidential....Effective next week, middle management
will be receiving some limited accounting reports for
the first time
Hell, we are not even doing as well
as we know how right now. Because of the resistance of
various levels of management we have been encountered
with...."
Top management attitude toward Innovation in accounting may be
attributed, among other things, to the age of top management, their
technical background especially of the president's, the type of owner­
ship and management awareness of the need for new modern tools to help
them in their decision making process:
1.

As to the effect of top management age, the following are
some of the relevant comments given by accountants inter­
viewed:

"....we had a complete change in management team just two
years ago. The previous top management executives were very old
....they resisted change by every means....but with the new
younger, more educated executives, we have now, changing the
accounting accounting system is a process to which much time end
effort is devoted at the present time...."
"....ten years ago, we had an old management teem....they were
not reelly sensitive to what was going on....when younger more
aggressive executives had replaced the old management.... they
needed more detailed analysis.... the son of the older president
insisted on making these changes when he became the new president...."
"....the owner of this company is an old man....he is not well
educated....his hand is usually In the business....his son is
an engineer....and the changes are being made by him after the
consent of his father.... the son has the high card....this is
why we started to use raw techniques...."
2.

As to the technical background of the president, these
comments are e typical sample.

On the one hand, an

accountant has expressed this opinion:

157
"....our president la salaa oriantad....he la from tha old
achool of managera....ha hae a low regard for m o d e m tech­
niques of management....ha controla the employeea and the
company by hlmaelf peraonally quite closely....by the (feel­
ing of the business)....This la why we do not apply new tech­
niques of accounting....he does not believe they are of any
value to him...."
"....our president Is a chemical engineer....he does not
understand accounting.... through the years he has made hla
own Information system....he does not follow neatly accounting
reports as we understand It...."
On the other hand, another accountant, In a company which Is
regarded according to this study as one of the leading companies with
regard to the extent of applying modern management accounting techni­
ques, has said:
"....our present president waa the reeaaurer of this company
before he became the president. At his time, he had initiated
the application of most of the m o d e m techniques we are using
now... .1 have just added some Improvement over time... .we
consult together on this matter often
he appreciates the
usefulness of relevant accounting Information In the decision
making process...."
3.

Although specific statistical data about the type of
ownership of the companies Included In this study has not
been sought, because of the scope of the study which
concentrates on small and medium companies, the companies
In most cases are owned and/or managed by one owner or
few owners;....more frequently than not with family re­
lationships.

However, the sample includes some publicly

owned companies.

The pressures on publicly owned com­

panies to apply m o d e m techniques tend to be more than on
those which are privately owned.

Thus, I have found some

companies adopting a technique because management feela that
once a company goes public It must apply the techniques to
satisfy the public.

157a
4.

As to the awareness of the need for new management tools by
the top executives and their personality growth, theae are
some of the accountants comments:

"*...we have applied this technique (standard costing) because of
top management recognition of the need for more control...."
"....we may use this technique (operating budget) when top manage­
ment realizes the possible gains from formallsad planning of the
future of this company...."
"....we are witnessing the results of the management’s own personality
growth In our organization.... they are changing their attitude as
a result of their personality growth along with tha company growth
....they are asking for more Information....this helped us to Intro­
duce some of the new techniques to provide them the desired Informa­
tion. ..."

158
The perception of top management of the Importance of accounting
function appears to be another phenomenon of the management attitude
toward the need for modernising this function.

A possible picture of

the relationship between accountant and top management Is adequately
described in the following comment by one accountant Interviewed:
"We are pretty inq>ortant to this company. However, the company's
objective is to get the part (the product) out of the door. The
accounting department is a kind of follower. Never has manage­
ment of this company relied a great deal on the accounting de­
partment . But we are improving....There was a time when top
management did not recognise the controller as a part of the
management team. But now he Is considered more and more in the
management team through the treasurer who Is In the executive
committee.
Therefore, chances of introducing some of these
techniques are enhanced every day...."
Table V-9 show a comparison between the relative performance of
each company with regard to the number of management accounting techni­
ques it applies and the Intensity of management resistance against
application of m o d e m accounting techniques.
There appears to be a reverse relationship between the average
extent of m o d e m management accounting techniques and the Intensity of
top management resistance to change the accounting system.

In those

companies which are applying less than 3 accounting techniques, the
average number of times management resisted changing the accounting
system Is 2.33 times.

In those companies idilch are applying the sample's

average (3 techniques), they resisted, their top managesient has re­
sisted, on the average, 1.62 times.

While in those companies who

are applying more than 3 techniques, their top management showed a
lesser sign of resistance to change, only 0.67 time.
In summary, acceptance and application of m o d e m management account­
ing techniques becomes more possible when the members of top management

159
TABLE V-9

1
X
2
3
4
5
X
X
6
7
8
X
9
10
X
11
12
13
14
15
X
X
16
17
18
19
20
X
21
22
23
X
24
25
X
26
X
X
27
X
X
28
X
29
30
31
X
X
32
33
34
35
X
[Total
B
-Ifi
Symbols: X
*

X
X

1
0
0
0
3
2
0
1
1
2
0
0
0
1
5
1
1
1
1
4
0
0
4
3
2
3
4
2
3
1
6
1
3
0
3

X

X

X
X

X
X
X

X

X
X
X

X

X

X
X
X
X
X
X

X

X

X
X
X
X

X
X
X
X

X
X

X
X

X
X
9
6
13
7
3
top management rai
Company applying 3 tachnlquaa (tha Sample Average)
Company applying leaa than Average
Company applying more than Average
-

Extent of MGT
Accounting
iTechniques

i
Number of
Techniques Not
Applied Because
of Management
Resistance

Network
Analysis

Linear
Programming

Budget
Capital

Budget
Operating

Responsibility
Accounting

Coating
Standard

Contribution
Margin

C-V-P

Company
Code No.

NUMBER OF MANAGEMENT ACCOUNTING APPLIED BY EACH COMPANY AND
THE NUMBER OF TIMES TOP MANAGEMENT RESISTED APPLICATION
OF A NEW TECHNIQUE

*
+
-

+
—
-

+
—
*
+
+
+
a.
+
*
+
*

*
+
*
*
_
a.

*
+
*
_

+
+

160
are young than when they are old, when the president hae financial back­
ground rather than technical one, and when they are composed of career
executives rather than entrepreneurial executives.

5.6

The Effects of Management Accountant*a Attitude
on Management Accounting Innovations:
The attitude of the management accountant in charge of the account­

ing system in a company, constitutes, without much doubt, one of the
major environmental conditions which influence the innovation process
of management accounting.

The research data clearly indicates that,

where a management accountant is professionally equipped and inspired to
improve his company's accounting system, more m o d e m management account­
ing techniques are introduced, accepted and applied in the system, than
where the accountant is less professionally competent and/or willing
to improve his management accounting system; other conditions remaining
the same.
The Management accountant's attitude toward introducing management
accounting innovations may depend on several factors, among them are the
following:
1.

The accountant's perception of what type of information
management needs, what type of information should he provide
managment and what is the best system which efficiently per­
forms the job.

2.

The accountant's expectation of how well management personnel
understands financial information and to what extent they
rely on it in their decision-making process.

3.

The accountant's perception of the top management attitude
toward change, especially in the accounting system, and his
reaction to their resistance to such change.

4.

The accountant's satisfaction with the company's accounting
system in operation at the present time and his motivation
toward modernising such systems.

161

1.

5.

The accountant's technical competency acquired through
formal education, special training, experience or combined
and through hla active membership in the professional
a c c o w t i n g institutions or associations.

6.

The accountant's age seems to constitute another important
factor.

The accountant's perception of the function of management accounting:
The accountant's perception of the role of management accounting

information system is described by one accountant, triiose company is
applying 5 out of 8 techniques, In the following quote:
"....accounting system, production system....etc.,....have
to serve the business goals not otherwise....1 believe in the
KISS approach (stands for Keep It Simple Stupid).... this does
not mean by any way to keep our system outdated or inadequate....
in contrast, we mean by this that we must adopt the accounting
system to our needs....we keep our system flexible and open to
any m o d e m techniques we feel It is useful for our decision­
making process....On the other hand, we do apply any technique
just because it is new...."
Another comment relevant to this point was given by another
accountant:
"....when I came to this company, I did not like the pricing
formula the company was following.
Then I initiated the
application of this technique (Contribution Margin) to use it
as basis for pricing decisions....management tried it....the
technique worked....we have been using it since then...."
2,

The Accountant's expectation about management appreciation of
accounting information:
A typical content about the accountant's expectation of managers;

comprehension and understanding of accounting information and his reac­
tion thereof has been given by another accountant:
"....I joined this small, family owned and managed company
after I had left a larger company with a rather sophisticated
management accounting system which was designed and established
by an outside management consultant employed by one of the major
public accounting firms....I had a very difficult time to sell
that system to middle management.... they could not understand
It....the sophisticated system did not work....Coming out with

162
such experience In mind, I decided Co keep this company's
accounting system as simple as possible to fit the current
management team's ability to comprehend accounting reports
and statements and to adapt to their attitudes toward change*..."
3.

Accountant's reaction to management resistance to change:
An accountant whose company Is using only one out of the eight

techniques studied, and who has indicated that he is encountering severe
resistance from his top management against any change in the company's
accounting system, expressed his views as follows:
"....the application of any of these techniques would depend to
a large extent, on whether top management will use the informa­
tion provided by the technique or not....In our case, I do not
think that our managers will understand it, they will not use
it....then, there is no need to bother introducing it to them any
more
reject applying it again...."
4.

Accountant's satisfaction with present system:
The relationship between the extent of modern management account­

ing techniques and the accountant's satisfaction with his present account­
ing system is shown in Table V-10.

Accountant's satisfaction is measured

by the number of times the accountant has indicated that a technique(s)
is not applied because he is satisfied with the current accounting
system without the technique.
Analysis of the results indicates that those accountants who
are doing less than average performance with regard to the application of
modern management accounting techniques (using less than 3 techniques)
are the most satisfied with their out-dated systems, and those account­
ants who are doing better than average are the leaat satisfied with
the old techniques remaining in their systems.

The average number of

times an accountant indicated his satisfaction of his accounting system
without application of the technique is 1.33 for those who are applying

163
TABLE V-10

X

pH p2
H
a h
4J 4)

! !

X

X
X

X

X
X

X
X

X
X

X
X
X
X
X

2
13X
x * •
- *
+ *

X

-1

3 60
■H M
4 a*
X

X

(3 O

X

0
2
5
0
0
2
2
0
0
3
4
0
1
0
0
1
3
0
1
0
0
0
0
0
1
0
2
1
1
1
4
0
0
0
0

Extent of MGT
Accounting
Techniques

a

Nuaber of
Techniques Not
Applied Because
of Accountant's
Satisfaction

Responsibility
Accounting

Operating
Budget
X

00
Network
Analysis

1
2
X
X
3
4
5
X
6
7
8
9
10
X
X
11
X
X
12
13
14
13
16
X
17
X
X
18
19
20
21
22
23
24
25
X
26
27
X
28
29
30
31
X
32
33
34
35
Total 6
7
* 1 3 5 * 28X
Syibola:

Standard
Coating

Contribution
Margin

C-V-P

Conpany
Code No.

COMPARISON BETWEEN THE NUMBER OF TIMES THE ACCOUNTANTS IS SATISFIED
WITHOUT APPLYING MANAGEMENT ACCOUNTING TECHNIQUES AND THE
EXTENT OF MODERN MANAGEMENT ACCOUNTING IN HIS COMPANY

+
-

+
-

-

+
-

*
-

♦
+

+
-

+
*

+
a
*
-

+
*
*

-

*
+
-

*
-

+

4
2
1
5
8
6%
32%
3%
27%
36%
Accountant satisfied without tha technique
Conpanyapplying 3 techniques (the Sanple Average)
Conpany applying wore than Average
Conpany
applyingaore than Average

164
less then 3 techniques, 1.18 for those who apply 3 techniques; the average,
but only 0.42 for those who are applying more than the average number of
techniques.
5.

The accountant's technical competencei
A.

The Influence of the accountant's technical competence on

the type of management accounting system and the extent of modern techni­
ques applied In that system, was apparent throughout the personal Inter­
views I conducted.

The data gathered reflect the same conclusion*

I

have witnessed examples of accountants who are officially certified by
the profession but who are, at the same time, lacking the basic knowledge
t

hat a specific management accounting technique is, let alone the

questions of Its prospective usefulness In the decision-making process
or how to sell It to top management.

In such cases, the introduction

of a new technique, even If top management Is ready to accept It, becomes
a matter of either reeducation to the present accountant or may Involve
the possibility of replacing the accountant himself for a better educated
one.

Such possibility has been indicated by some accountants who had

been appointed for this very reason, management's desire for better
educated accountants.
However, the research indicates that the great majority of
accountants Interviewed have the basic knowledge of the traditional
accounting techniques subject to this study.

But whan It comes to the

rather new quantitative techniques, the linear programming and network
analysis taken as examples, the data clearly Indicates that many accountants
do not even know what these techniques are about.

The great majority

of the present practicing accountants in small and medium companies are

165
not technically equipped to handle these new quatitative techniques.
At least 13 accountants have said frankly that the reason they did not
apply linear programming is due to the lack of knowledge about, the
nature, operattonality and usefulness of the technique.

In the same

time, at least 11 accountants have cited the same reason with regard to
not being able to apply the Network analysis (CPM/PERT).

This in

addition that most of those accountants who have recognised these techni­
ques seem to lack the analytical ability necessary to apply them in
operation.
Comparison batween formal education, measured in terms of the
degree(s) an accountant holds and the extent of modern management account­
ing techniques in his company, illustrates this importance of the
accountant's technical competence in his ability to apply modern techni­
ques, other conditions are the same.

Table V-ll shows such a comparison.

It is significant to note the following two observations about
this comparison.
a.

None of those who are doing better than average job with the
application of managemant accounting techniques, has less than
B.A. or B.S. degree in accounting.

b.

The percentage of those who hold a B.A. and M.B.A. la the
highest in the better than average category than in the other
two categories.

This may explain the trend of hiring new

M.B.A. graduates for high accounting positions to increase the
effectiveness of the accounting function.
B.

It became evident through the research that the more active

an accountant is in his local professional associations, the more informed
the accountant becomes about the new development, in the accounting field

166
TABLE V-ll
THE DEGREE OF FORMAL EDUCATION AND THE EXTENT OF
MODERN MANAGEMENT ACCOUNTING TECHNIQUES

vss Extent of Management
^ V sAccounting
^'^echniques
Less than
Formal
Average
Education
(less than 3)
Degree(s)
X
No.

Average
(3 techniques)
X
No.

Better than
Average
(more than 3)
No.
X

Less than B.A. (or BS)

5

33X

3

37X

-

B.A. (or BS)

9

60

2

25

5

42X

B.A.' and M.B.A
(or equivalent)

1

7

3

38

7

58

8

100X

Total

15

100X

12

-

100X

and the more he Is exposed to such modern techniques and becomes aware
of Its nature, operational!ty and prospective usefulness if applied In his
own accounting system.

The contribution of Informal education and

training through attending professional seminars, workshops and conven­
tions of the local chapters of the professional associations especially
the National Association of Accountants, becomes evident in many occasions
throughout the personal interviews.

In some cases, management accountants

interviewed indicated that they started application of some of these
techniques immediately after and as a result of attending one of these
meetings.
However, specific data on how active an accountant is in his pro­
fessional associations' activities ware not possible to get in this study.
At the same time, analysis of data collected on the accountants' professions
membership does not give any determinate relationship between the

167
TABLE V-12
THE ACCOUNTANTS' PROFESSIONAL MEMBERSHIP AND THE EXTENT OF
MANAGEMENT ACCOUNTING TECHNIQUES IN PRACTICE

Extent of Manage^ V J j e n t Accounting
^ SsV sTechniques
Professional''^.^
Membership

Less Than
Average
(less than 3)
No.
X

None

1

CPA only

6

NAA only
CPA and NAA

Total

Average
(3 techniques)
No
X

-

-

40

3

37X

7

58X

4

27

3

28

1

8

4

27

2

25

4

35

100X

8

100 X

15

6X

Better Than
Average
(more than 3)
X
No.

-

12

-

100X

accountant's membership in a particular association and the extent of
management accounting used in his company.

Table V-12 shows this obser­

vation.
C.

Analysis of the service period each accountant has spent w

his present company reveals that those who are doing less than the average
with regard to the application of modern management accounting techniques,
are those who have spent, in general, the longest period of service.

Those

who are doing better than average have the shortest period of service in
their companies.

This may indicate that the willingness and ability for

changing the accounting system prevail In the early period of service.
After, some time, the longer an accountant stays In his company the less
ambitious to effect change he becomes.

It Is significant to note that

none of those accountants who are doing better than the average has spent

168
TABLE V-13
THE ACCOUNTANT'S SERVICE PERIOD AND THE EXTENT OF
MANAGEMENT ACCOUNTING TECHNIQUES

Extent of Management
Accosting
^^■^Techniques
Service P e r i o a s,,^s>^ ^

Less Than
Average

Average

Better Than
Average

Less than 2 years

1

2-5 years

6

3

5

5-10 years

4

2

6

More than 10 years

4

3

None

15

8

12

Total

1

None

more Chan 10 years in Che presenc company he la working.

Table V-13

summarizes this conclusion.
6.

The Accountant h - t e s . The analysis of the data gathered for this study Indicates that

younger accountants are more willing and able to effect change In their
accounting systems and apply more modern techniques than older accountants.
A comparison between the accountants' age ranges and the number of manage­
ment accounting techniques applied Is shown In Table V-14.
The average age of those accountants who are applying more than
3 management accounting techniques (better than the sample average), le
35.4 years old.

None of them. In fact, la older than 40 years old.

While

the average age of those doing worse than the average, Is about 48 years
old.

The average age of those applying 3 techniques Is about 47 years old.

169
TABLE V-14
THE ACCOUNTANT'S AGE AND THE EXTENT OF
MANAGEMENT ACCOUNTING TECHNIQUES IN PRACTICE

>s,,ss^

Extent of Management Accounting
x.
Techniques

Accountants
Age Ranges

Less Than
Average
No.
X

2

25X

5

4 IX

26

1

13

7

59

6

40

2

27

None

-

4

27

3

37

None

-

100X

8

100X

Less than 35 years

1

35-40

4

40-50
More than 50

Total
Average Age (in years)

Average
No.
X

Better Than
Average
No.
X

15
48.1

7X

46 .5

12

100X
35.4

Then In summary, the management accountant who haa been able to
effect change In his company's accounting system, Is more probably than
not, perceptive to what type of Information his management executives need
and able to adapt the accounting techniques to fulfill it; understands
his management's attitude toward change and able to persuade them to such
change; not satisfied when the accounting system is outdated and obsolete;
more educated and holds either a B.A or B.S. degree in accounting and most
probably has either earned an M.B.A. degree or is working toward one,
is active in his professional association, and he is young, about 35 years
old.

170
5.7

The Extint of Modern Management Accounting Techniques
and the Availability of the Necessary Human and
Phvalcal Raaourcaa Raqulred
The availability of human and physical resources required to

plan for and apply new management accounting techniques has been expressed
several times by accountants Interviewed, as one of the environmental
conditions which influence the extent of modern management accounting tech­
niques in the practice of small and medium manufacturing companies.
Shortage of qualified accounting staff who are equipped with knowledge
of these techniques and able to adapt them to particular needs of
management decision-making process, is one of these requirements.

Time

j
.

needed for the planning stage of adopting and applying new techniques
by present accounting staff was another factor.
material or publications

Lack of available written

describing the technique, how it operates,

its usefulness, and how it could be adapted to particular situation was
also included In this category.

The necessity of having a computer was

cited by 3 accountants as a reason for not being able to apply linear
programming.
Table V-15 shows the numbers and percentage of accountants who
have Indicated that lack of these requirements constitutes a major obstacle
for the application of new accounting techniques.
Shortage of qualified management accounting staff appears to
hinder most the application of responsibility accounting, contribution
margin reporting and capital budgeting.

The Impact on the now quantita­

tive techniques, linear programming and network analysis, cannot be deter­
mined from the data available since several of the accountants interviewed
did not even know what these techniques are about.
with the next two observations.

This will also hold

171
TABLE V-15
THE LACK OF HUMAN AND PHYSICAL RESOURCES AMD THE APPLICATION
OF MODERN MANAGEMENT ACCOUNTING TECHNIQUES
•
>s

^Management Accounting
Techniques

Human and
Physical
Requirements

04
i
>
i
o

Shortage of Qualified
Accounting Staff
Percentage

3 $

n
i-i 60

TJ

0

I f

-M
* U
U 60
e tj
o. 3

ss
ii O
W O

O

9

•Q M

to *->

PQ

8 §
a. o
op 0
p? <

3 (O

4)

i4 60
P.<3

5
«
ft
■h

u

60
o
h

l-J 04

2

1 1
SB <1

2

3%

7%

2

5

2

28%

14%

15%

2

9

14%

26%

6

—

5

9

2

24%

24%

-

38%

36%

14%

11

3

7

7

20%

54%

7

. —i
•
ki
M OP

1

1

4

Time Press
Percentage

a
o
•H
3
5 a
t4
Ji QO
a n

7%

41%

44%

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

3

-

—

_

_

—

_

—

9%

—

Lack of Written Guiding
Publications
Percentage
Lack of Computer
Percentage

2
7%

Many accountants have indicated a ladder of preference as to the
allocation of their work time.

They put on the top of this ladder the

day-to-day routine work and list any needed changes afterward in order of
priority.

A high percentage of those who are not using the techniques

are placing operating budget, contribution margin reporting and cost-volumeprofit analysis in lower priorities of their preference ladder.

Thus,

they indicate that they do not have enough time to prepare for applying
these techniques in addition to coping with regular work responsibilities.

172
However, two accountants have expressed that It is really a matter of
conviction that these techniques are useful.

Once an accountant Is

convinced thet application of a new technique would Improve his perfor­
mance he would spare time for planning to apply it.
None of the accountants has mentioned that there is any lack of
written material on the application of any of the traditional accounting
techniques except for capital budgeting.

However, many accountants have

raised this point with regard to the quantitative techniques, even with
recognising thet many others do not even hear about them to give any
judgement about the adequacy of available written and published appli­
cations .

5.8

The Cost and Value of Information and Its Effect
on Changing Management Accounting System:
Changing the management accounting system or introducing new

techniques into an existing system is undoubtedly costly; it takes quali­
fied people and time to effect such change or to plan for applying the
technique.

Hiring new accounting staff will add costs that the company

was living without incurring before the change.

This cost is attributed

to the additional relevant information the management teem is getting as
a result of this change or the introducatlon of the new technique.

Then

the declson of whether to go eheed and change the system or remain
with the statue quo may depend on whether the cost of making such change
is justified.

This decision is based on management judgement and accoun­

tants salemanship in addition to the other environmental conditions
discussed earlier rather than on a quantification of what price is being
paid by deviating frosx a "best" course of action as against the cost of
getting better information.

173
During the personal Interview I conducted, the question of the
cost and value of Information was raised by some accountants as one of
the reasons for not being able to apply one or more of the modern manage­
ment accounting techniques under study.

Some accountants have Indicated

that "the value of information derived from a new system does not warrant
the cost of Installing it."
technique is not apparent.

The potential savings from applying a new
Bases for such judgement were not clear.

Some other accountants indicated that the application of a technique "is
too costly for them and they do not need the detailed information it will
provide that bad".
Table V-16 shows the number of accountants who indicated that
the cost of applying a technique Is one of the reasons of not 'applying it
till now.

TABLE V-16
COST AND VALUE OF INFORMATION AND THE EXTENT OF
MANAGEMENT ACCOUNTING TECHNIQUES

eo
ft
V o

•H 00

o
Too costly to install and
operate

1

Potential savings are
not apparent

-

CO

3

3

U A

4

3

2

2

2

2

-

1

2

1

174
The results of the table Indicate that the coat factor le not
a primary factor In the change process of the accounting system but rather
a minor one.

5.9

Other Environmental Factors:
The study has revealed other secondary factors which have their

role In the companies' environments and directly or Indirectly Influence
the acceptance and application of modern management accounting techniques
In practice.

5.10

Among these secondary conditions are the following:

1.

Company's ownership change whether through offering stock
to the general public or through mergers and acquisitions.

2.

Banks and other financial Institutions pressure especially
In the case of operating and capital budgeting.

3.

Business competition factors also play a role In changing
the accounting system.

Conclusions;
Throughout this Chapter the environmental conditions which tend

to Influence the acceptance and application of m o d e m management account­
ing techniques In the small and medium manufacturing companies accounting
systems were analysed and significant observations were pointed out.
Accounting Is a business decision making tool In the buslnesa that affects
and Is affected by the business envlronmer-w.

However, the effect of the

environmental conditions on Innovations in accounting and on the applica­
tion of these Innovations In practice vary from one condition to another.
From the empirical evidence this study tried to obtain, It becomes clear
that top management and Its attitude toward the value of accounting In­
formation and the desirability of applying modern techniques has the
greatest impact on management accounting innovation.

The accountant's

175
attitude toward change and hie profeeelonal ability to effect auch
change repreeente the eecond Important condition in the environment that
Influence accounting Innovation.

Slae of the bualneee and the nature

of buaineae operation have alao affected management accounting, but
they come after management end accountante Influences.

Availability of

human and physical resources and the relative value and coot of infor­
mation, are also Important but to a lesser degree of importance.

The

type of ownership, the degree of competition are among other environmental
factors which play a role in influencing the type and number of modern
management accounting techniques In practice.
Figure V-l depicts the relative degree of Influence of the
environmental condition upon the acceptance and application of modern
management accounting techniques in practice.

176

FIGURE V-l
The Environmental Conditions which Influence the Acceptance and
Application of Management Accounting Techniques in
Small and Medium Manufacturing Firms

y^UM A N A N D
OF T«£
, \ v&

mms/o
Tr" ' -

<<3fe

A cceptance
and opplicotior
m odern monoqemcnt
iounting tccHniq
in p ractice is
itnced by
il/V

lUjJ

*r

^6EMi^

Sr/rUDl
f AND C 0&1

&

0^

COMPfl£

A '

CHAPTER VI
DIFFUSION OF MANAGEMENT ACCOUNTING INNOVATIONS
IN SMALL AND MEDIUM MANUFACTURING FIRMS

6.1

Introduction:
A survey of modern management accounting techniques accepted

and applied In the practice of small and medium manufacuturlng firms,
has been the subject of Chapter IV of this thesis.

In Chapter V, the

environmental conditions which tend to influence the diffusion of
these techniques In practice were analysed in detail, with particular
emphasis on those conditions which tended to hinder

such diffusion.

In thi^ chapter, the diffusion process of management accounting Innova­
tions will be investigated.

The objective of this chapter is to answer

questions such as when did change take place, what was the occasion
for change and who initiated and effected such change*
The first part of this chapter is devoted to the definition of
the diffusion and the adoption processes.

Then the answers to these

questions will follow according to the empirical findings of the research
survey.

6.2

The Need for Innovation in Management Accounting:
A writer in a recent publication has spelled out the need for

innovation in accounting, in the following:
"Innovation will have a higher premium than ever. Innova­
tion can not be limited to manufacturing and engineering; it
must cover marketing, accounting, personnel practices and,
In fact, all functions necessary to the enterprise. The
function needing innovation the most, simply because histori­
cally it has In my opinion produced the least, will be accounting....
177

178
che most Important tool that management can have to cope with
^
the problem of tomorrow is sound dynamic accounting information....
We have argued In Chapter III, that, in order for the management
accountant to meet the challenge he faces as a result of new and con­
tinuing changes

in the information pceds and the evolving of mathematical

and statistical

techniques applicable in decision making, he must be

able to adapt to this new environment and must adopt, of these modern
techniques, the most appropriate ones to provide relevant economic
information.

His updating would produce more effectiveness and effi­

ciency in management decision making.

Only by adapting himself to the

changing world around him and by being the most dynamic man in the in­
formation team,

the management accountant can attain and maintain his

position as the

"Information director" of his company.

6.3

Diffusion of Accounting Techniques in Practice:
Professor G. Jones has defined innovation as "the introduction

of a new idea which will cause things to happen differently than they
did before."

2

Similarly, Professor Rogers has defined the same term as

follows:
"An innovation is an idea perceived as new by the individual.
It really matters little, as far as human behavior is con­
cerned, whether or not an idea is "objectively" new as measured
by the amount of time elapsed since its first use or discovery.

^Hugh D. Luke, "Dynamic Accounting For Effective Management,"
Management Accounting (May 1970), p. 11.

2

Gardner M. Jones, "Accounting Innovatlion and the Psychology of
Change," The Accounting Review (April 1962), p. 244.

179
It is ths newness of the idee to the individual that
determines his reaction to it."3
Professor Rogers has also defined diffusion as:
"the process by which an innovation is communicated from one
individual to another in a social system over time."*
Then the diffusion process, according to Rogers, has four crucial
elements, (1) the Innovation, (2) its communication from one individual
to another, (3) in a social system and (4) over time.

This same defini­

tion could be applied to the management accounting area.
ment accounting techniques represent the innovations.

The modern manage­

The spread of

the new accounting technique from the management accountant, a member of
top management and/or an outside consultant to its ultimate users or
adopters will represent the connunication of the accounting innovation.
The business organisation in which diffusion of accounting Innovation
Is taking place represents the social system.

And of course diffusion

works over time in any social environment.
Before any diffusion process could take place there should be
someone within or outside the business organisation who has adopted an
innovation and who is willing and able to act as a "change agent" in this
business organisation.

In the next two sections the adoption process and

the agents of change will be discussed.

6.4

The Adoption Process:
The adoption process has been defined by Professor Rogers as:

3
Everett M. Rogers, Diffusion of Innovations. The Free Press
(New York 1962), p. 13.
4Ibid., p. 19.

180
"the mental process through which an Individual passes from
first hearing about an Innovation to final adoption."
He says that the adoption process may be arbitrarily broken
into five stages:

(1)

awareness;

(4) trial and, (5) adoption.

(2)

Interest;

(3)

evaluation;

The adoption process is differentiated from

the diffusion process in the sense that the adoption process deals with
adoption of a new idea by one individual while the diffusion process
deals with the spread of new idea in a social system.
A brief summary of Professor Rogers' deflntlons of these five
stages is as follows:
1,

At the awareness stage, the individual is exposed
to the innovation but lacks complete information
about it.

2.

At the interest stage the individual becomes interested
in the new idea and seeks additional information about
It.

3*

At the evaluation stage the individual mentally applies
the innovation to his present and anticipated future
situation, and then decides tfiether or not to try it.

4.

At the trail stage the individual uses the Innovation
on a small scale in order to determine its utility in
his own situation to judge its usefulness for possible
complete adoption.

5.

At the adoption stage the individual decides to continue
the full use of the innovation.^

However, Professor Rogers, later in his book recognizes the
fact that this break dawn is arbitrary and specific knowledge about each
stage may prove to be difficult to get.

In addition, it is not necessary

that these five stages will be met separately before complete adoption
of an innovation in actual life.

5Ibid., p. 76-120.

In many cases, some of these stages

181
may be combined together or skipped over to the final adoption.

The Adoption Process In Mangement Accounting Innovation
Complete and direct data on the specific stages of the adoption
process, regarding management accounting Innovation, as defined above,
is not available from the empirical data 1 have gathered through the
personal Interviews.

However, somewhat Incomplete Information on the

adoption process could be obtained indirectly by deduction from the available data.

The results, though incomplete, should give a credible approxi­

mation to the real adoption process of modern management accounting
techniques in the practice of those companies under study.
We will deal with the adoption process of management accounting
innovations by the management accountant only,

because data regarding

the adoption of these Innovations by top management and/or outside con­
sultants is not available.
Rogers' five stages.

In addition, we will add another stage to

This stage will represent the situation preaware­

ness, and we may call it unawareness stage, where management accountants
have acknowledged that they have not been exposed to specific Innovations
before the Interview.
Complete and specific Information on those techniques which are
already adopted by the management accountants and diffused In practice
Is given In Chapter IV.

In Chapter V, we have mentioned those techni­

ques about which management accountants have Indicated lack of exposure
and lack of knowledge.

In addition, we have direct data, gathered through

the interviews on innovations in which accountants have shown interest and
which they said they are in the process of evaluating.

The missing data,

then, is about those innovations which are In the awareness stage.
ever, an approximate idea is derived by the deduction process of the

How­

182
TABLE VI-1

Responsibility
Accounting

Capital
Budgeting

Linear
Programing

Network
Analysis

-

1

3

2

13

11

12

16

11

11

1A

11

18

18

3

8

5

2

8

2

3

18
—

10
——

19
—

22
--

10
—

20
■"

1

6
'

35

35

35

35

35

35

35

35

C-V-P
Awsreness Stage
(Approximate)
Interest and Evaluation
Stages
Adoption Stage
Total number of
respondents

available data from total observations.

Operating
Budget

1

Standard
Costing

2

The Adoption Stages

Unawareness Stage

Contribution
Margin Reportini

THE ADOPTION PROCESS OF MANAGEMENT
ACCOUNTING INNOVATION IN PRACTICE

Table VI-1 shows the management

accounting Innovations and the approximate stages of the adoption process
they are in.
The following are the most significant observations that result
from information Included in the above table.
1.

The very low number of new quantitative techniques adopted
and diffused is matched with a relatively high number
that are in the unawareness stage. Accountants have
frankly said they did not know these techniques.

2.

The highest number of techniques that are in the Interest
and evaluation stages are in the contribution margin
reporting, responsibility accounting; eahh of them
was found to be related to one of the other highly adopted
techniques. Contribution margin reporting is related

183
to cost-volume-profit analysis and responsibility account­
ing is well fitted to operating budgets.
3.

The numbers and percentages of those techniques which
are in the awareness stage, with regard to each accountant,
are greater than those which are considered in the unaware­
ness stage. Almost all accountants Interviewed are at
least aware of management accounting Innovations under study.
This observation of course applies more properly to the
traditional accounting techniques rather than to the
new quantitative techniques.

There is another significant observation which results from
the empirical data and which is related to this point, though not
Included directly in the table.

Among all the companies participating

in this study, only two companies had tried the application of a new
technique and then decided to give it up for one reason or another.
One of these companies tried to use linear programming technique and
then rejected continuing its application on the ground that the techni­
que requires "too many guesses and assumptions"; once actual events
deviate greatly from these assumptions, the expected results turn out
to be Inaccurate and Inadequate to evaluate the actual performance.

The

second company has tried both linear programming and CPM and later it
stopped using both of them.

It discontinued applying linear programming

because, "it was difficult to explain and sell to top management" and
difficult to be understood by the operating management.

It dropped the

Critical Path Method because it "requires too many guesses and assump­
tions" to work with.
However, none of the companies studied, have Indicated the
rejection of any of the other techniques, once they were put into appli­
cation, by the "change agent" who led the diffusion process of the techni
qua within the business.

184
6.5

The Agents of Change In Management Accounting:
A "change agent" has been defined as a professional person who

attempts to Influence an adoption decialon In a positive direction.^
Essentially the change agent Is the link between the world of business
where managerial, technical and financial problems exist, and the world
of professional expertise where the solution to the problem may be
found.

To transfer knowledge and understanding of how to use that know­

ledge scientifically, an agent must be able to play any or all of a
variety of roles; as an analyst, advisor, and/or Innovator.

The challenge

to the change agent is to selectively mix the necessary knowledge, skill
and attitude to accomplish the desired result of transferring knowledge
and understanding to his client.^
At least three distinctive types of change agents were found
to be working In the change process of management accounting in prac­
tice.

The

and/or the

management accountant, one or more of the top management team
outside consultants are under

discussion in this section.

They work individually or with each other In Influencing the type and
number of management accounting techniques to be adopted and diffused in
practice.

The detailed results of the empirical research are illustrated

In Table VI-2.

6.5

The Management Accountant as "Agent of Change":
In

is a major

Chapter

V,it was pointed out that the management accountant

partner in

the change process of management accounting practice

*Roger, Diffusion of Innovations, p.
^Harold K. Charlesworth, "The Uncertain Future of Small Business:
Can This Picture be Changed," H.S.U. Business Topics, Spring 1970.

185
TABLE VI-2

-

1

40%

52%

45%

60%

35%

-

17%

2

3

6

7

2

4

11%

30%

31%

32%

20%

3

1

-

1

1

5

-

2

16%

10%

-

5%

10%

2%

-

33%

-

-

-

2

-

-

-

-

-

-

67%

Top Management alone
Percentage

Management Accountant and
Outside Consultant

-

-

1
s

at
95

3

1

20% 100%

50%

10%

Percentage
Top Management and
Outside Consultant

1

2

3

4

1

3

Percentage

6%

20%

16%

18%

10%

15%

10

19

22

10

20

18
Total

Linear
PrograHdng

7

Capital
Budgeting

Responsibility
Accounting
6

Percentage

Percentage

Budget
Operating
10

4

Management Accountant and
Top Management

a
■

10

12

Management Accountant alone

*

Standard
Costing

Who could be con­
sidered the source
of initiating the
idea of applying
this technique in
your company?

C-V-P

Question:

Contribution
Margin Reporting

AGENTS OF CHANGING THE MANAGEMENT ACCOUNTING SYSTEMS

100% 100%

100%

6

100% 100% 100% 100% 100%

HI* attitude toward clangs la one of the najor environemtnal conditions
found to Influence the diffusion of accounting practice.

In this sec­

tion, however, we will only concentrate on the accountant's role as a
change agent; the person who has worked toward introducing and diffusing

186
modern management accounting techniques In practice.

This discussion

will be In addition to what has been covered In the previous chapter.
According to the findings shown In Table VI-2, the accountant's
role as a change agent has been clearly felt In Introducing the traditional accounting techniques Into the management accounting practice of
small and medium companies under study.

But his role In diffusing the

rather new quantitative techniques Is less apparent and at a very low
scale.

In fact, linear programming has been Introduced In the only com­

pany found using the technique, by the top management, specifically by
the president who Is an engineer, not by the accountant.

With regard

to network analysis (PERT/CPM), the accountant has Introduced the
technique in only one of the six companies using it, though he had par­
ticipated with top management in applying the technique in two other
companies.
However, the management accountant's role in diffusing the
traditional techniques is well apparent as illustrated in Table Vl-2
above.

According to the findings of this study, he has practically

assumed the major role in diffusing 67 percent of the cost-volume-profit
analysis applied in practice; 60 percent of the responsibility accounting;
52 percent of the standard costing; 45 percent of the operating budget,
40 percent of the contribution margin reporting and 35 percent of the
capital budgeting.

In addition, in other companies he has participated

with top management and/or outside consultant in introducing these
techniques.

The cumulative percentages of the number of companies where

the management accountant has participated in introducing these techniques
either by himself as the primary change agent or cooperating and helping
either his top management initiation or an outside consultant, would be;

187
89 percent for C-V-P, 80 percent for contribution reporting, 70 percent
for responsibility accounting, 56 percent for operating budget, 52 per­
cent for standard costing and 45 percent for capital budgeting.
The accountant's role in the actual application and day-to-day
working with these techniques also seems to be a basic role.

Again,

it appears that his role is limited to the traditional accounting techni­
ques.

The actual application of linear programming is found to be in

the domain of an operating department, the engineering department, and
none of the network analysis techniques were found to be applied ex­
clusively by the accountant.

In 50 percent of the cases, the accountant

has been working with operating management in applying PERT/CPM
techniques.

The actual work in the other 50 percent is done by operating

management without the accountant's help.
However, the management accountant has the dominant role in the
actual application and administration of the other "traditional techni­
ques."

The details of his role regarding this point is shown in Table

VI-3 below.
The results Included in the table above, shows the the respon­
sibility of actual application of the traditional accounting techniques
lies in the accounting department in the great majority of the cases.
In all companies which use contribution margin reporting, the application
of the technique is the accounting department's responsibility.

The

same is the case with all but one of the companies using cost-volumeprofit analysis and responsibility accounting.

Eighty-four percent of

standard costing application is the responsibility of the management
accounting department.

The role of the accounting department is still

major, though not dominant in applying operating budgets.

However, the

188
TABLE VI-3

Operating

Responsibility
Accounting

Capital
Budgeting

The Management Accounting Dept.

10

16

15

9

9

-

-

Percentage

94%

100%

84%

68%

90%

45%

-

-

-

-

2

-

-

3

1

3

-

-

11%

-

-

1

-

1

7

1

8

-

3

6%

-

5%

32%

10%

40%

-

50%

22

10

20

An Operating Department
Percentage
Both Management accounting
and Operating Departments
Percentage

Total

18

10

19

100%

100%

100%

Analysis

Standard
Costing

17

„!

«
e
5
•H

Network

Who Does the figuring
for actual application
of the technique:

Budget

Contribution
Margin Reporting

Question:

C-V-P

|

THE MANAGEMENT ACCOUNTANT'S ROLE IN THE ACTUAL APPLICATION
OF MANAGEMENT ACCOUNTING TECHNIQUES

u

bo
S
h
o.

50%

14% 100%

__1

__ 6

100% 100% 100% 100% 100%

department Influence leseene with regard to the actual figuring and
application of capital budgeting technique*
only 45 percent of the cases.

where It ie responsible for

Nonetheless, the accountant shares the

responsibility of applying a high percentage of the other techniques with
the heads of operating departments.

This case is particularly apparent

in capital budgeting, operating budgets, and network analysis.

189
6.5

Top Management as "Change Agents":
It is important to reemphasize at this point that the interviews

undertaken for this study were limited to the heads of the management
accounting function in the companies.

No attempt was made to Interview

any one of the top executives beyond the accountant.

Though a great

majority of these accountants are considered members of the top manage­
ment team, they are considered here for the sake of analysis as separate.
The top management term here denotes all other top executives except
the chief accountant whatever his title is.

Accordingly, information

obtained about the role of top management in the change process of
management accounting is the result of the accountants' opinions and
feelings, the the possibility of their material bias is not entirely
excluded.
The effect of top management attitude toward or against adopting
and diffusing management accounting Innovations was pointed out and dis­
cussed in detail in Chapter V.

It was found out that the major, though

not the only, environmental condition which Influence the diffusion of
innovation in management accounting, is the top management attitude to­
ward modernizing the accounting function in their companies.

And it

was concluded that the main, though not the only hurdle, which stands
against diffusing accounting innovation is due to top management un­
willingness to encourage the change process in the accounting area.
In this section, we will deal with the role of top management
as change agents in those companies where modern accounting techniques
have been Introduced and applied.

Of course, because top management

has the final word on approving the application of any new technique, its
acceptance of such application is a necessary prerequisite for any

190
diffusion process to take place.

In fact, some of the techniques adopted

by the accountant, were subject to rejection during the diffusion pro­
cess unless one or more of the executives had supported this diffusion
process.

The support of top management for accounting Innovation is

necessary If a successful diffusion process Is likely to occur, not only
at the top executive hierarchical level but at all the lower operating
levels as well.

As an example, the president of a medium sized company,

a liberal engineer, stood behind his young well educated management
accountant during the diffusion process of management accounting Innova­
tions, and enabled him to modernize the accounting function from a
bookkeeping function to a well rounded management accounting function.
Seven of the eight techniques are applied in this company.

Six of them

were introduced by the accountant and supported by the president in
spite of objections from some of the other top executives as well as
resistance of operating managers to change.

The seventh technique is

adopted by the president himself.
In contrast to the accountant, top management seems to have the
major role as agents of change in diffusing the quantitative techniques
rather than the traditional accounting technique, as indicated in Table
VI-2.

Linear programming, as we mentioned earlier, was Introduced in

the sole company found applying the technique, by the chief executive
of that company.

In 5 out of 6 cases of PERT/CPM usage, the technique

was adopted and diffused by either top management alone or with coopera­
tion of the management accountant.
Top management has also been acting as "agent of change" In
introducing traditional accounting techniques, though at lower propor­
tions.

Capital budgeting was Introduced by top management alone or with

191
the help of management accountant and/or outside consultant In 55 percent
of the times; 20 percent of the times have been Introduced by top
management without the help of either.

Thirty-two percent of operating

budgets applied in practice were initiated by top management alone, in
addition to another 23 percent Introduced with the help of outside con­
sultant and management accountant.

Thirty-one percent of standard

costing techniques were initiated by top management.
of outside consultants in another 16 percent.

It sought the help

Top management could

also have the credit of diffusing the practice of 30 percent of the
contribution margin reporting and 20 percent of the responsibility account­
ing with partial credit for another 20 and 30 percent of the cases.

Top

management role as a change agent was least apparent in diffusing costvolume-proflt analysis; where it was considered the primary change agent
in only 11 percent of the cases and the secondary agent In another 22
percent of the application of the technique.

6.5

The Outside Management Accounting Consultant
as a “Change Agent"
Both the accountant's and the top management's roles in the

diffusion process of management accounting Innovations have been discussed
in detail in Chapter V and aupplementally in the previous two sections
of this chapter.

But until now the role of an important possible source

of change has not been mentioned.

Therefore, this section will deal,

in detail, with the outside consultant and his role as an effective
change agent in diffusing management accounting innovations.
1.

The Extent of Using the Outside Consultant
Services in Management Accounting

The empirical research indicates that small and medium manufactur­
ing companies subject to this study did not seek the maximum prospective

192
help available to them through the outside management servles consul­
tants in the area of management accounting.

The data gathered shows

that only 5 companies, 14 percent of sample, used to call outside
consultants on frequent basis.

In one of these companies, the outside

consultant role seems to supplement the function of the accounting
department in the company on a permanent basis.

He provides the company

with "chart-graphic" service on monthly basis for the financial activi­
ties done the month before, which includes financial data and profita­
bility measurements on charts.

Each month, top managemant meets

expeclally to discuss the outside consultant’s analysis and interpre­
tations given along with the charts.
Another 15 companies, 43 percent of the sample, did call on
outside consultants for service in management accounting but their
calls were on an infrequent basis, ranging between one call only in
company's life time, to a few calls in recent years.

However, the last

15 companies, also about 43 percent of sample, did not call at all on
any outside consultant for management accounting service.
Two significant observations related to the subject are due at
this point.

The first is that all the companies wlch have never called

on outside consultant services, are classified in the small size category.
They represent 60 percent of the small companies included in the sample.
None of them was a medium sized company.

The second observation, is

that the average number of management accounting techniques adopted and
diffused In these companies is about 2.53 techniques per company, and
average which lies below the performance of the sample average of 3*03
techniques.

The difference in this performance may indicate, to some

193
extent the importance of the outelde consultant role In the diffusion
process of management accounting innovations.

This high proportion of

the sample which never experienced outside consultant services in
management accounting may show how little opportunity has been given to
the consultant to share in the change process, particularly in the small
manufacturing firms.
The role of outside consultant, however, has been felt through
the personal Interviews with management accountants.
active change agent in some of the companies studied.

He has been an
In fact, according

to the information Included*ln Table VI-2, above, the credit of diffusing
about 12 percent of management accounting techniques found to be applied
in practice, are due to the outside consultant's services either by top
management Invitation or by the accountant's invitation pending of course,
on the approval of top management.

The contribution margin reporting,

standard costing, operating budget and capital budgeting are the four
management accounting techniques most influenced by the outside consultant,
as shown in Table VI-2.

However, none of the quantitative techniques

found applied in practice, have been reported to be the result of an
outside consultant's recommendations to companies used his services.
2.

The Need for the Outside Consultant
in Management Accounting

Several reasons were given by management accountants Interviewed
for calling on outside consultants to provide them with services in the
management accounting field.

Some of the major reasons are stated in the

following paragraphs.
a.

Lack of required qualification by the Internal staff:

Of

course one apparent and simple reason for calling on an outside consultant

194
is the conviction by management, accountant or both, that the outelde
consultant have something which Is not available to the company without
his services.

In 12 companies, 60 percent of those called upon an

outside management accounting consultant, sought his help because they
felt that the Internal staffs of the company's accounting department
did not possess the required professional competency needed to suggest
an effective solution to an outstanding problem or to Initiate the adoption
of a new technique the company found necessary to apply.

This case has

been more evident in situations of introducing a comprehensive budgeting
program or changing the costing system from actual costing to standard
costing.
b.

Top management preference to get an outsider to make objec­

tive independent recommendations.

This preference is also shared In some

cases by the company's management accountant.

Getting an outsider to

appraise the present situation, point out the probable problem and its
possible causes, and then recommend objective, nonbiased recoaanendatlona,
was the reason behind preferring to assign such a job to an outside
consultant.

This preference to the consultant's Independence has happened

in 8 companies, 40 percent of those who had used the services of outside
management accounting consultant.
c.

Shortage In the Internal accounting staff and the press

of time on the available people.
for day-to-day routine work.

Available staff were barely sufficient

No one la available for extra assignment.

Even If they have someone who has the required qualification to prepare
for the needed change, they would have to take him away from his regular
dally work, and they could not afford that.

Getting an outside consultant

195
to do this extra job would relieve the available Internal staff to handle
Its regular work without disruption.

Seven accountants, 35 percent of

those who used outsiders' services, have indicated this factor as one
of the Important reasons for seeking outside consultant services*
d.

To back up the management accountant's suggestions sub­

mitted to top management.
reason discussed above*

This reason Is somewhat related to the second
Management accountants who have pointed out

this factor feel that, once their top management will get the outside
consultant's independent recommendation which may more or less agree with
their own suggestions, top management might be Induced to change and be
more willing to go along with their own accountants' suggestions.

Possi­

ble agreement between accountant's suggestions and outside consultant's
recommendations comes from the fact that some accountants work closely
with their consultants to a point where it Is possible that mutual dis­
cussion about the problem may result in more or less mutual opinion about
Its causes and cures.

At least four accountants have felt that this

factor is one of the Important reasons for which they needed to call upon
outside consultants.
e.

Costs less than to hire a permanent accountant.

Another

reason given by management accountants for their companies' calls upon
outside consultants is an economic reason.

They believed that hiring

an outside consultant, on a temporary basis, for performing a specific
service might be less expensive than If they had to hire a permanent
qualified management accountant for doing such job.

These accountants

and/or their top managements believed. In addition, that they have enough
help for their regular routine accounting work; what they need Is someone

196
to provide a specific service whenever a need for sach service arise.

Only

three accountants specifically mentioned this reason among the reasons for
calling

on outside consultant in management accounting.
3.

Services Rendered by Outside Consultants:

The

services rendered to the companies by outside consultants

ranged from

just submitting a recommendation for a solution to a

specific problem, to a complete check up on the soundness of the whole
existing management accounting system for further action.

Table VI-4

shows the general types of services provided by the outside consultants.

TABLE VI-4
THE GENERAL TYPES OF SERVICES RENDERED
BY OUTSIDE CONSULTANT

No. of
Companies

Z of Companies
called on
outside
Consultants

To recommend a solution of specific
problem

14*

70Z*

To Install a new system (or technique
In a system)

12

60

7

35

_2

10

Purpose of Consultant's Visit

a.

b.

c.

To Improve the existing system

d.

To just check on the soundness of
the existing system

*Totals do not add up because some accountants gave more than one
purpose

a.

The most repeated purpose for calling upon outside consul

appears to be the realisation by either the management accountant, his

I

197
top management or both, of the existence of a specific problem which needs
an urgent solution and for one or more of the reasons mentioned earlier
the Internal accounting staff are not able to provide the needed solu­
tion.

An apparent alternative available is inviting outside consultant

to recommend a solution to such specific problem*

His service either

would end with just submitting this recommendation or it may be extended
to implementation of the recommendation.

Fourteen companies, 70 percamt

of those who had services by outside consultant gave this as one of the
purposes of his visits.

Measuring by the frequency of mentioning this

purpose, it seems that this is the major one though not the only.
b.

The accountants in twelve companies, 60 percent of those

who had called on outside consultants, have indicated that installing
a new accounting system or introducing a new technique in an existing
system is one of the purposes for which they had invited the outside
consultant.
Table VI-2 above, shows that the outside consultant's recommenda­
tions were adopted in installing at least 6 percent of the cost-volumeprofit analysis applied in practice; 20 percent of the contribution margin
reporting, 16 percent of the standard costing, 18 percent of the operating
budget, 10 percent of the responsibility accounting and 25 percent of
capital budgeting.
c.

The third purpose for outside consultant's visits has been

cited by accountants interviewed as to recommend improvements to the
existing accounting systems in their companies.

Such involvement might

have come incidentally and indirectly through the association of the com­
pany with its public accountant who is assigned the auditing of the com­
pany's financial records.

Ha may have pointed out the existence of some

198
weak points in the current system which may need improvements.

The com­

pany management accountant an/or the top management might ask the public
accounting firm to send in its specialist to review the case and submit
his recommendations.

Seven companies, 35 percent have indicated that

improving the existing system is one of the major purposes of using out­
side consultant's ervlces.
d.

Inviting an outside consultant to just check on the ade­

quacy and soundness of the current existing system was mentioned by two
accountants as one purpose for outside consultants invitation to their
companies.

However, for these two specific companies, it appears that

a check up was just the beginning of the outside consultant's mission.
Because data available Indicates that they have called on the consultant’s
services for other purposes as well.
4.

The Effect of the Outside Consultant's Recommendation
in the Change Process of Management Accounting

One way to measure this effect is to see to what extent top manage­
ment have adopted the outside consultant's recommendations which is sup­
posed to be the product of his services.

Generally, the results of the

study Indicate that most of the companies which have used outside con­
sulting services in management accounting, have in most cases adopted
the outside consultant's recommendations.

This general conclusion may

Indicate that the outside consultant has proved to be an effective change
agent in those companies which had allowed him to participate in the change
process.

However, this conclusion does not conflict at all with the

earlier conclusion, that the outside consultant effectiveness4as a change
agent is limited because of the fact that 43 percent of the companies in­
cluded in this sample have never had a chance to experlement with his

199
services.

They had never celled on an outside consultant In the management

accounting area.
In more specific terms, In anserlng a question on how often top
management have decided to adopt the outside consultant's recounendatlons,
the following Is the summary
a.

Seven companies,

of the replies to the question:
35 percent of those used the services,

said that their management had adopted the outside consultant's recommen­
dations

more than 75 percent of the time.
b.

Eight companies,

40 percent, indicated that their management

had adopted his recommendations in between 50 and 75 percent of the times.
c.

However, management accountants in 5 companies, 25 percent

of those used the consultant's services, had Indicated that their manage­
ment has been less receptive to outside consultant's recommendations.
They only adopted such recommendation in less than 50 percent of the
times.
5.

Factors Which Are Against the Outside Consultant's
to Become a More Effective "Change Agent"

In a previous part of this section, we have Indicated that 43
percent of the sample called on outside consultants on an infrequent
basis; whenever the accountant and/or top management feel that there
is a need for the consultant'a services.

We have also found that only

14 percent had needed the consultant'e services in such a way that
necessitated their frequent Invitation to him over time.

However, on the

other hand, the study results show that there are another 43 percent of
the sample, 15 companies, that have never called on an outside consultant,
to provide them with his services in the management accounting area, for
one reason or another.

200
When the management accountanta of those firms were asked why did
they never call on outside management accounting consultant, they
severalreasons.
a.

The most

gave

important reasons are discussed in the following.

Not economically feasible.

Eleven accountants, 73 per­

cent of those whose companies never invited an outside
management accounting consultant, believe that the
cost of the consultant's services are too expensive and
their companies are either not prepared to pay such cost,
or it can not afford It.

They consider the consultant's

fees are too high for their company to afford.

It may

be important to reemphasize here, that all of these
companies are categorized as small sized companies;
none of them is medium sized.
b.

No serious problem faced.

The second reason given for

not seeking the help of outside consultant's services in
this area, has been the belief of either the accountants,
top management or both, that they had not met any problem
which is serious enough to need outside help.

The feeling

of a need for consulting services was not powerful enough
to justify the cost of hiring a consultant.

Seven

accountants, 47 percent, have shared this point.
of them expressed it as:

One

"....it is not that we know

everything, but we did not meet a problem which requires
their services."
c.

Have a capable staff.

Another reason, though it seems

related to the above one, has been given by another
group of accountants.

They pointed out their high

confidence end reliance on their internal staff, on the
basis that they are qualified enough to cope with any
problem their companies had met so far.

For this group,

it is not a matter of not meeting any serious problem that
needed major changes in their accounting systems, rather
than, they have been successfully able to effect the
required change whenever needed.

Seven accountants have

expressed this factor as one of the major reasons for not
hiring an outside consultant.

Some of them said they had

worked as professional consultants before and they now
feel that they acquire the professional capability in
addition to their inside understanding of their existing
systems.
Most of his time spent to understand our system.

Although

the accountants with whom we are concerned here, are those
employed by firms which did not use outside management
accounting consultants services, some of these accountants
had experienced dealing with an outside consultant before
in a previous company.

Some of them had worked in consulting

firms themselveu before joining their current companies.
And some of them have listened to the experience of their
peers and reacted accordingly.

Five accountants, about

33 percent, have raised the point that most of the outside
consultant's time usually is spent to understand the present
local system and its mechanism.

He needs "too much time

to be familiar with the system before he is able to give
any useful recommendations."

Though it is most likely

that the consultlag service may come from the same public
accounting firm which audits the company's financial records,
and great deal of data about the current system may be
available, in most cases a specialist consultant may work
on consulting basis when the company wishes to seek a
specialized service.
Often recommends too complicated a system for the existing
staff to work with to Justify his high fees.

This serious

allegation about the outside consultant has been raised by
3 different management accountants interviewed.

They claim

that after spending too much time on the assignment, the
outside consultant comes with his recommendation for a new
or modified system which tends to be more difficult for
the available staff, to understand, raising the possibility
of incurring more expenses either for reeducating the
present staff or for hiring more qualified people.

They

also maintain that in some cases, the company might not
need such a sophisticated system to solve the problem
for which it had invited the outside consultant.
A temporary involvement tends to be a permanent engagement.
A rather more serious allegation against the outside con­
sultants, is that consultants, though they are hired initially
on a temporary basis to recommend a solution for specific
problem or to install a specific system or technique in the
system, in some cases convert the engagement into an
unintended permanent affair.

Management decision not to

203
get Involved with outelde consultant has been due, In these
accountants' views, to the fear of getting Into such a
situation.

Only two accountants, fortunately, shared this

view.
g.

Management resistance to outside Intrusion.

The resistance

of giving voluntary access to the company's financial
records to any outsider including the outside consultant
was cited during the interviews as another reason why a
company did noi use consultant's services.

This view is

held especially in a few of family owned, nonpublic com­
panies .

They still regard financial information as their

own private business secrets.
h.

Difficulty and ambiguity of the contract about the outside
consultant's responsibility after providing his services
are also mentioned as reasons producing fear of engaging
with outside consultants, and lessening the possibility of
giving him the chance to play his role as an effective
"change agent" in the management accounting area.

One accountant summarised moat of the above points in expressing
his personal feeling toward seeking outside consultants services in the
following quotation:
"....they are expensive....they over-step their bounds, instead
of doing a practical Job they intend to do a Job which keeps
them permanently with the company they are servicing.... they last
longer...they cost more than originally estimated....they over sold
what really they can do...."
Though these are the personal opinions of those accountants quoted, and
though not all accountants interviewed shared these opinions, nonethe­
less they express the attitudes of their holders.

One significant

204
implication is the fact that In order for the outside consultant to partici­
pate In the change process of management accounting in these accountants'
firms, he must be able first to change these negative attitudes toward
the usefulness of his services.

This has to be done before he could

have the opportunity to be invited into these companies and be able to
contribute to the diffusion process of accounting innovations*

6.6

The Occasions of Management Accounting Innovations:
To explain the occasions of innovations is to explain why a

specific old accounting system that has been regarded as satisfying
certain people (the accountant, top management or both) according to
certain criteria, no longer does so.

Occasions of innovations as they

are taken here represents the Incidents which might be responsible for
the process of change to have its start.

Table Vl-5 exhibits the different

occasions that led to the initiation and application of modern management
accounting techniques in practice.
In general, awareness of a definite problem and awareness of the
existence of an accounting technique which might provide more relevant
information for making better decisions to solve that problem, leads to
revision of the standards of satisfaction with the present accounting and
induce favorable conditions to adopt more m o d e m techniques.

This is

quite apparent from the information included in the above table.

A high

proportion of the m o d e m management accounting techniques found applied
in practice are adopted and applied because of the need for a more
effective tool to provide relevant information for making more informed
decisions to solve a specific problem.

No attempt is being made to

get detailed data on what specific problems these companies had faced to

205
TABLE VI-5
THE OCCASIONS OF MANAGEMENT ACCOUNTING INNOVATIONS

Question:

a*Hoo ■400a-H1

What was the occa­
sion to initiate
the application of
this technique in
the first place

U
a Vi
5 o
■H Cka
aM
.
F
i

______________________________________________________________________

a.

To aid In solving specific
problea (including cooped*
d o n factors)
Percentage

b.

Change In Accounting Philo­
sophy only
Percentage

c.

d.

e.

8
44%

3
17X

4

Percentage

22Z

Percentage

U
00
ri u

i,

*

Change in Kangement
Attitude only

Change in both Accounting
Philosophy & Mgt.
Attitude

5H Wa

a*

*4
4MJ
l
u
SI

00
•S
4)
00

►»
4-1
«H
H
•H 00
a a
•H -H

•3
i■<1Lso*/h
3u
tfl & 4 3 * \
w

f

62X

43X

40X

3

3

4

1

15X

14X

40X

5%

3

7

15X

32X

-

25X

2
20%

4

5

3

2

27X

20X

25X

30X

10X

10

100Z 100Z

5

1

1

26Z

5%

5%

19

22

1

5
83X

-

-

5

-

2

18

11

70X 100X

5

Percentage

M O
_! Ot

14

30X

30Z

9

a

h

1

12

3

40
OB

a
3 -a<
PQ
^ ; umMl 41. •ao
0) 00
2
n.

3

Industry wide accepted
technique

Totals

OB
o
o
•a
M

11
00
f
to

10

100X 100X 100X

20

-

-

-

-

-

1
-

17X

1

6

100% 100X 100X

206
induce the change*

However, competition problems are included in this

category though it is note the only type of problems indicated incidentally
by accountants.

Solving a specific problem constitutes a very Important

occasion for accounting innovations.

This is especially clear In the

cases of standard costing, capital budgeting and PERT/CPM.
Change in the accounting philosophy of the accounting department
of the company is another occasion for innovation.

This change may happen

as a result of change in the present accountant's attitude toward how
management accounting in his company should be, what purpose should it
serve and which techniques should be employed in the system.

The change

could also come as a result of changing the management accountant himself
i.e., employment of a new Controller.
Of course another important occasion for management accounting
innovations comes about as a result of change in the attitudes of management
toward the usefulness of management accounting in their decision making
process.

We have seen that resistance to accounting changes on the part

of top management constitutes the major though not the only environmental
factor which hinder such changes.

Any change In management attitudes from

the opposition side to the support side will significantly open the door
for change to take place.

Some of the change in management attitudes is

a result of replacing the old top management by a new team or a new presi­
dent.

Change of the ownership status of the company has also an effect

on top management attitudes.

Of course the success of the change process

would be enhanced if a change in the attitudes of either accountant or
management were accompanied by a change in the attitude of the other in
the same direction; supporting the winds of change.

207
A fourth stimulus for change has been indicated as the adoption
of what

the company considers as Industry wide accepted technique.

This

is particularly significant in standard costing, where about one fourth
of companies applying this technique mentioned this reason as their
Inducement to adopt it in their companies.
Table VI-6 shows, in details, the purposes in which every techni­
que was

first applied and

the

purposes inwhich the technique was second­

ly applied.
Pricing and budgeting are the most two purposes for which costvolume-profit relationships was first applied.

While sales mix and accept­

ance of special orders are most important as second applications of the
technique.

Profitability comparison and product pricing are the first

and second applications of responsibility accounting in most companies
applying the technique.

Product pricing and inventory valuation was the

first application for standard costing.
bidding, were its second applications.

Cost control, and pricing and
Controlling operations and planning

for future operations were the first and second applications for operating
budget.

Fixing responsibilities was the first application for responsi­

bility accounting.

Msasurlng performance of different responsibility

centers was its second purpose.

For capital budgeting, planning for expan­

sion and planning for replacements constituted the first and second
applications.

Production scheduling and product mix are the only two

applications for the sole linear programming application found in this
sample.

To meet specific finishing or delivery dates is the first appli­

cation of PERT/CPM.

208
TABLE VI-6
THE PURPOSES OR OBJECTIVES OF APPLYING
MANAGEMENT ACCOUNTING TECHNIQUES

Question:
x

I.

In which purpose this
u j
« d : : c 3 : 1,d’

11*
5
4
6
6
2

6
2
2

3
3
1
1

10

Standard Costing
Product Costing and inventory valuation
Cost control
Pricing and bidding
Measuring performance
Budgeting
Total

IV.

10
4
2
1
1
_jl
18

Contribution Margin Reporting
Proftiabillty Comparison
Product pricing
Operation control
Executive compenaatlon
Total

III.

„
,
Second
Application

C-V-P
Pricing
Budgeting
Addition or Deletion of Product Line
Seles Mix
Acceptance of special order
Channels of distribution
Total

II.

_.
First
Applicion

18
2
1
1

1
13
13
I2
^

20

Operating Budget
Controlling Operation
Planning future operations
Both planning and control
Com u n i cat ion
Motivation
Total

12
4

4
7

6

1

"
—Z
—

®

209

Technique and its application purposes

V.

Application

Responsibility Accounting
Control of Operation - Fixing
responsibility
Measuring Performance
Managers Compensation. Motivation
Total

VI.

5
3
2
10

4
6
4

13
2
3
1
19

2
7
4

Capital Budgeting
Planning for expansion only
Planning for Replacement only
Planning for Both Expansion and Replacement
Controlling Capital expenditure
Total

VII.

Second
Application

Linear Programming
Production Scheduling and inventory planning
Production mix

1

-

1
1

rill.

Network Analysis (PERT/CPM)
To meet delivery date
To move plant equipment to a
new location
Product development and marketing
Installing budgeting system
Planning for computer installation
Production scheduling
Combining two plants
Total

6.7

2

-

1
1
1
•
1

—
—
—
1
—
1

6

When Old Change in Management Accounting Take Place;
The results of the personel Interviews indicate that the history

of m o d e m management accounting techniques in the accounting practice of
small and medium manufacturing companies, has a rather short period of
time.

i

These companies started to use modern management accounting technique

210
TABLE VI-7

Capital

Linear
Programming

Network

1

4

2

3

-

1

Percentage

ex

-

5%

18%

20%

15%

-

17%

b.

1-5 years ago

8

5

3

9

5

9

-

5

Percentage

44%

50%

16%

41%

50%

45%

-

83%

c.

5-10 years ago

7

3

4

6

3

6

1

Percentage

39%

30%

21%

29%

30%

d.

More than 10 years ago

2

2

11

3

-

2

-

-

Percentage

11%

20%

58%

14%

-

10%

-

-

Total

18

10

19

22

10

20

__ 1

__6

Average age period

5.9

6.5

9.4

5.3

4.1

5.2

7.5

3

rather recently.

30% 100%

Analysis

Responsibility
Accounting

_

i
>
I
o
New this year

Budgeting

Budget
Operating

1

When did your
company start using
this technique?
tu

a.

.
1. 1
Costing
Standard

Question:

Contribution
Reporting

■' 1 -"i

Margin

RELATIVE AGES OF MANAGEMENT ACCOUNTING
TECHNIQUES IN PRACTICE

-

-

Table VI-7 shows the distribution of the techniques

applied according to the tine period they have been in practice of those
companies since their adoption.
In fact the data collected on this question indicates that about*
15 years ago none of the eight techniques under study (with the possible
exception of standard costing) was in application by any of the companies

211
Interviewed.
practice.

Standard coating appears to be the oldest technique in

Its average age period is about 9.4 years, with 58 percent

of the companies using It more than 10 years ago.

The linear programming

techniques was initiated between 5 and 10 years ago.

Contribution

margin comes next in order with an average age of 6.5 years, with only
two companies applying the technique more than 10 years ago.

Cost-

volume-profit analysis comes next with 5.9 years average age, with 50
percent of the companies applying the technique within the last 5
years.

Operating budgets and capital budgets seem to have emerged in

the same period with 5.3 and 5.2 years age for each.

Four companies

in the case of operating budget and 3 companies in the case of
capital budgeting started to apply the techniques only this year.
Responsibility accounting is a very young technique in the practice of
these small and medium companies.

Its average age is only 4.1 years

with 70 percent of the adoptions within the last 5 years.
technique in practice of the sample is PERT/CPM.

The youngest

All the companies

applying this technique have adopted it within the last 5 years.
This relatively short history of modern management accounting
techniques In the small and medium manufacturing companies implies a
significant conclusion.

That is, though diffusion of innovations in

management accounting had started very late, and the extent of such
innovations is still somewhat limited; nevertheless the momemtum of
change seems to have gained higher speed in recent years.

The high

proportions of techniques started in application within the last 5
years is an important indication for such a conclusion.

212
6.8

What Do Innovations of Management Accounting Contribute:
Objective measurement of the contributions of modern management

accounting techniques Is beyond the scope of this study.

Yet, the account­

ants Interviewed were aslced to express their judgment on the contribution
of each of the techniques studied and the results of these judgements
are included in Table VI-8.
As we emphasized earlier, segregation of the effect of each of
these techniques on the effectiveness and efficiency of business decision,
is difficult to attain especially with companies most of which are
closely held and where data on financial records is not accesslable
to outsiders beyond government agencies.

However, in the opinion of

accountants interviewed management accounting techniques have proved
useful in many areas.

Although profitability is a product of complex

of factors, it has been cited as one of the most important areas to which
the application of these techniques contribute.

This was especially

apparent in the cases of C-V-P analysis, contribution margin and respon­
sibility accounting.

A relatively high percentage of C-V-P analysis

and capital budget provided more relevant information to planning.

Stan­

dard costing, operating budget and responsibility accounting were praised
because they provided relevant information for control.

However, both

the planning and control functions of management were aided by the
application of linear programing, responsibility accounting, operating
budget, C-V-P, capital budget and network analysis in most cases.

Better

pricing was attributed to standard costing, C-V-P and to lesser extent,
to contribution margin reporting.

However, one significant observation

is obvious from the data available with regard to the contribution of

213
TABLE VI-8

1.

Profitability
X

2.

More Relevant Inforaation to
Planning Only
X

3.

More Relevant Inforaation for
Control Only
X

4.

More Relevant Inforaation
for both Planning & Control
X

5.

Better Pricing
X

6.

7.

8.

Comnunlcatlon

Analysis
Network

Linear
Programing

Budgeting
Capital

Costing

7

8

10

7

7

-

2

66X

70

42

45

70

35

-

33

-

1

1

9

-

1

10

-

5

10

45

-

17

2

5

5

2

-

-

-

20

26

22

20

-

-

-

4

8

13

6

10

1

3

40

42

59

60

50

100

50

4

10

5

1

-

-

1

40

53

22

10

-

-

17

1

1

8

5

2

-

-

10

5

36

50

10

-

-

2

1

5

6

-

-

-

20

5

22

60

-

-

-

-

-

-

1

-

-

-

-

-

-

-

5X

-

-

-

4
22X

1
6X

10
55X
9
SOX
5
28X

Motivation

5

X

28X

X

M
0
*rl
4J
<*
H
«
£

!

12*

X

Unable to Judge

4-1
0>

Responsibility
Accounting

*

>
i
o

Standard

In your Opinion, does
this technique con­
tribute to:

Contribution
Reporting

Question:

Margii

CONTRIBUTIONS OF MANAGEMENT ACCOUNTING INNOVATIONS

1

*Do not add up becausa accountants were aaked to give more than one
answer

214
modern techniques to both communication of information and motivation of
people*

A rather low percentage of accountants cited that new techniques

have any contribution either to communication or to motivation.

However,

responsibility accounting, operating budget and cost-volume-profitanalysis were mentioned to have been contributing to better comnunlcatlon
and better motivation.

Only one accountant was unable to judge the

usefulness of standard costing technique in his company.

6.9

Summary:
In this Chapter, the diffusion process of management accounting

innovations has been analysed in detail.

The adoption procass with

its five steps was applied to the empirical findings of the study.

The

roles of each of the top management, the management accountant and the
outside management consultant were analysed to illustrate their effective­
ness in the change process.

The role of the outside consultant was dis­

cussed in more detail because of its potential Importance in the diffusion
process and because we did not deal with it in the previous chapters*
Limitations of the outside consultants as change agents were also dis­
cussed in the Chapter.

The occasion of innovations, the time when

adoption of innovations took place, and the contribution of these innova­
tions to the effectiveness and efficiency of the management process, were
pointed out.

CHAPTER VII

SUMMARY, CONCLUSIONS AMD RECOMMENDATIONS
FOR FURTHER RESEARCH

7.1

Summary
The spreading of competition, the increasing size of business

enterprise, the growth of Industries requiring heavy investment, the
growing complexities of production operation, and the separation be­
tween ownership and management, all are factors which tend to force a
transition from management based on individual's memory of past his­
torical experience and intuition, to management heavily dependent on
objective judgment baaed on relevant information.

Therefore, manage­

ment information requirements have risen sharply and will continue to
rise as the pace of this dynamic change accelerates.

In order for

businesses to remain competitive and to progress, or even in a rela­
tively large number of cases, to survive, more relevant information is
needed for management decision making process.
Management accounting objective is to provide historical and
projected economic information to persons within the organisation that
enable them to make informed judgments and effective decisions to
achieve the organisation's goals.

In serving management's requirement

for such information, the management accountant must apply the appro­
priate concepts and techniques in processing and communicating economic
data.
The first part of the objective of this study has been to find

216
out the extent of application of management accounting techniques in
current practice of small and medium companies.

Investigating the

environmental conditions which influence the diffusion process of these
techniques in practice, constitutes the second part of the objective
of this study.
The scope of this study has been limited to eight selected
techniques.

Six of them could be called "traditional accounting" tech­

niques and the other two "non-traditional" new quantitative techniques
which have been advocated by many writers to be very useful in providing
management accounting information for decision making.
niques are:

The eight tech­

1) Cost-volume-profit analysis; 2) contribution margin

reporting; 3) standard costing, 4) operating budget; 5) responsibility
accounting; 6) capital budgeting; 7) linear programming; and 8) network
analysis (PERT/CPM).
Personal interviews have been conducted with the chief manage­
ment accountants in 41 manufacturing companies; thirty-five of these
companies represent the usable sample for this study.
panies are located in the State of Michigan.

All these com­

The guiding questionnaire

used as a basis for collecting the research data during these inr.ervJtwo,
is included in Appendix B.
Classification of these companies according to their else into
small and medium companies is based upon five else criteria; annual
employment, annual sales, total assets, number of major products or
product lines and number of manufacturing departments.

The weighted

average size of these companies resulted in a sample composed of 25
small and 10 medium companies.
from the scope of this study.

Large and largest companies are excluded

217
A description of the characteristics both of the companies in­
cluded in the study and of their management accountants is made in
Chapter II.
Management has been defined in Chapter III as a social process
with planning, organizing and control aa its three basic functions.

The

management accountant, as a member of the management executive team,
has the responsibility of providing relevant information to help other
executives plan, organize and control operations under their areas of
responsibility.

However, his role is more dominant in the planning and

control functions of management, and management accounting techniques
are more related to these two functions.

The second part of Chapter III,

has been devoted to brief description of each of the eight selected
management accounting techniques.
In Chapter IV, survey of the current practice of these manage­
ment accounting techniques was made to find out the extent of their
application in small and medium manufacturing companies.
have been studied for this purpose.

Two aspects

The first was to find out the

extent of application of each technique in the sample at large.

The

second was to datannine the number of these techniques applied by each
company.
Accounting la a

business decision making tool that affects

and is affected by the business environment.

Therefore, the environ­

mental conditions which tend to influence the diffusion process of
management accounting innovations in current practice has been the
subject of analysis in Chapter V.

Other aspects of the process of

diffusing management accounting Innovation were studied in Chapter VI
with special emphasis on the agents of change In management accounting

2X8
area.

Their respective rolea, contributions to change and their limi­

tations were discussed.

The role of outside management accounting con­

sultants was analysed at length in this chapter, beside the management
accountant and top management.

7.2

Findings of the Study:
Analysis of the results of the empirical research reveals the

following findings:
1.

Modern management accounting techniques are not highly
popular among the small and medium manufacturing companies
subject to this study.

The most applied technique in cur­

rent practice, as evidenced from this research, is the
operating budget; 63 percent of the companies included in
the sample are using the technique.

The least popular

technique in current practice la linear programming, where
it was found that only one company of the 35 included in
the sample, is applying the technique.
2.

There is a difference in the extent of application of these
techniques between the "traditional accounting" techniques
and the "non-tradltional" techniques.

The difference also

exists between "old traditional accounting" and "new tradi­
tional accounting" techniques.

The "traditional accounting"

techniques are found to be more popular In management
accounting practice than the "non-traditional" quantitative
techniques, like.the network analysis (PERT/CFM) and linear,
programming*

Quantitative techniques are still very un­

popular in small and medium companies.

Even in the "tradi­

tional accounting" techniques, we found that relatively old

techniques like operating budget, C-V-P, standard costing
and capital budgeting are more popular than the relatively
new responsibility accounting and contribution reporting
techniques.
The average manufacturing company In the sample Is found
applying only 3 of the eight techniques selected for this
study.

None of the companies, whose accountants are Inter­

viewed, Is using all the eight techniques, and only one
company Is found using 7 techniques.
There is a relationship between the slse of a manufacturing
company and the number of management accounting techniques
adopted and applied by the company.
Is not statistically significant.

But, this relationship
Siae Is one of the environ*

mental factors which tend to Influence the diffusion process
of management accounting Innovations.

But it Is not the

only determinant of how much and how modern should management
accounting be In a company.

There are other environmental

conditions which influence this diffusion process.
Top management and-its attitude toward the value of manage­
ment accounting-informatIon and its desirability to apply
modern techniques in management accounting have the primary
Impact on the-process of diffusing management accounting
innovations.- Its -resistance against change of.management
accounting represents the greatest obstacle for such change.
The management.accountant's attitudes toward change and his
professional competency to effect change in his company's
management accounting information subsystem, represent the

220
second most important environmental condition that influ­
ences the diffusion process of management accounting
innovations.
7.

The nature of business operation, the availability of human
and physical-resources required, the relative value and cost
of Information,.the type of ownership and the degree of
competition-are found to be important factors in the com­
pany's environment that tend to influence accounting innova­
tions, though.their-importance seem to come after top
management attitudes, accountant's compatency and attitudes,
and the slse of the business.

8.

The very low number of new quantitative techniques adopted
and diffused in current practice of small and medium com­
panies, is due especially , to management accountants' unaware­
ness and their lack of knowledge of these quantitative tools
of decision-making.

Even though, the management accountant

is found to be the major "change agent" in diffusing "tradi­
tional" accounting techniques.

In contrast to the accountant,

top management seems to have the major role in diffusing the
quantitative -techniques.
9.

The empirical research

indicates that small and medium

manufacturing companies did not seek the maximum prospective
help available to them through the outside management
accounting consultants' services.

Reasons given for the

unwelcoming attitude toward outside consultants Include:
s) not economically feasible; b) no serious problem faced;
c) company has capable staff; d) most of outside consultant's

221
time is spent to understand local system; e) often recommends
too complicated system for the existing staff to work with,
to justify his high fees; f) a company's temporary Involve*
ment with outside consultant tends to be permanent engage­
ment; and g) management resistance to any outside Intrusion
to their "business secrets".

7.3

Conclusions
The following are the principal conclusions resulting from the

findings of this study:
1.

Knowledge of modern accounting techniques, their defini­
tions, prospective usefulness and their operationallty,
alone by Itself, does not necessarily guarantee the adop­
tion and application of these techniques In the real world
of practice.

Accountant's ability and desire to understand

and appreciate the environmental conditions which surround
his company and his capability to Initiate and effect change
seem to be more Important factors than the mere mastering of
technical aspects of these techniques.

Making management

accounting students aware of the importance of these
environmental.factors, should be an essential part In any
management accounting course the objective of which Is to
teach these.techniques.
2.

Salesmanship, persuasiveness and communication access­
ibility seem to be.essential characteristics that manage­
ment accountant should acquire beside the technical know­
ledge of accounting techniques, to be effective In performing

his role in the change process.

Knowledge of a technique

however needed, will not ensure the application of such
technique in a company, until the accountant will be able
to sell the technique to his management and the management
becomes convinced that application of the technique is in
the best interest of-their company's goals and is congruent
with theirs too.

Then motivation for changes might start.

A need for continuing education for current management
accountants,-especially to equip themselves with deeper
knowledge of -the new quantitative decision making techniques
is also evidenced by the results of this research.

If the

management accountant is serious in his willingness to meet
the challenge he faces in the new era of information tech­
nology, he must seek to improve his competency not only by
updating himself on the new developments in accounting in
its traditional sense but also, to seek and acquire adequate
knowledge of the new.quantitative tools of decision making.
Otherwise, accountant will lose his position in the execu­
tive team as-the.man most identified with information, to a
more aggressive and competent professional.
One recommendation to the professional accounting associa­
tions which.this study reveals, is due at this point.

The

educational.efforts both of the American Institute of Certi­
fied Public.Accountants and the National Association of
Accountants, in the field of management accounting have
been tremendous, especially on the national level.

However,

much greater need exists for local educational activity,

223
particularly by the CPA's and NAA's chapters of which
management accountants are members.
which deal

Workshop activities

with actual management accounting problems

have been done successfully on the national level.

These

activities should be more fruitful if they are done on the
local chapters* level too.

Local chapters workshop activi­

ties which deeply involve the members of the chapters will
provide opportunities for exposure and experience for these
members through dealing with their own professional prob­
lems.

A prominent problem of one accountant today might have

been a problem of a fellow accountant in the past.

Though

situation might differ, peer's experience might help.
techniques might be recommended.

New

The adoption process

might start with its first step; awareness of the existence
of a technique that might help solving a problem.

7.4

Recommendations for further Research:
The following are some of the avenues open for further research

on the diffusion process of management accounting innovations in prac­
tice:
1.

Some studies are made on the behavioral effects of the
actual applications of some management accounting
niques, especially budgeting, on people.

tech­

But very little

is known about the behavioral effects of people's attitudes
on the diffusion.process of management accounting innova­
tions.

This current study has opened the door for such an

approach.

However, a deeper and more comprehensive study

on the behavioral attitudes of people during the steps
of the adoption process of accounting Innovations, is
recommended.
Another behavioral study could concentrate on the manage­
ment accountants themselves, from the sociological, psycho­
logical aspects.

Such study would answer some questions

like why do they choose to be menagement accountants, how
different they are from other professional groups and
whether they did plan to be what they are or becoming an
accountant is accidental and is subject to the Incidents
of time and place.

APPENDIX A
THE GUIDING QUESTIONNAIRE FOR PERSONAL INTERVIEWS
Series A
A-l

Generel Company Information
a.
b.
c.

d.

Company Name
Major Products
Sice: 1. Sales
2. Employment
3. Total Assets Invested
4. Market Share
5. Number of Products
6. Number of Departments
Name of the management accountant Interviewed
1.

Position In the organisation (Title)

2.

Education
Less than B.A. or B.S.
B.A. or B.S.
MBA (or equivalent)
Others
Membership
CPA
Yes [ ]
No [ ]
NAA
Yes [ ]
No
[ )
How long you have been working in this company
How old are you?

3.
4.
5*
A-2

Management Accounting Functions
From the standpoint of company policy, what do you believe is the
single most Important function of the management accounting sys­
tem of your company?
a.
b.
c.
d.
e.

To provide Information for planning only.
To provide information for control only.
To provide inforaation for both planning and control.
Preparation of financial reports.
Other (specify).

Series B
B-l

Cost-Volume-Profit Analysis
a.
b.
c.

Do you classify your costs into variable coats and fixed costs?
Yes 1 ]
No [ ]
Do you use the Cost-Volume-Profit analysis? Yes [ ] No [ 3
In what form?
[ ] 1. Formal (Explicit)
[ ] 2. Informal (Implicit)

225

226

B-2

d.

By which method?
[ ] 1. Graphical
[ ] 2. Mathematical
[ j 3. Both

e.

What are the major applications (or objectives) of the
C-V-P technique in your company?
[ ] 1. Pricing and bidding (including coating alternatives)
[ ] 2. Sales mix
[ ] 3. Channels of distribution
[ j 4. Addition or deletion of product line
[ j 5. Acceptance of special orders
[ j 6. Budgeting
[ ] 7. Others (specify)

Contribution Margin Reporting
a.
b.

c.

B-3

Does your company analyze contribution margins?
[ ] Yes
[ ] No
If "y*i” above by what segments?
[ ] 1. Divisions or Departments
[ ] 2. Products
I ] 3. Territories
[ ] 4. Jobs
[ ] 5. Other segments (specify)
What are the major applications of the contribution margin
technique?
[ ] 1. Current control
[ ] 2. Product pricing
[ ] 3. Profitability comparisons
[ ] 4. Executives compensations

Standard Costing
a.

b.

c.

Do you use standard costing?

(

] Yes

[ ] No

If yea,
] 1. For material cost
[ ] Yes
[ ] No
j 2. For labor cost
[ j Yes
( j No
j 3. For overhead cost
[ ] Yes
[ ] No
On what basis?
] 1. Technical engineering study
] 2. Average of past historical cost
] 3. Estimated future coat
] 4. Other basis (specify)
Do you use variance analysis to control operations and pin­
point responsibilities?
[ ] Yes
[ ] No
Material
Labor
Overhead

[ ) Yes
[ ] Yes
[ j Yes

[ ] No
[ ] No
[ j No

227
d.

e.

f.

B-4

Operating
a.
b.

c.

d.

f.

B-5

Are variance accounce Included In your formal books
[ ] Yea
[ ] No
or you keep them outside the books?
[ ] Yes
[ ] No
In your company, what are the major objectives of the
standard costing technique?
[ ] 1. To control cost
[
] 2. To measure performance
[
] 3. To provide data for product coating andinventory
valuation
[ ] 4. To provide data for pricing and bidding
[
] 5. To provide data forplanning purpoees (help
in
building budgets)
[ ] 6. Other (specify)
What is your costing method?
[
] 1. Job Order Costing
[
] 2. Process Costing
[
] 3. Both
Budgets

Do you use budgetary planning and control
[ ] Yes
[ 3 No
What Is the extent of budgeting you use?
] 1. Partial budgeting (specify)
] 2. Comprehensive budgeting
] 3. Operating budgeting
j 4. Capital budgeting
j 5. Both operating and capital budgeting
Who participates In setting the comprehensive budget?
1. President and Top Management
2. Operating Management
3. Management Accountant
4. 0 there
At what levels?
] 1. Divisions or departments
] 2. Foremen
] 3. Salesmen
] 4. Others (specify)
What are the major objective(a) of the flexible budget?
] 1. Better control
] 2. Better planning
] 3. Both control and planning
] 4. Motivation
Do you prepare a flexible operating budget for e range of
activity Instead of a single level?
[ ] Yes
[ 3 No

Responsibility Accounting
e.

Do you
t 3 1.
[ ] 2.
[ ] 3.
[ j 4.

have an organisation chart?
Yes
No
Formal
Informal

228
b.

c.

B-6

Capital Budgeting
a.

b.

c.

B-7

1. Are your performance reports prepared In such a way
to report only those controllable costs and expenses
at each level of responsibility?
C J Yes
[ 1 No
2. Or they are prepared In such a way as to differentiate
between controllable costs and uncontrollable costs but
total costs are reported to each level of responsibility.
I ] Yes
[ 3 No
3. Or are your reporte prepared In total form without
differentiating between controllable and uncontrollable
cost classifications?
t 3 Yes
[ 3 No
What are the major applications (or objectives) of respon­
sibility accounting In your company?
[ ] 1. Motivation - Compensation
[ ] 2. Control - Fixing responsibility
[ J 3. Measurement of performance
[ ] 4. Others

Do you use capital budgeting In planning for capital
expenditure?
[ ] Yes
[ 3 No
What criteria do you use to determine the Investment
decision?
(Check all that apply.)
( ] 1. Urgency and need
[ ] 2. Availability of cash appropriation
[ ] 3. Pay-back period
[ j 4. Accounting average rate ofreturn
onInvestment
[ ] 5. Discounted rate of return oninvestment
(R0I)
[ ] 6. Present value
[ ] 7. Other (specify)
What are the major applications and objectives of your
capital budgeting program?
1. Replacements only
2. Expansion and growth
3. Both replacements and expansion
4. Others

Linear Pr oar earning
a.

Do you use linear programming technique In decision making?
[ 3 Yea
I 3 No

229
b.

c.

B-8

By which method?
[ ] 1. The graphical method
[ ] 2. The simplex method
[ ] 3. The transportation method
What are the major applications of linear programming In
your company?
[ ] 1. Product mix
[ j 2. Blending or mixing problems
[ ] 3. Production scheduling and Inventory planning
[ j 4. Machine loading
[ ] 5. Shipping and physical distribution problems
[ ] 6. Other (specify)

PERT (or CPM)
a.

b.

c.

Do you use Program Evaluation and Review Technique or
Critical Path Method In your planning and control decisions?
[ ] Yea
[ ] No
To what extent?
[ ] 1. PERT (CPM)/Time
[ ] 2. PRTT (CPM)/Cost
[ ] 3. Both
What are the major applications of PERT (CPM) In your company?
1.
2
3.

.

Series C
Ol

In what situation the technique was first applied?

C-2

When did
[ ) a.
f j b.
[ ] c.
[ ] d.

C-3

In what other decision areas are you applying this technique?
a.

C-4

What was the occasion to Initiate the application of this technique
In the first place.
[ ]a. To aid solving specific problem
[ ]b. Change In accounting philosophy (New Controller)
[ ]c. Change in management attitude
[ jd. Competition factors
[ } e. Industry wide accepted technique
[ j f. Other (specify)

your company start using it?
Application has just started this year
Between 2-5 years ago
Between 5-10 years ago
More than 10 years ago

230
C-5

a. What could be considered the aource of initiating the idea of
applying this technique in your company?
] 1. The controller department
] 2. Top management
] 3. Newcomer
] 4. Outaide consultant
j 5. Not known
j 6. Other (specify)
Who does the figuring for actual application of thetechnique?
] 1. The controller department
j 2. The operating department

C-6

a. How well satisfied are you with the results of applying this
technique?
1. Extremely satisfied
2. Moderately satisfied
3. Not satisfied
b. In your opinion* does this technique contribute to:
1. Profitability
2. More relevant information for planning only
3. More relevant information for control only
4. More relevant information for both planning and
control
5. Better pricing system
6. Better communication
7. Better motivation
8. Others (specify)

C-7

In case you do not use this technique now* under what circumstances
do you
think you might apply it?
a.
b.
c.
d.

C-8

In case you have tried to use this technique and then gave it up*
what were the main causes for giving up?
a.
b.
c.
d.
e.
f.
g.

Too costly to Install and operate
Too time consuming to work with
Requires too many guesses
Too complicated for present accounting staff
Difficult to explain and sell to top management
Difficult to be understood by operating managers
Lead to conclusions which did not correspond with
Internal (subjective) feelings
h. Not workable for cur slse* business etc.
i. Not applicable to our operation
j . Other (specify)

231
C-9

In c u e the technique wee Investigated and the decision was made
not to use it, what are the main reasons for unacceptability?
[
[
[
[

]
]
j
j

a.
b.
c.
d.

I ] e.
[ ] f.
[ ] g.

[ ] h.
C-10

Too costly to install and operate
Too complicated to understand
Potential savings from application are not apparent
Requires computer which is not available now in our
company
Lack of available written material of application as
guidance
Time does not allow to design the operation of the
technique and provide for needed information
Resistance to chance on the part of management from
what is known practice to what has not been tried by
the company.
Others (specify)

In case you did not consider this technique before would you state
the main reasons for not considering it?
[
[

] a. Not applicable to your business operation
j b. Time press— too busy to think of applying any new
technique
[ ] c. Shortage of accounting staff
( j d . Satisfied with the performance of the present system
[ j e. Attitude of management toward changing the system
[ j f. Lack of available written material of application to
be used as guidance
[
] 8* Not feasible for our company size
[
] h. Others (specify)

Series D
D-l

a. Do you usually call on outside consultants?
I 1 1. Ysa
[ ] 2. No
b. For what purposa7
1.
2.
3.
4.

To
To
To
To

check on the existing system
install new
system
improve the
existing system
recommend a
solution to a specific problem when it arise

232
D-2

Why did you call on outaida conaultanta?
[ ] a. Frafer outsldar to cone in to make the objective
recommendationa
[ ] b. Reluctance on the part of people in charge to aay what
is needed to be changed
[ ] c. Shortage in the controller staff
[ j d. Lack of required qualification by the internal staff
[ } e. More economical to call on outside consultant than
to
hire permanent management accountant
[ ] f. Other (specify)

D-3

How often has the top management decided to adopt the outside
consultant's recommendations?
[
[
(

] a. Less than 50% of the time
] b. Between 50% and 75% of the time
] c. More than 75% of the time

Series E - Miscellaneous
E-l

Which of the management techniques considered by this study which
you are not using now, you feel that your company would be better
off if they are applied?
(Specify)

APPENDIX B

Dear Mr.
Mr. Saber Awad, a doctoral candidate in this department, is doing
his dissertation research under my direction. The subject of his inquiry
is the extent of acceptance and application of "modern" managerial
accounting techniques in smaller and medium-slsed manufacturing firms.
I wish to solicit your assistance for Mr. Awad in completing his research.
Management accounting concepts and techniques have long been recog­
nised as useful tools for planning, decision-making, and control. The
management accountant Is usually considered an active member of the
management team. The usefulness of some of the newer techniques-critical
path method, linear programming, statistical regression, economic order
quantity, and other models, as well as some less new ones, such as
marginal analysis, and flexible budgeting, — are advocated by many
writers in the management accounting literature. However, the need
exists for empirical evidence as to actual extent of acceptance in prac­
tice, and for an identification of the surrounding conditions where
acceptance and use of these techniques are practicable.
Mr. Awad la attempting to gather such empirical evidence, both out
of personal interest and to meet dissertation requirements for the
doctoral degree. This evidence should be useful to accounting educators
and to the National Association of Accountants, as a measure of the
success of their extensive continuing education efforts.
He has constructed an "Interview guide" for obtaining the necessary
data. Your help and cooperation will make accomplishment of his study
possible. He would like an appointment with you in the near future to
explore the set of questions with you. The discussion should take 2
hours at the most. Mr. Awad will not ask questions that could be con­
strued as prying into the affairs of your firm. Furthermore, complete
anonymity will be maintained in discussing the results of his study.
He will call you to find out If you are willing to help, and to set up
an appointment.
Thank you for your cooperation.
Sincerely,

Gardner M. Jones
Professor

APPENDIX C
SIZE CLASSIFICATION AND THE OVER -ALL AVERAGE SIZE
OF EACH COMPANY IN THE SAMPLE
Companies
Cods
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

Employment
S
S
S
S
S
M
S
L
S
S
S

s
s
M
M
M
S
L

s
s
s
s
s
s
V.S.
L
S
S
S

s
s
s
s
s
s

V.S. ■ very small
S - small
M “ medium
L * large

Size Criteria
Sales Assets Products
s
S

s
S

s
s

s
s

M
M
S
M
S
S
M
M
S
M
M
L
M
M

S

s
s
s

M

S
V.S.
M
M
S
M
L
S
S
L
M
L
L
M

M
S
M
S
S
M
M
M
M
L
M
M
M

s
s

s
s

s
s

S
S
S
M
S
M
S
S
S
S

S
S
M

M
V.S
M
S
S
M
M
M
S
V.S.

S
S
M

s
s
s
S
S
Weights:

S
S
S
S

s
s
s

s
s
s
s

M
S

S

V.S.
S
M
L

«

1
2
3
4

Department
M
S

Small
Small
Small
Small
Small
Medium
Small
Medium
Small
Small
Medium
Medium
Small
Medium
Medium
Medium
Medium
Medium
Small
Small
Small
Small
Small
Small
Small
Medium
Small
Small
Small
Small
Small
Small
Small
Small
Small

s
s
s
s
s
L
M
M
L
L

s
M
M
M
L
L
M
V.S.
S
M

s
s
s
M
M

s
L
L
V.S.
M
V.S.
M
M
Example:

Average size of
company no. 15 ■

3 + 3 + 4 + 3 + 3
5

According to this classification the sample is composed of
25 small and 10 medium companies.
71L

Average
Size
(complexity)

16
5
- 3.2 (Me:

SELECTED BIBLIOGRAPHY

A.

Books

Alexia* Marcus and Wilson, Charles Z., Organisational Decision Making,
Englewood Cliffs, N.J., Prentice-Hall, 1967.
♦

American Accounting Association, A Statement of Basic Accounting Theory,
AAA, Evanston, 111., 1966.
American Institute of Certified Public Accountants, Cost Analysis for
Product Line Decisions, Management Service Technical Study No. 1
(New York 1965).
________ , Committee on Management Services, Budgeting for Profit in Small
Business, Bulletin No. 2 (New York 1959).
Anderson, David R . , and Schmidt, Leo A., Practical Controllership. Revised
Ed., Homewood, 111., Richard D. Irwin, Inc., 1961.
Anthony, Robert N., Dearden, J., and Vancll, Richard P., Management Control
Systems, cases and readings, Homewood, 111., R. D. Irwin, 1965.
________ , Planning and Control Systems: A Framework for Analysis,
Division of Research, Graduate School of Business Administration,
Harvard University (Boston 1965).
Argyris, Chris, The Impact of Budget on People, New York, Controllership
Foundation, Inc., 1952.
________ , Interpersonal Competence and Organisational Effectiveness,
Richard D. Irwin, Inc., Homewood, 111., 1962.
Avery, Michael, Time Study Incentives and Budgetary Control, Business
Publication Limited, London, 1964.
Barnard, Chester I., The Function of the Executive. Harvard University
Press, Cambridge, Mass., 17th printing 1966.
Bennett, Clinton W . , Standard Costs: How They Serve Modern Management,
Prentice-Hall, Inc., Englewood Cliffs, N. J. 1957.
Blerman, Harold, Topics in Cost Accounting and Decisions. McGraw-Hill,
Inc., New York, 1963.
Black, Homer A . ; John E. Champion and R. Gene Brown, Accounting in Business
Decisions; Theory. Methods and Use, 2nd Ed., Prentice-Hall, Inc.
(Englewood Cliffs, N. J. 1967).

236
Caplan, Edwin H., A Comparison of Bnhnvior.nl Ae-umptions of Management
Accounting and some Behavioral Concept of Organization Theory,
Unpublished Doctoral Dissertation* University of California, 1964.
Cooper, Joseph D., The Art of Decision Making, Double Day & Co., Inc.,
Garden City, N. Y. 1961.
Dearden, John, Cost and Budget Analysis. Prentice-Hall, Englewood Cliffs,
N. J. 1962.
Gillespie, Cecil Merle, Accounting Procedures for Standard Costs, Rev. Ed.,
Prentice-Hall, Englewood Cliffs, N. J. 1959.
Henrci, Stanley, Standard Costs for Manufacturing, 3rd Ed., McGraw-Hill,
1960.
Horngren, Charles T., Cost Accounting; A Managerial Emphasis, 2nd Ed.,
Prentice-Hall, Inc., Englewood Cliffs, H. J. 1967.
Jones, Rlglnald L., Budgeting; Key to Planning and Control, Practical
Guidelines for Managers. Hew York, American Management Association,
1966.
Kepner, Charles H., and Tregoc, Benjamin B., The Rational Manager, Hew York,
McGraw-Hill, 1965.
Knight, William D., and Welnwurm, E. H . , Managerial Budgeting. Hew York,
Macmillan, 1964.
Kohler, Eric L., A Dictionary for Accountants, 3rd Ed., Prentice-Hall,
Inc., Englewood Cliffs, Hew Jersey, 1963.
Koontz, Harold and O'Donnell, Cyril, Principal of Management: An Analysis
of Managerial Function, 3rd Ed., McGraw-Hill Book Co., Hew York,
1964.
Li, David Hsiang Lu, Accounting for Management Analysis, Columbus, Ohio,
C. E. Merrill Books 1964.
Luoma, Gary A . , Accounting Information in Managerial Decision-Making for
Small and Medium Manufacturera, Rational Association of Accountants,
Research Monograph Ho. 2, H . Y . 1967.
McFarland, Dalton E., Management Principles and Practices, 2nd Ed., The
Macmillan Co., Hew York, 1964.
McFarland, Walter B., Concepts for Management Accounting, New York,
Hatlonal Association of Accountants, 1966.
Marpls, Raymond P . ed., Rational Association of Accounts on Direct Costing:
Selected Papers. Hew York, Ronald Press Co., 1965.

237
Marting, Elisabeth («d), Management for the Smaller Company (Mew York:
American Management Aesoclation, 1959).
Meigs, Walter B., and Johnson, Charles E., Accounting: The Basis for
Business Decision, New York, McGraw-Hill, 1967.
Moore, Carle L. and Jaedlcke, R. K . , Managerial Accounting, Cincinnati,
South-Western Publishing Co. 1963*
Moore, Francis E. and Howard Settler, Accounting Systems for Management
Control, Richard D. Irwin, Inc., Homewood, 111., 1963.
Morell, Robert W . , Managerial Decision Making:
Milwaukee, Bruce Publishing Co. 1960.

A Logical Approach,

Murphy, Mary E . , Managerial Accounting. D. VanNostrand Co., Inc.,
New York 1963.
National Asaoclatlon of Accountants, NAA Research Reports, N.A.A., New York,
No. 6, 12, 13, 14, 15, 16, 28, 34, 35, 37, 39, 42.
NcNeill, Winfield I., Effective Cost Control Systems, Prentice-Hall, Inc.,
Englewood Cliffs, N. J., 1965.
Newman, William H., Administrative Action: The Techniques of Organisation
and Management. 2nd Ed., Prentice-Hall, Inc., Englewood Cliffs, N. J.
________ , Summer, C. E. and Warren, Kirby W., The Process of Management,
2nd Ed., Prentice-Hall, Inc., Englewood Cliffs, N. J., 1967.
Sherlf, Carolyn W . , Muzafer, Sherlf and Roger E. Nebergall, Attitude and
Attitude Change: The Social Judgement - Involvement Approach,
W.B.S. and Co., Philadelphia, 1965.
Shlllinglaw, Gordon, Cost Accounting and Control. Homewood, 111., R. D.
Irwin, 1961.
Sldebotham, Roy, Accounting for Industrial Management. Oxford, Pergamon
Press, New York, Macmillan, 1964.
Siegel, Sidney, Nonparametric Statistics for the Behavioral Sciences,
McGraw-Hill, New York, 1956.
Simon, Herbert A., The New Science of Management Decision. New York,
Harper, The Ford Distinguished Lectures V. 3.
_______, Administrative Behavior. The Macmillan Co., New York, 1957.
Sollenberger, Harold M . , Major Changes Caused by the Implementation of
Management Information System. New York, National Association of
Accountants, 1968, NAA Research Monograph No. 4.

238
Sord* Burnard H., and Welach, Glenn A., Bualnaaa Budgeting: A Survey
of Management Planning and Control Practices (Controllership
Foundation* Inc.) New York* 1958.
Stedry* Andrew C . * Budget Control and Coat Behavior, Prentice-Hall* Inc.,
Englewood Cliffs* N. J.* 1960.
Stockton* John R . , Business Statistics, 2nd Ed.* South-Western Publishing
Co.* Cincinnati 27, Ohio, 1962.
Stockton* R. Stanabury* Introduction to Linear Progr«— "ing* Allen and
Bacon, Inc., Boston* 1963.
Terry* George R . * Principles of Management, Revised Ed., Richard D.
Irwin, Inc.* Homewood, 111.* 1956.
Tse, John Y. D . * Profit Planning Through Volume - Coat Analysis* The
Macmillan Co. (New York 1960).
Tuker*

Spencer* The Break-even System: A Tool for Profit Planning*
Prentice-Hall* Inc.* Englewood Cliffs, N. J. 1963.

Wlckesperg, Albert K . * Organisational Relationships in the Growing
Small Manufacturing Firms, Small Business Management Research
Report - The University of Minnesota, Minneapolis* Minn.
(April 1961).
Wright*

Ronald M . , An Inquiry into Budgetary Planning and Control
Techniques in tha Small Busineas Environment with Emphasis on
Small Manufacturing Companies* Unpublished Doctoral Dissertation,
Microfilm Inc. (Ann Arbor 1963).

Wright*

Wllmer* Direct Standard Coat for Decision Making and Control*
McGraw-Hill Book Co.* Inc.* New York* 1962.

B.

Articles

Aked, John* "Control of Fixed Cost in Relation to Volume," N.A.A.
Management Accounting (March* 1967), pp. 12-20.
Anthony* Robert N.* "Coat Concepts for Control," The Accounting Review
(April 1957), pp. 229-34.
Battista, G. L. and G. R. Grownlnshield, "Cost Behavior and Breakeven
Analysis - A Different Approach," NAA Management Accounting
(October* 1966), pp. 3-15.
________ , "The Accounting Revolution," N.A.A. Management Accounting
(July 1966), pp. 30-38.

239
Bedford, Norton M . , "Emerging Tools for Managerial Accounting, N.A.A.
Bulletin (Oct. 1961), pp. 31-37.
Benninger, L. J . , "Accounting Theory and Coat Accounting," Accounting
Review (July 1965), pp. 547-557.
Borth, Daniel Jr., "The Changing Role of the Accountant," N.A.A.
Management Accounting (January 1967), pp. 36-37.
Caplan, Edwin H . , "Behavioral Assumptions of Management Accounting,"
The Accounting Review (July 1966), pp. 496-502.
, "Behavioral Assumption of Management Accounting - Report of
a Field Study," The Accounting Review (April 1968), pp. 342-362.
Clark, John H . , "Financial Control of Ford Manufacturing Plants,"
N.A.A. Management Accounting (December 1966), pp. 10-15.
Clarke, Stuart A . , "Step Reporting for Responsibility Accounting,"
N.A.A. Bulletin (June 1961), pp. 5-14.
Cooke, Robert B., "Responsibility Reporting of Return on Investment,"
N.A.A. Management Accounting (July 1967), pp. 24-29.
Crowlngahleld, G. R. and G. L. Battista, "The Accounting Revolution,"
Management Accounting (July 1966), pp. 30-39.
Davis, Gordon B . , "Network Techniques and Accounting - With
Illustration," N.A.A. Bulletin (May 1963), pp. 11-18.
Davison, Ian Hay, "Budgetary Control and Long Range Planning," Management
Accounting (London), October 1967, pp. 406-409.
DeCoster, Don T . , "PERT/Cost: The Challenge," - Management Services
(May-June 1964), pp. 13-18.
Dupuch, Nicholas, Jacob G. B i m b e r g and Joel Demskl, "An Extension of
Standard Cost Variance Analysla," The Accounting Review (July
1967), pp. 526-36.
Edis, Denis C . , "Standard Marginal Costing in Action, A Case Study,"
Management Accounting (London). Feb. 1965, pp. 92-101.
Ferrara, William L., "Responsibility Accounting: A Basic Control
Concent." N.A.A. Bulletin (Sept., 1964), pp. 11-19.
________ , "The Contribution Approach," N.A.A. Bulletin (Dec. 1964),
pp. 19-29.
________ , "Responsibility Reporting vs. Direct Costing - is There a
Conflict," N.A.A. Management Accounting (June 1967), pp. 43-54.

240
Financial Executives Research Committee, "Developments in Financial
Organisation 1915-1965," Supplement to Financial Executive
(Sept. 1965), pp. 1-24.
Finston, H. V., "Managerial Development; Challenge to Accountants,"
Journal of Accounting (July 1956), pp. 32-35.
Firmin, Peter and James Linn, "Information System and Managerial
Accounting," The Accounting Review (January 1968), pp. 75-82.
Gibson, James L., "Accounting in the Decision Making Process - Some
Empirical Evidence," The Accounting Review (July 1963),
pp. 492-500.
Gleason, Charles H . , "The Profit-Volume-Relationship," N.A.C.A. Bulletin,
(July 1, 1947), pp. 1330-1351.
Goodlad, J. B., "Management Accounting and Industrial Management,"
Management Accounting (January 1965), pp. 16-22.
Green, David Jr., "Budgeting and Accounting: The Inseparable Siamese
Twins," Budgeting (Nov. 1965), pp. 10-13.
Hirschman, Robert W . , "Direct Costing and the Law," The Accounting
Review (Januery 1965), pp. 176-183.
Hogue, D. C . , "The Future of the Management Accountant," Management
Accounting (London) August 1966, pp. 302-307.
Hoover, H. Arthur; and Wilma D. Striklln, "Management and Accounting
Concepts of Control," N.A.A. Management Accounting (June 1967),
pp. 33-42.
Horngren, Charles, "A Contribution Margin Approach to the Analysis of
Capacity Utilisation," The Accounting Review (April 1967),
pp. 254-64.
-

, "Motivation and Coordination in Management Control Systems,"
N.A.A* Management Accounting (May 1967), pp. 3-7.

Ijlri, Y.; F. Levy and R. Lyon, "A Linear Programming Models for
Budgeting and Financial Planning," Journal of Accounting
Research (Autumn 1963), pp. 198-212.
________ , J. C. Klnerd and F. B. Putney, "An Integrated Evaluation
System for Budget Forecasting end Operating Performance with a
Classified Budgeting Bibliography," Journal of Accounting
Research (Spring 1968), pp. 1-28.
Jaedlcke, R. K . , "Accounting Data for Purposes of Control," Accounting
Review (April 1962), pp. 181-188.

241
Keller, 1. Wayne, "Controlling Contribution," N.A.A. Management
Accounting (June 1967), pp. 21-32.
Kemp, Patrick S., "Contribution Margin Analyals by Company Segments—
Three Usee," N.A.A. Bulletin (Nov. 1962), pp. 9-29.
Kirk, Andrew, "Company Organisation and Control," Management Accounting
(London) Feb., 1966. pp. 58-66.
Koonts, Harold, "Management Control: A Suggested Formulation of
Principles", California Management Review, (Winter, 1959).
Lentlthon, Robert W . , "Direct Costing - Either...Or?"
Review (Oct. 1964), pp. 880-883.

The Accounting

Levy, Ferdinand K . , Gerald L. Thompson and Jerome D. Wlest, "The ABC'a
of the Critical Path Method," Harvard Business Review (Sept.Oct. 1963), pp. 98-108.
Lundquist, William H . , "Accountants Face New Challenge," N.A.A.
Management Accounting (March 1967), pp. 3-9.
Marple, Raymond P., "Management Accounting is Coming of Age," N.A.A.
Management Accounting (July 1967), pp. 3-16.
National Association of Accountants' The Research Planning Committee,
"Objectives and Methods of Research in Management Accounting,"
N.A.A. Bulletin (March 1960), pp. 31-37.
Netten, E. W . , "Responsibility Accounting for Better Management,"
The Canadian Chartered Accountant (Sept. 1963, pp. 164-168.
Onsi, Mohamed, "Linear Programming-An Accounting Information Model,"
Management Accounting (December 1966), pp. 46-52.
Partridge, William, "A Plea for More Standards In Cost Accounting,"
N.A.A. Management Accounting (May 1967), pp. 8-15.
Raun, Donald L . , "Accounting for Decision," The Accounting Review
(July 1961), pp. 460-466.
Raymond, Robert H . , "History of the Flexible Budget," N.A.A. Management
Accounting (August 1966), pp. 8-15.
Ross, Wilber R . , "Accounting Aspects of PERT/Cost," N.A.A. Management
Accounting (April 1967), pp. 47-51.
Schofield, William M . , "An Effective Internal Management Reporting
System," Management Accounting (September 1966), pp. 17-26.
Slse, John, "The Development of Marginal Costing," Management
Accounting (January 1968), pp. 23-30.

242
Solomons, David, "Flexible Budgets and the Analysis of Overhead
Variance," Management International, 1961, pp. 84-93.
Stiller, H. M . , "Recent Trends and Tools in Financial Management,"
N.A.A. Bulletin (Feb. 1960), pp. 37-46.
Sweeny, Robert, "Business Use of Linear Programming," N.A.A. Management
Accounting (Sept. 1965), pp. 36-43.
William, James D . , "Human Relations and More Effective Reporting,"
N.A.A. Bulletin (May 1961), pp. 13-24.
, "Practical Application of Cost-Volume-Profit Analysis,"
N.A.A. Bulletin (March 1960), pp. 5-18,
Young, Robert B . t "Keys to Corporate Growth," Harvard Business Review
(Nov. - Dec. 1961), pp. 51-62.