Management Accounting Systems & Org Structure
Management accounting, by its very nature, is intertwined with organizational structure. Whereas financial accounting is designed with structural consistency in mind to assist the external stakeholders from whom those statements are produced, management accounting’s structural form is dictated more by the needs of the internal stakeholders. As firms devise their management accounting systems, those systems are inevitably influenced strongly by the underlying structures and beliefs of the firm itself. In that way, we can see how management theories, both structural and behavioral, can influence the development of management accounting systems within a given organization.
Bureaucracy is a structural construct developed to organize and operate complex organizations. Managerial accounting systems had their genesis in meeting the needs of the bureaucracy. Managers within the hierarchy had specific information needs, and throughout history often engaged in ad hoc managerial accounting practices in the course of their evaluation and decision-making.
These practices over time evolved into the more formal science of managerial accounting.
The structure of bureaucracy requires information that can be passed up and down the chain of command. For example, a subordinate manager needs financial data to support a project that must receive a series of approvals from higher managers. Ad hoc numbers do not easily translate, and the structure of financial accounting is geared too much towards scorekeeping. This lead directly to the formalization of managerial accounting systems, so that forward-looking information could not only be produced but could be disseminated in a consistent manner throughout the organization to all internal stakeholders, in the same way that financial statements are disseminated in a consistent manner to the external stakeholders.
Taylor’s scientific management was crucial in the development of management accounting systems. By adapting the scientific method to management, and to production in particular, he had several key impacts on management accounting systems. The first was that scientific management required the sort of information that management accounting systems produces.
Managers were required to quantify things that had previously not been quantified. Taylor found for example that many techniques used were based on rules of thumb, rather than quantifiable evidence. The need for such quantification lead to rapid advances in managerial accounting systems. The systems were designed to uncover information and then present it in usable format.
Another way in which Taylor’s scientific management led contributed to the development of management accounting systems was that the earliest practitioners of Taylorism, such as Henry Ford, shaped the direction of management accounting. The very types of information that management accounting systems produce today stemmed from the needs of scientific management. Taylor’s work focused the study of management on narrow tasks, rather than just end results. This shifted the focus of managers towards inputs, in addition to outputs. that developed to support Taylor’s scientific management began to focus on the contributions of each part of the production process, in order to improve productivity at all levels, as opposed to merely focusing on the end results. Decision-making no longer flowed directly from the end result backwards, but began at the beginning of the process instead.
Fayol’s administrative theory worked in somewhat the opposite manner of Taylor’s scientific management, in that it addressed the workings of administration from the top down. This influenced the development of management accounting systems in that it promoted the idea that management’s functions can be broken down into clear groupings. The clear line drawn between accounting and managing, for example, illustrates that traditional accounting systems are of little use to the managers, and that they should have their own accounting systems to meet their needs.
Another way in which Fayol influenced managerial accounting systems is in the way he viewed organizational structure. Some of his key structural principles, such as centralization and scalar chain, reinforce the value of management accounting systems. The systems are needed to support the chain of command, and the top manager at the center of the system. The principle of unity of direction probably contributed the most to management accounting systems because it ties objectives together with a single manager. This guided management accounting systems towards meeting specific singular objectives, and framed the chain of tasks around goals.
Behavioral theories also helped to have an influence of the development of management accounting systems. Human relations is a key part of the functioning of almost any organization. As management theory became more sophisticated, it introduced the human element into Taylorism and administrative theory. Those theories were heavily focused on cold, rational concepts and outlooks. The introduction of the concept of human relations added the social workplace as a motivating factor for workers, whereas Taylor for example viewed money as the sole motivating factor. The result was that management accounting systems moved away from the strictly rational concerns they had been based around, and began to incorporate human relations elements as well. Management accounting systems, particular those geared towards productivity issues, began to place value on softer things, an attempted to quantify improvements in morale on productivity.
One of the goals in many management accounting systems is to improve productivity, and in that task it has become increasingly recognized that human resources can make valuable contributions. Human resources goes beyond human relations, and considers the entire package of dealings with the workforce. The sum total of these dealings should ideally be maximum productivity. This is where management accounting and human resources converge. One area where this can be seen most is in revenue generation. Incentives and workplace environment can have a significant impact on sales and revenue generation, bringing the influence of some human resource functions into management accounting equations.
Today’s management accounting systems have grown from ad hoc number crunching to complex, multidimensional tools for analysis and decision-making. This occurred because the systems grew along with management theory, from the formalizing influence of scientific management to the structural influence of bureaucracy and administrative theory. The addition of behavioral theories such as human relations and human resources further refined management accounting systems, by finding ways to quantify the impacts of human behavior, motivation and incentive systems and incorporate those into broader strategic objectives.
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