The role and responsibilities of the managerial accountant include being familiar with the major theories that inform managerial accounting. Individually, the ten theories span the range of issues that confront a managerial accountant in providing operational and strategic advice and assistance to non- accounting managers. Their areas of complementary integration and convergence are summarized in Table 2-5, which both provides a quick reference to commonly used managerial accounting theories and is set out to enable pan-theoretical connections to be made. (The process of making pan- theoretical connections was described in the introduction to this chapter).
Although the theories have been separately discussed, this was a matter of convenience, not their intended manner of their use. There is some overlap in theories, and together they offer greater insights than when used individually. So, managerial accountant should make use of more than a single theory in conducting analysis, making recommendations and executing decisions. Together, the theories offer a means to avoid copying competitors.18 As noted in the introduction to this chapter, there is always the possibility that an underlying common foundation between different theories may be discerned, which can be used in analyses. This is preferable to attempting to create a meta-theory, which would inevitably omit obscure or simple theories which may potentially be beneficial while being a time-consuming exercise without a certain outcome. The observant managerial accountant may, over time, come to recognize the theories that are critical to the success in their role and responsibilities. The managerial accountant may wish to explore other theories that provide organizational insights.
The theories contribute to the managerial accountant’s compass in three ways. They show the importance of defining goals, and their limitations are represented as boundaries. For example, they make clear that the
Table 2-5 Managerial accounting theories set out for pan-theoretical connection.
Perspective Issue Theory
Closely Related Theory
Alternative Perspective Economic Changes over time to both supply and demand Price Change
theory
Wealth
theory Governance Transforms resources into desired products and
services
Wealth theory
Price Change
theory Resource-
Governance No single way to structure or make long-or short-term decisions
Contingency theory
Based View of the Firm
Value Cultural rationales for actions Institutional
theory
Principal- Agent theory Potential for loss of economic value from the
actions of managers
Principal- Agent theory
Institutional theory Interest groups that are interested in the
organization
Stakeholder theory
Principal- Agent theory Costing whether information and enforcement
economic tasks are better performed by organizations or in the market
Transaction Cost approach
Resource- Based View
Value Divides new products into disruptive or sustaining
Disruptive Innovation Process
theory
Resource Conversion
theory
Economic Identification of financial and non-financial
resources to support organizational strategy and examine a manager’s actions with resources
Resource- Based View
of the Firm
Contingency theory Allocation, deployment and leveraging of
capabilities and competencies
Resource Conversion
theory
Resource- Based View
of the Firm
purpose of the theory is to assist analysis as well as the interpretation of results. They emphasize the importance of using methods and making models guided by the theories. For example, they make clear that the choice of theories is well-established in managerial accounting. Applying the theories involves the non-accounting managers so developing collegiate relationships is also important as implementation assistance may also be necessary. Finally, the theories are influenced by context. The discussion of the economic approaches particularly emphasized the importance of aggregate and contextual factors. For example, the application of theories is influenced by the geographical location, industry sector characteristics, and trends and particular events. The managerial accountant’s compass is thus compatible with the major theories used by managerial accountants. The managerial accountant uses the discourse of concepts and classifications in working with theories and in their collegiate relationship with non-accounting managers.
Notes
1. Robbins (1935) also suggests, by inference, that transferring wealth from rich to poor would not increase total satisfaction. Thus, other remedial approaches are necessary such as integration into the international division of labor (Reisman, 1996).
2. Its maxims are (1) each individual maximizes his or her preference given some constraints, and (2) the actions of all individuals are
interdependent. Given perfect and pure competition, these two maxims will determine resource allocation and income distribution.
3. Smith (1776) accepted there were some responsibilities for government. They included defense of the nation, public works (infrastructure such as roads and bridges), universal education, the enforcement of legal rights (property rights and contracts) and criminal matters such as the punishment of crime. It is arguable that Smith (1976) would add public transport to this list on the grounds of making it easier for trade and markets to operate.
4. Inflation indicators such as the consumer price index report movements in the general level of prices for a basket of products and services, but the effects of price changes are specific. Even with low inflation (e.g., 2%–3%) what appears to be a modest increase in sales can actually be a decline. While most prices changes are increases, competition and economies of scale can lead to reductions (e.g., the prices of computers and electronics). Prices are ratios of value. Value comes from the subjective utility that people get from various products or services.
5. Economists (e.g., Marshall, 1890) prefer the term ‘goods’ to emphasize that the focus is an inherently useful to society and relatively scarce tangible item (e.g., an article, commodity, material, merchandise, supply, ware or resource). ‘Product’ or ‘service’ is used across these chapters to emphasize the factors of quality, market, and that it may be physical or virtual.
6. Reasoning from a price change or price movement will be erroneous. Instead, determine whether a shock to supply or demand occurred and which way the curve shifted. Hall and Hitch (1939) observed that organizations not only equate marginal revenue and marginal cost but fail to consider the elasticities of their position on the demand curve. Keynes (1939) also observed that calculation of short-term marginal cost or of marginal revenue should determine price policies. Both considered that this was not normal practice in the organizations they studied.
7. Red tape refers to onerous formalities and excessive bureaucracy in processing applications that increase costs and delay completion.
8. Green tape refers to time-consuming bureaucratic methods and processes relating to environmental concerns usually resulting from having to deal with multiple independent authorities with different requirements.
9. A theorem or proposition is a statement that is not self-evident but can be proved by a chain of reasoning referencing other accepted truths. It may embody a greater principle. The Transaction Cost theorem owes its debt to the Coase theorem, which states that where property rights are concerned, the parties do not necessarily consider how the property rights are granted if they can trade to produce a mutually advantageous outcome (e.g., financial compensation may be offered to an aggrieved party for the activities of the offending party in lieu of the offending party directly addressing the problem). Coase assumed that in completely competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution are selected.
10. Four broad organizational structures arise from market, business and historical factors: (1) centralized, where decisions are made on behalf of organizational units who are bound to accept (and in some cases, fund) them; (2) decentralized, where decisions, control and funding is assigned to the individual organizational unit to ensure speed and responsiveness to the market (There may be limited leveraging of expenditure or there may be higher capital or operating costs.); (3) dispersed, where organization units are required to fulfill organization-wide standards when making their decisions; and (4) federal, where organizational units co-operate to achieve critical mass and maximize value, but there are differences in return, risk, technology and support between them.
11. These may occur through overlooking the requirement to perform them having not been included in the costing, or it may be that no residual contract monitoring in-house employment group was retained after outsourcing occurred.
12. RBV uses the term ‘firm’, which is preferred in strategic management as equivalent to an organizational unit.
13. For Barney (1991), the order is significant. If a resource is considered a substitute, then it must be neither rare nor inimitable. These attributes follow from the prerequisite that resources in an organization are logically heterogeneous and immobile (Barney, 1991).
This contrasts with Porter (1990) who considers this unsatisfactory.
14. Tangible resources have physical or economic properties. Intangible resources are non-physical: reputation, technology and human which include the latter include culture, the training and expertise of employees, their commitment and loyalty, as well as intellectual capital (Hall, 1992).
15. Instructions are procedures that allow repetition of actions that involve multiple people whose actions are interdependent. They are the primary means by which organizations accomplish tasks. Feldman and Pentland (2003) distinguished between the ostensive or ideal routine and the performative or actual practice (Dionysiou & Tsoukas, 2013). Instructions are also known as performance programs (March & Simon, 1958), routines (Feldman & Pentland, 2003), standard operating procedures (Cyert & March, 1963) and decision rules for their use.
16. A competency can either be specific or broad. An example of a specific competency is the specific skills and expertise of just-in- time inventory control. It is restricted to a single organizational unit. Broad competencies are both inherently multidisciplinary and cross-functional. For example, competence in continuous product innovation requires contributions from managers with expertise in market research, new product R&D, design and engineering, cost-effective manufacturing, and new product market testing.
17. An organization may have more than one core competency in its resource portfolio, but more than two or three core competencies are rare (Prahalad & Hamel, 1990). A core competence may be the knowledge and experience of managers that results in their organizational unit outperforming its rivals. A core competency should have a greater positive impact on its market position and profitability.
18. The managerial accountant will be cautious in imitating other organizations or comparison groups with regard to Porter’s (1990) generic strategies of low cost leadership or niche-differentiation (e.g., Haunschild & Miner, 1997), organizational structure (e.g., Fligstein, 1985) and organizational processes (e.g., Massini, Lewin, Numagami & Pettigrew, 2002). Imitation does not necessarily reduce risk owing to differences in organizational history and circumstances (Porter, 1990).
3
Concepts and Classifications Discourse of the Managerial Accountant’s Compass
The aim of examining the discourse of concepts and classifications is to show they have a place in the managerial accountant’s compass. Managerial accountants negotiate and construct meaning with non- accounting managers using written and spoken discourse, narrative and rhetoric. Concepts and classifications support the four methods of managerial accountant’s compass discussed in Part IV. For easy recognition in this chapter, concepts and classifications are in italics and there is description of them so the ways in which discourse can use them is clarified. Discourse is a socially conditioned process that can determine, not just reflect, reality, being itself determined by the existing social conventions and power relations. But there is not just one discourse in an organization.