The contingency theory of management

accounting

MBA CENTER

MULTIMEDIA UNIVERSITY
 CYBERJAYA

February 2008
Table of Contents

Table of Contents............................................................................................2

Abstract.......................................................................................................... 3

Introduction.................................................................................................... 4

Research Problem...........................................................................................4

Objectives of the Research.............................................................................5

Research Questions.......................................................................................5

Scope of study................................................................................................5

Survey of Literature........................................................................................6

Management accounting ...............................................................................6

Research Methodology ................................................................................23

Discussion, Analysis and Finding..................................................................24

Limitations....................................................................................................25

Conclusion.................................................................................................... 25

References....................................................................................................26

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Abstract
Just a few years ago, most finance professionals would have been skeptical if someone had told them that
contingency theory as a new method which originating in other area of management could be applied to
core financial and accounting processes, and special for management accounting. Nowadays there is a
wider acceptance, growth and investment of this method on management accounting in both
manufacturing and service industries and most of the finance managers believe that combine of these
methods as powerful business strategy, has been well recognised as an imperative for achieving and
sustaining operational and service excellence. This paper described the contingency theory of
management accounting concept as important accounting method. The principles, methodology, definition
is discussed. In fact, the main intention of this paper is to know more about the new approach in
accounting to find a better choice for decision makers in organization.

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Key Word: management accounting, contingency theory,

Introduction
Over the last few years, business leaders across a diverse range of industries and geographies have
increasingly recognized and utilized various management methods that help to organizations to achieve
better business results. Today’s global business environment (and that of the future) characterized by
increasingly value savvy buyers, regulated operating environments, extended supply chains across
multiple organizational functions, and third party partners and suppliers, with many operating across
different cultures, time zones, and geographies has never been more challenging and critical. While the
increasing interest, popularity, and positive results achieved through the use of these methods and
combine of them together in the organizations. Contingency theory refers to any of a number of
management theories. Several contingency approaches were developed concurrently in the late 1960s.
They suggested that previous theories such as Weber's bureaucracy and Taylor's scientific management
had failed because they neglected that management style and organizational structure were influenced by
various aspects of the environment: the contingency factors. In this paper I want to describe management
accounting and clear its effect on accounting which is concerned with the provisions and use of
accounting information to managers within organizations, to provide them with the basis in making
informed business decisions that would allow them to be better equipped in their management and control
functions.

Research Problem
In the new era of business it seems inescapable to apply new methods or combine them together such as
management accounting and contingency theory to all aspects of business. Finance and accounting as
important parts of all businesses is now greatly empowered by utilization of these new methods. Many
investigations have been made to achieve the best out of these technologies for accounting and finance
objectives and their importance and benefits are clear for businesses today and implementing these
methods are been becoming more essential and necessary. From the literature reviews, it appears that.
Effectively, the research problems are summarized as follows:

a) There are too many available applying solutions for choose a method which make decision making
hard to achieve.

b) There is no clear definition of the contingency theory of management accounting

c) The contingency theory of management accounting implementation take more time and more
spend of money for implementing training programs of employees

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Objectives of the Research
I. To provide a clear definition and understanding of the contingency theory of management
accounting for companies and specifically accounting and finance departments.
II. To explore the importance of the contingency theory of management accounting for the
companies and specifically for accounting and finance departments.
III. To build up a decision making framework for choosing the best improvement technology
method. .
IV. To help companies develop their accounting and financial activities with use the contingency
theory of management accounting.

Research Questions
The purpose of this paper is o answer three important questions:

1. What is the contingency theory of management accounting?

2. Is it important or necessary for companies to implement the contingency theory of management

accounting?

Scope of study
Organizations should be able to best follow the new technological revolutions. Management accounting is
one of the fastest growing aspects of the new industrial era. It would widely affect accounting and finance
features and accounting would also greatly benefit these technologies. The first step in developing an
effective the contingency theory of management accounting in any organization is to decide the
appropriate approach towards development. One approach would be simply using an available
organization employee and utilizing it for business purposes while another approach would be outsourcing
the implementation process or doing the project within the organization by the help of accounting
companies who are more specialist and professional in this case. The main focus of this study is to find a
framework to help managers choose the best method in their organizations.

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Survey of Literature

With the growth of new accounting methods, the world quickly realized the advantages of these methods,
which reduces cost and increase profit, have created another industrial revolution in industrial and service
companies and have greatly influenced all characteristics of business and consequently now all the
managers know accounting as the language of business. Many researchers and papers have been carried
out and many articles have been provided regarding to these impacts. Three issues would be extracted
from these articles; (1) to provide a clear definition of the contingency theory of management accounting
(2) show the Management accounting practices in selected Asian countries (3) The contingency theory of
management accounting implementation strategies.

Management accounting

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is

"the process of identification, measurement, accumulation, analysis, preparation, interpretation and
communication of information used by management to plan, evaluate and control within an entity and to
assure appropriate use of and accountability for its resources. Management accounting also comprises the
preparation of financial reports for non management groups such as shareholders, creditors, regulatory
agencies and tax authorities" The American Institute of Certified Public Accountants(AICPA) states that
management accounting practice extends to the following three areas:
*Strategic Management Advancing the role of the management accountant as a strategic partner in the
organization.
*Performance Management developing the practice of business decision-making and managing the
performance of the organization.
*Risk Management contributing to frameworks and practices for identifying, measuring, managing and
reporting risks to the achievement of the objectives of the organization.

The Institute of Certified Management Accountants (ICMA), state "A management accountant applies his
or her professional knowledge and skill in the preparation and presentation of financial and other decision
oriented information in such a way as to assist management in the formulation of policies and in the
planning and control of the operation of the undertaking. Management Accountants therefore are seen as
the "value-creators" amongst the accountants. They are much more interested in forward looking and
taking decisions that will affect the future of the organization, than in the historical recording and
compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience
can therefore be obtained from varied fields and functions within an organization, such as information
management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc."

Aims

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 1. Formulating strategies;

2. Planning and constructing business activities;

3. Helps in making decision;

4. Optimal use of resources;

5. Supporting financial reports preparation; and

6. Safeguarding asset

Traditional vs. innovative management accounting practices

In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that
management accounting practices (and, even more so, the curriculum taught to accounting students) had
changed little over the preceding 60 years, despite radical changes in the business environment.
Professional accounting institutes, perhaps fearing that management accountants would increasingly be
seen as superfluous in business organizations, subsequently devoted considerable resources to the
development of a more innovative skills set for management accountants. The distinction between
‘traditional’ and ‘innovative’ management accounting practices can be illustrated by reference to cost
control techniques. Cost accounting is a central method in management accounting, and traditionally,
management accountants’ principal technique was variance analysis, which is a systematic approach to
the comparison of the actual and budgeted costs of the raw materials and labor used during a production
period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends
to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based
costing, which are designed with specific aspects of the modern business environment in mind. Lifecycle
costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest
when the product is still at the design stage of its product lifecycle (i.e., before the design has been
finalized and production commenced), since small changes to the product design may lead to significant
savings in the cost of manufacturing the product. Activity-based costing (ABC) recognizes that, in modern
factories, most manufacturing costs are determined by the amount of ‘activities’ (e.g., the number of
production runs per month, and the amount of production equipment idle time) and that the key to
effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting
is also known as Cause and Effect accounting. Both lifecycle costing and activity-based costing recognize
that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and
quality control failures) is of far greater importance than (for example) reducing the costs of raw

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materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead
on activities that drive costs, such as the provision of a service or the production of a product component.

Role of Management Accountants within the Corporation

Consistent with other roles in today's corporation, management accountants have a dual reporting
relationship. As a strategic partner and provider of decision based financial information, management
accountants are responsible to the business management team while at the same time also have reporting
relationships and responsibilities to the corporation's finance organization. The activities management
accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and
monitoring costs inherent in the business are ones that have dual accountability to both finance and the
business team. Examples of tasks where accountability may be more meaningful to the business
management team vs. the corporate finance department are the development of business driver metrics,
sales management score carding, and client profitability analysis. Conversely, the preparation of certain
financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will
be more useful to the corporate finance team as they are charged with aggregating certain financial
information from all segments of the corporation. One widely held view of the progression of the
accounting and finance career path is that financial accounting is a stepping stone to management
accounting. Consistent with the notion of value creation, management accountants help drive the success
of the business while strict financial accounting is more of a compliance and historical endeavor.

An alternative view of management accounting

A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign
influence in organizations, rather a mechanism for management control through surveillance. This view
locates management accounting specifically in the context of management control theory.

Specific Concepts

1. Throughput accounting

The most significant recent direction in managerial accounting is throughput accounting, which
recognizes the interdependencies of modern production processes and provide managers with a tool that
will allow them to measure the contribution per unit of constrained resource for any given product,
customer or supplier. (For a detailed description of Throughput Accounting, see cost accounting).

2. Lean accounting (accounting for lean enterprise)

In the mid to late 1990s several books were written about accounting in the lean enterprise (companies
implementing elements of the Toyota Production System). The term lean accounting was coined during
that period. These books contest that traditional accounting methods are better suited for mass production
and do not support or measure good business practices in just in time manufacturing and services. The

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movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, MI. 320
individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520
individuals attended the 2nd annual conference in 2006.

3. Transfer Pricing

Management accounting is an applied discipline used in various industries. The specific functions and
principles followed can vary based on the industry. Management accounting principles in banking are
specialized but do have some common fundamental concepts used whether the industry is manufacturing
based or service oriented. For example, transfer pricing is a concept used in manufacturing but is also
applied in banking. It is a fundamental principle used in assigning value and revenue attribution to the
various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate
risk of the bank to the various funding sources and uses of the enterprise. Thus, the bank's corporate
treasury department will assign funding charges to the business units for their use of the bank's resources
when they make loans to clients. The treasury department will also assign funding credit or business units
who bring in deposits (resources) to the bank. Although the funds transfer pricing process is primarily
applicable to the loans and deposits of the various banking units, this proactive is applied to all assets and
liabilities of the business segment. Once transfer pricing is applied and any other management accounting
entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in
the legal entity results), the business units are able to produce segment financial results which are used by
both internal and external users to evaluate performance.

Management Accounting Tasks/ Services Provided

Listed below are the primary tasks/ services performed by management accountants. The degree of
complexity relative to these activities is dependent on the experience level and abilities of any one
individual.

• Variance Analysis

• Rate & Volume Analysis

• Business Metrics Development

• Price Modeling

• Product Profitability

• Geographic vs. Industry or Client Segment Reporting

• Sales Management Scorecards

• Cost Analysis

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 • Cost Benefit Analysis

• Client Profitability Analysis

• Capital Budgeting

• Buy vs. Lease Analysis

• Strategic Planning

• Strategic Management Advise

• Internal Financial Presentation and Communication

• Sales and Financial Forecasting

• Annual Budgeting

• Cost Allocation

• Resource Allocation and Utilization

Management accounting practices in selected Asian countries

Traditional management accounting techniques such as standard costing and variance analysis, traditional
budgeting and cost volume profit analysis are said to be less useful in the present manufacturing
environment. To succeed in the present dynamic business environment, tools or strategies such as JIT,
ABC, TQM, process re-engineering, life cycle assessment and target costing would greatly enhance the
ability of corporations to meet global competition. Through a literature review, this study examines the
extent to which traditional and contemporary management accounting tools are being used in four Asian
countries: Singapore, Malaysia, China and India. Overall, the evidence reviewed suggests that the use of
contemporary management accounting tools is lacking in the four countries. The use of traditional
management accounting techniques remains strong. The paper concludes with various recommendations
for future research, the most important of which is the need for future studies to be grounded in theory.

Various authors have argued that traditional techniques such as standard costing and variance analysis,
traditional budgeting and cost volume profit (CVP) analysis are no longer adequate to be used as planning
and control tools in the present manufacturing environment. Further, many have predicted that the shorter
product life cycles, advanced manufacturing technologies, decreasing emphasis on labor in the production
process and global competition may lead to the demise of the above tools. To succeed in the present

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dynamic business environment, companies should link their strategies to quality improvement, increased
flexibility in meeting customers’ individual requirements, reduced lead times, inventories and production
cost. Thus, tools or strategies such as JIT, activity based costing (ABC), TQM, process re-engineering,
life cycle assessment and target costing would greatly enhance the ability of corporations to meet their
objectives. Consequently, it is not unreasonable to want to examine the extent to which contemporary and
traditional management accounting tools are being adopted by companies in emerging economies in Asia.

Through a literature review, this study attempts to investigate the management accounting practices in
four Asian countries: Singapore, Malaysia, China and India. The primary objective of this study is to
identify and highlight the management accounting practices in these four countries. It is hoped that the
results of this review will help reveal whether or not we are teaching our students what the practitioners
actually need. More specifically, is there a gap between the theory that we teach in our classrooms and
management accounting practice? Should a gap exist, then academics have got to seriously think about
restructuring the management accounting curriculum to better reflect the needs of the industry. Further,
the focus of earlier studies examining management accounting practices in these four countries has been
on individual countries. For example, Abdul Rahman and Sulaiman surveyed Malaysian companies,
Ghosh and Chan and surveyed companies in Singapore, Firth in China and Joshi in India. Thus, the
second objective of this study is to provide a comparative analysis of management accounting techniques
used in the four countries. It is hoped that the synthesis of earlier studies will help provide an overview of
management accounting practices in the four countries under review, thus enhancing the literature in the
area of management accounting practices in Asia. This would, in part, address Willett’s concern that
studies on management accounting practices in this region lag behind studies in financial accounting. Last
but not least, the results of this study will shed some light on whether or not the national culture is an
important variable in explaining the management accounting practices across the four countries. This
issue is pertinent primarily because it has often been cited that accounting is a product of its environment.
If, indeed, accounting is shaped by the environment, then one would expect there to be differences
emerging in the adoption of the various management accounting tools by companies in these countries.

This paper is organized as follows. Section 2 examines the extent to which traditional management
accounting planning and control tools such as budgets, standard costing and CVP analysis are used by
companies operating in India, China, Singapore and Malaysia. Section 3 examines the extent to which
contemporary management accounting tools such as ABC, target costing and the balanced scorecards
(BSC) are used by such firms. Section 4 concludes with a discussion of the various possible reasons as to
why traditional management accounting tools are still being used by a large majority of firms in Asia,
suggestions for future research and the limitations of a comparative analysis of this nature.

2. Traditional management accounting tools

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2.1 Budgets

Various authors have suggested that there are several advantages to preparing budgets. Budgets aid
planning and facilitate interdepartmental communication and coordination. Budgets also provide a means
for companies to allocate scarce resources more efficiently. Additionally, budgets may also be used as a
tool to evaluate the divisional or managerial performance. More recently, however, there have been
numerous criticisms leveled at traditional budgets. In particular, the Consortium for Advanced
Manufacturing-International (CAM-I), an international research consortium of companies, management
consultants and academics, argue that the traditional budget acts as a barrier to effective management,
particularly in the present dynamic business environment. They claim that the budgeting process, as
traditionally practiced, is simply an exercise in justifying the increase and decrease in the previous year’s
spending. As a result, companies are better off without budgets, especially since budgets can also create a
climate of “going by the book” and contribute to a “control by constraint” mechanism. This would, in
turn, suppress an individual’s creativity and innovativeness.

Interestingly, despite the preceding criticisms, the use of budgets as a planning, control and performance
evaluation tool (to enable managers to make more informed decisions) is widespread in the selected Asian
countries under review. In Singapore, for example, about 95 per cent of the 174 companies surveyed by
Ghosh in 1984 used budgets as a financial control tool (Table I). Another survey conducted in 1996 also
revealed similar results. Out of 109 companies surveyed, 97 percent reported the use of budgets. Thus, the
use of budgets, over the years, has not diminished. Indeed, the 97 percent indicates an increasing use of
budgets by companies in Singapore. Further, all the 106 companies that said “yes” to budgets reported
that they used budgets to evaluate performance. However, overall, only 83 (76 percent) companies
prepared the cash budget. It is interesting to note that the cash budget is prevalent amongst companies in
the retail, manufacturing and the hotel sectors. Ghosh and Yoong’s study comparing the management
accounting practices of 64 multinationals and 110 local firms in Singapore also revealed consistent
results. Ninety-seven per cent (97 percent) of the multinational firms and 93 percent of the local firms
reported that they used budgets.

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Table I Broad areas of management accounting practices in India, Singapore, Malaysia and China

Table II Malaysia (all figures in per cent)

Malaysian enterprises also report a high rate of use for budgets. Abdul Rahman in their survey reported
that 98 percent (out of 48 manufacturing firms) of the companies used budgets. In contrast with the
Singapore surveys, only 40 percent (out of the 98 percent who said they used budgets) actually used
budgets as a performance evaluation tool. Sulaiman surveyed 61 companies in the industrial and
consumer products sectors of the Kuala Lumpur Stock Exchange’s (KLSE) main board and found that 98
percent of the survey respondents used budgets. With regard to final budget authorization (of a particular
department or budget holder), for the Sulaiman survey, 97 percent of the respondents reported that senior
management has the greatest influence and supervisors the least at 29 per cent. Abdul Rahman, on the

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other hand, found only 32 percent of the respondents reported that senior management provides the most
important influence in authorizing the final budget. Table II (Panel A) provides the details. When asked to
indicate the extent to which they agreed with participative budgeting, 58 per cent in the Sulaiman survey
and 60 percent in Abdul Rahman’s survey said that budget holders should not have too much influence in
determining their own budgets. These results contrast with Drury’s survey of companies in the UK. There,
a mere 23 percent felt that budget holders should not have too much influence in their own budgets. On
whether or not budgets should be used as a performance evaluation tool, 63 percent of the respondents in
both Malaysian surveys agreed that top management should judge a manager’s performance primarily on
his/her ability to meet the budget. Interestingly, 46 percent of the respondents in Drury’s survey thought
so. Although the percentage from the UK survey is lower than that of the two Malaysian surveys, the
figure is relatively high. Accordingly, it must be emphasized that using budgets to evaluate a manager’s
performance may lead to dysfunctional consequences. According to Bart, the potential for budget games
may be high if budget holders are evaluated primarily on their ability to meet their budgets.

In India, Joshi, who examined the adoption rate of 44 management accounting techniques, sought the
manager’s perceptions on the benefits of such tools and their importance in the future by surveying 60
large and medium size firms. All (100 percent) respondents indicated that they used budgets for planning
day-to-day operations and cash flows. A lower percentage (93 percent) said that they used budgets for
controlling costs and 91 percent reported that they used budgets for planning financial position. His study
also revealed that Indian firms perceived budgeting to be one of the more important management
accounting tools in the future. When asked to rate its benefits and future emphasis (and subsequently,
ranking the means), the operational budget was ranked 22 in terms of its perceived benefits and 8 in terms
of its future emphasis. Similarly, the cash budget had a rank of 5 (perceived benefits) and 1 (future
emphasis), respectively. Anderson and Lanen examined the use of budgeting procedures, firms’ budgeting
philosophy and involvement of various levels of managers of 14 firms (seven internationally oriented
firms and seven domestic oriented firms) in India. They found that economic reforms and greater self-
determination on the part of Indian managers had led to an increased use of standard budgeting and
planning procedures since 1991. Second, firms set more accurate budgets in 1996 as compared to 1991.
They suggest that this may be due to the manager’s increased involvement in and understanding of the
firm’s strategy as well as decreased government intervention since the liberalization of the Indian
economy in 1991. Third, plant managers in their survey tend to be more involved in budgeting than in
strategy formulation. The reverse holds true for divisional managers; they appear to be more involved
with strategy formulation than budgeting. Additionally, the only discernible difference between the
domestic and internationally oriented firms is the extent to which they used cost data to develop budgets.
Internationally oriented firms seem to put less emphasis on cost data to prepare budgets.

While the use of budgets in India, Malaysia, and Singapore remains high, there is very limited use of
budgets in China. An interesting study quoted in Bromwich and Wang on a survey of 81 accountants in
China (on the perceived practical value of various management accounting techniques) found a mere 4
percent perceiving operational budgets to be useful. The low percentage may be due to the fact that many

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Chinese accountants (before the economic reforms in the late 1970s) did not regard sales or production
planning as their responsibility. This is primarily because Chinese state enterprises were essentially
production units under the purview of an industrial ministry or an administrative corporation. However,
this may not be the case at present. Another study by Firth, examining the diffusion of management
accounting practices in foreign partnered joint venture (JV) firms, also looked at the budget use of various
types of enterprises in China. He surveyed 535 foreign firms, 456 foreign partnered JV firms, 432 Chinese
partner firms and 370 state owned enterprises (SOE). While the production budget appears to be important
to all four types of firms (Table III), the cash/working capital budget, the sales and profits budgets have
moderate use amongst the SOEs and the Chinese partner firms. (Table III, Panel A gives the details.)
Middle management’s participation in the preparation of budgets, across the four types of firms, is rather
limited. Only 45 and 49 per cent of the foreign partnered firms and foreign partnered

JV firms, respectively, reported some kind of participation. The percentages for Chinese partner firms and
SOEs remain low (at 20 and 11 per cent, respectively). There is also less attention given to capital
budgeting in China amongst Chinese partner firms and SOEs. This is primarily because in a command
economy like China, the government is the primary provider of capital. Consequently, managers of SOEs
have few discretionary decision-making responsibilities. Only about 30 per cent of the 81 accountants in
Bromwich and Wang’s survey felt that the capital budget was useful. If capital budgeting is undertaken,
the method most often used is the payback period. However, as China moves toward a more competitive
market economy, there will be a heightened interest to evaluate the usefulness of capitalist style
management accounting methods and procedures.

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Table III China

2.2 Standard costing and variance analysis

As a result of changes in the manufacturing environment, the usefulness of standard costing and variance
analysis is diminishing. In the past, standard costing has been regarded as a tool that enhances planning
and control and also improves performance evaluation. Further, standard costing also aids in product
costing. However, in the present advanced manufacturing environment, the benefits of operational control
are said to be less evident as standard costing may result in dysfunctional behavior. For example, a
material price variance may encourage the purchasing manager to buy in bulk (to take advantage of
discounts) which would subsequently result in high inventory holding costs. This action is inconsistent
with the JIT philosophy. Further, standard cost variance reports prepared monthly are deemed less useful
as the information provided is stale and out of date for managers to act upon, particularly in the current
competitive environment. Added to that is the notion that current production processes are no longer labor
intensive. As such, the calculation of labor variances may not be as useful today as it was in the past.

On the basis of the above criticisms, one would not expect the widespread use of standard costing for
planning and control purposes. However, empirical results show otherwise. Despite the criticisms leveled
at standard costing, many companies still find standard costing useful for planning and control purposes.
In India, for example, 68 per cent of the 60 firms surveyed still use standard costing. Ghosh found that 47
per cent of the Singapore companies surveyed still use standard costing. A later survey by Ghosh and
Chan found the percentage to be higher at 56 per cent. In Malaysia, the percentage is moderately high at
49 per cent in Abdul Rahman’s survey and 70 per cent in Sulaiman’s study. Most of the companies used
standard costing to compute product cost (74 percent), as an aid to budgeting (74 percent) and for cost
control and performance evaluation The results appear to be consistent with Sulaiman et al.’s (2002)
survey. Though, in their survey of 214 manufacturing companies, reported that 69 percent of the
companies used standard costing. If this is a reflection of the trend in Malaysia, then the demise of
standard costing, as suggested by various authors, may not hold true. Similarly, in the UK, it was reported
that 76 per cent of the companies that responded to Drury et al.’s (1993) survey said that they used
standard costing. In China, standard costing is predominantly used for joint product costing and
budgeting. About 94 per cent of the Chinese partner firms and 92 per cent of the SOEs use standard

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costing for joint product costing. The high adoption rates for standard costing by both private and SOEs in
China may be due, in part, to the similarities between the standard and normative castings. The latter
costing system was adopted from the former USSR in the 1950s.Similarly, foreign firms and foreign
partnered JV firms also indicate high adoption rates (at 87 and 83 per cent, respectively) (Table III).
While traditionally, standard costing has been used to aid budgeting, standard costing is increasingly
becoming a control tool, especially amongst the foreign and foreign partnered JV firms in China. The
calculation of standard cost variances is also prevalent in both types of firms. On the contrary, Chinese
partner firms and SOEs reported very limited use of standard costing as a control mechanism. Further,
only 36 per cent of Chinese partner firms and 16 per cent of SOEs said that they computed variances as
compared to 82 and 70 per cent in foreign firms and foreign partnered JV firms, respectively. In India, 68
percent of the 60 companies that participated in Joshi’s (2001) survey reported that they used standard
costing. When asked to indicate the perceived benefits of standard costing on a Likert scale of “1” (no
benefit) to “7” (high benefits), the mean obtained was 4.37. Ranking the means puts standard costing as
23rd out of the 44 management accounting tools investigated in the survey. On the future emphasis of
standard costing, the managers again ranked it 23rd (out of 44) with a mean of 4.69. This may, perhaps,
signal the fact that companies in India are not about to discard standard costing, not just yet!

2.3 CVP analysis

CVP is claimed to be one of the most powerful tools that help managers in planning and decision making.
CVP helps managers understand the interrelationship between the quantity sold, cost, selling price and
profit. However, because of its limiting assumptions, some managers are of the opinion that the tool may
have very little use in practice. For example, the assumptions that selling price and costs remain constant
over the relevant range may not be practical in this ever changing business world. Further, the assumption
that there is no opening and closing inventories of finished goods may also not be realistic. As such, the
CVP technique may slowly lose its importance. However, empirical results of the four countries reviewed
reveal otherwise.

Seventy-two (66 percent) companies in the Singapore survey used CVP. The earlier study by Ghosh
reported only a 55 percent adoption rate, thus showing an increase of 11 per cent. In Malaysia, Tho
reported that 53 per cent of the 214 manufacturing companies in their survey have “often” or “always”
used the CVP technique. Joshi reported a 65 per cent adoption rate amongst medium and large companies
in their survey.

2.4 Performance measurement

Performance evaluation is an important function of management accounting, particularly in companies

that have a divisional organizational structure. The most often cited methods used to measure the
divisional performance indicated in our management accounting textbooks are the return on investment
(ROI), the residual income (RI) and the economic value added (EVA). More recently, however, there
have been suggestions that relying on accounting related measures is not enough. Proponents of the BSC

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have argued that non-financial measures should also be measured. Subsequently, many companies are
currently focusing on both accounting and non-accounting related measures.

In India, for example, Joshi’s study revealed that although 100 percent of the companies that responded to
his survey evaluated performance on the basis of ROI, a sizeable percentage (about 53 percent) also
focused on non-financial measures. Eighty percent of the companies reported that they evaluated
performance based on customer satisfaction (Table IV, Panel B). However, financial-based performance
measures were still the favored techniques as far as Indian companies are concerned. Variance analysis
and divisional profit were used to evaluate performance by all the respondents in the survey. Interestingly,
37 percent reported that they also used qualitative measures to evaluate their plant management, senior
corporate managers and chief executive officers. Business enterprises are increasingly focusing on
customer satisfaction. About 80 percent of the firms surveyed used customer satisfaction to evaluate the
performance.

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Table IV India

The same is evident in Malaysia. About 76 per cent of the companies in Addul Rahman’s survey reported
that they measured customer satisfaction/product quality as part of performance evaluation. Of the 61
companies in Sulaiman’s study, 59 percent of the respondents said they measured customer
satisfaction/product quality. As for ROI, its use as a performance evaluation tool in Malaysia is rather
limited. Only 17 percent reported that they used ROI to evaluate managers. In Singapore, 56 percent (61)
of the companies said they used ROI as a management control technique. Out of these, 13 used gross
investment, 32 used net assets, 26 used share capital and reserves while six companies did not specify the
basis used. Additionally, 29 companies (48 percent) reported that ROI was computed for each
division/department. The earlier study by Ghosh reported a higher percentage (63 percent) of the
companies adopting ROI and 45 per cent of those companies computed divisional/departmental ROI.
Then, the two most common bases used were gross investment (45 percent) and net investment (44
percent).

In China, there appears to be some kind of traditional responsibility accounting comprising international
business accounting (IBA) and normative costing. As stated elsewhere in the paper, the latter is a type of
standard costing borrowed from the USSR in the 1950s. According to Bromwich and Wang (1991),
various features of the IBA bear considerable similarity to Western responsibility accounting. An
interesting feature of the IBA on performance measures and incentive devices within Chinese enterprises
is the belief that no individual can perform well without the efforts of his subordinates and colleagues.
Thus, the emphasis is more on the group as a unit rather than the individual orientation of accounting
controls of the West. This, in itself, may not have significant implications on the techniques used to
evaluate managers. Rather, how the technique is used may differ. In other words, instead of evaluating the
individual using ROI, the performance of the whole department will be evaluated. The extent to which
Chinese firms use responsibility accounting can only be discerned from the survey of accountants cited in

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Bromwich and Wang. In that survey, 54 per cent of the accountants perceived responsibility accounting to
have practical value.

3. Contemporary management accounting tools

Often, we have heard criticisms that traditional management control tools are produced too late and at too
aggregate a level to be relevant for today’s planning and control decisions. To better meet the challenges
of the present dynamic business environment, techniques such as ABC and target costing are said to be
more appropriate. Additionally, the use of accounting measures to evaluate the performance is no more
sufficient. Companies need to focus on non-financial accounting measures too. The introduction of the
BSC helps enterprises to concentrate on both the financial and non-financial aspects of a firm’s activities.
The following subsections provide detailed discussions on ABC, target costing and the BSC.

3.1 Target costing

Target costing is said to provide companies with a competitive edge as it provides continuous
improvement both at the design and production stages. Subsequently, this will help companies,
particularly Japanese companies, to maintain their competitiveness. In India, amongst the contemporary
management accounting tools, target costing looks promising. Although only 35 per cent of the firms
reported that they have adopted target costing, in terms of its benefits, survey respondents ranked it fourth.
In terms of its future emphasis, target costing was ranked number 1, thus indicating a possible increase in
its use in the future. In Malaysia, about 41 per cent of the 214 companies that responded in Tho’s study
reported that they had implemented target costing and another 4 per cent said that they would implement
target costing in the next five years. Surveys conducted in Singapore and China did not examine the use of
target costing.

3.2 ABC

ABC has gained increasing attention amongst practitioners as a tool to help allocate overheads with a
greater degree of accuracy. The issue of more accurate overheads allocation is pertinent because, often
when pricing relies on flawed cost data, the problems/errors will be perpetuated. It is also said that ABC
corrects for the limitations of traditional costing by identifying all the work activities and the costs that go
into manufacturing the product. The traditional accounting approach where cost allocation is based on

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labor hours or machine hours rarely reflects the true cause and effect relationship between indirect costs
and individual products. Recent surveys have reported the increasing use of ABC, particularly amongst
Western enterprises. It has been suggested that the decreasing cost of computing power and the ABC
software that complements the software on enterprise resource planning may have contributed to this
phenomenon. Studies in the West have reported an adoption rate in the range of 6 to slightly more than 50
per cent. In Singapore, 14 of the 106 companies surveyed said that they used ABC. This represents 13
percent of the sample. Their primary reason for using ABC was that it helped them to identify activities
that drive costs. More importantly, ABC enabled them to understand their activities better. In Malaysia,
while Abdul Rahman found a mere 4 percent in their sample using ABC, Sulaiman had 28 percent of the
respondents indicating that they used ABC to allocate overheads. In India, only 20 percent of the 60
companies surveyed said they had adopted ABC. China’s percentage is even lower. For Chinese partner
firms and SOEs, the percentage was 2 and 1 per cent, respectively. Amongst foreign firms and foreign
partnered JV firms, ABC usage was much higher. The former reported 15 per cent and the latter 10 per
cent. It would seem that the use of ABC has not caught on in the four countries surveyed. Consequently,
an interesting area to address in the future research is the obstacles to ABC implementation in Asian
firms.

3.3 BSC

The BSC has gained increasing popularity since its introduction by Kaplan and Norton. Scholars and
practitioners alike have argued that relying solely on accounting metrics to evaluate performance may not
be adequate. With this in mind, the introducers (inventors) of the BSC have focused on four perspectives
of a business: the internal business process, learning and growth, customers and financial aspects.
Atkinson argues that the BSC may be regarded as one of the most significant developments in
management accounting. Hoque and James are of the opinion that using a BSC: . . . does not mean “using
more measures”: it means putting a handful of strategically critical measures together in a single report, in
a way that makes cause-and-effect relations transparent and keeps managers from sub optimizing by
improving one measure at the expense of the others.

Thus, to achieve a balance, firms need to focus on all the four perspectives. As to be expected, Hoque and
James found that there is a positive relationship between the size and BSC usage. Thus, the bigger the
company, the more practical it is to use BSC to support their strategic decision making. Joshi’s survey, to
some extent, supported this contention. He found that large companies tend to use newly developed
management accounting techniques to a greater extent than medium sized enterprises. In Malaysia,
Sulaiman found very little usage of the BSC in the 61 companies that they surveyed. Only 13 percent
(eight companies) of the companies surveyed actually used a BSC. In India, the percentage was 40 per
cent. Surveys in Singapore and Chinese did not examine the BSC.

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Overall, the evidence reviewed suggests that the use of contemporary management accounting tools is
lacking in the four countries studied. For example, the future emphasis in India is on traditional
management accounting techniques. It was perceived by the survey respondents that the benefits accruing
to traditional management accounting practices were high (Joshi, 2001). Perhaps, this is because Indian
managers generally avoid risks, and are quite conservative and tend to be less innovative. Thus, it is
taking Indians a longer time to adopt new management accounting tools. Another factor may be the high
costs involved in implementing contemporary management accounting techniques. Indian companies
perceived that it is rather expensive to implement new management accounting tools (Joshi, 2001). As
observed in Table IV (Panel B), the respondents envisaged traditional tools such as ROI and variance
analysis to be further emphasized in the future, ranking the latter eighth and the former fifth amongst the
44 techniques investigated. Similarly, in Singapore, there is an increasing use of CVP, standard costing
and traditional budgeting over the period from 1987 to 1996. Tho et al. (1998) provide various reasons as
to why traditional management accounting practices are still widely used in developing countries: the lack
of awareness of new techniques, the lack of expertise and, perhaps, more importantly, the lack of top
management support. Additional factors include the high cost of implementation and the fact that there
simply was “no reason to change” from the traditional technique to the new tool.

One primary limitation of this study is the fact that there is limited overlap. This is due to different survey
instruments being used in each country. Further, the size of companies surveyed, sampling procedures and
types of measures may have major implications on the reported findings. These issues may pose a
significant threat to the validity of the results. Consequently, future research on cross-country
comparisons should address the matters just discussed. One way to circumvent these shortcomings is,
perhaps, to conduct each country’s survey using the same instrument and to ensure that the sampling
procedures and the sample chosen are consistent across countries. Second, all the studies reviewed here
are largely exploratory in nature and the results are generally descriptive. Ultimately, there is a need for
such studies to be grounded in theory. It is time that the exploratory phase of research in this area was
minimized. To this end, detailed case studies on management accounting in practice may have to be
undertaken. Case studies, according to Scopes, will enable researchers to: . . . describe management
accounting systems, explore how those systems are used, attempt to identify best practices and explain the
determinants of existing practices.

Additionally, a rigorous statistical analysis of the results of earlier studies is lacking. Results are limited to
percentages and frequency. Finally, future studies should attempt to examine specific factors as to why
firms in Asia (with the exception of Japan) are not adopting newly developed management accounting
tools such as ABC and target costing. What are the obstacles to implement such techniques? Is culture a
predominant factor? As far as this review is concerned, firms across the four countries are consistently

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taking on board traditional management accounting practices despite the fact that their national cultural
values differ (to some extent). Thus, are current management accounting practices being strongly driven
by factors at the macro level where considerable global pressures lead to similar practices across
countries? Consequently, the global similarities perspective of management accounting practices is
certainly an area that is worth examining.

Research Methodology

Here, in order to gain or collect related data, different sources are used. Secondary data have been used in
this paper. Important sources for this paper include Emerald, EBSCO, and Google-books databases have
been used as well as Yahoo and Google search engines. Besides, to develop a useful research, some
textbooks and web sites have been used as well. The research framework is shown in figure

Main problems:

1. There is no clear definition of the contingency theory of management accounting

2. There are too many available applying solutions for choose a method which make decision making
hard to achieve.

3. The contingency theory of management accounting implementation take more time and more spend of
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money for implementing training programs of employees
 Need for new
accounting method

Defined the
contingency theory of
management
accounting

To implement the
contingency theory
of management
accounting

To reduce the costs of

organization and rectify the
organization problems

Discussion, Analysis and Finding

There are different sorts of industries, organizations, business models and strategies. For instance,
industries vary too much and within each industry organizations are different. On the other hand, there are
different organizational structures and managerial levels. Each company has its own objectives, vision,
mission, policy, etc and organizations possess different size of activities, employee numbers, and many
other features. It is also possible that one organization finds more than one type of accounting methods

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suitable for different objectives of organization and different volume and type of activities are applicable
to each of them. I think after read of this paper we can have better understanding about management
accounting and we will have clear information about the Management accounting practices in selected
Asian countries.

Limitations

There are major obstacles to the contingency theory of management accounting:

• They address management theory as a secondary or tertiary issue.

• They don’t address policies, either formal or informal.

• They don’t combine this method with the other general theory of management used by the organization.

• They don’t address the organization’s values.

Conclusion

Management accounting as a powerful accounting method has been well recognised as an imperative for
achieving and sustaining operational and service excellence. While the original focus of this method was
on. use of accounting information to managers within organizations, to provide them with the basis in
making informed business decisions that would allow them to be better equipped in their management and
control functions but now we can see the finger print of management accounting in all the area of business
andd leveles of management. Management accounting has made a huge impact on industry and yet the
academic community lags behind in its understanding of this powerful strategy. Therefore be incumbent
on academic fraternity to provide well-grounded theories to explain the phenomena of management
accounting in new areas. In other words, management accounting lacks a theoretical underpinning and
hence it is our responsibility as academicians to bridge the gap between the theory and practice of six
sigma. This paper defined management accounting as a powerful accounting method and shows the
design, implementation, beneficial of that to help you to make best decision for your organization.

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References