The relationship between management accounting, profitability and operations in an uncertain world. Evidence from literature and practice
At the heart of many core Management Accounting (MA) practices there is a potentialmismatch between the assumption of a materially predictable future operatingenvironment, and the reality of an uncertain and unpredictable world. Practices such asbudgets, product costing, investment appraisal and financial projections, aimed atfacilitating the achievement of profitability goals, are based on the assumption that thefuture is sufficiently stable and predictable to benefit from analytical calculation.However, we live in a world where the future can be uncertain, unstable andunpredictable. Does this mean that when operating conditions become unstable,unpredictable and uncertain many MA practices lose their core modus operandi?This thesis addresses this issue through an interwoven mix of a longitudinal case studyand literature reviews spread over three projects. The case study was longitudinal andbased on in depth participant observation. The firm involved was a £38m UK logisticscompany. The study benefited from totally unrestricted access to all strategic, financialand operational activities and data, because of the author’s senior role in the firm. Theliterature review was conducted using a targeted systematic review (Tranfield andDenyer, 2003) supported by additional narrative reviews. This synoptic paper providesa reflective synthesis of the findings and the contribution of the three projects whichtogether constitute the research.Four core interlinked findings emerged from the study, based on the assumption that theachievement of profitability goals is the primary goal of the organisation.First, building on the proposals of (Otley, 1999) a framework showing the relationshipbetween MA, profitability, operations and uncertainty is proposed. It demonstrates howMA financialises operations by creating a parallel financial space to the operationalspace; how profitability outcomes result from the financial consequences of operationalactions; how the role of MA is to inform and control operational actions in a mannerthat achieves profitability goals; and how uncertainty has a critical impact on MAfunctionality.Second, the differing dimensions and implications of uncertainty are distinguished. Theprincipal distinction is between external and internal uncertainty. External uncertaintiesarise from unanticipated changes from customers, suppliers and the market and thusaffect the predictability of the future on which plans and targets are based. The datagathered during the course of this research suggests that external uncertainty tends to betypified by pockets of instability oscillating with periods of relative stability. Internaluncertainties occur in relation to management effectiveness, reporting validity andchoice of appropriate accounting perspective (five are identified - Product, Customer,Throughout, Process, Financial Accounting). The external uncertainties magnify theimpact of the internal uncertainties by potentially changing and thus de-stabilising therequirements of management, the validity of reporting and the appropriateness of theaccounting perspective used.Third, Management Accounting Systems (MAS) respond to external uncertainties, andthe aspirations of external financial stakeholders for increased profitability, by operating in two differing modes – the first is fixed/control (Fixed), the second is inform/flex(Flex). Fixed is the default mode and assumes conditions of relative certainty; the role isto control the achievement of agreed plans and targets. Flex is intermittently initiatedwhen, signalled by feedback, the impact of external uncertainties or profit pressurestrigger the need to change original plans and targets. Calculative analysis informsrevised operational plans aimed at maintaining the achievement of profitability goals;targets are flexed to reflect the changes. The intent is to develop a revised position ofrelative stability in which the achievement of profitability plans and targets can becontrolled via reverting back to Fixed. The process is therefore continual, but appears tobe typified by an uneven series of oscillations between the two modes.Four, the Financial Accounting (FA) profitability measure, with the goal derived fromexternal financial stakeholders, provides partial responses to the three internaluncertainties by introducing for each an element of certainty. For managementeffectiveness uncertainty, the profitability goal provides a relatively certain externalreferent which can be cascaded down the organisational structure, and against whichperformance can be evaluated. For reporting validity uncertainty, FA standards providean authoritatively accepted definition of profitability, so that reported profitability istreated as if it were ‘true and fair’. For multiple accounting perspectives uncertainty,four perspectives (Product, Customer, Throughout, Process) make up a range of MAtools for developing actions to achieve target profitability levels, and the fifth (FA)provides the definition of profitability; all five are complementary and compatible astheir differing aggregations are composed of the same underlying financial transactions.These responses, however, are only partial as the aspirations of external financialstakeholders are in themselves substantially self referential and liable to change, and theunderlying uncertainty of FA reporting validity still exists, even if treated as if it doesnot.The study contributes to the further development of MA theory. It extends the Otley(1999) framework towards linking operations and profitability through paralleloperational and financial spaces, and incorporating the central role of uncertainty. Itadds to the debate in MA research on uncertainty by providing a classification of itsdimensions, and its impact on triggering a requirement for differing MA modes. Ithighlights the central role of profitability in providing a stable certainty of purpose as acounterbalance to inherent internal and external uncertainties. It provides a clearidentification of the differences and complementarities between MA and FA, FAdefining the quantum of profitability achieved, MA facilitating the achievement ofprofitability goal. Finally the study inputs to a wide range of issues addressed by MAresearch which at their heart reflect the impact of uncertainty (Budgeting, AccountingRepresentation, Costing Perspectives).The study contributes to practice by proposing a set of ten tenets designed to provideguidelines for MAS development, implementation and evaluation. These are drawnfrom a cross sectional deconstruction of the four findings, viewed as a whole, aimed atidentifying the specific factors that have direct implications for practice. The intent isthat these tenets provide a bridge between theory and practice, based on the premisethat, since MA theory was drawn from practice, the test of MA theory development isits applicability and relevance to practice.
Year of publication: |
2007
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Authors: | Smith, Philip |
Other Persons: | Neely, Andrew (contributor) |
Publisher: |
Cranfield University |
Saved in:
freely available
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