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Contingency Theory in Management Accounting

Contingency theory in management accounting: “The contingency theory of management accounting is not really a theory at all. It is neither a logical set of propositions nor is it well-founded. Indeed, after many of management accounting contingency research, all we have developed is a theory that says, “It all depends on the particular circumstances”! Is this a valid criticism of the contingency theory of management accounting?

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No, this is not a valid criticism of the contingency theory of management accounting. When one considers the numerous practical applications of the contingency theory, it can only be seen as a theory capable of being developed further. According to the contingency theory approach, there is no single general strategy that is ideally suited for all organizations. The design of various parts of an accounting system depends on specific factors or contingencies that will help in creating a perfect match. The contingency theory has mainly been used to explain how accounting systems differ in situations with changes in technology, organizational structure and theory, and the environment. Thus, “the contingency approach advocates that there is no one ‘best’ design for a management accounting information system, but that ‘it all depends’ upon the situational factors” (Drury 2004, 696). Studies show that in accordance with the contingency theory, management accounting techniques used in practice differ with the particular information needs of the organization, and this theory has been used to explain and predict phenomena in the realm of management accounting.

Strength of Contingency Theory: Validity

Studies have proved again and again that environmental factors and other contingency factors such as technology, size, etc., do have an impact on accounting systems, thereby lending solid support to the contingency theory. Khandwalla (1972) was one of the first researchers in the field of accounting to study the effect of the external environment on management control practices. According to him, the design of AISs (Accounting Information System) depends on the intensity of competition faced by the firm. Moreover, he also found that different types of competition impacted accounting information differently. For example, price, marketing, or product competitions have different impacts on the use of accounting information in manufacturing firms. In their research paper, Gordon and Miller (1976) identified three main environmental characteristics that were supposed to affect control systems – viz. “dynamism, heterogeneity, and hostility” (Gordon and Miller, 1976, 59). When there is a high level of dynamism, there will be a greater rate of change, and this will require frequent control reports that include not only financial information but also non-financial information. Moreover, the focus will be more on forecasts than on past actual results in such a changing environment. In the case of heterogeneity, when many product markets are being served, there will be a need for a decentralized control system with partially independent responsibility centers. However, when the environment is that of severe competition or market hostility, a more sophisticated AIS is required – one that includes non-financial information (Emmanuel et al., 2004, 60). Waterhouse and Tiessen (1978) have noted that the environment has two dimensions that impact the AIS – the simple-complex dimension and the static-dynamic dimension. These ideas have been further elaborated in the studies of Hayes (1977). Thus it is true to say that the contingency theory is a powerful theory that impacts the approach of accounting researchers to a large extent.

Strength of Contingency Theory – Practicality

Rayburn and Rayburn (1991), in their study titled “Contingency Theory and the Impact of New Accounting Technology in Uncertain Hospital Environments,” used the contingency model to assess the impact of a new accounting technology – Diagnosis-related Group (DRG) systems in US hospitals – on various aspects of accounting, contingent on the nature of the hospital. According to their finding, accountants from public and for-profit hospital accountants reported more of an increase in the use of financial data for control than proprietary hospital accountants. Rayburn and Rayburn (1991) explain that this could be due to the greater use of centralized financial controls and policies in the case of proprietary hospitals compared to the not-for-profit area prior to DRG. Likewise, Cadez and Guilding (2008), in their study, have found that there is no universally suitable strategic management accounting system, and factors such as company size and strategy have an effect on the application of strategic management accounting (Cadez and Guilding 2008). These findings show that the contingency theory finds practical application in the accounting context.

Strength of Contingency Theory: Impact of Other Factors

Apart from environmental factors, other factors such as technology, size, culture, corporate strategy, etc., also impact accounting system design, and hence they also prove the contingency theory right in the context of accounting. Woodward’s (1958) work linked different organizational structural arrangements with particular types of workflows. This has been extended later to include the accounting information system designs. Accountants have always recognized that “the nature of the production process determines the amount of cost allocation rather than cost apportionment that can take place” (Emmanuel et al. 1998, 60). Moreover, they also found that it was difficult to have a high level of accuracy in the case of process production compared to costing unity and small batch production because a greater proportion of the costs are incurred jointly by a mix of final products. This leads to a technological constraint on AIS design as a direct outcome of product interdependence. Piper (1978) has linked the complexity of the task as a contingency factor to financial controls. According to him, the complexity of the task faced by an organization is relevant to defining an appropriate financial control structure. His study based on four retail organizations reveals that task complexity affected the financial control structure adopted through the intervening variable of the organizational structure. In this context, task complexity was defined by the range of products sold, the diversity of the range, and seasonal variations in the type of outlet. Organizational size is another factor that can affect control arrangements. Williamson (1964) holds that when an organization expands, it will impact the accounting system as well. When it is of medium size, the organization will work on a functional basis. However, when it expands through diversification, there is increased exposure to more diverse product market environments, and the activities of the organization get reorganized into semi-autonomous divisions. This calls for the accounting system to be so designed as to measure and compare divisional performances using similar accounting measures as those used to measure overall firm performance. Control systems have also been shown to differ by industry type. Controls in the manufacturing sector have a large number of standard cost centers that rely extensively on detailed variance analysis. In contrast, costs in nonmanufacturing industries tend to be mostly of a discretionary nature.

Contribution of contingency theory research to the development of management accounting knowledge

. The contingency theory has benefited the field of accounting knowledge in many ways. It has been used by Haka to predict which firms were most likely to benefit from using sophisticated capital budgeting techniques (Riahi-Belkaoui, 2002, 143). The contingency theory has helped study various aspects of management accounting information systems such as budgeting, accounting information for performance evaluation, and dimensions of information (timeliness and level of aggregation). It has also helped in studying to what extent organization effectiveness is dependent on the level of adaptability between contingent variables and the management accounting system. In other words, the contingency theory holds that organizations must achieve a match between the contingent variables and the design of the management accounting information system in order to achieve enhanced performance (Drury 2004). Such a well-fitted match will also help the top management to make crucial decisions, increase goal congruence, and ultimately achieve financial gains. Shimin Chen (2008) has studied the impact of product standardization on capital budgeting that makes use of both discounted cash flow techniques and non-financial measures. His finding is that firms with high product standardization tend to place more importance on discounted cash flow techniques while firms with low standardization are more likely to focus on nonfinancial measures in the capital budgeting process. However, when an appropriate match is made between product standardization and the two capital budgeting methods, the capital budgeting process elicits the firm’s satisfaction (Chen 2008). This illustrates how the contingency theory can benefit the firm’s budgeting process.

Weaknesses of the Contingency Theory

The weakness of the contingency theory is that “it is not clear whether positivistic prescriptions that are stable across time and national and organizational culture are likely to be found even with a much greater volume of contingency research” (Chapman et al., 2007, 788). There is also the possibility of “equifinality,” where different approaches can often lead to the same outcomes meaning that different contingency factors can give rise to the same accounting impact, and this theory does not include that probability. A major challenge in accepting the contingency theory-related findings is that the literature has developed largely independently. (Chapman et al. 2007, 788) and there is not much connection between them. Moreover, most of the studies do not cite each other. Gerdin and Greve (2004) have highlighted the inadequacies of contingency theory style research. They hold that this theory suffers from disparate definitions of variables, insufficient data, and contradictory theory.

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Theoretical Value of Contingency Theory

Watts and Zimmerman, in their Positive Accounting theory (1986), have argued that the one important criterion for a theory’s success “is the value of the theory to users” (Malmi and Granlund 2005, 4). Contingency theory, by way of practical applications, has proved itself to be a successful theory. Whetten (1989) has put forth his argument that a complete theory must contain four elements: logical consideration of factors (variables, constructs, concepts); their relationships; the underlying psychological, economic, or social dynamics that justify the selection of factors and the proposed causal relationships; and finally, conditions that place limitations on the propositions generated from a theoretical model (Malmi and Granlund 2005). Generally, in studies involving the contingency theory and accounting, the findings are very general, partly self-evident, and have very little practical value. There is a need to advance from this stage to be able to argue that as uncertainty increases, certain forms of accounting systems used in a certain way would provide better decision-making support or, more likely, achievement of goal congruence. This would make it more practical. Currently, one may say that the contingency theory in accounting is a theory but an incomplete one that needs to be developed further to increase its explanatory power.


The above discussions show that the contingency theory is truly a theory that finds wide application in the changing world of today, where numerous factors affect the design of the accounting information system. However, much more needs to be done in building the theoretical aspects of the contingency theory in the context of management accounting. Till then, it may be safe to conclude that contingency theory is an accounting theory that is in the process of development.


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