THE RELATIONSHIP BETWEEN MANAGEMENT ACCOUNTING, PROFITABILITY AND OPERATIONS IN AN UNCERTAIN WORLD

The relationship between Management Accounting, profitability and operations in an uncertain world: Evidence from literature and practice

ABSTRACT

At the heart of many core Management Accounting (MA) practices there is a potential mismatch between the assumption of a materially predictable future operating environment, and the reality of an uncertain and unpredictable world. Practices such as budgets, product costing, investment appraisal and financial projections, aimed at facilitating the achievement of profitability goals, are based on the assumption that the future is sufficiently stable and predictable to benefit from analytical calculation.

However, we live in a world where the future can be uncertain, unstable and unpredictable. 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 study and literature reviews spread over three projects. The case study was longitudinal and based on in depth participant observation. The firm involved was a £38m UK logistics company. The study benefited from totally unrestricted access to all strategic, financial and operational activities and data, because of the author's senior role in the firm. The literature review was conducted using a targeted systematic review (Tranfield and Denyer, 2003) supported by additional narrative reviews. This synoptic paper provides a reflective synthesis of the findings and the contribution of the three projects which together constitute the research.

Four core interlinked findings emerged from the study, based on the assumption that the achievement of profitability goals is the primary goal of the organisation.

First, building on the proposals of (Otley, 1999) a framework showing the relationship between MA, profitability, operations and uncertainty is proposed. It demonstrates how MA financialises operations by creating a parallel financial space to the operational space; how profitability outcomes result from the financial consequences of operational actions; how the role of MA is to inform and control operational actions in a manner that achieves profitability goals; and how uncertainty has a critical impact on MA functionality.

Second, the differing dimensions and implications of uncertainty are distinguished. The principal distinction is between external and internal uncertainty. External uncertainties arise from unanticipated changes from customers, suppliers and the market and thus affect the predictability of the future on which plans and targets are based. The data gathered during the course of this research suggests that external uncertainty tends to be typified by pockets of instability oscillating with periods of relative stability. Internal uncertainties occur in relation to management effectiveness, reporting validity and choice of appropriate accounting perspective (five are identified - Product, Customer, Throughout, Process, Financial Accounting). The external uncertainties magnify the impact of the internal uncertainties by potentially changing and thus de-stabilising the requirements of management, the validity of reporting and the appropriateness of the accounting perspective used.

Third, Management Accounting Systems (MAS) respond to external uncertainties, and the aspirations of external financial stakeholders for increased profitability, by operating ii in two differing modes - the first is ...