The Linkage between Organizational Size and the Management Accounting System

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The Linkage Between Organizational Size and the Management Accounting System

Organizational and management theorists have recognized since the mid-1960s that there is no "one best way" to design an organization. Organizations differ because of their adaptation to various situation factors. Studies by Bruns and Waterhouse [4], Daft and Macintosh [9], Golembiewski [14], Gordon and Narayanan [15], Hayes [16], Merchant [26], Otley [28, 29], Rosenzweig [31], and Sathe [32] suggest that the design of certain characteristics of management accounting systems is the purposeful response to the various circumstances of the organization. Numerous studies have found a linkage between organizational size and organizational design (see[23] for a review). This linkage has generally been found to extend to the control systems of the organization. This suggests the hypothesis that the management accounting system is a control system of the organization.

The purpose of this paper is to examine the relationship of various practices, techniques, and reports in the management accounting system with the size of the organization. The development of management accounting has been closely related to the emergence of large, hierarchical, and diversified organizations in the late nineteenth and early twentieth century [21]. Subsequently, there has also been a tendency to accept management accounting as a static, technical area unrelated to the organization in which it operates [19]. The design of a management accounting system has generally been based upon the pursuit of technical rationality reflected in terms of "good" budgeting and reporting or the "best" techniques and practices. Evidence of a significant relationship between the size of the organization and factors of the management accounting system would provide management accountants with a rationale in the choice of practices, techniques, and reports that is reflected in the needs and requirements of organizations of different sizes.

BACKGROUND

A copious body of empirical studies in contigency theory has been conducted evaluating the effect of organizational size on various aspects of the organization structure (see, for example, [2, 7, 10, 12, 17, 23]). Often size has been included as "something that should be controlled for - albeit for reasons of intuition and past precedent in most cases - and big organizations are, or should be, somehow different from little ones" [23, p. 574]. An important study providing theoretical justification for inclusion of size as a contingency theory variable was conducted by Blau and Schoenherr [2]. The most prominent influence of size existed in the differentation of the structure in terms of number of job titles, number of hierarchical levels, number of major divisions, and number of sections per division. Furthermore, greater organizational size created more automation, increasingly formalized procedures and regulations, and greater decentralization of responsibilities. Blau and Schoenherr concluded "that size is the most important condition affecting the structure of organizations . . ." [2, p. 57]. Blau and Schoenherr also suggested that a possible linkage between size and internal accounting systems was established through the increased problems of coordination and communication created as the size of the organization increases, resulting in more formalization and standardization. This formalization and standardization should be reflected in the budgeting and planning process and the reports and procedures used in the accounting system.

Studies by Caplow [5] and Weick [35] found linkages between organizational size and communications. Child [7] and Meyer [27] found significant relationships between organizational size and the organizational structure. Child concluded that the additional organizational complexity created by increased sized required increased formalization, more procedures and documentation, and a greater level of decentralization. …