The impact of firm characteristics on management accounting practices: A UK-based empirical analysis

Abstract

There has been sustained interest in explaining why firms adopt different management accounting practices. This paper applies contingency theory to respond empirically to calls by Gerdin (2005), Tillema (2005) and Chenhall (2007) to increase understanding of factors that explain management accounting sophistication.

We examine the impact of a range of potentially contingent variables on a broad set of management accounting practices in a sample of companies selected from the UK’s largest industry sector. The variables relate to external characteristics, organisational characteristics, and manufacturing or processing characteristics. The method differs from prior studies in not testing association between contingency factors and a single, or a limited number of, accounting practice(s) but in looking for relationships with aggregate levels of based on the emphasis that respondents place on 38 practices and techniques. Furthermore, the 10 contingency factors considered in this study include two constructs (product perishabilityand customer power) not previously explored.

The results, derived from a large scale questionnaire survey, indicate that differences in management accounting sophistication are significantly explained by environmental uncertainty, customer power, decentralisation, size, AMT, TQM and JIT. The data confirms that customer power should be considered as an added external variable in the contingency theory paradigm. Expectations of relationships between competitive strategy, processing system complexity and product perishability, and management accounting sophistication were not, however, supported by the data.

The improved understanding of the relationships between 10 contingency factors and management accounting techniques employed contributes to the further development of an integrated contingency framework explaining variations in the investment in management accounting.