The Contingency Theory of Managerial Accounting

Author(s): David C. Hayes

Source: The Accounting Review, Vol. 52, No. 1 (Jan., 1977), pp. 22-39
Published by: American Accounting Association
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THE ACCOUNTING REVIEW
Vol. LII, No. I
January 1977

The Contingency Theory of

Managerial Accounting

David C. Hayes

ABSTRACT: Working mainly from the literature of modern organization theory, it was
possible to develop a model of organizational performance for internal subunits. The model
hypothesizes three major contingencies which affect subunit performance: (1 ) factors
internal to the subunit (internal factors); (2) interrelationships with other subunits (inter-
dependency factors); and (3) interactions external to the firm (environmental factors).
The contingencies operate differentially across organizational subunits. Three propositions
derived from the model were examined empirically in a field study of large manufacturing
organizations. Strong support for two of the propositions was found, along with indica-
tions of support for the third, by using the analytical methodology of path analysis. The
final section of the paper explores the implications of the study approach and results for
managerial accounting theory and practice.

T HE role of managerial accounting in not provide a sufficiently rich description

business organizations generally is
perceived to be the provision of in-
formation for decision making by various
elements of the organization's hierarchy.
The use of such information in the evalu-
ation of performance is a critical aspect of
the decision-making function. Despite
the Demski paper [1972], the impact of
analytical research in information eco-
nomics has tended to divert attention
from performance assessment,1 one of
the three managerial accounting func-
tions discussed by Simon, et al. [1954] in
their landmark study.
The managerial accounting tools of
performance evaluation are restricted
largely to financially quantifiable data.
Although in textbook discussions such
data are intended to serve a signal gener-
ating function, implicit within its use is
the assumption that performance can be
summarized and captured by a dollar
number. The rationale for the research
reported here is that this approach does
22
of performance. On the other hand, or-
ganization theory provides a far more
complete approach to organizational
assessment, in general, and subunit evalu-
ation, in particular.
The structure of the paper is as follows.
Contingency theory research on assess-
ment and a model derived from the liter-
ature are outlined. Three propositions
implied by the model are suggested, fol-
lowed by a description of the empirical
research undertaken to test the model.
1 See, e.g., Feltham [1972], Horngren [1972] and
Demski and Feltham [1976].
Many helpful comments on an earlier draft of this
paper were made by Philip Brown, Gerry Feltham and
members of the UBC Accounting Workshop. Tom Burns
and Jack Baumler provided a great deal of advice and
assistance during the performance of the research.
This paper was a 1976 manuscript con-
test winner. David C. Hayes is Assistant
Professor at the University of British
Columbia.

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Hayes
The two dimensions concern the rela-
tive stability and homogeneity of the
environment faced by subunits. It is sug-
gested that the uncertainty associated
with dealing with elements of the environ-
ment is lowest in Cell I and greatest in
Cell IV but that no ordering can be placed
on the relationships of the other situa-
tions in such a typology.
The nature of the environment faced
by a subunit will determine the relative
difficulty such a unit will encounter in
dealing with environmental elements. It
would appear a priori that the more un-
certain the environment, the more diffi-
cult will be the tasks of the subunit and
the greater the extent of environmental
influence on their functions. Thus, type
of environment is another contingent
aspect of performance, leading to con-
tingent methods of assessment.
The other major contingency aspects of
performance evaluation concern the in-
ternal structure and functions of a sub-
unit. The nature of the tasks performed,
types of people, interpersonal relation-
ships and the ability to measure and
quantify functions are all likely to vary
with subunit type.
A three-dimensional model of the as-
sessment function can be constructed on
the basis of the three major contingencies
FIGURE 1
THE ASSESSMENT MODEL
Internal
Departmental
Effectiveness Interdependency
Environmental
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23
associated with performance. This model
is presented in Figure 1.
The model is not intended to suggest
that all aspects of each dimension are
appropriate for the evaluation of all sub-
units. Rather, only some aspects of each
dimension would seem applicable for dif-
ferent types of subunits. Some of these
are outlined in the propositions pre-
sented.
THE ASSESSMENT MODEL
Two major contributions to a con-
tingency theory of organizations are pro-
vided by Thompson [ 1967] and Lawrence
and Lorsch [1969]. Although conceptu-
ally abstract, Thompson deals more com-
pletely with the contingent aspects of
performance than Lawrence and Lorsch;
thus, the Thompson study serves as the
basis for much of the proposed model
development.
The essence of any evaluation task can
be captured by two dimensions per-
formance criteria and the ability to dis-
cern cause-effect relationships. Thomp-
son diagrams these via a 2 x 2 matrix as
presented in figure 2.
Situations posited by Cells I and II
theoretically provide little challenge to
the development of assessment devices
and, consequently, encompass most of
Productivity
______________________ Cost behavior
Supportive relations
Manpower utilization
Work group cohesion
_ Reliability
< Cooperation
Flexibility
Planning ability
<_ Share of market
Dealer opinions
-\ Environmental stability
Environmental diversity
24
FIGURE 2
POTENTIAL ASSESSMENT SITUATIONS
(From Thompson [1967, p. 86])
Beliefs about Cause-Effect Relationships
Complete Incomplete
Crystallized
Standards I II
of
Desirability
Ambiguous
III
the currently employed managerial ac-
counting assessment tools. However,
Cell II does involve uncertainty, typified
by the allocation procedures employed
and proposed by accountants. Cells III
and IV of the matrix suggest difficulties
not generally addressed by managerial
accounting. If standards are ambiguous
(but not necessarily multiple and con-
flicting) the evaluation procedures em-
ployed by accountants may fail. These
cells suggest assessment methods con-
tingent on the particular situation faced
by the organizational subunit of interest;
the matrix as a whole implies combina-
tions of contingent assessment proce-
dures.
The contingency aspects explored
within this study concern subunit inter-
dependence, environmental relationships
and factors internal to the particular sub-
unit of interest.
Interdependence can be examined in
the typology suggested by Thompson
[1967, Ch. 7] following March and
Simon [1958]. The interdependent rela-
tionships and the procedures for their
coordination vary with organizational
complexity. Stable, pooled interdepen-
dence occurs in those cases where the
only connection between two subunits is
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The Accounting Review, January 1977
that they belong to the same organiza-
tion; no exchanges occur between them,
and coordination involves the establish-
ment of standardized procedures and
rules.
Sequential interdependence occurs in
cases where the outputs of one subunit are
inputs to another, and thus a serial non-
symmetrical relationship exists between
them. Careful planning of the interde-
pendence is important because one unit
cannot act prior to the actions of another.
However, some degree of flexibility and
IV buffering can be built into such an ar-
rangement so that temporary failures by
one subunit will not jeopardize substan-
tively the operations of the other.
A reciprocal interdependence occurs
in cases where there is a symmetrical flow
between two subunits; i.e., an input to
one is an output of the other. Coordina-
tion in this complex situation may occur
via a process of mutual adjustment, with
no fixed plans or rules. If a continual con-
sultative relationship occurs, the poten-
tial exists for new information and ideas
to be introduced which may change the
intended nature of the activities from
those originally specified. Thus, depend-
ing on the type of interdependency exist-
ing between any two subunits, different
methods of coordination and, conse-
quently, assessment can be proposed.
The type of environment faced by an
organization and its subunits can be
viewed similarly on several dimensions.
One typology suggested by Thompson is
presented in Figure 3.
Previous Research
Prior literature on contingent assess-
ment is limited. Most organizational
research in the area has been ad hoc in
that the intent appears to have been data
gathering and examination rather than
exploration in the context of well-struc-
tured models and hypotheses. Despite
Hayes
FIGURE 3
ENVIRONMENTAL REPRESENTATION
(From Thompson [1967, p. 72])
Stable Dynamic
H omogeneous
Heterogeneous
III IV
this approach, the results are relatively
uniform and tend to provide empirical
support for the contingent model pro-
posed previously.
The studies by Mahoney [1967], Ma-
honey and Weitzel [1969] and Mahoney
and Frost [1974] represent several dif-
ferent examinations of the same data.
Initially, the opinions of managers of
different organizational subunits were
solicited on variables a priori related to
subunit effectiveness. The same managers
also were requested to rate the overall
effectiveness of the subunits. This rating
was used as the dependent variable in the
analyses of the latter two reports. In the
first study, the variables were factor-
analyzed; the four highest loading fac-
tors were interpreted to mesh neatly into
the three dimensions of the model pro-
posed in Figure 1. Two of the factors,
planning and initiative, appear to be
related to dealing with the task en-
vironment; the others, reliability and
productivity, appear to be related to the
interdependency and internal factors,
respectively.
The second report utilized these fac-
tors in a regression analysis, and the
third classified subunits on the basis of
the dominant technology of the unit prior
to performing a path analysis. In both
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25
these reports there were indications that
assessment methods differed across sub-
units.
A study on production subunits of
varying size by Wahba and Shapiro
[1973] found results similar to the Ma-
honey studies. The three dimensions they
posit with respect to effectiveness repre-
sent an expansion of the internal and
interdependency dimensions proposed in
this study.
Other studies by Georgopoolos and
Tannenbaum [1957], Friedlander and
Pickle [1968], and Seashore and Yucht-
man [1967] highlighted major variables
in the assessment of organizational sub-
units which can be categorized easily as
corresponding to the three dimensions of
the Figure 1 model. All of these studies
were in a slightly different context than
both the others cited and the research
here.
Accounting-oriented studies on effec-
tiveness are limited to those by Kinney
[1969] and Solomons [1965]. Other ap-
proaches, such as the Hopwood [1974]
and Klammer [1973] studies, are of only
marginal relevance to this research.
Kinney examined the effect on account-
ing performance measures of factors out-
side the control of the manager being
assessed. The approach to assessment
was narrow and only analyzed surrogate
measures of management's ability to
cope with the task environment faced.
Although Solomons broadly addressed
the assessment problem, its applicability
is limited due to the primarily verbal
analysis performed.
There is a limited amount of prior re-
search in the area of concern to this
study; it is apparent that the proposed
model can satisfactorily explain such
research. The following section outlines
some propositions which may be drawn
from the model, followed by the research
design and discussion of results.
26
Propositions
Three propositions of interest can be
derived with respect to the model just
outlined.
Proposition 1. Internal variables are
the major explanators of performance for
production departments, with a lesser
contribution made by interdependency
variables.
Within production departments, it is
expected that variables classified as in-
ternal will best explain their effectiveness.
Both cause-effect relations and standards
or objectives are expected to be relatively
well-established for these departments.
Output and cost objectives of a produc-
tion subunit can be evaluated readily by
normal accounting techniques, such as
standard cost variance analysis and rate
of return. Thus, it is expected that inter-
nal variables will explain most of the
effective performance herein. However,
given the interrelationships with market-
ing, on the product output side, and
R & D, on the technological input side,
interdependency factors are expected to
have some explanatory power.
Proposition 2. Interdependency
ables are the major explanators of per-
formance for research and development
departments.
Ambiguous desirability standards in
research and development departments
suggest that the use of internal variables
in the evaluation of their effectiveness
will have limited impact in explaining
their performance. The extent to which
they achieve budgeted cost levels in a
given period gives little insight into their
outputs or its value to the other subunits
of the firm which it serves. This implies
that the nature of the interdependent
relationship it possesses with these units,
and the degree to which it fulfills the ex-
pectations of other units via the coopera-
tion achieved between them, would be
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The Accounting Review, January 1977
the major evaluation factors employed.
Proposition 3. Environmental and in-
terdependency variables provide approx-
imately equal contributions to the
explanation of the performance of
marketing departments.
A boundary-spanning unit such as
marketing deals primarily with environ-
mental constraints and contingencies
operating on the firm. Thus, the nature of
the environment faced would be of criti-
cal importance in defining the role of
such a department. The role of a market-
ing unit is perceived to be two-fold,
thus defining the important assessment
variables. On the one hand, its relation-
ships with production departments are
critical in that there is a sequential rela-
tionship between them for products; the
output of production is an input to
marketing. Evaluation of this interde-
pendence would seem relevant. On the
other hand, its interrelationship with the
environment to which it transfers this
product represents its primary task for
the firm. Thus, another element in the
overall marketing assessment is expected
to be the evaluation of this relationship.
vari-
RESEARCH DESIGN AND METHODOLOGY
Manufacturing firms in Ohio fitting
two major characteristics were chosen
for study. To overcome the problem of
comparing the responses of individuals
from very small with very large firms, an
arbitrary size limit was selected as a cut-
off rule for firm inclusion. Although dif-
ferent indicators of size can be used, such
as total assets or sales, number of em-
ployees is a common measure in the
literature.2 Firms employing more than
500 persons were selected for inclusion
in this study. The other major character-
istic of the firms chosen was that each
possessed research and development,
2 See, e.g., Pugh, et al. [1968].
Hayes 27

TABLE I
ANALYSIS OF QUESTIONNAIRE RETURNS

Production Marketing R&D

Questionnaires Departments Departmients Departments Controllers Totals

Sent 107 109 105 109 430

Returned 55 65 70 84 274
Return percentages 51.4 59.6 66.7 77.1 63.7

marketing and production departments. for questionnaire studies.

Two questionnaires sent to different
individuals in each firm were prepared.
The major questionnaire was sent to the
marketing, production and research and
development managers in each of the 109
firms which met the required characteris-
tics. Two sets of responses were solicited
from each manager; one set dealt with
their perception of internal and external
factors that influence departmental per-
formance, and the other dealt with their
perceptions of the effectiveness of inter-
dependent departments. The second
questionnaire solicited from the con-
trollers of the respective organizations a
judgment on the effectiveness of the
respective departments in the study. This
judgment, independent from all of the
departments, was used as the dependent
variable in the path analysis.
Of the 430 questionnaires sent (4 to
each of 103 firms, 3 to 6 others where
one department or another had indicated
an unwillingness to participate), an over-
all response of 274, or 63.7 percent, was
achieved.3 This overall response rate is
broken down by departmental classifica-
tion in Table 1. As the questionnaire sent
to controllers was far shorter than that
sent to the respective department man-
agers, the same time commitment for
completion was not required. Elimi-
nating the responses of controllers from
the total (274 less 84), the overall re-
sponse rate decreased to 59.2 percent
(190 replies received from 321 question-
naires sent). This still is a substantial rate
Two further comments concerning
Table 1 are necessary. First, it merely
examines the total number of returns
from each department group and does
not indicate the number of firms from
which more than one questionnaire was
returned. This information is provided
in Table 2. Second, the response rates
differ markedly among departments,
most noticeably between research and
development (66.7 percent) and produc-
tion (51.4 percent). This may be due to
greater interest in general research by
R & D managers and their greater fa-
miliarity with questionnaire surveys. The
large controller difference is probably
due to the shortness of the questionnaire
and the inherent interest in an accounting
study.
TA13LE 2
QUESTIONNAIRE RETURNS FOR 109 FIRMS IN SAMPLE
One
0o1
Complete
Set of Three Two No
Questionnaire Retulrns Returns Retulrns Retulrns
Number 24 30 29 26
The nature of the research design
necessitated returning an entire set of
questionnaires (four) from each firm so
that a complete analysis could be per-
3 Following Oppenheim [1966] as far as practicable
given the nature of the questionnaire, examination for
nonresponse bias was performed. There were no readily
apparent differences between respondents and non-
respondents within the subunit categories.

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28
formed. As Table 2 shows, of the firms
that received questionnaires, 24 (23 per-
cent) responded. Only the analyses re-
lating to the complete sets of returned
questionnaires are reported here.4
A two-stage data analysis was under-
taken on a departmental basis across
firms. The data initially was factor-
analyzed; then it was inputted to a path
analysis as described below. Factor anal-
ysis was carried out for two reasons. The
first reason was that it provided a statis-
tically objective means of variable selec-
tion for the path analysis. Given the
number of firms analyzed, it was appar-
ent that a set smaller than the total
number of variables (approximately 160)
would have to be utilized in the path
analysis. The highest loading variable on
each factor in the three separate factor
analyses was used as input to the path
analyses to avoid the factor interpretation
problem associated with using factor
scores as secondary analysis input.
Weighting and combining variables into
a renamed combination usually lead to
information loss and difficulty of under-
standing. It should be noted that the
variables selected for inclusion in the
path analyses by this approach concep-
tually represent the particular factors,
not just themselves as separate entities.
The other reason for performing the
factor analysis was that it provided a
first crude picture of the pattern of re-
sults. As can be seen from the representa-
tions of the factors in Tables 3-5, the
factors are quite 'cleai' in that high
loading variables on each factor clearly
relate to separate dimensions of the
model in Figure 1, a first satisfactory
result of the analysis.
Path analysis then was undertaken on
the variables selected by the factor analy-
sis. Stepwise regression was performed
on this set of variables and a number of
other variables e.g., the independently
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The Accounting Review, January 1977
obtained overall judgment on perfor-
mance by controllers (the dependent
variable) as well as summary overall per-
formance judgments on each department
made by the respective managers and
their interdependent peers. The latter
were added to the set of independent
variables and interpreted as reflecting all
aspects of departmental performance.
The path-analytic methodology is es-
sentially similar to multiple regression,
however, its advantages are numerous.
As discussed by Duncan [1966], the
method focuses heavily on variable inter-
pretation, and its diagrammatic ap-
proach is a valuable tool in the search
for alternative explanatory hypotheses.
However, its greatest strength lies in the
ability of the method to enable closure
to be forced on a system of interrelated
variables. This allows relative percent-
ages of explanation to be associated with
the independent variables by a partition-
ing of R , the coefficient of determina-
tion, which cannot be done with ordinary
multiple regression.
RESULTS
The model and derived propositions
refer to contingent assessment of or-
ganizational subunits. Subsequent to the
discussion of the results for each de-
partment in the study, some general
implications of the research are outlined
which examine the results as a whole.
Production Departments
The proposition on production de-
partment assessment indicated that in-
ternal variables would be the major
explanators of effectiveness, with inter-
dependency variables of secondary im-
portance. The buffering of production
departments from the environment was
expected to result in little or no explana-
4 See Hayes [1975] for more extensive data analyses
as well as for copies of the questionnaires utilized.
Hayes 29

TABLE 3
PRODUCTION DEPARTMENT FACTOR ANALYSIS: HIGHEST LOADING VARIABLES

Factor I Factor 2* Factor 3** Factor 4 Factor 5 Factor 6 Factor 7 Factor 8 Factor 9 Factor 10

Price-F Extent of Extent of Superior/ Product Importance Reliability of Budget Delivery Leadership
.75634 cooperation cooperation subordinate quality-D of budget personnel capturing of schedules-D ability
.82582 .72677 relations .86001 .88200 .81004 performance .71081 .66984
.87118 .82198

Customer Confidence Task Skill Product Performance Financial Delivery

service-D expressed cooperation utilization quality-F pressure data- schedules-F
.90141 .89126 .66858 .76202 .74707 .66846 capturing .78016
performance
.83109

Customer Task Productive Meeting of Company Capturing of

service-F cooperation conflict budget reputation-D performance
.88201 .92090 settlement .65886 .59351 .83109
.76062

Customer Productive Team

requirements-D conflict feeling
.91629 settlement .84754
.86747

Customer Team Creative

requirements-F feeling problem
.90247 .82021 solutions
.80435

Creative Information
problem exchange
solutions .84208
.93583

Information Flexibility
exchange .67791
.75786

Flexibility
.89668

* Interdependency variables; as perceived by marketing departments.

** Interdependency variables; as perceived by research and development departments.
NOTE: All variables followed by D or F represent the extent of influence of each on the performance of the department's daily or future planning
tasks, respectively.

tory power residing in the set of environ- where

mental variables.
Zi Py2i = direct effects
It is apparent from examination of
Figure 4 that this proposition is well-
supported by the analysis. Although each and
of the three performance dimensions are Z Py.iPy.jrij = indirect effects.5
present in this analysis, the relative sizes i~j
of the path and determination coeffi- In this case, suppressing the residual
cients associated with the internal vari- value,
ables indicate their explanatory impact.
The computation of the determination
5 The P,.i's refer to the individual path coefficients,
coefficients presented in the table ac- which can be shown to be equivalent to standardized
companying the figure is straightforward. regression beta weights. For an extensive discussion of
Complete determination is given by the merits of the analysis and its utility, see Land [1969].
Further discussion of the methodology as utilized in the
social sciences can be found in Aldrich [1972] and
ZPp2i + E p jPy.jrij 1 (1) Boudon [1968] and in its original application in genetics
i i~j in Wright [1921, 1934].

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30 The Accounting Review, January 1977

TABLE 4
RESEARCH AND DEVELOPMENT DEPARTMENT FACTOR ANALYSIS: HIGHEST LOADING VARIABLES

Factor J* Factor 2** Factor 3 Factor 4 Factor 5 Factor 6 Factor 7 Factor 8 Factor 9 Factor 10

Extent of Extent of Innovation-D Reliability Skill Budget- Product Superior/ Leadership Delivery
cooperation cooperation -.58619 of personnel utilization capturing quality-D subordinate ability schedules-D
-.80188 .68762 .70805 -.82457 performance .75514 relations -.74834 .71828
.75287 .89703

Confidence Confidence Customer Price-F Financial Product Delivery

expressed expressed service-D .83197 data- quality-F schedules-F
-.88417 .57247 -.93558 capturing .84283 .63185
performance
.85949

Performance Performance Customer Company

pressure pressure service-F reputation-D
-.64060 .64712 -.78077 .81213

Task Task Customer Company

cooperation cooperation requirements-D reputation-F
-.95992 .93685 -.74815 .82944

Productive Productive Customer

conflict conflict requirements-F
settlement settlement -.74768
-.81206 .83407

Team feeling Team feeling

- .83261 .85014

Creative Creative
problem problem
solutions solutions
-.91046 .83295

Information Information
exchange exchange
- .88354 .91635

Flexibility Flexibility
-.89618 .81403

* Interdependency variables as perceived by marketing departments.

** Interdependency variables as perceived by production departments.
NOTE: All variables followed by D or F represent the extent of influence of each on the performance of the department's daily or future planning.

(.5471)2 + (.2415)2 + (.3039)2 + (- .2385)2 partmental performance, has both the

P2 p22 p2 p2 largest path coefficient and provides the
Y1 ly.2 y.3 y.4

? [(.5471)(.2415)(.2726) greatest explanation of variation in de-

Py 1 Py.2 rl2 partmental effectiveness. As indicated
? (.5471)(.3039)(- .2795) + earlier, this variable was interpreted as a
summary combination of all elements
Py.1 Pyp3 rl3
relating to performance in the internal
(- .2385)(.3039)(- .3135)] dimension of the model.
Py.4 Py 3 143 It is noteworthy that interdependence
=.2993 + .0583 + .0923 + .0569 with marketing as summarized by the
marketing manager judgment variable
+ [(- .0427) + (.0050) - (.0392)
provides the second largest direct ex-
-(.0251)] =.4048 = R2 planation after the internal variables, as
(with rounding errors). (2) hypothesized by the proposition. Al-
though there is a positive association with
The overall summary variable, pro- effective performance (Py-= .3039),
duction manager's own judgment on de- correlation with production manager

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Hayes 31

TABLE5
MARKETING DEPARTMENT FACTOR ANALYSIS: HIGHEST LOADING VARIABLES

Factor I* Factor 2** Factor 3 Factor 4 Factor 5 Factor 6 Factor 7 Factor 8 Factor 9 Factor 10 Factor 11

Extent of Confidence Within- Customer Innovation-D Budget- Product Product Price-D Extent of Performance
cooperation expressed group work service-D .72776 capturing price-F quality-D - .83286 cooperation pressure
.62786 .90771 relations .62682 perfor- -.94706 .66290 .74215 .82156
.85158 mance
-.74570

Confidence Task Superior, Customer Company Financial Delivery

expressed Coopera- subordinate service-F reputation-D data- schedules-D
.84995 tion relation- .84035 .83393 capturing .64272
.83195 ships perfor-
.86727 mance
- .79265

Performance Productive Leadership Customer Company

pressure conflict .83871 require- reputation-F
.74266 settlement ments-F .71002
.95920 .89487

Task Team
cooperation feeling
.91442 .89592

Productive Creative
conflict problem
settlement solutions
.88451 .86215

T:am feeling Information

.88160 exchange
.88373

Creative Flexibility
problem .80287
solutions
.88118

Information
exchange
.93492

Flexibility
.90476

* Interdependency variables, as perceived by research and development departments.

** Interdependency variables, as perceived by production departments.
NOTE: All variables followed by D or F represent the extent of influence of each on the performance of the departments daily or future planning.

judgment is negative (r13=
joint interpretation of this result suggests
that while interdependence is an impor-
tant element in explaining production
department effectiveness
terdependence and internal factors may
be working against each other (r13<0).
This highlights potential conflict and
indicates the continual difficulty of suc-
cessful differentiation and integration
[Lawrence and Lorsch, 1969].
Limited association with effective per-
formance was expected from variables
on the environmental dimension. Both
- .2795). A the direct (.0569) and net effects (.0318)
computed for the coefficient of determi-
nation support this proposition. Further,
assuming some consonance between fu-
(P. 3 > 0), in- ture production and delivery schedules,
the negative path coefficient (PY 4=
-.2385) suggests an inverse relationship
with effectiveness. This implies that pro-
duction departments are being buffered
successfully from environmental influ-
ence by sufficient order lead times. Thus,
the proposition concerning production
department effectiveness is supported
strongly by the analysis.

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32 The Accounting Review, January 1977

FIGURE 4
PRODUCTION DEPARTMENTS*

/ 1. Own judgment on
/ performance
/ ~~~(internal)
Residual .5471
1 I / ~~~~ ~ ~ ~
~~~~~~~~.2726\\ ~

.7716 2. Leadership ability of

/ , ~~~~supervisors -.2795 \
/ .2415 / (internal) \/ (r, 3)

Y. Effectiveness 2(r23) (r474)

\ ~~~~~3.
Marketing managers' /.2698 /
\ on performance
~~~~~judgment /
\ ~~~(interdependence)/
(r34)~ ~ ~ ~(r24)~~~~~(r4

\- 2385 , /
\ ~~~4.
Importance of meeting /
future delivery
schedules
(environmental)

Coefficients of Determination

1 2 3 4

Direct effect: p2 .2993 .0583 .0923 .0569

Indirect effect: p).ipY.jrij -.0427 .0050 -.0392 -.0251

Net effect: .2565 .0633 .0531 .0318

* Straight lines refer to paths of influence, in direction of arrow; respective path coefficients are indicated on each.
Curved lines and associated numbers referto correlations between variables. Size of respective coefficients of determina-
tion included in accompanying table.

would lead to as ready a rejection of the

Research and Development Departments
proposition as acceptance in the case
The proposition advanced concerning of production departments. The size
research and development (R&D) de- of the path and determination coeffi-
partments stated that interdependency cients associated with the first variable,
variables would be the main explanators financial data, requires some explanation
of effectiveness. Internal and environ- prior to hasty rejection of the propo-
mental variables were expected to have sition.
little or no influence. A t-test comparison of answers to
Cursory examination of Figure 5 selected questions was performed on the

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Hayes 33

FIGURE 5
RESEARCH AND DEVELOPMENT DEPARTMENTS*

1. Ability of financial data

to measure performance
p q t
((internal)m
.6021/ \

.7106 /-.106 \

YCEffectiveness e 2. tasos 3m on joint

Cooperation
l m ~~~~~~~~~with
marketing .18
\ ~~~(interdependence) (,3

\ \ ~~~~~~~~-
.351 9 /
\-.2217 l32 3 \

\ 3. Importance of improving /
product quality
(environmental)

Coefficients of Determination

1 2 3

Direct effect: py. 1 .3625 .0910 .0492

Indirect effect: py ipjrij .0197 .0147 -.0421

Net effect: .3823 .1052 .0071

* Straight lines refer to paths of influence, in direction of arrow; respective path coefficients are indicated on each.
Curved lines and associated numbers referto correlations between variables. Size of respective coefficients of determina-
tion included in accompanying table.

respective responses of all departmental their departments. It is suggested that

managers. (See Table 1 for the numbers
in each group.) On the question of how
well they perceived financial data to
measure their department's performance,
the mean response of R&D managers
was 2.62 on a scale of from 1-5. The
R&D mean response was significantly
lower (P<.001) in both instances than
those of marketing managers (mean=
3.24) and production managers (mean=
3.64) to the same question. Clearly, R&D
managers perceive financial measures of
performance to be inappropriate for
other judges of performance, having
little or no experience with nonfinancial
measures and experiencing difficulty in
evaluating the tasks performed by R&D
departments, resort to financial data as
the means of evaluation. Note that the
independent judges of performance in
this study were controllers.6
6
Controllers were selected for pragmatic reasons. It
was necessary to obtain responses from independent
judges with positions high enough in the organizational
hierarchy that they would have sufficient knowledge of
the departments involved in the study. As different

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34
To avoid forcing their responses in
particular directions, the controllers in
the study were not questioned about the
bases upon which they made their evalu-
ations. The explanation advanced is thus
essentially an hypothesis generated from
further examination of the data. It
should be noted that its tenor is not such
as to deny that financial information on
R&D departments is important; such
information may serve as a useful signal-
generating device for managers. The
hypothesis is an empirical question
worthy of investigation, for empirical
support would aid in the search for alter-
native assessment methods.
Both the interdependence and environ-
mental dimensions were represented in
the analysis of R&D performance. The
negative path coefficient (Py 2 =-.3017)
on cooperation with marketing suggests
an inverse relationship with effective-
ness, implying some difficulty in co-
operative activities. Perhaps differences
in perceptions as to the urgency of par-
ticular tasks, which lead to fruitless
meetings, may explain this result. Law-
rence and Lorsch [1969] found a number
of differences in the personalities of
marketing and R&D personnel, among
which was a difference in time horizons.
Implicit in the development of the
proposition on R&D departments was
the assumption that innovative pressures
from the environment would be chan-
neled via marketing departments. The
environmental variable present concerns
innovation; to some extent it can be inter-
preted as relating to interdependence.
Indications of the importance of the
interdependence dimension of the model
in assessing R&D effectiveness are pro-
vided by the results. The primary con-
clusion, however, must be that further
exploration is required on the proposi-
tion advanced. Given the hypothetical
explanation of the financial data variable,
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The Accounting Review, January 1977
it is suggested that refutation is not
warranted at this stage.
Marketing Departments
Approximately equal contributions to
the explanation of marketing department
effectiveness were expected from inter-
dependency and environmental variables.
Limited explanation was expected from
internal variables.
Examination of the coefficients of de-
termination of the respective variables
(Figure 6) shows that environmental
variables had by far the greatest impact.
The sum of net effects of the two en-
vironmental variables (4 and 5) is ap-
proximately 35 percent; the direct effects
are even greater. The interdependent
relationship with production is evidenced
by the inclusion of variables 2 and 3, the
summary judgment and pressure vari-
ables. However, the values of the path
and determination coefficients are quite
low. The total direct effect of the two
variables is less than 9 percent, lower than
that of the summary internal variable
(.094). It would appear that interde-
pendence is less important than pro-
posed. However, the major environ-
mental variable, concern with product
quality, has some implications for the
production/marketing relationship. Its
relative size and impact in explaining
variation in effectiveness implies that
marketing personnel may be able to
exercise some control over product qual-
ity by the provision of feedback from the
environment. The correlations (r24=
-.2843) with the summary judgment
variable and the felt pressure variable
(r34=.2655) suggest this interpretation.
titles usually accompany similar executive levels in dif-
ferent firms, it appeared that only controllers and presi-
dents could be reached in each firm to assure some con-
sistency across judges. It was felt that there would be a
greater chance of obtaining responses from controllers,
so they were utilized.
Hayes 35

FIGURE 6
MARKETING DEPARTMENTS*

.. a Own judgment on
performance \
/ (internal)\ \

Y/ Efeu 2. Production managers'judgment

/ ~~~~on performance
Residual 5 ( r(interdependence)dpnec
}
/ ~~~~~~~.2432\/\
.7148 / /(r2 3) \ .1079 \ .0824
/ /' \ v
r3)
(r, 4)
~~~~~~~~~~~~~~~~(,
1,f teltpressure to perform
odu3. p e (
.1l(660 highly on joint taskse/nt
Y. Effectiveness -Cwith productionof Dtr
.5977 (interdepeence) (r)

\ \ ~~-.2655>\ ~
'~~~~~

Direct effect:.0407current product quality .

Ind\rec efet:.01 -047 -.(environmental) 2
\2245a
Net effect: .54 0360235 .280.665 .1885
1
\ ~~~~~(r4 5) (r3 52l

S g n fo s no5. \ Importance. of meeting d o

3.66e
\ future product require- / (1- id

ments of customers z
(environmental)

Coefficients of Determination

tion icddnao2 3 4 5

Direct effect: py2 i 0940 .0582 .0275 .3573 .0504

Indirect effect: py. py.jrij .0214 -.0547 -.0041 -.0733 .0122

Net effect: .11l54 .0036 .0235 .2840 .0626

*Straight lines refer to paths of influence, in direction of arrow; respective path coefficients are idctdon each.
Curved lines and associated numbers refer to correlations between variables. Size of respective coefficients of determina-
tion included in accompanying table.

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36
The absolute values of the correlation
r45 (- .1565) and r14 (.0824) are sub-
stantially less than those with the inter-
dependency variables, indicating that it
has a relatively closer relationship to the
interdependency variables than the
others.
Another important relationship to note
is that between the internal summary
variable (1) and concern with customers'
future requirements (5); r15=.3622. One
aspect of this association is the depart-
mental ability to perform its boundary-
spanning role between the firm and the
environment. It suggests that internal
task-performance is associated with satis-
fying environmental requirements. As
such, it provides supportive argument
for the proposition and its rationale as
outlined in an earlier section of the paper.
Examination of the variables and
their interrelationships indicates substan-
tive support for the proposition ad-
vanced concerning marketing depart-
ment effectiveness. However, environ-
mental variables may contribute more to
the explanation than interdependencies.
Further refinement and empirical work
are required to clarify the various inter-
relationships.
Evaluating the results for all three de-
partments suggests strong support for the
propositions on production and market-
ing departments, and indications of such
support for research and development
departments.
IMPLICATIONS
The research results reported here
indicate that the traditional managerial
accounting tools were relatively poor
explanators of effectiveness. The follow-
ing exploration of some implications of
this finding is performed within the
constraints on generalizability imposed
by the obvious limitations of the study.
One of the problem areas of managerial
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The Accounting Review, January 1977
accounting is that of budgeting and its
behavioral ramifications. The standard
research approach has been the explora-
tion of factors such as the extent of par-
ticipation in budget setting and the per-
formance effects of tight and loose
standards. The emphasis of this study
has been on more fundamental issues,
and these other aspects were intention-
ally excluded. What have been explored
are the perceptions of managers with
respect to the accuracy and importance
of budgets and other financial data
utilized in performance evaluation. The
results indicate a general dissatisfaction
with such measures, tending to reinforce
the arguments from previous work that
they are unsatisfactory assessment tools
[Argyris, 1953, Lowe and Shaw, 1968].
In fact in most instances, environmental
and interdependency factors were gen-
erally more important than financial
data. The implication is that budgets,
which are essentially surrogates for the
entire set of factors which influence per-
formance, do not perform the surroga-
tion function well. By explicitly recog-
nizing controllable and uncontrollable
influences [Horngren, 1972, pp. 162-163]
the link is formed to the concept of
responsibility accounting.
Responsibility, Accounting
The basic tenet of responsibility ac-
counting is that subunit managers should
only be held accountable for aspects of
subunit performance over which they
have control. As Caplan [1971, p. 19]
argued, accountants usually mean by
this responsibility for costs. However,
the notion really is broader than costs
for the extent of controllability of the
factors cause certain costs to occur,
and that really delimits the extent of re-
sponsibility. From the theoretical de-
velopment and empirical results reported
here, it is argued that these factors fall
Hayes
into three classes. Controllability and
responsibility are differentials across the
classes.
The personnel variables included in
the internal dimension are of intuitive
importance in determining the actual
costs that a subunit will incur. Managers
regard the variables in this manner, as
demonstrated by their uniformly high
responses to questions concerning the
importance of each variable to the
effective functioning of the subunit
[Hayes, 1975]. Cost data are not good
surrogates, especially in marketing and
R&D departments. The path analyses
showed that environmental influences
had a substantial impact on the per-
formance of departmental tasks. In many
instances, the inferred ability of the de-
partment to deal with these influences
was of primary importance in the expla-
nation of the results. Another aspect of
causation behind actual cost figures is the
interdependent relationship among sub-
units. To the extent that this relationship
is more complex, the influence on the
performance of a particular subunit and
the costs incurred therein, too, would be
greater. With each class of items which
influence and lay behind the cost data,
the question to be addressed (as far as re-
sponsibility accounting and budgeting
are concerned) is the extent of controlla-
bility.
Personnel factors are controllable to
a large degree by various levels of the
management hierarchy. The abilities or
skills of the workforce may not be con-
trollable by immediate supervisors, but
they are controllable by those performing
the personnel function in the firm. The
way in which such skills are utilized,
inter- and intra-group relationships, and
other aspects are under the influence of
subunit management.'
With respect to control over the en-
vironment, Thompson [1967, pp. 20-22]
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37
outlined a number of strategies an organi-
zation may employ. For example, or-
ganizations attempt to protect their
technical cores by buffering them from
environmental fluctuations. In cases
where this is not completely possible,
they either will try to smooth input and
output transactions or try to anticipate
and adapt to environmental fluctuations.
Depending on the strategy employed, the
ability of units that are interdependent
with production to decrease the influ-
ence of the environment on the produc-
tion department could be evaluated
readily. The number of short lead-time
orders or unplanned product specifica-
tion changes requested are examples of
such measures. The path analysis of
production departments indicated that
the protection offered them from en-
vironmental influence was not optimal
in that some environmental effects on
performance were disclosed. As such
factors behind cost figures are control-
lable to some extent, they could be
assessed in overall subunit evaluation.
A number of environmental control
strategies can be employed by the or-
ganization as a whole [Thompson, 1967,
pp. 35-36]. Contracting entails obtain-
ing agreement on the undertaking of
future activities with task environment
elements. A more restrictive means of
attempting to gain some environmental
control is cooptation, whereby elements
of the task environment are absorbed into
the leadership of the organization; e.g.,
the inclusion of external directors on the
board. Finally, joint ventures may be
undertaken with other organizations; this
is referred to as a coalescing strategy.
'This provides a slightly different rationale for
"human asset accounting" than that generally advoacted
[Flamholtz, 1972]; i.e., accountants should measure
personnel factors (not in financial terms) because the
current cost data obtained are poor surrogates for this
causal influence behind costs.
38 The Accounting Review, January 1977

Although such strategies refer to a charged with performing the integration,

broader spectrum than that addressed in
this study, the extent to which an organi-
zation undertakes them will directly in-
fluence departmental functioning. Re-
sponsibility for adoption of some of
these strategies may rest with marketing
departments and could provide an as-
sessment alternative to simply costs,
both for marketing and production sub-
units.
Direct evaluation of interdependence
is an explicit part of such environmental
impact measures. However, there are
other controllable aspects of interde-
pendence, such as the performance of the
integrating function as explored by Law-
rence and Lorsch [1969], which imply
further evaluation approaches. Depend-
ing on the hierarchical level of those
responsibility could be assessed directly.
The overall implications of the study
for managerial accounting are severe,
for they suggest a major reorientation
from the narrow examination of sur-
rogates to the evaluation of the underly-
ing causal variables. This implies not
only employing methods and techniques
which are not necessarily universally
applicable but also having a major re-
orientation in the approach to assess-
ment. Indeed, the primary implication is
that a contingency approach be taken to
managerial accounting, the relevant as-
sessment methods being determined by
subunit type, subunit interrelationships
and the extent of environmental influ-
ence on subunit functioning.

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