University of Tartu

Faculty of Economics and Business

Administration

INFLUENCING
CONTINGENCIES ON
MANAGEMENT ACCOUNTING
PRACTICES IN ESTONIAN
MANUFACTURING
COMPANIES
Toomas Haldma
Kertu Lts

Tartu 2002

INFLUENCING CONTINGENCIES ON
MANAGEMENT ACCOUNTING PRACTICES IN
ESTONIAN MANUFACTURING COMPANIES
Toomas Haldma 1, Kertu Lts2
Abstract
Current paper examines the management accounting practices of
Estonian manufacturing companies, exploring the main impacts on
them within a contingency theory framework. The methodology
comprises an analysis of 62 responses to a postal questionnaire
survey carried out among the largest Estonian manufacturing companies. On the one hand, the present research aims to confirm earlier findings related to the contingent factors that influence management accounting, on the other, to identify possible new factors,
such as, the legal accounting environment and shortage of properly
qualified accountants.

University of Tartu, Faculty of Economics and Business Administration,

Ass. Prof. of Accounting Department, PhD, E-mail: [email protected]
2
University of Tartu, Faculty of Economics and Business Administration,
Lecturer of Accounting Department, PhD student, E-mail:
[email protected]
Acknowledgements: The authors are grateful to prof. Robert Chenhall
from Monash University for his assistance and to visiting prof. Gary
Cunningham from Stuttgart University of Technology for his constructive
comments. The financial support from the Estonian Science Foundation is
herein acknowledged with gratitude.

TABLE OF CONTENTS
Introduction .........................................................................7
1. Previous research in management accounting in
the transition countries ......................................................9
2. The contingency approach framework ..............................11
3. Research method .............................................................14
4. Analysis of the contingencies influencing the
development of management accounting systems .............15
4.1. Conceptual changes in the Estonian companies
management and cost accounting patterns
during the period of transition. ................................. 15
4.2. Impact of environmental aspects ...............................20
4.3. Development of cost and management
accounting practices ................................................ 23
4.4. Impact of technological aspects ................................ 28
4.5. Impact of organisational aspects ............................... 29
4.6. Need for further improvements ................................. 33
Conclusion .........................................................................33
References .........................................................................35
KOKKUVTE...................................................................39

Appendix 1. Net sales of the surveyed companies...........41

Introduction
In the conditions of market economy and intensified competition,
the management of a company, in order to be consciously competitive on the market needs to have objective information about
the formation and shape of the companys performance, which are
documented in mandatory financial statements. Therefore, the need
for developing such cost and management accounting systems,
which could provide adequate information about main impacts on
cost characteristics and companies performance, has grown rapidly in Estonia and all the other former socialist countries.
On the one hand, the habitual cost and management accounting
practices of Estonian companies, can be described by the traditions
and knowledge that have origins in their centrally planned economic background, and on the other, by the necessity to solve urgent problems of everyday management. Hence the management
accounting systems (MAS) of the companies operating in the conditions of transition should provide adequate information, which
would help managers take decisions at different management levels. To be able to make generalisations about the directions of development of MAS, both researchers and practitioners need more
systematic information about the currently operating cost accounting and management accounting systems and the factors influencing them. Therefore, the present study is focused on the contingencies that influence companies management accounting systems,
with a particular emphasis on those operating in the transition
economies. The paper aims to describe the stages and tendencies in
the development of the management accounting issues in Estonian
companies, analysing the impacts on MAS by means of the contingency approach. Considering the enormous changes that have
taken place in the social and economic environments, it will be reasonable to expect significant changes to have occurred also in the
management accounting systems. Thus, besides the description of
the situation, the present study will examine the factors influencing
the management accounting systems applied by Estonian manufacturing companies.

Influencing contingencies on management

The paper makes two main contributions to the existing management accounting literature. Firstly, it has to be admitted that the
number of studies focusing on developments in management accounting in the transition countries is limited, especially such
studies that apply the contingency approach. Thus, at a more general level, our findings may shed light on the development of management accounting in other developing societies presently undergoing rapid changes. Secondly, we argue that the environmental
aspect affecting the company management accounting system in
the initial period of transition is distinguishable at two levels: the
general business (external) environment level and the legal accounting environment level. Conceptual changes in the legal (financial) accounting level of a company would therefore serve as a
precondition for the design and introduction of its management accounting area, and consequently the development of its management accounting system.
Although we will examine the management accounting position in
Estonian companies, there are many features of contingencies that
have influenced companies in other transition economies in a
similar way. At the same time, our study involves uniquely Estonian features that set the accounting issues of the manufacturing
companies we studied apart from those of the other transition
countries. The differences result mainly from the different developmental levels of financial accounting and auditing regulations as
a precondition for the design and introduction of the management
accounting area and companies MAS.
The paper is organised as follows. The next section is a brief overview of the previous investigations in the field of management accounting in the transition countries. The third section outlines the
elements of the contingency theory of management accounting,
subsequently discussing a research sample. The fifth section presents our findings on driving forces of the management accounting
practices of Estonian manufacturing companies including catalysts
for the design and formation of MAS, analysis of the role of environmental contingencies and development of management accounting practices, analysis of the role of technological and organisational contingencies in management accounting practices. Fi-

Toomas Haldma, Kertu Lts

nally, section 6 presents some concluding remarks on the evolution

of management accounting systems in Estonian companies.

1. Previous research in management

accounting in the transition countries
Over the last decades, management accounting has emerged as a
comparatively popular research topic in market economy countries.
Different surveys on management accountin g have been carried out
in several European countries and their results have been reported
in various publications (Bhimani, 1996; Drury et al., 1993; Lukka,
Granlund, 1996; Amat et al., 1994).
Analysing management accounting research done in the Eastern
and Central European transition countries on the basis of the publications in Management Accounting Research and The European
Accounting Review, and presentations at the Annual Congresses of
the European Accounting Association, we discovered that in these
countries management accounting is still in its initial stages of development and in the process of developing into a research area in
its own right.
During the last eight years (19942001) only a small number of
papers dedicated to the practice and development of management
accounting in the Eastern European countries have appeared in
Management Accounting Research. Proceeding from the information at the authors disposal, there were only two of them: in 1994
a paper about accounting in an east-west joint venture (Southworth,
1994) and in 2000 a paper about management accounting practices
in a Hungarian chemical company (Vamosi, 2000). The latter discusses institutionalisation aspects of management accounting.
The European Accounting Review has published various papers
about accounting and related areas in the Eastern European countries during the last nine years (1993 2001). Several publications
address the subject of financial accounting and auditing in Poland,
Czech Republic, Romania, etc. In 1995 The European Accounting
Review dedicated a special edition to accounting in Central and
Eastern Europe, which comprised an introductory article followed
by a number of papers analysing the characteristic features of de-

10

Influencing contingencies on management

velopment of accounting in Poland, the Czech Republic, the Baltic

States, Hungary, Romania, Slovenia, Yugoslavia, and Russia. All
the papers in this edition concentrated on financial accounting,
whereas no aspects of development or practice of cost accounting
and management accounting were even mentioned in the introductory paper (Bailey, 1995). This does not mean that cost accounting and management accounting did not exist at that time or
was not considered to be a research topic at all. The above-mentioned fact merely confirms that the transition countries prioritised
the development of financial accounting, while management accounting was only in its initial stages of development. The main
reasons for that will be analysed later on.
In several European countries different surveys on management
accounting have been carried out. In the Eastern and Central European countries, proceeding from the information at the authors
disposal, initial surveys of the design of companies cost and management accounting systems have been carried out in Poland (Sobanska, Wnuk, 1999; Szychta, 2001 etc.) and in Estonia (Haldma,
1997). A comprehensive overview of the research projects and
publications addressing the state of cost accounting and management accounting in Poland in 19932000 was given by Szychta
(Szychta, 2001).
To sum up, mainly the investigations on management accounting
in the Eastern and Central European countries indicate state-of-theart-type studies (except Varmosi, 2000). One of the characteristics
of these studies is the fact, that the findings are reported without
using any theoretical framework. In the transition economies, research projects on management accounting practices using the
contingency approach were conducted by Anderson and Lanen
(1999, India), and Luther and Longden (2001, South Africa). Consequently, the development of the management accounting practices in the Eastern and Central European countries has not yet
been studied in detail.

Toomas Haldma, Kertu Lts

11

2. The contingency approach framework

The contingency approach to management accounting is based on
the premise that there is no universally appropriate accounting
system applying equally to all organisations in all circumstances
(Emmanuel et al., 1990). Rather it is suggested that the particular
features of an appropriate accounting system will depend upon the
specific circumstances in which an organisation finds itself. How
effective the design of an accounting system is depends on its ability to adapt to changes in external circumstances and internal factors.
We presume that organisations operate as open systems, being
concerned about their goals and responding to external and internal
pressures. The contingency-based approach assumes that management accounting systems are adopted in order to assist managers in
achieving some desired company outcomes or goals. If a management accounting system is found to be appropriate, then it is likely
to provide enhanced information to the individuals who then can
take improved decisions and thus achieve the organisational goals
in a better way.
The major external factors that have been examined at the company level in management accounting and control (including cost
accounting) research are external environment (Khandwalla, 1977;
Merchant, 1990; Chapmann, 1997; Hartmann, 2000), and national
culture (Hofstede, 1984; Harrison, 1992; OConnor, 1995). The
most widely emphasised research aspects are environmental uncertainty and hostility. The hardly predictable environmental elements have their own impact on organisational structure, performance evaluation, budgeting and budgetary control, and are associated with more open and externally focused financial accounting
systems. Environmental hostility from intensive competition
stresses the importance of formal control and sophisticated accounting (Khandwalla, 1972; Otley, 1978).
The most common internal factors that have been examined in relation to management accounting are organisational size (Khandwalla, 1972; Bruns, Waterhouse, 1975; Merchant 1981), technology (Khandwalla, 1977; Merchant, 1984; Dunk, 1992), and com-

12

Influencing contingencies on management

panies strategies (Miles and Snow, 1978, Gupta and Govindarajan, 1984; Simons, 1987; Chenhall, Morris, 1995).
As organisations become larger, the need for managers to handle
greater quantities of information increases to a point where they
have to institute controls, such as rules, documentation, specialisation of roles and functions, extended hierarchies and greater decentralisation down to hierarchical structures (Child and Mansfield,
1972). Khandwalla (1972) found that large firms were more diversified in product lines, as well as more divisionalised, and employed mass production techniques and more sophisticated controls. According to Merchants study (1981), large companies are
more decentralised and use more sophisticated budgets in a participative way.
Technological contingency factors include the nature of the production process, its degree of routine, how well means-end relationships are understood and the amount of task variety (Emmanuel, et al., 1990). More standardised and automated process
technologies are served by more traditional formal management
control systems with highly developed process controls (Khandwalla, 1972), high budget use (Merchant, 1984) and high budgetary
controls (Dunk, 1992). Untight use of budgets is less frequently
found in the more predictable and automated process, and will be
positively related to less automated, less predictable job/batch type
technologies.
Figure 1 shows the contingency-based theoretical framework. The
described process influences the management accounting practice
and effectiveness of performance measurement and evaluation. The
contingencies are divided into two general groups: external and
internal factors. External factors indicate the features of external
environment at the level of business and accounting. Environmental factors impact both on the internal characteristics of an organisation and its management accounting practice. For example,
fierce competition influences the choice of strategy, organisational
structure and also the application of appropriate cost management
and control. Internal contingencies are determined as organisational aspects, technology and strategy. The effectiveness of performance measurement and evaluation depends on the internal

Toomas Haldma, Kertu Lts

13

factors and the management accounting practice. Additionally,

feedback from the effectiveness of performance measurement and
evaluation of the management accounting practice can be considered.

External factors
Business
environment
Accounting
environment

Internal factors
Organisational
aspects
Technology
Strategy

Management
accounting
practices
Cost management
Budgeting
Control etc.

Effectiveness of
performance
measurement and
evaluation

Figure 1. Theoretical framework of contingency approach.

Effectiveness can be defined by various measures which all have

their advantages and disadvantages. We defined effectiveness as
managers satisfaction with their performance measurement and
evaluation.
The list of contingencies and relations in our theoretical framework
cannot be considered exhaustive, since we were unable to identify
and include all factors and impacts. Contingency-based studies assume the existing link between nature and the use of the MAS and
subsequently enhanced performance. At the same time, other behavioural and organisational aspects also influence better goal
achievement (e.g. job satisfaction, working place environment,
formal and informal control, and participation in the budgeting
process). In the present paper we focus on the following major
classes of contingencies: the external environment, technology and
organisational aspects. These elements and their different impact
on companies accounting systems are further elaborated on.

14

Influencing contingencies on management

Empirical research of contingency theory in management accounting has been conducted at different levels (industry, firm, and
units of a firm), considering different contextual factors. The present study was performed and analysed at the level of a company
or major business unit.

3. Research method
Current research builds on contingency theory and exploratory statistical analysis of the factors influencing MAS in Estonian manufacturing companies. Herein we will review the principles used to
construct the data set for our work.
The empirical data were gathered by a postal survey in 181 larger
Estonian manufacturing companies. To develop an accurate mailing list, each company was telephoned and the names and addresses of business units were identified, as well as the name of the
most eligible person within each business unit to complete the survey. These were typically financial directors, chief accountants,
senior management accountants or chief executives. These steps
were considered important to increase the accuracy of the survey
responses. In Estonia the survey was pilot tested with a group of
chief accountants and financial directors to refine the design and
focus the content. The mailed survey package included an introductory letter explaining the purpose of the research, a copy of the
survey, and a pre-paid envelope for returning the survey. The
study aimed at the design of cost and management accounting systems in Estonian companies and was carried out in 1999. The
mailing resulted in 62 usable responses or a 34.3% response rate. It
seems to be acceptable, compared to other surveys carried out in
the area (Kind, 1985; Reichmann, Kleinschnittger, 1987; Drury et
al., 1993; Andersen, Rohde, 1994).
On the basis of the returned surveys a statistical analysis was carried out, using one-way analysis, two-way analysis and Fishers
Exact Test.
The responding companies in Estonia represented 15 different
branches of manufacturing, such as energy supplying, wood industry, food industry (covering dairy, meat, fish, tobacco products and

Toomas Haldma, Kertu Lts

15

drinks), chemical, metal, textile industry, etc. The predominant industries were food industry represented by 15 companies, textile
industry by 10 and wood industry by 8 companies. A smaller number of companies represented other branches of industry.
The population for the study comprised the countrys largest manufacturing companies. Therefore, the findings of this study are related to the largest manufacturing companies and should not be interpreted as relating to the general population of manufacturing
companies. In as much as size is associated with the availability of
resources to experiment with a range of management and accounting practices, it is likely that the sample included a greater proportion of companies employing advanced practices than the total
population of manufacturers. Hence, the study has its limitations if
we want to generalise the results to all manufacturing companies in
Estonia.
The categories of information that have been included into the survey cover the following aspects of MAS: background, cost measurement and appraisal in financial accounting, cost element accounting, cost centres accounting, costing methods, pricing principles, budgeting, and internal performance measurement systems.

4. Analysis of the contingencies influencing

the development of management
accounting systems
4.1. Conceptual changes in the Estonian
companies management and cost
accounting patterns during the period
of transition.
The process of development and implementation of cost accounting and management accounting systems in Estonia can be characterised by a competition between the traditional customs and
knowledge having their origins in the countrys centrally planned
economic background, on the one hand, and the need to solve urgent everyday management problems, on the other. In centrally
planned economies companies never had to face such commercial

16

Influencing contingencies on management

problems as, for instance, what products should be produced or on

which markets they should be sold to bring them into profit. Decision-making was highly centralised and accounting information
was considered significant neither in the decision-making process
nor for performance evaluation. The income statement used at that
time was based solely on the cost by nature format. As state officials fixed product prices, companies had to produce accurate information, especially about their production costs. As a consequence of the unified measures adopted by the State (based on a
unified chart of accounts applied by all Soviet companies), full
costing became compulsory for all industrial enterprises. The full
costing approach was also supported by academics. A view was
spread, according to which the product cost had to include both
manufacturing and selling costs and all the other expenses of the
company (Petrova, 1986). Enthoven has pointed out that in the
conditions of a centrally planned economy, cost and management
accounting were not treated as independent branches, but as integral parts of unitary financial accounting (Enthoven et al., 1993).
Under a centrally planned economy, Estonian companies introduced several aspects of cost accounting, but this served the objectives of financial accounting, statistics and centralised management. At that point, we fully agree with Enthoven. However, it has
to be admitted that in the highly centralised decision-making
framework, flexible rearrangements in the companies management systems of external environmental impacts were not needed.
Therefore, we argue that within the Soviet accounting framework,
management accounting existed in a very narrow sense. Hence,
during the first stage of transition, the MAS was a conceptually
new issue in the development of the companies accounting system
whose design and introduction necessitated a conceptual change in
the thinking of the companies financial personnel.
The first step towards the formation of a market economy accounting environment in Estonia was made as early as 1990 when
the Estonian Regulation on Accounting was passed. This regulation marked the first attempt made in the country to establish a legal basis for accounting requirements consistent with the internationally accepted accounting principles. As pointed out by Bailey
(Bailey et al., 1995), this event marked the beginning of the spread

Toomas Haldma, Kertu Lts

17

of disharmony in accounting on the territories comprising the

USSR. With regaining independence in 1991, the economic situation of Estonia changed dramatically. Besides other transformations, an entirely new role was attributed to accounting by the market forces. The need to create and develop conceptually different
management accounting systems was growing rapidly. Prompted
by the changing needs of companies, cost accounting started to expand, as a result of which management accounting emerged.
While in the market economy countries the fundamental nature of
management accounting systems and practices have remained the
same throughout the last decades (Drury et al., 1993), the application of accounting within the management process has changed to
some degree (Bromwich, Bhimani, 1994). At the same time, both
accounting as a whole and financial as well as management accounting in Estonia and the other transition economies underwent
evolutionary changes in the first half of the 1990s.
The next, even more substantial and complex step in the accounting reform of Estonia relates to the Estonian Accounting Law
(EAL), which came into effect in January 1995. Since its enforcement, the concepts of financial accounting that Estonian companies
are guided by have improved essentially. In accordance with the
EAL, companies can now use one of the two income statement
formats: either the cost by nature format (already introduced by
the Regulation on Accounting) or the cost by function format
(which was new to the accounting practices of Estonia). In addition to establishing the legal accounting framework, the law urged
companies to improve their cost accounting and management accounting systems.
The EAL states that the values of inventories and the cost of goods
sold should be based on manufacturing costs (Estonian Accounting
Law, 1994). This is a conceptual difference in comparison with
the full costing methods characteristic of and solely used by a centrally planned economy. Although the law stipulates no systematic
requirements for companies cost accounting systems, the implementation of the cost by function income statement format made
it necessary to pay more attention to objective cost allocation

18

Influencing contingencies on management

methods in order to receive more objective information for product-mix decisions, profit budgeting and profit-conscious pricing.
74% of the respondents of the survey had made changes in different cost aspects concerning their accounting systems in the years
19961999. Half of the respondents had planned to make such
changes in their cost accounting system, which would yield more
detailed and segmented cost information. Among the main areas
needing improvement, the following were pointed out: the companies cost allocation methods, the product costing methods, the implementation of variable costing with the contribution margin approach, and the introduction of the activity-based costing system.
The respondents to our survey admitted that mainly two driving
forces had made them develop their companies cost accounting
systems, namely, the need for more detailed divisional (segmental)
performance information (66% of the respondents) and changes in
the organisational structure (42%) (see Table 1). Thus, the growing
market pressures have raised the companies awareness about the
need for more detailed cost information. Such catalysts as changes
in production technology and market structure had comparatively
less influence on the improvements made by the companies in their
cost accounting systems (see Table 1).
Table 1
Initiatives for changes in cost and management
accounting systems during 1996 1999
Reasons
Number of companies
Need for more detailed information
41
Changes in organisation structure
26
Changes in production structure
16
Changes in production technology
10
Changes in market structure
8
Other reasons
6

%
66
42
26
16
13
10

Toomas Haldma, Kertu Lts

19

Subsequently, we will try to set the expanded list of causes into the
contingency approach framework. In the survey, we asked the respondents to indicate on a five-point scale what significance any of
the catalysts had had on the improvement of their cost accounting
and management accounting systems.
Table 2 describes the drivers that have either sped up or slowed
down the transformations in the Estonian companies cost and
management accounting systems. While all of them had a generally
positive (i.e. speeding-up) influence, the most forceful among them
were the need for more detailed divisional (segmental) performance information, availability/non-availability of competent financial staff, changes in the managerial practices, and advances in information technology. According to Table 2, among the other drivers the change of production technology and the impact of retraining programmes had the lowest standard deviation and a tendency
to spread, in the respondents opinion. The opinions differed most
about how the level of satisfaction with the performance measurement systems influenced the change of the accounting systems.
Table 2
Contingencies that have slowed down or speeded up
changes in accounting systems
(1 significantly slowed down, 2 slowed down in some degree,
3 no effect, 4 speeded up to in some degree,
5 significantly speeded up)
Stand.
Contingency
Contingencies
Mean
characteristic*
deviation
Need for more detailed divisional (segmental) perOA
4.36
1.12
formance information
Availability/non-availOA
4.25
0.81
ability of competent financial staff
Changes in managerial
OA
4.07
1.02
practice
Advances in information
OA
3.91
1.17
technology

Influencing contingencies on management

20

Contingencies

E
OA

3.84
3.70

Stand.
deviation
1.07
1.01

3.56

0.76

OA

3.52

1.23

3.48

0.72

3.44

0.89

3.39

0.82

3.36

0.82

Contingency
characteristic*

Tightening competition
Change of the organisation
structure
Impact of retraining programs
Dissatisfaction with performance measurement
systems
Change of the production
technology
Change of the production
structure
Benchmarking of the cost
and management accounting methods
Change of the market
structure
* E environmental aspect,
OA organisational aspect,
T technological aspect

Mean

The driving forces behind the emergence of cost accounting and

management accounting (see Table 2) reflect different environmental, technological and organisational aspects of the companies
accounting patterns. Therefore, in what follows they will be regarded as the contingencies that influence cost and management
accounting in the Estonian manufacturing companies.

4.2. Impact of environmental aspects

The environment is a term used to explain a number of facets.
Relevant features of an organisations environment which affect
the design of its accounting system include the degree of predictability, the extent of competition faced on the market place, the

Toomas Haldma, Kertu Lts

21

number of different product-markets faced by a degree of hostility

(price, product, technological and distribution competition) (Emmanuel et al., 1990). It is suggested that increasing structural complexity will lead to the addition of new accounting tools to those already in use.
Considering the above-mentioned role of financial accounting in
the formation process of the accounting framework during transition, we argue that the environmental aspects affecting companies
management accounting systems in the initial period of transition
can be distinguished at two different levels:
1) the general business or external environment level and
2) the legal accounting environment level.
The external environment will affect the nature of the accounting
system, for any particular accounting system chosen aims to facilitate the companies adaptation to the environment it faces. In the
course of transition from a centrally planned to a market economy,
a companys accounting system is affected by two mutually connected changes related to the ways they utilise accounting information (Alver, et al, 1996):
1) a change from the state to the business community as the primary user;
2) a change from the passive role to an active role in the
stimula tion of economic activity.
In the second half of the 1990s, the development of the general
business environment in Estonia was affected by the following
events:
conceptual changes in the regulatory context (enforcement of
the Accounting Law in January 1995 and of the Commercial
Code in September 1995, etc.);
ownership changes (the most intensive period of privatisation was 19931995);
development of the capital market (the Tallinn Stock Exchange opened in May 1996);
recession on the Eastern markets (the Asian crises in 1997,
the Russian crisis in 1998).
In the main, these systematic factors had an indirect impact on the
companies management accounting system; but the above-men-

22

Influencing contingencies on management

tioned recession on the Eastern markets tightened the competition

on the domestic markets. Increased competition and raised production quality standards required adoption of a more sophisticated
and market-sensitive internal management accounting system.
From the list of drivers given in Table 2, the following items indicate what environmental aspects influence the accounting system:
the need for a more detailed divisional (segmental) performance information;
tightening competition;
change of production structure;
benchmarking of the cost and management accounting methods;
change of the market structure;
retraining programmes.
A more competitive marketplace, its greater dynamism and heterogeneity, and a more intensive operating environment all broadly
suggest that the accounting system should become more sophisticated and complex, and capable of evaluating managerial performance in more varied ways. The need for more detailed divisional
(segmental) performance information reflects both environmental
and organisational aspects of impacts on management accounting,
depending on a particular performance unit involved. In our conception performance units such as product groups, client groups,
sales regions, etc. reflect environmental aspects, while such performance units as organisational units reflect an organisational aspect. Concerning the environmental aspects, more than a half of the
surveyed companies based their performance measurement on the
product groups (52% of the respondents), much fewer on their client groups (20%) and quite few on the sales regions (17%). The
main part of the companies monitored and evaluated the profits and
profitability measures of different internal business units and products or product groups, while only a few companies stated that they
measured the profitability of their client groups and sales regions.
Consequently, the companies performance measurement system
was manufacturing-oriented rather than market-oriented.
Tightening competition; changes both in the market structure and
in the production structure precipitated the need for a market-sen-

Toomas Haldma, Kertu Lts

23

sitive attitude in performance measurement and for receiving objective and appropriate cost information about different cost units
(cost objects). No longer could the companies expect to cover costs
automatically, simply by engaging in full cost accounting or by
charging their customers a full-cost-based price. A challenge for
variable costing had emerged.

4.3. Development of cost and management

accounting practices
A comprehensive cost accounting system serves as a basis for understanding the process of cost formation in the companies value
chain, in order to analyse and manage cost behaviour. Cost accounting generally includes four broad areas: cost elements (types)
accounting; cost centre accounting; cost objects (cost units) accounting, and operative performance measurement (Mayer, et al.,
1994). Cooper and Kaplan (Kaplan, Cooper, 1998) distinguish four
different stages in the integration of cost and performance measurement systems:
1) Stage I systems: systems, which are inadequate for financial
reporting;
2) Stage II systems: financial reporting driven systems;
3) Stage III systems: develop customised, managerially relevant, but stand-alone systems;
4) Stage IV systems: integrated cost management and financial
reporting systems.
To succeed the fourth stage level, it requires a high degree of interaction between management accountants and operational managers, common understanding and mutual trust between accountants
and managers. This objective should be based on common understanding about the process of formation of expenses according to
the technological map of the value chain processes of the company.
Although there has been a big change in perceiving the role and
relevance of cost and management accounting, the managers of
Estonian companies still interpret their objectives, methods and influence on management decisions in differing ways.

24

Influencing contingencies on management

The majority (80%) of the companies div ides their costs into
manufacturing and non-manufacturing ones, 58% into variable and
fixed ones, and 75% of the companies into direct and indirect ones.
Although in formal terms cost analysis has been widely introduced,
many companies have chosen overly broad accounting segments
and units. The analysis of direct-indirect costs was carried out
mainly within an organisational dimension and that of variablefixed costs within a product dimension. On the issues of cost accounting the survey yielded the results shown in Table 3.
Table 3

Principles and methods used in product costing

by the Estonian manufacturing companies
Product Costing Principles
Full costing
Variable costing
Variable costing and full costing
Product costing methods
Process costing
Job-order costing
Both
Activity-based costing

Proportion (%)
(N=62)
54.8
38.7
6.5
Proportion (%)
51.3
33.7
15
7

Concerning the principles of product costing, our survey indicated

that 54.8% of the companies follow the principles of full costing,
38.7% those of variable costing and 6.5% both of them. From
among the product costing methods 51.3% preferred process costing and 33.7% job-order costing, while 15% of the companies used
both methods. In our estimation, only 7% of the respondents use
activity-based costing (ABC).
Our survey indicated that manufacturing overheads were usually
allocated on a volume basis. As the main allocation bases, direct
labour costs (42% of respondents), sales volume (38%), direct labour hours (28%), direct materials (26%), machine-hours (16%)

Toomas Haldma, Kertu Lts

25

and the number of operating cycles (8%) were used. Non-manufacturing overheads were usually assigned according to the manufacturing costs of the products, to a lesser degree according to sales
volumes. Our survey also indicated that 50% of the companies
used up to two and 70% up to four different allocation bases. In
most companies direct costs are not connected with technological
maps of the manufacturing process, which implies an arbitrary
choice of cost allocation rates. Unfortunately, such a limited approach could not yield a comprehensive picture of the cost formation process in manufacturing.
To measure the operative performance of different operating segments, internal reporting systems had been introduced by 82% of
the responding companies. A large number of the companies, however, compiled their internal performance reports on the basis of
their financial accounting statements. The cost by nature income
statement format was used by 48% and the cost by function format by 53% of the respondents. Four companies (6%) used both
formats. Variable costing with the cost-volume-profit analysis offered a convenient and more objective way to get an idea about the
cost formation process in manufacturing, to fix the price ranges
and to realise an active pricing policy. However, in parallel with
the above-mentioned income statement formats, a couple of companies have used the contribution margin approach, although to a
limited extent. 21% of the companies prepare their internal income
statements according to the multi-step and 28% according to the
single-step contribution margin approach. This tendency shows
that the Estonian companies management accounting systems
have to provide more detailed cost information in order to help
managers to take decisions and manage performance. There is an
interaction between the external and internal aspects of reporting:
objective information about the cost of activit ies, products, services, etc. Serve as a foundation for an adequate evaluation of the
cost of the goods sold and inventory. Consequently, cost accounting serves as an information basis for the performance measurement systems.
The development of cost accounting and management accounting
and the application of the variable costing and contribution margin
approaches in performance measurement are more associated with

26

Influencing contingencies on management

the efforts of academics and consultants than those of practitioners.

In the mid-1990s, most active practitioners in the field of accounting had been trained in the conditions of a centrally planned economy. As mentioned above, a full costing approach could not provide the management with objective information on costing, pricing and cost management. Our interviews in the companies revealed a critical shortage of competent financially trained staff.
Academic knowledge of accounting was infiltrating into the cost
accounting and management accounting practices of the companies
little by little. Thanks to the companies close contacts with the
teaching staff of accounting in the educational establishments,
seminars were held for the top management and employees in accountancy. This helped to transmit new ideas and techniques into
the actual practice.
Regarding the legal accounting environment as a driver influencing
the development of cost and management accounting, we suggest
that this is a characteristic feature of the transition economies. Our
suggestion rests on the following conceptual moments. Among the
other improvements made in accounting during the transition period, the first priority was given to financial accounting. This approach was justified, as it was first and foremost necessary to guarantee that the companies of the country would be able to prepare
their financial statements in compliance with the Estonian Accounting Law (EAL) and the generally accepted accounting principles. After the EAL was enforced, the companies were required to
conceptually redesign their financial accounting systems. On the
other hand, the compulsory reconstruction of their financial accounting systems did not let the companies pay enough attention to
the improvement of their internal accounting systems (including
cost accounting, management accounting, management control,
etc).
Proceeding from the previous statements, we argue that the conceptual changes in financial accounting characteristic of the Eastern and Central European transition countries served as a precondition for the design, introduction and improvement of cost accounting and management accounting, and the development of
companies management accounting systems. Market economy
countries have not experienced such a conceptual change in finan-

Toomas Haldma, Kertu Lts

27

cial accounting in such a short time during the last decades. We

support Virtanen et al. (1996) and Scherrer (1996) who say that the
evolution of financial accounting has influenced the development
of cost accounting and management accounting.
Proceeding from the four-stage model of cost system evolution designed by R. Kaplan and R. Cooper (1998) we contend that all surveyed companies have cost systems that are adequate for financial
reporting purposes and hence they have overpassed first stage broken systems. Following our estimation most of the Estonian companies are still in second stage, where cost and performance information is available only from the system used to prepare periodic
financial reports. Unfortunately second stage cost systems are
completely inadequate for the key managerial purposes (Kaplan,
Cooper, 1998). Only few companies in Estonia have migrated to
third stage. Any of the companies have not moved to the stage
four, where cost and performance measurement information become integrated into the mainstream fabric of organisational reporting and managerial processes.
Studying the classification of the expenses in the chart of accounts,
it becomes evident that in 1990 1995 the most frequently used
classification was based on cost by nature, whereas since 1995,
the classification based on cost by function has been preferred.
For example, the expense classification based on cost by function
was used by 13% of the respondents in 1996 and by 60% in 1999.
This can be viewed as a conceptual change. Wider implementation
of cost classification and the cost by function format of the income statement induced a debate about the allocation methods of
fixed overhead costs used by Estonian companies. This opened the
way to improving the cost allocation and product costing methods,
the implementation of variable costing with the contribution margin approach, and the introduction of the activity-based costing
system. But 65% of the companies were still using the cost by
nature-based classification and a quarter of the respondents were
using both classification bases simultaneously. However, 53% of
the responding Estonian companies included non-manufacturing
costs into product costs. A large majority used the cost by nature
income statement format. Consequently, the pressure from the legal accounting environment to improve the methods of cost alloca-

28

Influencing contingencies on management

tion and product costing, on the one hand, and cost accounting, on
the other, serve as an information basis for compiling true and fair
financial statements.

4.4. Impact of technological aspects

It is argued that the production process will affect the selection of
the type of costing system. A production facility that produces individual products to specific criteria will require a very different
costing mechanism to the one that is geared up to mass production
with high joint fixed costs.
Due to product inter-dependence, there is a technological constraint on the design of an accounting system. New technology will
evidently lead to a change in cost structures. Therefore, while the
technological progress continues, the accounting system might
probably become more complex and sophisticated, and capable of
following cost appearance in the manufacturing process more precisely. From among the drivers of cost accounting and management accounting given in Tables 1 and 2 the change of production
technology reflects a technological feature. As mentioned above,
this factor failed to have a sufficient impact on the companies accounting practices in Estonia. However, the tightening global competition and increasing fixed costs associated with the use of advanced manufacturing technologies have prompted the need to
analyse, allocate and manage fixed costs better. In 63% of the responding companies the share of manufacturing overheads in the
manufacturing costs was up to 30%, while in 11% of the companies it exceeded 50%. 13% of the companies, unfortunately, were
not used to distinguishing the manufacturing overhead costs.
Detailed cost centres accounting helps us to understand where the
costs appear and to clarify the connections between the costs and
cost objects. An analysis of the implementation of cost centres revealed that 72% of the companies have introduced cost centre accounting. At the same time, manufacturing overheads are measured
in the cost centres at the equipment level by 14% of the companies,
at the production line level by 27%, and at the sub-unit or company
level by 59% of the companies. These results indicate that manu-

Toomas Haldma, Kertu Lts

29

facturing overheads are broadly defined, which in the future may

raise potential difficulties when trying to relate these costs with
their cost objects (products), and may cause problems in the whole
product costing area. It is apparent that the application of cost centre accounting tends to increase in line with company size. As indicated by our survey, 90% of the companies whose sales volumes
exceeded 6.5 million euros applied cost centre accounting, while
only 59% of the companies with smaller sales volumes did so. Our
study revealed no clear distinction in the MAS design among different production technologies. The allocation of maintenance department costs among production cost centres was in 47% of the
cases based on a company-wide rate and in 26% of the cases on a
plant-wide rate. Such behaviour refers to inaccurate information
about the consumption of these supporting services by the manufacturing process of the particular products. In order to get objective cost information and to avoid potential problems, the companies would need to use more specified cost drivers.

4.5. Impact of organisational aspects

From the list of drivers in Table 2, the following items reflect the
organisational aspects influencing the accounting system:
need for more detailed divisional (segmental) performance
information;
availability/non-availability of competent financial staff;
changes in manage rial practice;
advances in information technology;
changes in the organisational structure;
dissatisfaction with the performance measurement system.
These have been the most crucial drivers speeding up the changes
in the management accounting practices of the Estonian manufacturing companies. Among these the need for more detailed divisional (segmental) performance information had the strongest influence on the changes in the MAS. As mentioned above, the need
for more detailed divisional (segmental) performance information
reflects both environmental and organisational aspects of impacts
on management accounting, depending on the performance unit in-

30

Influencing contingencies on management

volved. Such performance units as product groups, client groups,

sales regions etc. indicate environmental aspects in our conception
and their impact was analysed in part 4.2. Organisational units as
performance units reflect organisational aspects. In most companies (68%) performance measurement is based on different operating segments or divisions. The majority of the companies monitored and evaluated the profits of different internal business units
and products or product groups, only a few companies stated that
they measured the profitability of their client groups and sales regions. 74% used profitability as a performance measurement indicator and 26% did not measure profitability at all. The profitability
calculations were predominantly based on the profits of the business units and products.
We divided our research population into two groups: smaller companies with sales less than 13 million euros and bigger companies
with sales over 13 million euros (see Appendix 1). As a rule,
smaller companies preferred to prepare and use budgets for the
company as a whole (92%). Only 47% of these companies prepared budgets for internal business units and 51% applied more
detailed cost budgets. The performance measurement and variance
analysis between the budgeted and actual results was also carried
out at company level, and to a lesser extent at internal business unit
level.
Larger companies used more sophisticated budgets. They all composed budgets for internal business units and 90% of them used
more detailed cost budgets. They used more sophisticated performance measurement systems (e.g. for evaluating the performance of
different products or business units, but also that of different regions or customer segments). This result supports the findings by
Merchant (1984), according to whom it is large companies that use
more sophisticated budgets.
Internal performance measurement and reporting systems were introduced in 82% of the responding companies. Nevertheless, most
of the companies used the financial accounting statement formats
as a source for internal reporting. The contribution margin approach was applied to a lesser extent. There was a difference between larger and smaller companies: 50% of the bigger and 18% of

Toomas Haldma, Kertu Lts

31

the smaller companies applied the contribution margin approach in

their internal reporting.
It is apparent that the level of sophistication of a cost accounting
system tends to increase in line with company size. Our survey indicated that larger companies were more inclined to record their
costs at production line and equipment level, while companies with
sales revenues under 13 million euros evaluated their costs at company or department level.
Luther and Longden (2001) found a positive relationship between
pressure exerted by controlling shareholders and management accounting change. All the companies involved in our sample (62
companies) were privatised. In our survey we distinguished between three groups of companies on the basis of their independence concerning the design of their internal accounting systems
and foreign capital involvement:
Single companies (incl. parent companies) which were
responsible for and independent in designing their internal
accounting system (incl. cost accounting, internal performance measurement, etc.) 36 companies (58% of the
population). In this group, only in two companies the majority of shares was owned by foreign capital (5.5% of the
group population).
Subsidiaries of the group which were responsible for and
independent in designing their internal accounting system
15 companies (24.3% of the population). In eight companies
the majority of shares was owned by foreign capital (53.3%
of the group population).
Subsidiaries of the group in which the design of their internal accounting system was regulated by parent companies
11 companies (17.7% of the population). In ten companies
the majority of shares was owned by foreign capital (90.9%
of the group population).
We analysed these companies cost accounting and management
accounting aspects considering their independence in designing
their internal accounting systems and foreign capital involvement
in them, on the one hand, and implementation of more advanced
cost accounting and management accounting approaches (variable

32

Influencing contingencies on management

costing, the contribution margin approach, activity-based costing),

on the other. We did not get any clear evidence to support the idea
that shareholders pressure and foreign capital involvement actually directly affect the designing of accounting systems. Only in
one aspect certain evidence was found. In 46% of the companies,
the subsidiaries of the group which were independent in designing
their internal accounting system (second group) implemented variable costing (on average in 38.7% of the companies). However,
concerning the ownership aspect (foreign capital involvement), no
difference was revealed between the companies MAS design.
The companies which implemented the variable costing and the
contribution margin approaches ranked such drivers of management accounting as availability/non-availability of competent financial staff and changes in managerial practice highest. This
may be attributed to increased application of modern management
techniques as a result of increased awareness, education and retraining programs. On the other hand, the shortage of qualified accountants may serve as a crucial aspect, as far as application of
contemporary management accounting techniques is concerned.
In internal reporting the main accent has been stressed in monthly
and annual reports. Additionally, companies also prepare the operating cost reports according to the organisational structure. The results indicate that half of the companies used different principles
when designing their budgets and internal reports. All the companies with sales over 13 million euros stated that they prepared
budgets for business units using the contribution margin approach,
but only half of them evaluated the performance in the reports according to the same principle. Among the smaller companies, the
contribution margin approach was used in budgeting by 46% of the
companies and in internal performance measurement (reporting) by
19%. The insufficiently related budgeting and reporting systems
indicate that many companies do not use accounting information
systematically for clear and useful purposes. This may raise serious
problems for managers who plan and control their companies performance.

Toomas Haldma, Kertu Lts

33

4.6. Need for further improvements

The areas of cost accounting and management were highly important issues for 70% of the companies, whereas 5% of the respondents found that these areas had no significance for them.
As mentioned above, dissatisfaction with the performance measurement system, which was unable to provide appropriate information for decision-making, served as a significant catalyst in improving the cost accounting and management accounting systems.
In the survey we requested the respondents to assess on a threepoint scale their degree of contentment with their companies performance measurement system. Among the surveyed population,
20% of the companies stated that they were satisfied, 68% were
partly satisfied and 10% were dissatisfied. There was no clear difference between the performance of smaller and larger companies.
All the companies, whose managers stated that they were satisfied
with the performance measurement, used more comprehensive cost
budgets, but only 27% of them had integrated similar approaches
in budgeting, performance measurement and reporting. The dissatisfied companies had applied no internal budgeting or performance
measurement at all. Consequently, there is a need for certain improvements to be made in the companies cost accounting and
management accounting systems.

Conclusion
The present study shows that the contingency framework helps to
structure the impact of various drivers upon the design and use of
cost accounting and management accounting systems in transition
economy.
By exploring the drivers of accounting in Estonian manufacturing
companies we may have succeeded in shedding some light on the
role of management accounting in companies of transition societies. Our research confirms some prior findings related to influencing contingencies, such as tightening competition and organisation size, and introduces possible new drivers, such as the legal accounting environment and shortage of qualified accountants. These

34

Influencing contingencies on management

features are characteristic of transitional countries. Subsequently

we conclude that the conceptual change in the area of financial accounting characteristic of the Eastern and Central European transition countries served as a precondition for the design and introduction of management accounting and for the development of companies management accounting systems. Market economy countries have not experienced such a conceptual change in financial
accounting within such a short period of time.
Our study, which analysed the development of management accounting in Estonian manufacturing companies by means of the
contingency approach, revealed the following issues:
Most of the companies have management accounting systems that report inadequate product costs, have non-existent
customer costs, provide feedback to managers and employees that is too late, too aggregate and too financial.
Broadly defined cost centres may raise potential difficulties
in relating different cost elements with the cost objects
(products), and hence problems will occur in the whole
product costing area.
There was no clear distinction between the management accounting system designs of different production technologies.
Most of the companies used the financial accounting statement formats as a source for internal reporting.
The insufficiently related budgeting and reporting systems
indicated that many companies failed to use accounting information systematically for clearly defined and useful purposes.
In most companies, performance measurement was based on
different functions and product groups, to a lesser extent on
client groups and sales regions.
Finally, we would like to admit that this exploratory study has certain limitations. First, it has a static character. It would be useful to
expand the survey on more longitudinal aspects and management
accounting change, on the one hand, and on specific management
techniques in a more detailed way, on the other. Secondly, we recognise that the comparatively low number of responses to our
questionnaire survey may have caused a bias.

Toomas Haldma, Kertu Lts

35

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KOKKUVTE
Eesti tootmisettevtete juhtimisarvestuse
praktikat mjutavad tegurid
Kesolevas artiklis ksitletakse Eesti suuremate tootmisettevtete
juhtimisarvestuse praktikat analsides sltuvuse teooria (contingency theory) abil juhtimisarvestuse ssteeme mjutavaid tegureid.
Ettevtetes rakendatavat arvestusssteemi lesehitust ning olemust
mjutavate peamiste teguritena vaadeldakse ts keskkonna, tehnoloogilisi ja organisatsioonilisi aspekte. Sltuvuse teooria peamise idee kohaselt sltub ettevttes rakendatava arvestusssteemi thusus eelkige selle vimest reageerida ja kohaneda nii ettevtet
mbritsevas keskkonnas toimuvate kui ka ettevttesiseselt aset
leidvate muutustega.
Uurimuse raames teostatud empiiriline anals phineb 62 Eesti
suurema tootmisettevtte andmetel. Ettevtted on viimasel aastakmnel intensiivselt arendanud kasutatavaid kulu- ja juhtimis arvestuse ssteeme. Arvestusssteemides muudatusi tinginud peamiste
keskkonnamjuritena nevad ettevtete juhid tihenevat konkurentsi
ning lbitud koolitus programme. Olulise siirdemajanduse juhtimisarvestust mjutava keskkonnategurina ksitletakse artiklis majandusarvestuse keskkonda. Peamiste organisatsiooniliste mjuritena ksitletakse juhtide vajadust detailsema segmentide tegevustulemusi puudutava info jrele, toodangu struktuuri muutuseid ja turustruktuuri muutuseid ning ettevtte suurust.
Eesti tootmisettevte juhtimisarvestusssteemide ja neid mjutavate tegurite analsi peamised tulemused kajastuvad jrgnevates
momentides:
Enamus ettevtteid kasutasid siseste aruannetena kohustuslikke finantsaruandeid, mis ei paku ettevtte juhtimiseks piisava detailsusega vajalikku infot.

40

Collectivism and its consequences for

Eelarve- ja aruandlusssteemide liigne eraldatus ei vimalda

kasutada arvestusinformatsiooni sstemaatiliselt ning eesmrgipraselt.
Tegevustulemusi jlgitakse enamikes ettevtetes funktsioonide ja tootegruppide likes, vhemal mral kliendigruppide ning mgipiirkondade likes.
Liiga laialt mratletud kulukohad tekitavad raskusi erinevate kuluelementide seostamisel kuluobjektide ehk toodetega
ning seega teatud mramatust toodete omahinna kalkuleerimisel.
Erinevate tehnoloogiatega ettevtete arvestusssteemide
lesehitus on kllalt sarnane. Seega ei avalda tehnoloogilised
muudatused ettevtetes veel piisavat mju arvestusssteemide arengule.
Analsi tulemused nitasid, et Eesti ettevtete kulu- ja juhtimisarvestusssteemid ei peegelda veel piisavalt detailsel tasemel ettevtetes asetleidvaid tegevusi ja protsesse ning sellest tingituna ei ole
juhtimiseks vajalik informatsioon ettevtte tegevuste, toodete ja
klientidega seotud kulude osas piisavalt objektiivne. Kuid jrjest
laienev keskendumine ettevtte kulu- ja juhtimisarvestusssteemide arendamisele annab tunnistust nimetatud valdkonna olulisuse
teadvustamisest ettevtte majandustulemuste kujundamisel.

Appendix 1
Net sales of the surveyed companies
Net sales
(million
euros)

Number
of companies

Cumulative
frequency

Cumulative
%

Up to 3.7
3.86.5

15
19

25.2
30.6

34
34

38.7
54.8

6.613.0

17

27.4

51

82.3

13.132
Over 32

12.9

59

95.2

4.8

62

100