BEHAVIORAL ACCOUNTING

A BEHAVIORAL INTERPRETATION OF DECENTRALIZATION

WRITTEN BY:

NISFIATUR RAMDLIYAH 17312272

AMALIA WIDYASNINGRUM 17312328
DILASTUTYASAKTI ESTU KINASIH 17312344

Faculty of Economic

The Major of Accounting International Program

Islamic University of Indonesia

2019/2020
CHAPTER 12
A Behavioral Interpretation of Decentralization

A. The Meaning of Decentralization

The term of decentralization is used in large and diverse body of literature. It has come to mean
different people. According to H.A. Simon Decentralization is an administrative organization is
centralized to the extent that decisions are made at relatively high levels in the organization;
decentralized to the extent that decision are delegated by top management to lower levels of executive
authority. So, the main point from Simon means that Decentralization is philosophical behavior and
appears as a response to the environmental needed.
1) Environment as a Determinant of Decentralization
The focus of decentralization is on three main parts, namely: how to use the term and resolution
of decentralization’s terms, explain the requirements model that lead to the decentralization
needs, and three key steps of decentralization by choosing structures, directions, elections.
According to Vancill, a typical discussion of the reason for decentralization will include the
following:
a. Decentralization frees top management to focus on long range strategic decisions rather than
being involved in operating decisions. This is better use of valuable managerial time.
b. It allows organization to respond quickly and effectively to problems because those closest to
a problem (local managers) have the best information and therefore can respond better to
local needs.
c. A centralized system is unable to handle all the complex information needed to make optimal
decision. Centralized decisions may be inferior to locally-made decisions in a decentralized
system.
d. It provides a good training ground for future top management
e. It fulfills the need for autonomy and is thus a powerful motivational tool for managers.
The most comprehensive theoretical and empirical foundation for understanding decentralization
has been provided by Chandler in two major works.
The first, Strategy and Structure (1962), argues that a firm’s structure is a response to its strategy.
The latter depend upon two key elements such as the market environment and technology.
The second study, The Visible Hand (1977), provides a historical survey supporting this
proposition. In this study, Chandler relates the development of the decentralization divisional firm to
change in the environment (development of railroads and telegraphs) and change in technology
(development of mass production techniques).
 The availability of expanded communications and production capacity allowed firm to pursue a
strategy forward and backward vertical integration. For example, many manufactures acquired
wholesalers to market their product directly, while manufactures acquired suppliers of parts used as
raw material in their production process. The resulting expansion and diversification caused firms to
change from functional to multidivisional structure.
A difficulty in modeling the effect of the environment on decentralization is the lack of an
agreement of what constitutes an organization’s environment. Many competing notions are available
and new ones are rapidly evolving, so what is written may become dated and fairly quickly. The
approach that used by J. Pfeffer and G.R. Salancik, an organization’s environment may be split into
two subgroups. First is task environment, which defines the set of exchange relationship between the
focal organization and other social actors. Examples such as customers, suppliers, creditors, unions,
and other resources providers. The other group consist of the larger “community” of political,
cultural, and social actors that legitimate the activities of an organization.
Task environment is typically described along three dimensions such as munificence or the
availability of the scarce resources, interconnectedness or the number and pattern of inter
organizational linkages, and concentration or the extent to which power, authority, and resources are
dispersed in the environment. These characteristic determine the degree of conflict and change that
confront a focal organization. The larger “community” consisting of political, social, and cultural
factors, determine the freedom with which an organization can pursue various courses of action.
Thus, the set of responses available to an organization is determined by inter action of change,
conflict, and constraints posed by its environment.
In general, the higher degree of conflict and change in task environment, the greater need of the
organization to develop specialized, information processing capability, develop an ability to respond
quickly, and encourage risk taking and innovative behavior on the part of its members. The method
pursuing these ends must be consistent with the values of the larger community so the organization
does not jeopardize its legitimacy. From this perspective, it is now possible to see that
decentralization allows organizations faced with the greater conflict and change to develop
specialized information, respond speedily, and encourage risk taking and innovation. This figure is
one example about an environmental response model of decentralization:
 Based on the picture above, shows the key characteristics of the task environment for the source of
generosity, interconnection of social actors, and concentration of power.

Choosing a Structure
To implement decentralization, an organization must choose an appropriate structure, develop a
charter, and measure the performance of decentralization subunit. How to select one that enhances
decentralization is the subject of this section.
The choice of an appropriate decentralized structure requires two key decision: (1) how to divide
the task/decisions in an organization, (2) what system of accountability to impose for resources
expended in carrying the various task/decision.

Division of Task/Decision
The functional divisional types of organization structure represent to different ways of dividing
the task/decisions in an organization. A functional structure divides an organization along the lines of
its main functions such as production, marketing, finance, and so on. It is suited for exploiting
economies of scale since people specialize in particular functions.
The divisional structure usually divides an organization along product lines. It is particularly
suited for multiproduct or highly diversified companies. In the case of multiproduct firms, the savings
in coordination cost offset the costs of functional duplication created by divisionalization.
An added complication in dividing task/decisions in most large organization is the geographical
dispersal of their units. Geography adds to the coordination problem, especially when you need cross
national boundaries. Firms must know be organized by territories, with each territory having a further
functional or product organization. A difficult problem arises when only a few products of a
multiproduct firm are sold in the various territories in such situation, organizations are faced with the
difficult choice of duplicating product divisions in all territories or using geographical division for all
their product.

Devising Resource Accountability

The second step is choosing a structure is devising an appropriate system of resource
accountability on the various functional, product or territorial subunits. Four types of resources
accounting units are identified in the literature, such as cost centers, profit centers, revenue centers
and investment centers.
Because the correspondence between activities or decision and resources expended, functional
organization primarily used revenue and cost center. Also, because divisions typically combine both
marketing and production under one manager, they are organized as profit and investment center.
This is probably why the term divisions, profit centers, and decentralization are sometimes used
interchangeably in the literature.

Developing a Charter
A set of operating rules and principles that will govern the relationship of subunits with
headquarters (HQ) and with each other. The subunits’ relationship with headquarters requires
delineating and activities over which subunits has primary authority and responsibility, and the
manner in which headquarters expect subunits manager to carry out the activities assigned to their
units.

Delegation of Activities
An important prerequisite for decentralization the determination of which activities sold be
delegated to subunits and which activities should be controlled centrally. In theory, a completely
decentralized system would assign all separable activities to subunits, with little or no role for central
management. There are six suggest that may explain current practices and may be useful for
organization in the process decentralizing they are: 1) utilization of specialized talent; 2) economies
of scale; 3) uniformity; 4) lasting consequents; 5) time frame; 6) encourage of experimentation.
The need for fully utilizing specialize talent probably accounts for activities such as legal,
computing, and accounting being centralized.
The idea of economies of scale, the activities such as cash management and purchasing are
centralized because better interest rates and purchase price are available when the organization deal in
larger quantities.
 The need for corporate uniformity in certain activities is another important reason for centralizing
them.
Another factors that determined the degree of decentralization is whether a decision has lasting
consequences for an organization. Mistakes that will be give an effect to the material of the company
will have a long lasting consequence example is capital budget decisions.
A popular reason for decentralization is the time frame within which decision have been made.
Indeed, where time is of the essence, decisions can’t be centralizing because of the delay caused by to
communicate and process relevant information.
Finally, some organization decentralize to encourage experimentation at the local level. In this
way harmful effect from an experiment are contained while beneficial effects can be adopted later by
the remaining organization.

Establishing Behavioral Norms

A charter must follow the division of activities by spelling out the behavior norms headquarters
expect of its subunits managers in carrying out these activities. For instance, while unit may be free to
make all product decisions, headquarters may expect such decision to be guided by considerations of
long-run profitability. Several option for communicating desired norms of behavior are available. The
most important ones are socialization, specialization, standardization, and formalization. All of these
method provide a means by which headquarters can communicate its desires or structure situations so
that subunit decisions and actions conform to acceptable norms of behavior.
Before examining how these methods can be used to set up norms of behavior, it is important to
recognize that their use poses a real danger of moving an organization from decentralization to
centralization. Controlling behavior directly or through control of the premises on which decision are
made defeats the philosophy of encouraging independent and autonomous managers.
Socialization is the process of orienting new members into the norms of an organization. It is
perhaps the most important technique used in communicating what is acceptable behavior.
Companies use elaborates orientation and training program, create myths and stories, and use other
such techniques to induct individuals into their value system. Socialization is most effective in
communicating an organization’s values such as quality and service. It can be of great assistance in
decentralization if freedom to make mistakes and take risks are among the values encouraged by an
organization.
Specialization refers to the number of specialties and the extent of professionalization in an
organization. The latter is particularly important since the use of professionals by an organization
means socialization in the norms of their profession before joining an organization. Professionals tend
to be fairly autonomous and independent in their orientation. As long as the values of an organization
do not conflict with professional values, increased professionalization will ensure that organizational
behavior is governed by acceptable norms within the decentralization units.
Standardization denotes the degree to which standard rules are in place. A distinction must be
made between standards of behavior, such as a code of ethics, and standardized behavior¸ such as
producing products to a standard of quality. While the former is consistent with decentralization, the
latter may not be. Use of standards to communicate norms of behavior is consistent only if such
standards are broad and fall short of specifying actual outcomes. For example, standards of personnel
selection, which have to be consistent with affirmative action guidelines, are consistent with
decentralization; standards dictating the qualifications, experience, or sex of a prospective employee
are not.
Formalization or the extent to which there are written rules, procedures, and routine, is another
technique of communicating norms. Extensive reliance on formalization is likely to inhibit
decentralization because broad guides are generally difficult to reduce to crisp routines.

Clarifying Interunit Relationship

A good charter also provides the ground rules for managing inter-unit exchanges. These
exchanges are necessary when subunits are dependent on each other for inputs or outputs. The degree
of dependence varies from high in vertically integrated companies to low in diversified
conglomerates. Decentralization increases the danger of subunits maximizing their goals at the
expense of the organization by allowing subunit managers to act independently.
 Competitive vs Collaborative Approach
A charter for decentralization attempts to prevent this chance of suboptimization. It can use two
extreme approach to do so. The first, a competitive approach, relies on a market mechanism and
substitutes a fictitious internal market for the external market. Competition among subunits is
encouraged and internal transfer prices perform the resource allocation role of the external price
system. The other, a collaborative approach, emphasizes organizational membership and
encourages individuals to work as a team by using appropriate rules, rewards, and values.
 Factors Influencing the Choice
A pragmatic approach to developing a decentralized charter attempts to mix the two approaches.
Its task is to locate the organization on a continuum whose end points are competition and
collaboration (bearing in mind that neither end point is generally feasible). There are four
important factors that should be considered by an organization in deciding what point to choose
on this competition-collaboration continuum. As follows:
 a. Availability of external market, the competitive posture among subunits is possible only when
there is an external market for the product or service being traded internally.
b. Strategic Independence, a key factors in choosing between competition and collaboration is
the strategy of an organization.
c. Incompleteness of price, the competitive approach requires a price mechanism as the basic
signal for regulating exchanges. To the extent that prices capture all relevant decision
variables, the competitive approach will be successful. Of particular importance quality are
differences, uncertainty, and externalities.
d. Availability of the exit option, an important requirement for the success of the competitive
approach is the availability of the exit option. The exit option allows an inefficient internal
producer to be penalized by allowing the buyer to refuse to buy internally. The discipline of
the market place, however, does not always stop or arrest internal inefficiencies.

Decentralization and Transfer Pricing

A key mechanism used by organization to regulates exchanges between subunits is the transfer
pricing mechanism. Transfer pricing encourage and promote certain types of behavior in
organizations. The transfer pricing system can be used as a tool for reinforcing the behaviors desired
by a charter.
 Types of Transfer Prices
Organization typically employ five types of transfer price such as market prices, cost-plus price,
variable cost, negotiated prices and arbitrated or dictated prices.
a. Market prices are used when some type of external market for the product exists. It encourages
competitive behaviors between subunits and may discourage commitment to an organization
since it frees both buying and selling divisions to deal externally.
b. Cost plus may be full cost or variable cost plus profit margin. Both these rules may encourage
internal suppliers to become inefficient by allowing them to pass costs on to buying divisions.
c. Variable costs are motivationally discouraging for a selling unit because they do not allow such
units to show any profits.
d. Negotiated transfer price encourage negotiating skill at the expense of productivity because the
best negotiator can charge a higher price.
e. Arbitrated or dictated prices are used when two subunits cannot agree on a mutually satisfactory
transfer price or if one division refuse to deal with another. In such cases, it is common practice
for top management to dictate an appropriate solution to resolve the dispute. When this is done,
the managers involved no longer have complete responsibility for the activities of their divisions.
Transfer Price and Decentralization Charters
The behavioral impact of transfer price suggests a possible reinterpretation of the transfer prices
as behavioral mechanism to support the degree of competition or collaboration desired by an
organization among its subunits. Table 12-1 shows a possible match among five possible locations on
the competition-collaboration continuum and the type of transfer price best suited to support this
decision. The five locations are purely suggestive and simply reflect a move along this continuum.

From this section argues that a key of decentralization is the need to develop an appropriate
charter. Such a charter must decide what activities and decisions headquarters will make and which
one will be delegated to individual units, provide appropriate norms of behavior for unit to follow in
carrying out the activities assigned and establish whether exchange among units will be governed
primarily by rules of competition or collaboration. A possible interpretation of transfer prices as a
way of governing interunit exchanges was also offered.

Measuring and Evaluating Performance

The final step in decentralization is the setting up of a system for evaluating and rewarding
performance. Attributes of performance measures most likely to lead to goal congruence such as
controllability, completeness, and separation of activity and managerial evaluation.
 Controllability is considered desirable because it excludes from measurement those aspect of
performance that a manager cannot control. Control is defined as equivalent to formal authority.
Therefore, it is argued that it is inappropriate for manufacturing units to be held accountable for
actions originating in sales and vice versa.
Completeness refers to the degree to which a measure can capture all relevant dimension of
performance.
Separation of activities and managerial evaluation is designed to distinguish the economic
attractiveness of an activity from the way it is managed.
Performance measures must encourage both independent action and team work. There are 3
attributes in such measures as follows:
Focus attention of managers on critical variable, provide specific action guide that generate
desired outcomes and enhance the perception of fairness for shared risk.
Guiding behaviors in desired directions can be accomplished if performance measures can link
actions to outcomes. Organizations represent desired outcomes in the form of measures, which then
become the focus of organizational action.
Enhancing perceived fairness is perhaps one of the most important and most difficult attributes of
performance measures. This is because effective decentralization requires rewards not so much for
carrying out specific actions, but for sharing risks.
DECENTRALIZATION, PERCEIVED ENVIORMENTAL UNCERTAINITY, MANAGERIAL
PERFORMANCE AND MANAGEMENT ACCOUNTING SYSTEM INFORMATION
EGYPTIAN HOSPITALS

I. PURPOSE
The purpose of this paper is to provide empirical evidence concerning the relationships
between decentralization, perceived environmental uncertainty and management accounting
system (MAS) information and the relationships between MAS information and managerial
performance within Egyptian Hospitals.

II. STUDY BACKGROUND

The rapid grown of healthcare sector causes more attention has been paid by citizen and the
government to healthcare services and their providers with the aim of achieving higher
service quality, lower cost and better performance. Since hospitals must provide higher
service quality and lower cost for large number of patients in order to survive, they have to
maintain rigorous control over their performance as well as operations. In addition,
governments are compelled to focus on assessing and improving hospitals efficiency due to
the increasing healthcare spending. Information system such as management and cost
accounting must be able to support basic control process and increase organizational
effectiveness and efficiency. The successful implementation of new accounting and control
system in the healthcare sector requires integrated finical and financial accountability,
assignment of responsibility to clinicians, freedom in choosing appropriate control tolls and
flexibility in adoption. To address the importance of management accounting information in
the hospital context, managers tend to perceive these information characteristic to be useful in
facilitating decision making which consist of scope, timeliness, aggregation, and integration.
The Egyptian healthcare system is considered highly pluralistic, complex and poorly
managed. Ministry of Health and Population (MOHP) and various international agencies,
such as the World Bank and the International Monetary Fund (IMF) have worked together to
develop better management accounting and accountability systems so as to bring about the
improvement required in the efficiency of Egyptian health service.
III. THEORY OF THE STUDY
Theory that used in the study is based on contingency theory which contends the design and
use of control systems are contingent upon context of the organizational setting in which
these controls operate and function.
1) Management Accounting System
MAS serves as part of an information system providing, useful information to decision
makers. It is important that the managers, being the users of MAS services are satisfied
with the information quality provided. MAS information quality which is aggregation of
three characteristics such as accuracy, timeliness, and relevance is associated with user
satisfaction.

2) Organizational Structure and MAS

Organizational structure is defined as the formal allocation of work roles and
administrative mechanism to control and integrate work activities. Interestingly, the
success of MAS innovation depends largely on organizational structure. Organizational
structure is considered as one of the contextual variables in the contingency theory of
management accounting.

3) PEU and MAS

Environmental uncertainty is the lack of information regarding the environmental factor
associated with a given decision making situation, not knowing the outcome of a specific
decision in terms of how much the organization would lose if the decision were incorrect,
and inability to assign probabilities with any degree of confidence with regard to how
environmental factors are going to affect the success or failure of the decision unit in
performing its function. The relationships between management information
characteristics (scope, timeliness, aggregation) and PEU are all significantly positive.

4) MAS and Managerial Performance

The nature of managerial work (e.g. negotiation, recruiting, training, innovating and
contacting individual managers) strongly affects the importance of information because
each managerial work has specific information needs and there is no ordered or
systematic way to carry out these works.
IV. FINDINGS
The study reveals that decentralization and environmental uncertainty, to some extent, are
essential factors in designing efficient and effectiveness MAS. Hospitals with decentralized
structure make better use of timely, aggregated and integrated MAS information.
Environment in which the hospitals operate does have significant influence on the type of
information provided by the MAS.