Dynamical systems theory applied to management accounting: chaos in cost behaviour in a standard costing system setting

This Research Report draws the attention of control engineers to some of the results obtained from the application of chaos theory to modelling complex behaviour, The example chosen is a typical management accounting system in a manufacturing firm, and the model includes not only the formal control devices, but also the responses af the human operators, the managers, to the variance signals from that system.

Management accounting has become an eclectic discipline and so over time it has called upon a wide variety of methodologies to help to address its problems. It has, perhaps reluctantly, accepted the notion that statistical analysis and the assessment of probabilities can overcome, in part at least, the ambiguity of many managerial situations. It would be expected to be very eager to consider ways and means of reducing reliance on such methods and of increasing the explanaiory power of some of the tools already at its disposal within its own core discipline; for example, the setting of standards for budgetary control.

This paper reports recent research into the application of 'Dynamical Systems Theory'as a means of explaining apparently random cost behaviour in a standard cost context. It suggests that attention should be directed to the effects of different standard setting policies on the stability of the behaviour of managerial control systems.