(a) Management accountants have a key role in the design and
operation of management control systems such as budgetary
control, standard costing and performance measurement
systems. Such systems are intended to encourage people in an
organisation to behave in ways which are consistent with the
achievement of organisational objectives. It is therefore
important to know why/how individuals are motivated to act
when designing and operating such accounting control systems.
Some specific examples of the relationship between motivation
theories and the design/operation of accounting control systems are
set out below.
(i) McGregor’s theories X and Y have implications for how budgets
should be used by managers – and even perhaps in some
circumstances, whether they should be used at all. Theory X may
imply that budgets should be used in a rigid, disciplinary way,
whereby failure to achieve budgets is heavily penalised. Theory
Y, on the other hand, may imply that budget variances should be
interpreted in a more constructive way as a vehicle for mutual
learning and continuous improvement.
(ii) Expectancy theory has implications for the level at which budget
targets should be set, that is, how demanding they should be, in
order to induce maximum performance. According to this theory,
effort applied is a function of the perceived probability that the
target is achievable. The implications are that budget targets
(and standard costs) and other performance measures should be
challenging but achievable.
(iii) Herzberg’s ‘hygiene factors’ and ‘motivators’ have implications
for the design of incentive schemes linked to achievement of
budget targets, for example, in considering the importance of
(b) The main objectives of macroeconomic policy in modern capitalist
economies are as follows.
(i) A sustainable rate of economic growth, in order to improve
continuously economic well-being.
(ii) Low levels of unemployment, in order to prevent waste of
productive resources and also the social unrest/disorder that
prolonged high levels of unemployment can bring.
(iii) A stable price level, that is, low inflation, in order to prevent the
distortions to the price mechanism and also possible undesirable
social consequences of high inflation.
Answer guidance 33
(c) Externalities are the effects of production or consumption that
impact on people who are not involved in the market exchange
between producer and consumer, for example, pollution.
Ignoring a negative externality will result in the private costs of
production/consumption not being as high as the social costs.
Consequently, the output of the product/service concerned will
be higher than it should be, as too many resources will be
allocated to the production of this particular product or service.
A positive externality will have exactly the opposite effect, with
under-production and too few resources being allocated to the
particular product or service.
(Question 5 total: 25 marks)
34 Assessment Booklet
(a) (i) A person culture puts individuals and their interests first
and sees the organisation as a means to an end – it is a
resource on which individuals can draw to enhance their
own talents, abilities or concerns. The person culture is
represented by Handy as a constellation of loosely clustered
stars. In this culture, commitment to the organisation for its
own sake is likely to be limited.
Managers in a person culture are more likely to exhibit
Theory Y behaviour. Managers are likely to exhibit such
behaviour as the workers are very self-directed in a person
culture and would resent managerial interference in ‘their’
(ii) Subordinates or colleagues want their social needs met in
ways which improve their general social life and ability to
network. This might be fulfilled in the workplace by the
provision of a social club, or even something as simple as
coffee break-out areas. A good/excellent answer will
successfully relate the explanation to a specific
(b) Any three answers from the list below would be acceptable.
l A country is materially less well off, that is, it has a lower
GDP, because fewer goods and services are being produced.
l Government obtains less income from taxing its citizens. Tax
revenues fall immediately from direct taxes, such as those on
salaries (income tax in the UK), but also on indirect taxes
such as on consumer spending (VAT in the UK).
l For modern, capitalist economies, there is a sustained
increase in welfare payments because governments have to
pay out more in state benefits. This is money that the
government could otherwise spend on improving the natural
environment as well as the economic infrastructure of a
country, or could pass on to households and firms through
l There are major social costs associated with increases in
crime and other forms of anti-social behaviour such as civil
unrest. Deep, persistent unemployment also leads to less
obvious social consequences such as a decline in public
health, and an increase in personal, family and community
distress and instability.
l Productive, useful skills are lost that can only be maintained
l The existing distribution of income is made more unequal as
unemployment affects the poorly skilled and less educated,
who earn the least, more than the better skilled and educated
who tend to earn more.
Answer guidance 35
(c) (i) Monetary policy relates to all government efforts to
influence the money supply and interest rates of an economy
in order to achieve macroeconomic objectives. An example
could be reducing interest rates to stimulate economic
(ii) Economies of scale refer to situations where an increase in
the scale of production causes a decrease in the average cost
of each unit of production. An example could be a
manufacturing enterprise increasing the size of its factory to
reduce product costs.
(iii) A cartel is an agreement between oligopolists to enter into a
potentially illegal, collusive arrangement to fix prices and/or
output. An example could be when Unilever and Proctor &
Gamble were found guilty of fixing prices. Organisations
such as OPEC which are not clearly illegal are also regarded
(iv) The situation where the use of goods and services cannot be
restricted by those providing them. An example could be the
provision of a firework display in a public place.