Organisations and management accounting
Organisations and management accounting

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Organisations and management accounting

1.2 Why do organisations exist?

Organisations exist because groups of people working together can achieve more than the sum of the achievements which the individuals in the organisation could produce when working separately. For example, one person might struggle all day to carry a piano upstairs, whereas a team of four people, each taking one corner, may need to put in much less than a quarter of the effort of one person to complete the task (Coates et al., 1996, p. 19). Although such cooperation is beneficial, if individuals pull in different directions, the result is counter-productive. Thus coordination is necessary and this is a fundamental role of management, as will be discussed in a later section of this session.

It can also be argued that organisations exist as a result of the impact of transaction costs, because they can arrange transactions between their different parts at a lower total cost than that available in the open market. In crude terms, it may be cheaper to make or do something ‘in house’ because this cuts out the time consuming process of negotiating terms – and renegotiating them every time your requirements change. Before the Industrial Age, it was common for artisans/craftsmen to work individually from home, producing various products, which merchants would purchase from these individuals and sell to consumers. All transactions were conducted through market exchange without the need for formal organisations. As economic development gained pace, however, it became clear that it was more efficient to organise production internally within a firm rather than undertake each transaction externally through the market. The latter process involved substantial costs in terms of time that had to be spent investigating suppliers, detailing specifications, negotiating/renegotiating contracts, checking that agreed terms had been met and so on.

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