The Use of Management Accounting Techniques as a Veritable Tools for Organisational Decision Making
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Chapter one on The Use of Management Accounting Techniques as a Veritable Tools for Organisational Decision Making
BACKGROUND TO THE STUDY
Prices of goods and services are gradually increasing day by day, and due to the fact that the sole aim of a businessman, producer or manufacturer is to make profit they end up making use of low quality materials for production so as to reduce cost of production and maximize profit. Moreover, with the increase of competitors around, most of the producers have thought it wise to manufacture or package a quality product and also enhance their profit level, prevent wastage and utilize available resources, management decision decision needs to be made both mostly in the financial aspect.
The precarious situation of the economy requires to major participants in economic life, policy makers in particular, to take immediate action. However, these measures delays to occur. On the economic level, the decision is at the discretion of the manager. Therefore, a manager cannot achieve its intended objectives, without taking into account information obtained from management accounting techniques. For efficient management of the economic entities having as its object of activity the production of goods, information is needed to calculate product costs. Cost accounting techniques are being applied to collect information on production, to allocate specific spending lots of product and unit cost calculation. Also, as the deployment of production and generation of costs, strict quality control procedures are being applied to compare actual costs with planned costs. Through these methods it can be determined the efficiency of exploitation activity and management. Finally, managers need special financial reports and analysis to substantiate their decisions. Therefore, at the base of management decisions must stand the analysis of alternative lines of action.
Management accounting techniques has been equipping organizational managers with important information to take decision and deals with both constant timely and frequently changing business dealings i.e. order received, order backlog, capacity utilization, and sales. Other analytical reports are prepared for decline in profitability, market share shrinkage, customer loyalty disruption towards the organization. In both cases, it is usually done through comparing actual results with the planned results or benchmarks. Management accounting techniques is about “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information” (D. Colin, 2000). Management accounting techniques usually plays as an influencing role for planning, organizing, leading and controlling through managers of the organization. Planning activity is done mostly through budgeting, standard costing, target costing, cost-volume-profit analysis and directing or organizing through process reengineering, just in time (JIT), activity based costing (ABC), flow direction, value proposition. Leading and controlling through total quality management (TQM), balance score card (BSC), actual and budgeted performance comparison, benchmark analysis.
Management accounting techniques is renowned to be very useful accounting resources that extensively help organizations incorporate cost accounting data, financial and non-financial information. Knowing this information is essential for managers to do their jobs, in the present day today, organizations need development and continual improvement in their performance for maintaining their activity and survival in the dynamic competitive environments. The abilities and capacities of an organization through efficient and effective use of the organization’s resources are introduced as the important tools for improvement of organizational performance that benefiting from it requires aware management. Therefore, collecting and providing relevant information to the performance is indispensible for organizations that the need can be satisfied with employing management accounting techniques. Furthermore, management for achieving the organization’s objectives requires firm plans that management accounting can employ different solutions in the plans through appropriate operating methods as well as help managers in achieving the objectives. The recent progress of researchers in the field of competitive markets indicates that organizations needs management accounting in order to improve their performance according to the changing competitive conditions.
The conducted research indicates that management accounting techniques can be used in the following ways:
Serves as a catalyst for decision making process Use as a financial tools for management decision making provide the managers’ needed information to improve the organization’s performance Sustain company growth and profitability.
As management accounting moves into the 21st century, what happens in the last decade of millennium will be crucial. Management accounting has already undergone a period of trial and tribulations and will no doubt continue to do so. Management accounting technique can include budgeting, performance evaluation, information for decision-making; and strategic analyses are some of the methods used among many others. Ittner&Larcker (2001) has also argued that due to the development of these new methods, it has changed the basic principles of management accounting to a more superior one that adds value to various practices. The research study indicated that some techniques such as absorption costing and marginal costing have not been highly favoured by most manufacturing businesses. For example, Dugdale and Jones (2002) stressed that there is a limitation within these costing systems, since they do not provide an accurate method of recording costs to be exact in order to make sound management decisions.
There is a general perception that management accounting provides relevant information for making decisions, both internally and externally and on a long term or short term basis. There are many different tools for making short term decisions such as cost volume profit (CVP) analysis, and customer profitability analysis, however, the use of discounted cash flows and internal rate of return techniques to calculate the cost of capital seems not to be a regular management accounting practice used by businesses.
The IT based management accounting intends to provide information and insight to management and shareholders, who are in the position to decide the budgets, investments and long term planning with the help of management accounting. Application of IT in management accounting depends on individual organizations’ vision and appropriate system or technology acquired. If the need for strong and structured technology is not installed, an organization can waste its capital investment on technology, however there are still low level of awareness and understanding of technology available and suitable based on organization to be adapted in management accounting including Lack of availability of internal expertise and consultant to suggest, evaluate and implement IT in management accounting. Furthermore, Quality decision making has never been more important – or more difficult. Competition is relentless, as new innovations and innovators daily disrupt the status quo. The volume and velocity of unstructured data is increasing complexity, in recent years, the cost of products manufactured in Nigeria has been very expensive beyond the reach of common Nigerians. This cost challenges has made many products manufactured in the country unpatronized by the consumers, and as a result of that expires in the hands of the sellers. There is also a problem of poor inventory management which leads to overstocking thereby tying down the company‟s working capital. Another problem facing some or most of the manufacturing firm is the installation of improper plan to reduce cost of production so as to maximize profit, i.e. ( making use of low quality raw material).
OBJECTIVES OF THE STUDY
The main objective of the study is to examine the use of management accounting techniques as veritable tools for organization decision.
The specific objectives are:
Determine the extent to which management accounting techniques are employed by management. Explain the differences between management Accounting and other fields of Accounting. Identify the factors influencing the choice of management accounting techniques by management. Ascertain level of effectiveness of management accounting techniques for decision making. Contrast and scrutinize the traditional management accounting approach and modern management accounting techniques. Eliminate the constraints affecting the application of management accounting techniques by management.
The following tentative research questions were asked to guide the research study:
To what extent are the management accounting techniques employed by management? What are the differences between management accounting and other fields of Accounting? What are the factors influencing the choice of management accounting techniques by management? Level of effectiveness of management accounting techniques for decision making? What is the difference between the traditional management accounting approach and modern management accounting techniques? Are there any constraint mitigating the application of management accounting techniques by management?
SIGNIFICANCE OF STUDY
This study will have useful implications for theory and practice. Regarding the potential implications for theory, the study will expand the existing management accounting literature in two main ways. First the study will provide new empirical evidence on the use of management accounting techniques. Second, the study will contribute an additional study in the new context of Nigerian firms regarding what contingent factors affect the extent of management accounting techniques use.
On this note, this research work when completed will be very useful to the followings:
Business/ Organisations: To this group, the research work will provide them with the requisite knowledge of management accounting techniques in making provision and interpretation of information required by management at all levels for formulating organizational policies, planning and good decision making.
SME businesses: the creation of awareness among SME managers of the importance of management accounting techniquesas a means of improving performance and maintaining competitiveness in the marketplace.
The study will also be of importance to government corporation, companies, regulators and policy makers who are involved in regulating the accounting Standards and guidelines, it will also educate the general public, investors and entrepreneurs on application of management accounting techniques, types, it application, and benefits, It will also enable a better understanding of common management accounting techniques in relation to other fields of accounting.
This research would contribute to the existing literature by focusing on modern management accounting techniques in Nigeria with a view to identifying the critical problems that are confronting it application so that appropriate measures could be taken to tackle them.
STATEMENT OF HYPOTHESIS
Hypothesis is “a speculation of the way the variables of study behaves” it is a guide method to be used in their analysis. The needs for such guides rise to the following hypothesis;
Ho: Management Accounting techniques has a negative impact on decision making of organization.
There are no significant relationship between the use of management accounting techniques and organizational performance.
SCOPE OF THE STUDY
From the foregoing discussion, the research focuses on use of management accounting techniques as veritable tools for organization decision using Tower Aluminum Plc, As Case Study.
LIMITATION OF THE STUDY
Limitations envisage in this research work are:
Uncooperative attitude of the staff in the organisation: this is a major limitation which increase the time spent in completing the research work. Monetary constraints: this factors serves as a deficiency for the research work, and as a result of low financial capability, it was not enough to give us desired results. Inadequacy of Reference Material: In the process of carrying out this research work, the most nagging problem facing the study is how to obtain reference materials. The time to carry out the research is short and insufficient, since it is done alongside with some other courses to contend with so as to present a good result.
DEFINITION OF TERMS
Management accounting is the process of identification, measurement, gathering, analysis, providing, interpretation and presentation of the management’s useful financial information in order to plan, evaluate and control of an organization’s operations. Capital budgeting is the process of identification, evaluation, planning and financial security of the main investment projects in the commercial units and guiding and monitoring such investments Budget is the action plan or the organization’s measure in a particular period of time that is presented according to the financial or non-financial quantities. Decision making: the thought process of selecting a logical choice from the available option. It is done to achieve a specific objective or solve a specific problem. Management: this is defined as the process of dealing with or controlling things or people. It is the responsibility for control of a company or similar organization. Costing is the appropriate classification and division of costs in order to determine the final price of the products and services of the commercial unit and adjustment and providence of relevant information appropriately in a way that it would be usable for the guidance of managers, the owners of commercial units to control its operation. Target costing is a comprehensive cost planning, cost management and cost control concept used to influence or to have an impact on product cost structures primarily at the early stages of product design depending upon the requirements drawn from the market. Cost volume profit analysis as a method or tool for measuring potential changes in the company‟s revenues, costs and prices. CVP analysis is used in manufacturing companies to determine how many units of a particular product must be sold in order to break even. 9.Throughput accounting: The most significant recent direction in managerial accounting is throughput accounting; which recognizes the interdependencies of modern production processes. For any given product, customer or supplier, it is a tool to measure the contribution per unit of constrained resource
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