Cost Accounting And Management Accounting As A Tool For Performance Evaluation In Manufacturing Company

Introduction

1.1 Background to the Study

Cost accounting (CA), which measures and reports financial and non-financial information related to the organization"s acquisition or consumption of resources, has an exceptionally important position within the entire accounting information system of an organization because it provides information to both management accounting and financial accounting as subsystems of the accounting information system. When its information is intended for the financial accounting it measures product costs in compliance with the strict legal and professional regulations. When its information is used for internal purposes it provides the basis for planning, control, and decision-making. Accounting data used for external reporting very often do not completely satisfy managers‟ needs for decision-making purposes. Attempts at slight modifications of financial accounting systems for managerial purposes rarely end happily and far from effective (Wikipedia, 2015).

According to the Institute of Management Accountants (IMA): "Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization"s strategy".

The primary focus of economic planning and management in Nigeria over the years has been the transformation of the economy through industrialization, however, desired results are yet to be obtained. The Nigerian economy is far from being fully industrialized and the manufacturing sector is yet to take a prominent place in the scheme of things (Ayodele & Falokun, 2003). The country has not been able to shift its export base, from crude oil and agriculture to manufactures. Up to date, on the average, the manufacturing sector"s contribution to gross domestic product (GDP) has been unimpressive ranging between 3 to 6 percent since the turn of the millennium. For instance, manufacturing contribution to GDP declined from about 6% in 2000 to 3.91% in 2006 and between 4.03% and 4.17% from 2007 to 2010 (National Bureau of Statistics 2011). The need to increase company level efficiency has been a dominant suggestion offered as the key to reversing this unimpressive performance. As Soderbom and Teal (2002) suggested, a key policy issue the Nigerian government should face is to understand and address the factors that will enable the efficiencies of companies and consequently their competitiveness to increase. Ayodele and Falokun (2003) also suggested the adoption of the combination of suitable management techniques with suitable technology and other resources in addressing the low productivity of the sector.

Cost accounting and management accounting has been suggested as one of such important management techniques that can help ensure efficiency in the use of companies" resources (IFAC, 1998). Traditionally, the main objective of the cost accounting and management accounting systems has been to provide information for costing products and for promoting efficiency in the use of labour and materials (Johnson & Kaplan, 1987). Such traditional method adopt practices and techniques such as standard costing and flexible budgeting for cost control, cost allocation and product cost measurements; incremental analysis for decision-making; measurement of profit, contribution and return on investments for performance monitoring; and the full integration of internal cost accumulation systems with the external financial reporting systems (Shillinglaw, 1989).

Company performance is the net result of the combined efforts of all individuals and groups in an organization (Khandwalla, 1977). Companies referred to in this study are the manufacturing companies. The definition of company performance is problematic because it varies, depending on the viewpoint from which it is being assessed. For example, from society"s viewpoint, performance may be assessed in terms of efficiency of production of products or services needed by the society. From the owners" viewpoint, profitability and growth rate in earnings may be the criteria, while employees may assess performance from how well employees are being treated. Customers may look at product quality, prompt delivery and competitive pricing. Since management must take into account the various expectations of these groups in setting its goals, management"s criteria for assessing company performance may be assumed to adequately reflect the concerns of others groups such as the society, employees, suppliers and customers (Khandwalla, 1977). However, the researcher is examining the effect of use of cost accounting and management accounting as a tool for performance evaluation in manufacturing company.

1.2 Statement of the Problem

Even though a cost accounting and management accounting system is supposed to assure that manufacturing work is done according to the company strategy, this has not been the reality in many companies. It has been known for many decades that management and production systems used in manufacturing have not developed in harmony. This misalignment is a reason for why unfavourable decisions are encouraged in manufacturing (Skinner, 1971; Kaplan, 1984).

When reviewing publications regarding cost accounting and management accounting systems, it is obvious that the interest in the topic has grown in recent years. However, the researcher will provide an overview of cost accounting and management accounting as a tool for performance evaluation in manufacturing company.

1.3 Objectives of the Study

The general objective of this study is to analyze cost accounting and management accounting as a tool for performance evaluation in manufacturing company. However, the following are the specific objectives:

To find out if cost accounting can be a tool for performance evaluation in manufacturing company

To find out if management accounting can be a tool for performance evaluation in manufacturing company

To examine the effect of cost accounting and management accounting on manufacturing company performance.

1.4 Research Questions

Can cost accounting be used as a tool for performance evaluation in manufacturing company?

Can management accounting be used as a tool for performance evaluation in manufacturing company?

What is the effect of cost accounting and management accounting on manufacturing company performance?

1.5 Hypothesis

HO: Cost accounting and management accounting cannot be used as a tool for performance evaluation in manufacturing company

HA: Cost accounting and management accounting can be used as a tool for performance evaluation in manufacturing company

1.6 Significance of the Study

The following are the significance of this study:

It will be a guide for manufacturing companies basically on how cost accounting and management can be used as a tool for performance evaluation. It will also educate stakeholders in the manufacturing sector on how cost accounting and management accounting can be sued to boost productivity and profitability.

This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied, it will go to an extent to provide new explanation to the topic.

1.7 Scope / Limitations of the Study

The scope of this study on cost accounting and management accounting as a tool for performance evaluation in manufacturing company will cover all the manufacturing companies in Lagos State by carefully examining their respective performance evaluation tools.

Limitation of Study

Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 Definition of Terms

Management Accounting:

Is the part of the management process that is focused on adding value to organizations by attaining the effective use of resources in dynamic and competitive contexts (Sharman, 2003). Management accounting consists of both cost accounting and performance measurement. It contains all the information which is officially gathered to support the decision making in production. It is used for internal purposes and therefore different from financial accounting which is used for reporting for external stakeholders.

Cost Accounting:

Is the process of accumulating and accounting for the flows of costs in a business. It is defined as a technique or method for determining the cost of a project, process, or thing through direct measurement, arbitrary assignment, or systematic and rational allocation. The appropriate method of determining cost often depends on the circumstances that generate the need for information (Swamidass, 2000). This can be information such as material cost, production cost, product cost, investment calculations, and budget.

Performance Measurement:

Is the process of quantifying actions, where measurement is the process of quantification and performance is the result of action (Slack, 1997). These measurements show how well the production is performing in categories such as quality, delivery precision, service level, time per operation, set up time and so on.

Summary, Conclusion and Recommendations

5.1 Summary

The general objective of this study was to investigate the effects of cost and management accounting practices on financial performance of manufacturing companies in Kenya. This study adopted a descriptive survey design. The target population for this study was the 455 manufacturing companies in Kenya.

The study found that costing systems were rated as highly used. The costing systems included; cost of quality, departmental overhead rates, separation of costs, plant-wide overhead rates, Activity- based costing (ABC), target costs and regression techniques and/or learning curve techniques respectively. The study also found out that the budgeting practices were highly used in the respondents companies. They included; budgeting for long-term (strategic) plans, zero-based budgeting, budgeting for controlling costs, flexible budgeting, budgeting with analysis", budgeting" what for planning and activity- based budgeting. Performance evaluation measures were also found to be highly used in the respondents companies. They included; non-financial measure(s) related to customers, non-financial measures(s) and benchmarks. The study found out that information for decision making were used in the respondents companies. These included; evaluation of major capital investment based on discounted cash flow method(s), evaluation of major capital investments, and Cost-volume-profit analysis (break-even analysis) for major products. Strategic Analysis was also established to be highly used in the respondents companies.

5.2 Conclusions of the Study

The study concludes that Information for Decision Making practices is the most highly used cost and management accounting practice amongst the manufacturing companies in Kenya followed by Strategic Analysis, Budgeting, Performance Evaluation, Costing, Size and Leverage respectively.

The study further concludes that the most important elements of cost and management accounting practices amongst the manufacturing companies in Kenya are; The cost and management accounting function identifies key factors that influence performance and risky areas that require improvements and Return on equity, ROE (Net income / Average Equity) has increased as a result of application of cost and management accounting practices, The cost and management accounting function develops strategies that enable the manufacturing companies to exploit financial innovations in creating a sustainable competitive advantage and Cost and management accounting provides information from its environment to management to facilitate decision-making and Return on Asset, ROA (Net income /Total assets) as a result of application of cost and management accounting practices.

5.3 Recommendations for Policy and Practice

This study examined effects of cost and management accounting practices on financial performance of manufacturing companies in Kenya. From the practice perspective, this study recommends the creation and enhancement of awareness among firms of the importance of information for decision making practices as this is the most highly used cost and management accounting practice amongst the manufacturing companies in Kenya.

The findings recommend that to achieve a proper measure of financial performance, firms need not only to integrate Return on Equity, Return on Asset and Earnings per share as the measures for accounting but also other value based measures which have gained popularity in academic literature in last two decades.

As an efficient accounting ethical practice, it is the responsibility of the cost and management accounting professionals to remain relevant in adding value to the companies for which they work and to their profession by keeping abreast of research findings in their area of responsibility.

In relation to policies, accounting curriculum should be developed consistently to the changing role of accountants. Accounting Education must equip their student with capabilities in coping with the rapid changing of the business environment so that they can always provide relevant cost and management accounting information to managers.

Academics and practitioners can use the findings of this study to fully understand how cost and management accounting practices can help to improve business performance in companies.

5.4 Limitations of the Study

The study only concentrated on the cost and management accounting practices of manufacturing companies in Kenya and not all the companies in the economy. These results are therefore only limited to the manufacturing companies and may be of little or no use to the companies in other sectors in the country.

Due to the self-report nature of data which entailed the use of questionnaires, responses on the survey may not accurately convey their real involvement in the cost and management accounting practices. Some of the respondent did not return the questionnaires therefore, resulting to lesser the targeted sample thus, influencing the nature of statistical reporting.

Further, some firms did not accurately disclose the ROA figures due to the nature of the sensitivity of financial information disclosure. Therefore, this affected proper statistical analysis of the data.

Finally, due to limited time available to carry out the research, the above areas were not comprehensively studied to provide a national wide picture. This would be an important area because policy makers and implementers argue that the effects of cost and management accounting practices on financial performance of manufacturing companies in Kenya can only be resolved by providing them with research action points based on empirical data.

5.5 Suggestions for Further Research

Research should be carried out that also includes those companies in other sectors to establish if they also consider the cost and management accounting practices as important and to establish the frequency of usage of the practices.

Further research is important in other countries with similar or almost same micro and macroeconomic environments for manufacturing companies. The findings of would enhance a cross-country comparison of the cost and management accounting practices and their impact on financial performance.

In addition, future studies should examine specific factors as to why manufacturing companies are not adopting newly developed cost and management accounting tools. The relatively limited benefits associated with new cost and management accounting techniques raises the question of the conditions necessary to effective implement these tools.

Finally, the dependence between traditional and new cost and management accounting techniques needs further investigation.

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