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AN EVALUATION OF MANAGEMENT ACCOUNTING TECHNIQUES

CHAPTER ONE

INTRODUCTION

1.1. Background to the study

Management process is a set of interdependent activities used by an organization to carry out their functions which include, planning, organizing, staffing, leading, and controlling. Brech (2010) recommends the following definition of management as the most appropriate for general usage: “A social process entailing responsibility for the effectiveness and economic planning and regulations of the operation of an enterprise in fulfillment of a given purpose of task.” Such responsibilities involve: Judgment and decision in determining plans and in using data to control performance and progress against plans; and the guidance, integration, motivation and supervising the personnel comprising the enterprise and carrying out its operations.

Management Accounting refers to that part of the management process which is focused on adding value to organizations by attaining the effective use of resources by people, in dynamic and competitive contexts. It is an integral part of the management process, distinctly adds value by continuously probing whether resources are used effectively by people and organizations – in creating value for customers, shareholders or other stakeholders. (Adelegan, 1998). Without the application of management accounting techniques, no business can succeed in its operations and attain its set objectives (Adeniji A. 2015). Moreover, its decision making will not be guided as management accounting techniques provide adequate guide to decision making at all levels. Management accounting is the application of accounting knowledge, techniques and skills to the provision of information designed to assist all levels of management in planning and controlling the activities of a business enterprise.

The managerial function of controlling is the measurement and correction of the performance of activities of subordinate in order to make sure that enterprises objectives and plans devised are being accomplished. It is therefore not surprising that many manufacturing companies particularly the large scale enterprises are showing more interest in the application of management accounting techniques. Management accounting is the use of accounting data to assist the management team with information useful in the decision-making process. This makes decision making more of a scientific process and less of a guess. Management accounting is inward-focused and does not focus on the reporting issues or compliance requirements. As stated above that “without the application of management accounting

techniques no business can succeed in its operations and attain its set objectives. Moreover its decision making will not be guided as management accounting techniques provide adequate guide to management making at all levels” the objective is to point out the weaknesses and errors (if any), so as to rectify and prevent re-occurrence. It is therefore, the function of every enterprise to ensure accuracy, completeness and reliability of accounting records and this is the most important control measures as far as the management is concerned. For an enterprise to conform to its plans there is need for an effective management accounting techniques in operation, this will help the organisation in the control, financial or otherwise, established by the management in order to carry on the business of an enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard of assets and promote the operational efficiency of all aspect of the company’s activities and communicate managerial

policies and to encourage and measure compliance therewith.

In addition, any organisation, whether private or public has set objectives. Attainment of these objectives depends on how effectively the resources available to the organisation were deplored for the purpose for which they are meant to serve. Also deployment of these resources to appropriate area agreed in the organisation depends on the information availability to the management of the organisation. Management accounting provides valuable information concerning segments and the entire organisation. Aku (1999) provides a clear demarcation between accounting generally and management accounting in particular, that it provides management information for the good of enterprise while accounting generally is concerned with reporting the entity’s performance at regular periods. However the use of management accounting techniques in manufacturing companies is yet to be fully implemented and put into use due to unqualified nature of their accounting personnel and this is said to be one of the major reasons why many manufacturing companies does not stay long in the market especially in a country like Nigeria.

Furthermore, management accounting therefore is primarily concerned with data gathering, analyzing, processing, interpreting and communicating the resulting information for use within the organization so that management can plan more effectively, make decision and control operations. While management accounting is concerned with the provision of management information, management accounting techniques is concerned with those practices in management accounting which management should adapt to facilitate management decision making. According to T. Lucy (1984) ‘management accounting techniques is a method which is designed to suit the way goods are processed or manufactured or the way the service are produced’. The techniques to be adopted by an organization depends on the purpose for which the organization wants to attain. Management accounting practice include those techniques as marginal costing, absorption costing, standard costing, actual costing ascertainment, variance accounting, budgetary control, differential costing and capital budgeting etc.

Also, Managerial accounting encompasses techniques and processes that are intended to provide financial and non-financial information to people within an organization to make better decisions and thereby achieve organizational control and enhance organizational effectiveness (Paul M. Collier 2018). The overall scope of management accounting are; planning, controlling, decision making and performance appraisal. From the above definition of management accounting, it can be deduced and established that management accounting plays a major role in the decision making of an organisation. Decision making is a continuous process that pervades all organizational activities. Managers in every type of organization – business, hospital, government, education – make decisions every day. To this extent, understanding what makes an organization successful depends upon our knowledge of how people make effective decisions (in which management accounting intends to provide such knowledge). A decision is defined as a conscious choice among alternative courses of action followed by activities to implement the choice. A decision-making process is a series or chain of related steps that lead up to an action or an outcome and assessment. Decision making is so basic that no management function can be performed without it. For management purposes, decisions are obviously required in planning, organization, actuating, and controlling.

Conclusively, management accounting techniques are important in an organization because they reduce the causes of ineffectiveness, inefficiency and uneconomical activities in an organization. An important feature of an effective management accounting techniques for decision making is usually a four-phase process which could be effected through setting standards, measuring performance against the set standard, feedback of result and correcting deviation from standard In the light of the aforementioned, this research work tries to assess the effectiveness and application of management accounting techniques for decision making as established and operated within the selected food manufacturing firms in Akure Metropolis.

1.2. Statement of the Problem

The Manufacturers Association of Nigeria (MAN) has been complaining of societal attitude toward locally manufactured goods, low patronage for locally made goods and preference for imported ones substantiate due to the fact that competition has become stiff and fierce, the imperatives of globalization have all combined to force organization to seek better ways of optimizing the competitive advantage. Companies lacking appropriate Management Accounting skills may be unable to adjust to the pressure of this competition and may not succeed in the long run as it is very critical to survival of business.

Some manufacturing companies in Nigeria are not even aware of the importance of Management Accounting Techniques which leads them to engage in activities which do not add value to their business and in which they do not have competitive ability thus leaving their core competent area to suffer and incur unnecessary costs Moreover, it is observed that there has been tremendous work on topics related to this, but most of them used descriptive analysis and a few among them that attempted to use models limited themselves to general applicability without them given consideration to managerial parameter affecting selection of management accounting techniques as planning and decision making tool and its impact in the effectiveness of those techniques. It is on view of this that the present study decided assess the effect of management accounting techniques and its effectiveness on decision making of the selected food manufacturing firms in Akure Metropolis. Hence, the identified vacuum or gap which the study intended to fill.

Management accounting techniques can help an organization to achieve its desired performance and profitability targets, better service delivery and also prevent loss of resources. It can help ensure reliable financial reporting. In sum, it can help an organization prosper in order to achieve its objectives and also avoid pitfalls and surprises along the way. Therefore, the researcher had to investigate and assess the application of the selected management accounting techniques (standards and standard costing, budget and budgetary control and life cycle costing) for decision making in the selected food manufacturing firms in the following food manufacturing firms in Akure Metropolis:

LifePro Food Mills, Home Bake Bakery, Basincliff Resources Ltd Agro, Stanmark Cocoa Processing Company Ltd and Olam Coop Cocoa Factory.

1.3. Research Questions

What are the management accounting techniques used in the selected firm?
What are the information provided by the management accounting techniques that aid decision making?
What are the effects of management accounting techniques on decision making?

1.4. Objective of the study

The broad objective is to assess the application of management accounting techniques for decision making in the selected food manufacturing firm in Akure Metropolis.

The specific objectives are to:

identify the management accounting techniques used in the selected firms.
determine management accounting information provided by the system for decision making.
assess the effect of management accounting techniques on decision making.

1.5. Research Hypothesis

In carrying out this study, the researcher intents to test hypothesis are merely expected relationships between or among the variables of interest. The hypothesis is tested for the third research question and objective. This study is required to test among other things the following:

Ho: Management accounting techniques does not have effect on decision making.

Hi: Management accounting techniques have effect on decision making.

1.6. Significant of the study

A good management accounting techniques operated in a company is an indispensable aid to efficient management in that it provides qualitative and reliable information for decision making in all level of management. The significance of this study is to bring to the notice of management the impact of a good management accounting

techniques in the achievement of the organization’s objectives. That is to say, it will help the organization to know how to manage its scarce resources, it will provide information for decision making, it facilitates planning and controlling, it will help to discover the existence of internal control system in an organization and to know if there are weaknesses in the system and suggest measures to correcting them.

The outcome of this research will be of great benefit to the management and staff of the organization in the following areas: it will help the organization to identify the factors that may affect the operations of an organization; to reduce to the barest minimum, production inefficiency and high cost of production as well as incidence of errors; it will serve as a benefit for the business executives, middle management, staff and any other parties interested in the management accounting techniques; It will ensure the quality of financial statements in the management accounting techniques used; it will help policy makers in setting policies that are relevant to the Organization performance and in making good decisions; it will provide the information and knowledge to academics and other researchers; the study will also provide information that will assist workers and other stake holders to improve on the existing management accounting techniques among the manufacturing firms.

1.7. Scope and Delimitation of the study

This research work is restricted to only food manufacturing firms in Akure Metropolis and it covers the evaluation of the effectiveness of management accounting techniques. A case LifePro Food Mills, Home Bake Bakery, Basincliff Resources Ltd Agro, Stanmark Cocoa Processing Company Ltd and Olam Coop Cocoa Factory. The focus of this research will be on three management accounting techniques which are; budget and budgetary controls, standards and standard costing and life-cycle costing. The research work is very essential since it will help to know how each of the departments are carrying out the work that are assigned to them. Usually, management accounting techniques is a very important feature of any organization or enterprise that should be run efficiently and effectively. However, for every coin there must be two sides, though management accounting is a helpful tool to the management as it provides information for planning, controlling and decision making, still its effectiveness is limited by a number of reasons. Some of the limitations of management accounting are as follows: it is based on accounting information (financial and cost); lack of knowledge in related subjects like accounting principles, statistics, economics, principles of management e.t.c; management accounting is only a tool and techniques of providing information and not decision (decision are to be taken by the management); personal prejudices and bias; and so on.

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