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The impact of management accounting techniques


Posted on Aug 2017



THE IMPACT OF MANAGEMENT ACCOUNTING TECHNIQUES ON MANUFACTURING COMPANIES’ PERFORMANCE: BASED ON MA COSTING AND BUDGETING PROCESS

 

Table of Contents

1.0 Introduction. 2

1.1 Background.. 2

1.2 Research Problem... 3

1.3 Research Objectives. 4

1.4 Specific Objectives. 4

1.5 Significance of the Study. 5

1.6 Limitations of the Study. 5

2.0 Literature Review.. 5

2.1 Management Accounting Theories. 5

2.2 Manufacturing Companies Performance Determinants. 6

2.3 Budgeting and MA Costing Processes. 7

 

 

 

 

 

 

 

 

 

 

 

The Impact of Management Accounting Techniques on Manufacturing Companies’ Performance: based on MA costing and budgeting process

1.0 Introduction

1.1 Background

 Management accounting techniques are widely used by companies in assessing their operations. Some the widely used MA techniques include budgeting, breakeven analysis and variance analysis. The techniques aid companies to come up with plans, direct as well as the control of operating costs so as to attain profitability. It is difficult for an organization to achieve high levels of profitability without proper planning and control of operations costs, especially in manufacturing companies, where they need to be in control of variable costs (Horngren et al. 2010). According to Horngren et al. (2010), various practices in the field of management accounting are critical to the success of any organization. Kaplan and Atkinson (2015) indicates that management accounting tends to be the use of the right concepts and techniques in the process of projecting and historical economic data in an organization to aid the management in coming with future strategic plans.

 Ajibolade (2013) indicates that budgeting and costing processes are the most widely used management accounting related practices in dealing with the performance of manufacturing companies. The budgeting process assists in ensuring that appropriate allocation of resources to different units within an organization is in place. The costing approaches widely used in today's manufacturing firms are traditional costing and activity-based costing. Most of the studies have indicated that activity-based costing is effective in helping an organization achieve efficiency and improve performance when compared to traditional costing methods (Kaplan and Atkinson 2015). Therefore, most of the existing studies have focused on how organizations can enhance costing using budgeting process and MA costing approaches. However, there is a gap concerning the actual impact of budgeting as well as MA costing processes can have on the performance of manufacturing companies around the world.

1.2 Research Problem

            The world of business is becoming highly competitive each and every day. In the manufacturing sector around the world, the number of players entering the manufacturing sector is increasing, especially in the production of consumer goods, hence, increasing the levels of competition faced by companies operating in the industry. Also, the biggest challenge that most of the manufacturing firms' faces are controlling and allocating costs to different units and products in the most effective way. As a result, the overall cost of products ends up being too high reducing the profit margins generated by the organization (Horngren et al. 2010). Costs incurred by a firm in manufacturing and distributing products have an overall impact on the profitability of a firm as well as its competitiveness in the market. When the cost of producing a product is high, it becomes tough to offer a product at a lower price so that it can be competitive in the market, while generating higher returns. Use of budgeting and costing accounting techniques have proven to be effective tools in allowing business to control costs and allocate them in the most appropriate manner (Kaplan and Atkinson 2015). The main research problem being addressed by this research is how manufacturing companies can use MA costing and budgeting process as the basis for enhancing their performance in the future, especially profitability and competitiveness in the market.

 

1.3 Research Objectives

            This research’s general objective is to determine the effects of MA costing and budgeting processes on the performance of manufacturing firms in the U.K

1.4 Specific Objectives

            The study will aim at achieving the following specific objectives;

I)                    To find out practices in the area of management accounting employed by manufacturing firms in the U.K.

II)                   To find out the impacts of management accounting costing as well as budgeting on the performance of manufacturing firms in the U.K.

1.5 Significance of the Study

            The findings of this research will be instrumental in helping manufacturing firms in the UK to address the challenges of cost, which adversely affects their profitability and competitiveness in the market. The costing challenges occur due to inappropriate management accounting techniques being employed by individual firms. The study aim is to look at how budgeting process and MA costing can be used as the basis for improving the performance of an organization. Thus, the findings of the study will bring new information on how budgeting process can be applied by firms in enhancing their performance, especially in ensuring there is efficient cost allocation to products and units in a firm. On the other hand, inaccurate costing impacts negatively on the performance of many manufacturing firms. However, the findings of the study will help those in managerial positions understand the best costing technique that can be used to in a manufacturing company to ensure there are accurate costing processes. This research will improve costing and budgeting processes in manufacturing firms within the U.K as well as other parts of the world, as the basis of enhancing future performance of companies operating in this critical economic sector.

1.6 Limitations of the Study

 The main limitations of the study will be the available resources for completing the research. The resources are limited, and it will be difficult to use a larger sample size, and this might hurt the reliability and validity of the study findings. 

2.0 Literature Review

2.1 Management Accounting Theories

 According to Smith (2009) of the widely accepted theory in the practice of management, accounting is contingency theory. The contingency theory indicates that different firms make use various accounting practices that suit them (Kaplan and Atkinson 2015). Macintosh and Quattrone (2010) indicates that contingency theory looks at various specific influential factors, which help management in deciding on the right practices in the field of management accounting to apply in a firm. Some of the factors include infrastructure available in a firm or technological changes. According to the contingency theory the needs of an organization influences the types of management accounting practices, it will employ at any given time, and they keep of changing depending on the changes of the needs of a firm (Ahmad 2013). For example, if a firm intends to increase the accuracy of the costing allocation process, the management might decide to employ activity-based costing as it costing technique instead of traditional costing which is largely viewed as less effective in ensuring there is accuracy during the costing process in a firm. Thus, the right management accounting approaches to be used in budgeting and costing process should be dependent on the needs of a firm on the contingency theory (Kaplan and Atkinson 2015).

 New institutional sociology theory is also widely used in management accounting. According to Drury (2013), new institutional sociology theory indicates that operations of an organization are determined by the institutional regulations and resources available. Given organizations operates in an institutionalized environment, their practices in the area of management accounting are dependent on the existing organization resources, regulations, and external government policies. The firms have to legitimize their accounting practices, such as budgeting techniques and costing approaches to be used. 

2.2 Manufacturing Companies Performance Determinants

 Undertaking the analysis of firm's financial performance determinants is crucial for the stakeholders, particularly the investors'. The goal of any company is to ensure that at all times can maximize the shareholder's value. However, the shareholder's value is determined by some factors: company's operational risks, projected future earnings and prevailing profitability of a firm (Drury 2013). According to Cadez and Guilding (2008) financial indicators that use accounting information tends to be adequate in determining the shareholder's value.  The financial performance of any manufacturing company is influenced in a direct way by its individual market position.  Kaplan and Atkinson (2015) points out that net profit margin and net turnover influences the profitability of a firm at any given time. In the situation where the turnover is high, it is an indication that the firm is utilizing its assets in a better way, leading to efficiency, while higher profit margins are an indication of a company having control of bigger market share (Hansen, Mowen and Guan 2007).

 Drury (2014) indicates that risks, as well as growth patterns of a firm, determines its overall financial performance. In a situation where the risks faced by a firm are high, and they are not properly managed, its performance might end being impacted in a negative way. On the other hand, if the growth experienced by a firm, regarding market share increment and expansion of its products and customer base, its financial performance will be better. Also, Hansen, Mowen, and Guan (2007) argue that cost structure of a firm determines its overall performance. In the case, where the firm has a high-cost structure, for instance, the variable costs are high; this impacts its overall costs of operations, resulting in lower profitability in the long-term.

2.3 Budgeting and MA Costing Processes

            The budgeting process is concerned with the way an organization engages in budget building activities (Hansen 2011). Drury (2013) indicates that a budgeting process that is good usually involves all the stakeholders who will be responsible for budget implementation to meet particular objectives in an organization. The budgeting process should be guided by fiscal accountability and mission priorities. The budgeting process determines the allocation of resources to various products and units within a manufacturing firm (Ahmad 2013). One of the biggest mistake that many firms make during the budgeting process is allocating products that are less profitable huge resources ignoring the ones that generate higher profits (Kaplan and Atkinson 2015). An effective budgeting process should ensure that resources are accurately and appropriately allocated to various product and units in accordance to how they contribute to the overall financial performance of a firm. This indicates that the budgeting process can be a major tool for allowing a firm to attain a high level of performance financially if it is utilized in the right way (Macintosh, N.B. and Quattrone 2010).

            Drury (2013) points out that costing process within a firm play a critical role in determining the overall performance. There two major costing approaches that are widely used by manufacturing companies around the world. Traditional costing is one of the MA costing techniques used by many organizations around the globe. According to Macintosh and Quattrone (2010) traditional costing usually assigns manufacturing related overheads by the cost driver volume, for instance, direct labor hours required in producing an item. Drury (2013) indicates that cost drives are those factors that result in a cost being incurred, such as direct material hours, machine hours and others. This major approach weakness is inaccuracy when it comes to assigning cost overheads to different products and units within a firm (Kaplan and Atkinson 2015). Alternatively, activity-based costing in the recent years has gained popularity in the manufacturing sector as MA costing technique (Ahmad 2013). ABC is a costing approach that assigns costs based on activities associated with a unit or product on a daily basis (Salawu and Ayoola 2012). ABC is widely used in the manufacturing companies due to its ability to capture costs accurately allowing for pricing of products manufactured in a precise manner.

3.0 Methodology

3.1 Research Methods

 This study is going to be qualitative. Therefore, qualitative research methods are going to be used in areas of data collection as well as analysis to understand how MA costing, and budgeting processes can impact on the performance of manufacturing firms in the U.S market. According to Bryman and Bell (2015) points out that qualitative research is one where the respondents provide in-depth accounts of their experiences, attitudes related to a certain phenomenon. Therefore, qualitative methods in this research will help the participants to provide a detailed experience of how budgeting and costing techniques impacts on the performance of their respective firms.

3.2 Research Design

            The research will make use of the descriptive research design. Zikmund et al. (2013) point out that descriptive research design tends to be the one whereby the participants give accurate information describing the experience they have with the study phenomenon. The descriptive study fits well in this study, as participants will be expected to describe the experiences they have with budgeting and MA costing, regarding the way impacts the performance of the manufacturing companies in which they work. 

3.3 Sampling Method and Sample Size

 The sampling technique that will be employed in this study will be purposive sampling technique. According to Creswell (2013), purposive sampling approach is one where the study participants are selected based on certain unique traits. The focus of the study is the application of the MA costing and budgeting techniques in the manufacturing sector within the U.K market. Hence, the participants will be expected to be managers or accounts working within U.K manufacturing sector. This means that purposive sampling technique will be suitable for the study, as the participants will have the right traits needed for collecting accurate and reliable data. The sampling technique that will be used will help to avoid bias in the data collection process, by ensuring that the right participants are selected who can give information related to budgeting and MA costing processes within the manufacturing sector in the U.K and the way they impact on an organization's financial performance. 

            Additionally, a sample of 30 participants from five different manufacturing companies operating in the region of London will be selected. A small sample size will be used due to the nature of the data collection technique that will be applied in the study. Also, the financial resources available cannot allow for the use of a larger sample size.

3.4 Data Collection and Sources

 The major sources of data that will be used in this study are both primary and secondary sources. The secondary data will be obtained from existing literature on the subject of the research, such as journals, books, and publications. The primary data in this research will be collected from the field. The data collection technique that will be employed in this study will be close ended interviews. The interviews will contain questions related to management accounting costing approaches and budgeting processes as used by manufacturing companies and the effects they have on overall firm's performance. According to Creswell (2013) interviews as data collection techniques is flexible, allowing for flexibility during the data collection process. Also, the use of interviews will help in ensuring that the collected data is valid and research integrity is maintained.

3.5 Data Analysis

 Given that the study is going to be qualitative, the data collected from the field will be analyzed using theme coding approach. The data will be summarized according to the major themes, and this will be used as the basis of presenting the major findings of the research. 

3.6 Research Ethics

 Research ethics will be observed in this study. First, all the participants will be required to give informed consent before participating in the study. Second, the integrity of the data collection and analysis process will be maintained. Lastly, issues to do with plagiarism will be avoided by properly citing all data that will be collected from secondary sources (Creswell 2013).