Impact of Management Accounting Techniques on Manufacturing Companies’
Performance: based on MA costing and budgeting process
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
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.
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.
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
The study will aim at achieving the following specific objectives;
find out practices in the area of management accounting employed by
manufacturing firms in the U.K.
find out the impacts of management accounting costing as well as budgeting on
the performance of manufacturing firms in the U.K.
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.
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.
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).
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.
Manufacturing Companies Performance Determinants
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).
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.
Budgeting and MA Costing
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
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.
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.
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.
Sampling Method and Sample Size
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.
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.
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
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).
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