IMPACT OF MANAGEMENT ACCOUNTING PRACTICES ON PROFITABILITY OF MANUFACTURING FIRMS IN NIGERIA
CHAPTER ONE INTRODUCTION
Background the Study
Management accounting practice helps an organization to survive in the competitive, ever- changing world, because it provides an important competitive advantage for an organization that guides managerial action, motivates behaviors, supports and creates the cultural values necessary to achieve an organization’s strategic objectives. Management accounting is concerned primarily with the internal needs of management. It is oriented toward evaluation of performance and development of estimates of the future as opposed to traditional financial accounting which emphasizes historical data related to such legal financial matters as ownership, investment, credit granting, taxation, regulation, and the building of foundations for consistent and conservative external reporting, “in accordance with generally accepted accounting principles.” Flexibility is an essential characteristic of management accounting since it presupposes that careful attention has been given to determine the important needs of management, many of which cannot be precisely identified in advance (Parker, 2002). The Institute of Management Accountants (IMA), the professional association of practicing and academic management accountants, defines management accounting as “The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities” (Smith, 2009).
Management accounting provides information from its environment to management to facilitate decision-making. Good management accounting information has three attributes: Technical-it enhances the understanding of the phenomena measured and provides relevant information for strategic decisions, Behavioral-it encourages actions that are consistent with an organization’s strategic objectives, and Cultural-it supports and/or creates a set of shared cultural values, beliefs, and mindsets in an organization and society (Ashton et al., 1991). The development of management accounting is responsive to the demands of management and the environment. Management accounting adapts to organizational change and three major forces cause organizations to evolve: technological change, globalization, and customer needs (McWatters, 2001). In order to remain competitive in today’s global market, business must continually improve. Good management accounting practices help the organization to improve continually. Due to these all over the world there are so many management accounting tools & techniques developed and practiced.
Ittner and Larcker (2002) defined management accounting practices as a variety of methods specially considered for manufacturing businesses so as to support the organization’s infrastructure and management accounting processes. Management accounting practices can include budgeting, performance evaluation, information for decision-making and strategic analyses, among many others. Ittner and Larcker (2001) argued that due to the development of these new methods, the basic principles of management accounting has changed to a more superior one that adds value to various practices. The literature has also indicated that some practices such as absorption costing and marginal costing have not been highly favoured by most 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.
Management accounting practices enable management to obtain relevant information for meaningful decision making (Alleyne and Weekes-Marshall, 2011). Uyar (2010) noted that the perceived importance of cost accounting is driven by decreasing profitability, increasing costs and competition, and economic crises. The author also noted that while companies still perceive traditional management accounting tools as still important, new management accounting practices such as strategic planning, and transfer pricing are perceived less important than traditional ones. The study also found that the most important three management accounting practices are budgeting, planning and control, and cost- volume-profit analysis.
A number of factors influence the changes in management accounting practices within some organisations. Otley and Berry (1980) made reference to some systems as open, that is, there is a continuous cycle of resources that are inputs which moves from the external environment. It is a common belief that such changes will have an influence on the selection of the appropriate management accounting practices within any organization. Some researchers have commented that such changes may originate due to different settings of both economic and cultural environments. Most of the research focused on changes in management accounting practices, primarily in countries such as South Africa and Canada (for example Luther and Longden, 2001). However, some researchers noted what is often taught in schools is far different in the world of work and therefore creates a breach in knowledge between the practice and the theory. Johnson and Kaplan (1987) argued that management accounting has not changed over the past years. However, Libby and Waterhouse (1996) were convinced that there were changes. Burns et al. (1999) further argued that there is evidence that management accounting practices have changed over the last decade in a developed country such as the UK.
Management accounting as a research paradigm has not been fully explored in Nigeria. A few studies exist on the same mainly as theses and dissertations in various universities in Nigeria (for instance Arithi, 2001; Waweru, 1999; and Mapetla, 1982) and around the world (for example Ndwiga, 2011), a few in local journals in the country (for example Waweru, Kamasara and Anyangu, 2003) and very few, if any, in international journals (for instance Abdel-Kader and Wadongo, 2011; and Mathenge, 2012). Therefore, it can be concluded that the effects of management accounting practices on financial performance in Nigeria is not well documented just as much as in other developing countries as had noted Li and Yu (2002).
Statement of the Problem
As today’s business environment becomes increasingly competitive, business organizations are becoming more aggressive and dynamic in identifying strategies that will ensure profitable existence. Competition may be attributed to business innovations, advancement in technology and the changing demand of customers. Competition amongst business organizations may compel the management to develop business techniques and strategies that would guide an organization towards the maximization of profits. This may be achieved through increased sales and reduced cost of production. The optimization of profits and minimization of costs may enable an organization to create a competitive advantage in its industry. Certain management accounting practices provide strategies that can influence a large number of customers to have a lasting preference for a company’s products. Thompson, Strickland and Gamble (2009) are of the view that the adoption of management accounting techniques may provide an organization with a sustainable competitive advantage over its rivals.
Management accounting practices have moved from reporting historical information, especially on variance analysis, to taking part in the strategic planning process of an organization (Kiesler and Sproull, 1982). These authors contend that management accounting skills are actively applied in the business environment where both market intelligence is sought and evaluated, and strategic decisions are made and competitive strategies put in place. These are factors which Ittner and Larcker (1997) argue that they enable an organization to gain an advantage in the ever demanding competitive business environment where innovative management accounting practices need to be employed. The management accountants, especially those in the manufacturing sector, should therefore be at the forefront in the search and development of innovative competitive strategies that may enable an organization to remain profitable and competitive. These measures are particularly important in the manufacturing sector where efficiency and cost effectiveness may be used as a competitive tool for growth and profitability. Studies in other countries have shown that despite the developments in management accounting theory, the practice has not changed as companies still prefer the use of traditional management accounting tools (Uyar, 2010).
The accounting profession in Nigeria has grown tremendously with the adoption of IFRS and IAS as accounting and auditing standards. Over the years, the challenge to keep costs down in order to keep better performance has been predominant in most companies and especially those listed on the NSE given the pressure from the shareholders for firms to post better performance. With the overall economic situation in Nigeria, investors are looking for companies that can create wealth for them hence companies which perform poorly do not attract investors. Management accounting offers the best opportunity for firms to compete in the market in order to offer best quality products and services at affordable prices to consumers. Most of the existing research literature on accounting in Nigeria manufacturing companies tends to be more biased toward the arm of financial accounting, information technology adoption as well as research in credit accessibility for manufacturing companies, more so only remote exists in regard to effects of management accounting practices on financial performance of manufacturing companies in Nigeria (Wairegi, 2011),(Makau, Wawire, & Ofafa, 2013), (Waweru, 2012), (Mugambi, 2010), despite this previous research studies being vital, lack of management accounting practices for decision making and lack of technical skills are as much obstacles to developing manufacturing companies as is the inability to access credit (Mbogo, 2011). This study thus sought to establish the Impact of management accounting practices on Profitability of manufacturing firms in Nigeria.
The general objective of this study was to investigate the Impact of management accounting practices on Profitability of manufacturing firms in Nigeria.
- To establish the management accounting practices undertaken by the manufacturing companies in
- To establish the effects of management accounting practices on financial
- Evaluate the benefits associated with the use of appropriate management accounting practices by manufacturing firms in Nigeria
Significance of the Study
This study adds onto the theory of management accounting in developing countries by focusing on the practice of manufacturing companies in Nigeria. The study will show whether the manufacturing companies still prefer the traditional tools or if there has been developments in practice as has the theory. The study will also benefit various other companies in Nigeria as they will understand the methods and tools available for them as far as controlling costs are concerned. The recommendations provided will help the firms improve their practice. The study will also benefit scholars and academicians interested in pursuing a study in accounting and especially management accounting as it will form a foundation for other studies.