COST ACCOUNTING AND MANAGEMENT ACCOUNTING AS A
TOOL FOR PERFORMANCE EVALUATION IN MANUFACTURING COMPANY
CHAPTER ONE
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:
1. To find out if cost accounting can be a
tool for performance evaluation in manufacturing company
2. To find out if management accounting can
be a tool for performance evaluation in manufacturing company
3. To
examine the effect of cost accounting and management accounting on
manufacturing company performance.
1.4 RESEARCH
QUESTIONS
1. Can cost accounting be used as a tool
for performance evaluation in manufacturing company?
2. Can management accounting be used as a
tool for performance evaluation in manufacturing company?
3. 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:
1. 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.
2. 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.
REFERENCES
Ayodele, A.
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IFAC (1998).
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pdf.
Johnson, H.
T. & Kaplan, R. S. (1987) Relevance lost: The rise and fall of management
accounting. Massachusetts: Harvard Business School Press.
Kaplan, R.
S. (1983). Measuring manufacturing performance: A new challenge for managerial
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Khandwalla,
P. N. (1977). The design of organizations. New York: Harcourt Brace Jovanovich
Inc.
National
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from http://www.nigerianstat.gov.ng/pages/download/40.
Shillinglaw,
G. (1989). Managerial cost accounting: present and future. Journal of Management
Accounting Research, 1, 33-46.
Soderbom,
M. and Teal, F. (2002). The performance of Nigerian manufacturing firms report
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of African Economies. Retrieved from www.unido.org/file_storage/download/ ?file_id=8152.
Skinner, J.
L. (2003). Accounting for decision making and control. (4th ed.). Boston:
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