Effects of Management Accounting Practices on the Financial Performance of Manufacturing Companies in Nigeria
Chapter One
Research Objective
The general objective of this study was to investigate the effects of management accounting practices on financial performance of manufacturing companies in Nigeria.
Specific objectives
- To establish the management accounting practices undertaken by the manufacturing companies in Nigeria.
- To establish the effects of management accounting practices on financial performance.
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter presents a review of literature on the concepts under study. The chapter begins with a theoretical review where in section 2.2, theories of management accounting; 2.3 determinants of financial performance of manufacturing firms; 2.4 reviews empirical studies where a number of studies done on management accounting practices together with their findings and their contribution to the present study is made. This is followed by a conclusion of the literature review section.
Theories of Management Accounting
This section presents two theories. The first theory is contingency theory of management accounting while the second is the new institutional sociology theory of management accounting as discussed by Ribeiro and Scapens (2006).
Contingency Theory of Management Accounting
Burns & Stalker (1961) discussed why management accounting practices may be unalike when comparing one organization to the other. This can be related to organisations operating in different industries or sectors. Otley (1980) applied contingency theory to management accounting practices and explained that there is no single general standard accounting practice that can be applied to all organisations. In essence, each organization will have its own management accounting practices. The theory looks at certain influential factors that will assist management to decide on an appropriate management accounting practice. These factors can either be technological changes and the infrastructure of an organization. For example, a manufacturing food company may want to change the technology used to a more modern hygienic and efficient way of handling, processing and packaging its food. It may then consider installing a computer based system that mass produces its products. However, the type of qualified personnel that is required to operate such highly complex equipment will influence the type of management accounting practices selected and production costs.
Dugdale (1994) highlighted which management accounting practices are widely used in manufacturing organisations. Those that were highly favoured were budgeting for controlling costs and performance evaluation. His findings revealed that budgeting plays an important role in the managing and directing process of the organization. This tells managers what costs to expect over the next budgeted period and also gives an indication when the company might expect to go through a seasonal change and the impact it will have on the company’s cash flows and revenues. Perhaps this is the main reason why this particular management accounting practice is highly rated over many other practices. Dugdale (1994) further went on to mention that budgeting enables organisations to effectively plan and develop strategies to achieve their goals. Luther & Longden (2001) also observed that the budgeting process is an integral part of managing and controlling costs in the manufacturing sector, for example, in the UK, South Africa and Australia.
New Institutional Sociology
The foundations of New Institutional Sociology (NIS) were laid by Meyer and Rowan’s (1977) seminal paper, which came after a series of puzzling observations made in the 1970s by a group of researchers studying the educational sector in the USA. Specifically, they had identified inconsistencies and observed the loose coupling (March and Olsen, 1976; Weick, 1976) of formal structures/procedures and actual work practices, which existing organizational theory could not explain (Meyer and Scott, 1992).
The key contention of NIS is that some organisations exist in highly institutionalized environments. In this sense, “environment” is not merely conceptualized as a source of task constraints or a relational network (of customers, suppliers and other near constituencies) that poses demands for operational coordination and control on an organization. Rather, it includes the cultural rules and social norms that are reflected in specific formal structures and procedures of the organization. That is, institutionalized organisations tend to adopt structures and procedures that are valued in their social and cultural environment. They do this in order to achieve legitimacy and to secure the resources that are essential for their survival.
This search for legitimacy and resources explains why specific organizational forms and procedures are diffused across organisations operating in similar settings –, e.g. similar environments (Scott, 1992), societal sectors (Scott and Meyer, 1992), or organizational fields (DiMaggio and Powell, 1983). Developing this insight, DiMaggio and Powell (1983) suggested that this process of diffusion can create pressures that lead organisations to become isomorphic with other organisations in their institutional setting. Competitive isomorphism (Hannan and Freeman, 1977), such as market forces, is not dismissed, but the emphasis is placed instead on three types of institutional isomorphism – coercive, normative and mimetic isomorphism – that highlight the social and political dimensions of the environment in which organisations are located.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter outlines the methodology which the present study took. Outlined here are the research design, population and sample, data collection, and data analysis.
Research Design
This study adopted a descriptive survey design. According to Churchill (2011) it is appropriate where the study seeks to describe the characteristics of certain groups, estimate the proportion of people who have certain characteristics and make predictions. The study sought to collect data from the manufacturing companies at one point in time and determine the effects of management accounting practices on financial performance of manufacturing companies in Nigeria.
Population
Target population in statistics is the specific population about which information is desired. According to Ngechu (2004), a population is a well-defined or set of people, services, elements, events, group of things or households that are being investigated. This definition ensures that population of interest is homogeneous. Population studies also called census are more representative because everyone has equal chance to be included in the final sample that is drawn according to (Mugenda and Mugenda, 2003). The target population for this study was the 455 manufacturing companies in Nigeria.
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND INTERPRETATION
Introduction
This chapter presents the results of data analysis. Responses from 37 firms (representing 80.4% response rate) were used in the data analysis. The chapter presents results on the effects of management accounting practices on financial performance of manufacturing companies in Nigeria. The information was gathered from the staff in the finance department including Chief financial officers, accountants and Credits officers as they handle management accountancy issues. The objectives of the study were; to establish the management accounting practices undertaken by the manufacturing companies in Nigeria and to establish the effects of management accounting practices on financial performance.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary
The general objective of this study was to investigate the effects of management accounting practices on financial performance of manufacturing companies in Nigeria. This study adopted a descriptive survey design. The target population for this study was the 455 manufacturing companies in Nigeria.
The study found that costing systems were rated as highly used. The costing systems included; cost of quality, departmental overhead rates, separation of costs, plant-wide overhead rates, Activity- based costing (ABC), target costs and regression techniques and/or learning curve techniques respectively. The study also found out that the budgeting practices were highly used in the respondents companies. They included; budgeting for long-term (strategic) plans, zero-based budgeting, budgeting for controlling costs, flexible budgeting, budgeting with “what if analysis”, budgeting for planning and activity- based budgeting. Performance evaluation measures were also found to be highly used in the respondents companies. They included; non-financial measure(s) related to customers, non- financial measures(s) and benchmarks. The study found out that information for decision making were used in the respondents companies. These included; evaluation of major capital investment based on discounted cash flow method(s), evaluation of major capital investments, and Cost-volume-profit analysis (break-even analysis) for major products. Strategic Analysis was also established to be highly used in the respondents companies.
Conclusions of the study
The study concludes that Information for Decision Making practices is the most highly used management accounting practice amongst the manufacturing companies in Nigeria followed by Strategic Analysis, Budgeting, Performance Evaluation, Costing, Size and Leverage respectively.
The study further concludes that the most important elements of management accounting practices amongst the manufacturing companies in Nigeria are; The management accounting function identifies key factors that influence performance and risky areas that require improvements and Return on equity, ROE (Net income / Average Equity) has increased as a result of application of management accounting practices, The management accounting function develops strategies that enable the manufacturing companies to exploit financial innovations in creating a sustainable competitive advantage and Management accounting provides information from its environment to management to facilitate decision-making and Return on Asset, ROA (Net income /Total assets) as a result of application of management accounting practices.
Recommendations for Policy and Practice
This study examined effects of management accounting practices on financial performance of manufacturing companies in Nigeria. From the practice perspective, this study recommends the creation and enhancement of awareness among firms of the importance of
information for decision making practices as this is the most highly used management accounting practice amongst the manufacturing companies in Nigeria.
The findings recommend that to achieve a proper measure of financial performance, firms need not only to integrate Return on Equity, Return on Asset and Earnings per share as the measures for accounting but also other value based measures which have gained popularity in academic literature in last two decades.
As an efficient accounting ethical practice, it is the responsibility of the management accounting professionals to remain relevant in adding value to the companies for which they work and to their profession by keeping abreast of research findings in their area of responsibility.
In relation to policies, accounting curriculum should be developed consistently to the changing role of accountants. Accounting Education must equip their student with capabilities in coping with the rapid changing of the business environment so that they can always provide relevant management accounting information to managers.
Academics and practitioners can use the findings of this study to fully understand how management accounting practices can help to improve business performance in companies.
Limitations of the Study
The study only concentrated on the management accounting practices of manufacturing companies in Nigeria and not all the companies in the economy. These results are therefore only limited to the manufacturing companies and may be of little or no use to the companies in other sectors in the country.
Due to the self-report nature of data which entailed the use of questionnaires, responses on the survey may not accurately convey their real involvement in the management accounting practices. Some of the respondent did not return the questionnaires therefore, resulting to lesser the targeted sample thus, influencing the nature of statistical reporting.
Further, some firms did not accurately disclose the ROA figures due to the nature of the sensitivity of financial information disclosure. Therefore, this affected proper statistical analysis of the data.
Finally, due to limited time available to carry out the research, the above areas were not comprehensively studied to provide a national wide picture. This would be an important area because policy makers and implementers argue that the effects of management accounting practices on financial performance of manufacturing companies in Nigeria can only be resolved by providing them with research action points based on empirical data.
REFERENCES
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