COST ACCOUNTING AND MANAGEMENT ACCOUNTING AS A TOOL FOR PERFORMANCE EVALUATION IN MANUFACTURING COMPANY

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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 unfavorable 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? . What is the effect of cost accounting and management accounting on manufacturing company performance?

COST ACCOUNTING AND MANAGEMENT ACCOUNTING AS A TOOL FOR PERFORMANCE EVALUATION IN MANUFACTURING COMPANY