CHAPTER ONE
INTRODUCTION
1.1 Background to the study
The small and medium scale enterprises sector has been recognized worldwide for its role in economic advancement through various ways like; wealth generation, employment creation, and poverty reduction. Small and medium scale enterprises are a fundamental part of the economic fabric in most developing countries, and they play a very important role in furthering growth, innovation and prosperity. Small and medium scale enterprises are defined as non- subsidiary, independent firms which employ less than a given number of employees, this number varies across national systems, other parameters other than the number of employees are used in categorizing businesses as small and medium scale enterprises. Small and Medium Scale Enterprises are mostly found in the service sector of various economies which in most countries account for two-thirds of employment levels.
The primary objective of management accounting is to help managers in carrying out the tasks of: planning, organizing, directing, controlling, and decision making. Also, the major goal of every organization is to achieve satisfactory financial result and for a firm to be financially buoyant the management of that organization must be efficient and effective and this will depend on the management accounting techniques being used. According to Rehman, (2011) efficiency means maintaining a satisfactory relationship between a firms resource inputs and its outputs (the number of labor hours required to produce a product); effectiveness on the other hand refers to how well a firm attains its goal (for example, actual sale value against planned sale value).Nurturing of the small to medium size enterprises (SMEs) is being hailed for their pivotal role in promoting grassroots economic growth and equitable sustainable development, this nurturing has resulted in increased entrepreneur activities in the small and medium scale enterprises sector in developing countries. Small and medium scale enterprises play a key role in transition and developing countries. These firms, constitute a major source of employment and generate significant domestic and export earnings, thus small and medium scale enterprises development emerges as a key instrument in poverty reduction efforts and their advancement is key to sustained economic growth, for they are an integral part of a country’s economic fabric and their success affects the well being of the society as engines of job creation, economic growth and innovation.
In Kwara state, the small and medium scale enterprises play an important role in employment and wealth creation, income distribution, accumulation of technological capabilities and spreading the available resources among a large number of efficient and dynamic small and medium size enterprises.The small and medium scale enterprises sector acts as the incubating center for emerging entrepreneurial pursuits and thus complementing the process of adjustment in large enterprises by bringing backward and forward linkages for products as well as services previously not available in the market. If well utilized, the modern management accounting techniques can provide the firm’s management with the aid to be more efficient in its operations as well as being more effective in its end results.
Small and medium scale enterprises (SMEs) are the life wire of every developing economy. Their role in the economy cannot be over looked as they contribute immensely to the growth of the nation’s economy and equally generates employment opportunities. The need for the adoption of modern management accounting techniques in these forms of enterprises therefore becomes paramount as this will enable them embrace and appreciate the benefits of management accounting and conduct their businesses to meet internationally accepted accounting standard. As today‟s business environment becomes increasingly competitive, business organisations are becoming more aggressive and dynamic in identifying competitive 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 organisations may compel the management to develop business techniques and strategies that would guide an organisation 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 organisation 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 organisation 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 organisation (Kiesler and Sproull, 1982:548). 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 (1997:243) argue that they enable an organisation to gain an advantage in the ever demanding competitive business environment where innovative management accounting practices need to be employed.
1.2 Statement of the problem
Traditionally, management accounting has been dominated by quantity financial information. Modern management accounting techniques such as Activity based costing, Target costing, and Life cycle costing are mainly developed as a reaction to changes in information needs driven by a growing competitive environment. Activity based costing systems measure more accurately the cost of activities, products, services and customers. Target costing is a method of strategic management of cost and profit. It involves setting a target or objective for the maximum cost of a product or service and then working out how to achieve this target. Life cycle costing is a technique that attempts to identify the total cost associated with the ownership of an asset so that decisions can be made about asset acquisition.Subject to changes in the economic system around the globe, there is an indication that management accounting may have lost some relevance to management of other information. Lack of managerial accounting skills and techniques for decision making are obstacles to SMEs obtaining credit.Adoption of modern management accounting techniques such as Activity based costing, Target costing, and Life cycle costing would bring about the following benefits: Accurate measurement of cost of activities, Strategic management of cost and profit, and improved evaluation of options.
