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Techniques and Practices of Management Accounting Essay

Study of the application of management accounting in manufacturing sectors of Pakistan

Abstract

The world is now getting global; markets are far more competitive, new technologies have been introduced in manufacturing sectors, firms are more customer oriented, firms divert their attention toward the long-term growth strategies and want to remain profitable as much as they can. These factors lead firms toward a change of their management accounting practices from traditional to the new one because survival without innovation in this globally competitive world is impossible. These factors matter a lot for business, but there are other factors which are also under our consideration like the size of firms, the structure of firms, no of professional accountants, resources of firms, external environment of firms all these factors have a direct relationship with the usage of new and innovative management accounting practices.

The aim of conducting this study was to find out that to what manufacturing companies of Pakistan are using extent management accounting techniques.
For this study, we have taken a sample of 10 individual listed manufacturing companies in Pakistan. The questionnaires were developed for getting the data from respondents in these firms, all the data was gathered through the telephonic source.

Introduction

The researcher is always motivated toward the understanding of changes which are accruing in management accounting practices and its applications in this changing world. The technology is prevailing in every aspect of life and also in the most of modern businesses.

The firms are nowadays facing new challenges which they don’t imagine a few decades before, many of these organizations are moving toward the global competition, changing overall organization designs, getting more technology oriented, more customer oriented, show most of their concerns to efficient utilization of resources and also do value and cost analysis of their end products all these factors cumulatively makes businesses to think of acquiring new methods and techniques which makes them an amount able business in their particular business environments . Change in these variables is directly related to the application of modern management accounting techniques.

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So for the understanding of how the change in these variable affects the usage of management accounting practices in the manufacturing sector of Pakistan, we have selected ten different listed manufacturing companies of Pakistan.

These companies includes Ghazi Fabrics which belongs to personal goods (textile) area, Engro Polymer which belongs to Chemical sector, Shezan International which belongs to food product sector, Tariq Glass which belongs to Glass Industry, Ghani Global which also belongs to Glass producing sector, Berger Paints Pakistan Ltd which belongs to paint producing industry, Mehran Sugar Mills Ltd which belongs to sugar-producing factors, Nirala Foods which belongs to food-producing sector, Safe Mix Concrete Ltd which belongs to construction sector, Pakistan Gum and Chemicals Limited which belongs to chemical sector.

Through literature review, we were able to find the variables that affect management accounting this variable includes technology, size of firms, and structure of firms, no of professional accountants, globalization, external environment, and resources. On the bases of these variables, we have developed hypotheses

  1. Technology change has a direct association with the use of management accounting practices by the companies.
  2. Size of companies is associated with the use of management accounting practices by the companies.
  3. Globalization cause companies to use different management accounting practices.
  4. The more competitive environment will drive organizations towards change in their traditional management accounting techniques.
  5. More celebrated the no of resources of firms are directly related to the evolution of management accounting techniques.
  6. Professional accountants have direct impacts on the company’s management accounting practices.
  7. The structure of companies has an association with the use of management accounting techniques

Literature review

Many researchers had done researches on the change in management accounting practices which are caused by different variables in different time periods. So we have included seven factors which show the relevance of our topic.

Technology

Technology is the most critical factor that can affect the management accounting, with the advent of new technology the managerial accountants can record the product cost related data of their companies more quickly and the data interpretation is now more accurate, more efficient and decision making is now speedup due to the technology (Emmanuel et al., 1990). Now a days firms are changing from labor intensive to capital intensive this change requires a change in management accounting practices(Haldma and Lääts, 2002), such as when firms were labor intensive they use only traditional Manufacturing overhead technique to allocate the overheads to the products which were ok at that time because all firms were using the same method to map the costs to the product and most of the firms were making only one kind of products that’s why the products were able to survive in that environment.

Now firms are diversifying and can create various products at the same time with the utilization of technology in their manufacturing processes if management accountants continue to use the traditional overhead techniques to allocate the overhead costs to the products this will raise the price of the products which their firms offer to their customers and the higher price of the product can be a problem if competitor is offering the same quality product at the lower price this will result in loss of potential market share.

For overcoming this situation, firms now use activity-based costing (ABC) which makes them able to compete effectively in the market due to ABC firms can deliver a competitive product to the market which is necessary for their long-term existence (Emmanuel et al., 1990).

Size of the firm

Size of a firm also an essential factor that has a profound impact on the management accounting. Most of the large firms adopt changes more rapidly as compared to small firms. Large firms have an immense amount of capital and they can take more risks, for managing this massive amount of money and high level of risks firms need highly competitive management accountants who can make sure firms long-term existence, by using their in-depth knowledge of management accounting in managing of that high level of risks and capital (Ko et al., 2008).

The structure of firms

The structure of an organization affects the management practices. There are two types of organizational structures centralized and decentralized (Catelin, 2003). The organizations which are decentralized allows their employees to share the information’s and the ideas to the top management to make business more competitive and profitable as compared to the other players in the market. In decentralized organization management accountants are supported if they want some changes in the regular accounting practices(Chenhall 2003). Management accountants are warmly welcomed when they introduce the innovative management accounting practices such as activity-based costing (ABC) (Abdel-Kader and Luther 2008). These innovations to the management practices make the businesses to survive for an extended period (Brickley, Smith and Zimmerman, 2002).

Globalization

The globalization has taken the world into a new dimension. Most of the big firms are nowadays working outside of their country borders (Mubiru, 2003). This transformation of firms from their home countries to the other countries, where there is an entirely new working environment, new customers whose taste and choices are different, new competitors who already have in-depth knowledge of market and are performing their operations efficiently, new government policies and restrictions which new coming firms must consider when they make decisions (Abdel-Kader & Luther, 2008).These all factors will have a direct impact on the management techniques which they will use in that particular environment.

To survive in other countries firms must modify their management techniques they cannot use the same methods which they were using in the home country because changing environment needs a change in management techniques (Edirisinghe, Ismail &Emerson, 2009). You cannot attract the potential customers on the anticipation of what you will produce will be purchased by the customers and the price which your firms offer to them, unless you have done a proper costing and managed the others cost that will put burden on the amount of final product if they are not adequately controlled (Siegel & Sorensen, 1999).

The global competition has put pressure on the firms to evolve their management techniques which add value to their products, such methods which are introduced due to the worldwide competition are activity-based management (ABM), total quality management (TQM), benchmarking and re-engineering.

Professional Management accountants

Professional accountants play a vital role in the success of any organization. The money instructor.com has elaborated the importance of managerial accountants by saying that “The management accountants are equally important to the organization as rain is important to the farmers.” The influence of managerial accountants is evident that no organization can survive without having a professional accounting team. Formerly the role of accountants was limited to providing the accounting information which was used by the decision makers by making decisions.

Nowadays the part of managerial accountants have been changed from an information provider to active decision makers they are involved in planning, directing and controlling this includes overall value to the organization (Weygandt, Kimmel, and kieso(2008). In this era of immense competition, accountants bring evolutions in the traditional management accounting systems and bring a new variation to the management accounting which helps their organization to remain competitive in the market.

If an organization has a variety of talented accountants than the performance of that organization will be much better than the other players in the markets, because they all always will be focused toward changing the management accounting practices according to the need of environment and this will give them advantage. This organization has high chances of growth and survival.

Resources

Resources are significant for the growth and development of organizations (Adler and ET, 2000). The larger organization has much more support which they can use when they think there is a need for innovation in their standard accounting practices. While the smaller firms don’t have plenty of resources which they need to bring change in their accounting systems. Like larger firms with plenty of resources can afford highly qualified and competent accountants to look after their day to day issues.

These organizations have resources to change their entire accounting system from traditional manual mode to a highly sophisticated computer-based management system (Moores& Yuen, 2001. This change is positively related to the success of the organization. These organizations can afford high price advanced accounting software’s which makes them able to close monthly accounts in one or two days; the financial accuracy is increased, enhances the overall financial control provides more time for business partnering standardize the whole accounting process, eliminates redundancy, and integrate information across business units.

These changes provide a competitive advantage over the other firms. The entire process becomes efficient, and this makes them serve their customers (Baines and Langfield-Smith 2003) better.

External environment

Government policies shape the external environment of a business, customer’s choices, competitors, stockholders and stakeholders (Baines & Langfield-Smith, 2003). According to Tybot (2000), the external environment plays a vital role in the selection of the best accounting practices. Due to the increased use of technology and high level of globalization, the external environments become more competitive (Kassim et al., 2003). With the use of technologies, the firms in the external environment can serve better to their customers at a lower cost of production.

The globalization has brought new companies to the situation which have a considerable amount of resources and give a high-end competition to the existing businesses. These all factors force a firm to change their regular practices and to introduce new techniques to the companies which can maximize stockholders wealth and also provides the short term and long term growth opportunities which are necessary for competing in the challenging environment.

Methodology

The focus of this study was to find out that to what extent the manufacturing companies of Pakistan are using management accounting practices in their companies.

For conducting the study we have examined the literature review which was related to our research from that literature review we have considered seven variables that have an association with the use of management accounting practices by the companies, later we have designed a questionnaire which includes 15 questions most of the problem in our survey were close-ended in which responded were bound to selected the answers from the choices which are provided by us. The study covers these areas

  1. the size of the company
  2. Management accounting practices.
  3. Advance manufacturing technology.
  4. Competitive environment.
  5. Company performance.
  6. Empowered employees.
  7. Involvement of management in decision making.

The sample size for our research was 10. We have chosen ten different listed companies manufacturing companies in Pakistan. All the data was gathered by using telephonic source because most of the companies were far from the city, the second reason for choosing the telephonic reference is that it is less timely.

For drawing a comparison between the companies that are involved in our study Microsoft excel was used in the making of various graphs. These graphs tell about the performances of different companies relative to the other players which are part of our study of us Testing of all hypotheses had been done on Microsoft, and the toll which was used was chi-square test.

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