Managerial and Cost Accounting - Assignment Example

Managerial and Cost Accounting Introduction Managerial accounting is the identification, collection, classification and reporting of financial and non-financial information, which is useful to internal users in planning, controlling and decision making (Rich and Jones 667). Managerial accounting is a vital function of an organization. It aids in planning for the future. Managers use managerial accounting reports such as budgets to make future projections for the organization. Managerial accounting also helps in instilling control within an organization. This is because managerial accounting provides information and reports that may be used by organizations to identify areas within the organization that need additional investigation and examination. Managers use information provided by managerial accounting such as budgets to make decisions and plans. The information provided by managerial accounting can be used by managers to solve problems. Therefore, managers can use such information to develop alternatives to issues arising from budgets and production changes. Managerial accounting information is used by managers to make estimations of product and service costs and profitability. In addition, managers understand customer orientation through managerial accounting. Managers are able to evaluate the business from cross functional perspective by use of managerial accounting information. Managerial accounting also provides information that is useful in improving total quality by an organization (Rich and Jones 667). Through managerial accounting, managers can formulate and implement an organization’s strategy activities. It also enables managers to do their work efficiently and effectively, adding value to the organization. This is because managerial accounting creates organizational alignment throughout the organization and facilitates continuous learning and improvement (Davis and Davis 4). This paper investigates then application of management accounting practices in one of the Saudi organizations, SABIC. In the analysis, the use of both financial and managerial information in decision making are evaluated. This analysis is done in comparison with the application of MAPS by UK companies that produce foods and drinks. The study also analyses the financial and non financial benefits of using MAPs to an organization. This study fills the gap that exists between literature and practice. The information of this study can also be used in the educational sector. Literature Review In 1993, Alnamri and Majbour carried out a research on management accounting in Saudi Arabia. This study was a comparative analysis of Saudi and Western approaches, which investigated the differences and similarities in management accounting practices between companies owned and managed by Saudis and joint venture companies in Saudi (Alnamri and Majbour). In the investigation, the managerial use of accounting, sophistication of management accounting systems and the role of accountants in decision making and control were investigated. Similarities and differences between the researched companies in terms of accounting system sophistication and managerial use of accounting and the accountants’ role of in decision making and control were also studied (Alnamri and Majbour). The study was only descriptive. It was established from the study that Western joint venture companies based in Saudi Arabia have sophisticated accounting systems, compared to Saudi owned and managed companies (Alnamri and Majbour). Also, accountants of Western joint venture companies based in Saudi Arabia play a greater role in decision making and control, compared to Saudi owned and managed companies. In addition to the aforementioned findings, it was found out, in the study, that managers of Western joint venture companies based in Saudi Arabia fully depend on accounting information in decision making and control (Alnamri and Majbour). This case was not exhibited by Saudi owned and managed companies, which were studied. The study also sought to provide explanations of the reasons as to why there are differences in managerial accounting practices between the companies that were studied. To achieve this, the study investigated the relationship between the environmental, organizational and managerial variables and the sophistication level of management accounting systems, the role of accountants in control and decision making and the use of accounting information for managerial purposes (Alnamri and Majbour). Senior management is among the imperative factors that contributed to the differences of the practices of the companies that were studies, as indicated by the results of the study (Alnamri and Majbour). Organizational goals, competition in terms of price, ownership and accounting education were the other factors that the study found to be influential (Alnamri and Majbour). Separately, in 2003, El-Ebaishi, Karbhari and Naser carried out a study on the empirical evidence on the use of management accounting techniques in a sample of Saudi manufacturing companies. Both large and medium sized Saudi, manufacturing companies were examined to determine their use of selected management accounting techniques (El-Ebaishi, Karbhari and Naser). The research found out that majority of the studied companies use management accounting practices. However, most the participant companies use traditional management accounting techniques (El-Ebaishi, Karbhari and Naser). It was also established that new management accounting practices such as Activity Based Costing and Just In Time are used by very few number of the study’s participant companies. However, this finding was in line with the findings of similar studies carried out in some developed countries (El-Ebaishi, Karbhari and Naser). McLellan and Moustafa studied the management accounting practices in the Gulf Cooperative Countries (GCC) in 2011. Preceding, similar studies established that Western countries have well established business and management information systems (McLellan and Moustafa) 1. The main objective of the study was to examine the use of management accounting practices (MAP’s) in the GCC and to determine which MAP’s are most used by managers. The study surveyed businesses from six different countries. The study was also not industry specific, as compared to other studies. In the study, the extent of the use of large numbers of management accounting tools and techniques by businesses in the six GCC countries was examined (McLellan and Moustafa). It should be noted that the study sought to examine whether companies in the GCC countries depend on traditional management accounting practices such as budgeting for planning and control, performance evaluation and standard costing, based on divisional profits or they rely on the recent strategic focused tools such as Activity Based Costing and the use of the balanced scorecard (McLellan and Moustafa 2). The study had three hypotheses. The first hypothesis sought to find out whether the use of budgeting to plan day to day activities, cash flows, profits and budgeting for control tools would be the most frequently used MAP’s ranked by respondents, with means greater than one standard deviation above the average mean of all tools (McLellan and Moustafa 4). The second hypothesis sought to find out whether traditional cost accounting techniques such as standard costing and job costing would be ranked above the average mean use while more contemporary tools such as ABC, target costing and product life cycle costing would rank below the average mean use (McLellan and Moustafa 4). The third hypothesis of the study sought to find out whether performance evaluation measurement tools such as divisional profits, Return on Investment, economic value, added and residual income, the balanced scorecard and non-financial measures such as customer satisfaction analysis would be ranked above the average mean for all management accounting tools (McLellan and Moustafa 5). The study used an adopted survey questionnaire from other studies to collect data. The survey questionnaire was uploaded Survey Monkey, a software program. The results of the study indicated that current management accounting tools were less frequently used. The same case was observed for the use of non-financial tools such as customer satisfaction, benchmarking, supplier evaluation and competitor analysis. Management accounting tools with a longer term focus such as product life cycle, Activity Based Costing, economic vale added and cost of quality tools were ranked as rarely used by companies in the GCC (McLellan and Moustafa 11). Short term decision making tools such as volume profit analysis, development of contribution margin statements and product productivity analysis were ranked higher in terms of usage than long term decision making tools such as performance of sensitivity analysis and the use of cost of capital in discounting cash flows (McLellan and Moustafa). The use of budgeting fro planning and control was the most frequently used set of MAP’s while traditional cost accounting tools ranked higher than current, contemporary tools such as Activity Based Costing and target costing. It was found out that companies in the GCC rarely use customer satisfaction analysis, economic value added to business, the balanced scorecard and residual income tools (McLellan and Moustafa). These previous studies are important because they have helped fill the gap between literature and practice. The studies also provide valuable insights on the issue of management accounting practices application in Saudi companies that can be used in future studies. For instance, the research that was carried out by El-Ebaishi, Karbhari and Naser aimed at filling the gap in literature because no previous study had been done to investigate the use of management accounting practices by wholly owned Saudi manufacturing companies. The study was also vital in providing information to other GCC countries such as Kuwait, UAE, Oman, Qatar and Bahrain (El-Ebaishi, Karbhari and Naser). The study also provided crucial inputs to policy makers in the Saudi higher education sector for managerial accounting teaching. The study by McLellan and Moustafa would benefit management accounting educators in the GCC. This would help them equip their students with technical skills that are both relevant and required in the current, fast paced economy. Discussion The application of management accounting practices in Saudi organizations is influenced b various factors. It should be noted that Saudi Arabia is a developing economy, and the country has not fully achieved its goals in terms industrialization and adoption of new technologies. Therefore, Information Communication Technology adoption and diffusion determines how Saudi organizations implement and apply MAPs. Organizations that have adopted IT to the fullest can apply these practices while others, which have not, may not be able to apply MAPs. Secondly, accounting regulatory organizations within Saudi also influence how companies apply MAPs because they regulate and oversee the accounting and reporting practices of organizations. Finally, education is a determinant of the application of MAPs because managers and other employees apply what they have been taught in institutions in managing their companies. In this analysis, SABIC, a Saudi organization has been analyzed and compared with UK food and drink manufacturing companies, in terms of MAPs application and implementation. SABIC is a Saudi corporation that manufactures chemicals, fertilizers, metals and plastics (SABIC). The company aims at knowing how business works and what brings sustained growth and market leadership. Therefore, SABIC seeks to help power its customers’ competitive advantage for the long term (SABIC). The company also seeks to maintain, and even increase its global presence by investing in innovation and technology. To meet customer needs, SABIC ensures that it avails the right products to clients at the right time. SABIC is among the top performing companies in Saudi. For instance, the company’s net profit was 6.47 billion riyals in the third quarter of this year, compared to last year’s net profit of 6.31 billion riyals. The company’s sales went up by 9%, meaning that the actual sales were 48.8 billion riyals (Churchill). In analyzing the application of management accounting practices by this company, it was found out from the financial report that the company’s management uses financial information in making business decisions majorly. The 2012 annual, financial report for SABIC indicated that accounts receivables increased in 2012 to 31,542,075 riyals, compared to 31,426, 445 riyals for 2011. Management uses this information to plan on how to meet short term financial needs. SABIC inventories for 2012 were worthy 18,823,892 riyals, compared to 19,121,688 riyals for 2011. Information about inventories is used by management to forecast and project production schedules so as to meet customer demands. Investments increased to 7,617,409 riyals in 2012, compared to 7,007,177 riyals recorded in 2011. This information is used by management of the company to plan its investment projects and how to finance such projects. Assets such as land and buildings increased from 16,167,506 riyals in 2011 to 18,239,879 riyals in 2012 while plant and equipment reduced from 128,854,936 riyals to 123,773,249 riyals and furniture and fixtures increased from 458,626 riyals to 997,365 riyals. Information on non-current assets is used by management for control so that areas that need more investment are addressed. From the annual report, work in progress for SABIC in 2012 was 22,429,823 riyals, compared to 20,323,489 riyals in 2011. This information would be used by management in planning production. The company’s accounts payable increased from 16,388,099 riyals in 2011 to 19,604,347 riyals in 2012 while long term debt reduced from 87,907,399 riyals in 2011 to 79, 624,927 riyals in 2012. This information was also used for planning and making decisions on financing issues. However, SABIC applies management accounting practice, though, in limited instances. For instance, the company provides segment information, where it analyses performance by segment. These segments are chemicals, fertilizers and metals (SABIC). Secondly, SABIC adds economic value by engaging green chemistry technologies such as plastic recycling, production of fiber-enhanced plastics and other bio based material (SABIC, Sustainability Report 2012)48. In comparison to companies in the United Kingdom food and drinks manufacturing industry, it is imperative to note that these companies apply management accounting practices to a greater extent than their counterparts in Saudi. For instance UK food and drinks manufacturing industry distinguish between variable costs and fixed costs for decision making purposes (Abdel-Kader and Luther). Also, some companies use overhead allocation to cost objects. As much as UK companies realize that costing of quality is important, it is not frequently calculated. Therefore, most of the UK companies only use overhead allocation techniques for ad-hoc costing studies. It is also evident that budgeting is often used for planning and controlling costs by companies while Activity Based Budgeting is regarded as important too, but it is not used. There is a high frequency in the use of traditional financial measures while non-financial measures are not used frequently by these companies. This is because it is believed that non-financial information is crucial in addressing issues pertaining to customers, operations, and innovation, which is not regarded as an accounting activity. However, product profitability and customer profitability analysis are calculated by UK companies to facilitate decision making. Also, accounting rate of return and pay back period for major capital projects is used (Abdel-Kader and Luther). There are various financial and the non-financial benefits that accrue before and after the application of the MAPs in a company. When a company applies management accounting practices it benefits from product specialization. A company is also able to acquire area and customer specialism because MAP’s provide management with relevant information for addressing these issues. As a result of the application of MAPs, performance management becomes easier because there are clear responsibilities for different sections. Consequently, application of MAPs develops managers. The costs that are recorded when MAPs are applied reflect the complexity of production while selling prices are more realistic, reflecting resources used by products. MAPs aid in control, as responsibility is appropriately allocated and arbitrary nature of cost absorption is reduced (Barnett 32). Limitations of the Study There are some limitations that were associated with this study, especially in collection of data. First, most of the companies do not publish management accounting reports. Companies provide financial reports only. Therefore, there were challenges in collecting information on how companies apply MAPs. As a result, the study had to rely on sustainability reports of companies. However, sustainability reports may report what the organization intends to do so as to please stakeholders and authorities, but do not specify how, and this information may not be practicable. Therefore, reliance on secondary information was the major limitation to collection of data for this study. Conclusion It has been established, from this study, that organizations in Saudi Arabia do not apply Maps as much as Western countries’ organizations. Traditional financial performance management accounting tools such as budgeting, profit based performance and variance analysis are highly adopted by many Saudi organizations, compared to the recent management accounting practices such as Activity based Costing, which have low adoption rates. In addition, traditional short term planning and control tools are used frequently by Saudi organizations. These include budgeting for planning and control, budget variance analysis, job costing, standard costing and contribution margin analysis. In performance evaluation, traditional tools such as ROI and divisional profits are used in high rates, compared to the balanced scorecard. MAP’s for longer term focus are the least used by Saudi companies. These include sensitivity analysis and evaluation of major capital investments. Works Cited Abdel-Kader, Magdy and Robert Luther. "Management Accounting Practices in the UK Food and Drinks Industry." 2013. Web. 14 December 2013. Alnamri and Majbour. "Management Accounting in Saudi Arabia: A Comparative Analysis of Saudi and Western Approaches." 1993 . Web. 14 December 2013. Barnett, Ian. CIMA Exam Practice Kit Management Accounting Performance Evaluation. Oxford : Elsevier Press, 2007. Print. Churchill, Neil. "Revealed: Top 5 Companies In Saudi Arabia 2013." 6 November 2013. Web. 14 December 2013. Davis, Charles E and Elizabeth Davis. Managerial Accounting. Hoboken: John Wiley & Sons Press, 2012. Print. El-Ebaishi, Mohammad, Yusuf Karbhari and Kamal Naser. "Empirical Evidence on the Use of Management Accounting Techniques in a Sample of Saudi Manufacturing Companies." International Journal of Commerce and Management (2003): pp. 1-5. Print. McLellan, John D. and Essam Moustafa. "Management Accounting Practices in the Gulf Cooperative Countries." International Journal of Business, Accounting, and Finance (2011): pp. 1-15. Print. Rich, Jay S and Jefferson P. Jones. Cornerstones of Financial and Managerial Accounting. Mason: South-Western/Cengage Learning Press, 2012. Print. SABIC. "Annual Reprt & Accounts 2012." 2013. Web. 14 December 2013. SABIC. "Chemistry that Matters." 2013. Web. 14 December 2013. SABIC. "Sustainability Report 2012." 2013. Web. 14 December 2013. Read More