THE IMPACT OF MANAGEMENT ACCOUNTING TECHNIQUES ON ORGANIZATIONAL DECISION MAKING

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THE IMPACT OF MANAGEMENT ACCOUNTING TECHNIQUES ON ORGANIZATIONAL DECISION MAKING

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Management accounting technique is essential for the attainment of the set objectives and decision making in every organization or company. Decision making of the company will not be guided as management accounting techniques provide adequate guide to management decision making at all levels. It is a known fact that techniques change over time largely because businesses themselves and the societies that they operate in change as well. What was considered as a good management technique a year ago may be considered ineffective in making decision in the future. Businesses thrive based on quality decision. Accounting system is a major source of management accounting. Management accounting technique is there to help improve the organization making by making routine operation decision, strategic decisions, report the outcome of their operation to the management.

Any organization, whether private or public has set objectives. Attainment of these objectives depends on how effectively the resources available to the organization were deplored for the purpose for which they are meant to serve. Also deployment of these resources to appropriate area agreed in the organization depends on the information available to the management of the organization. The role of management accounting is to, provides valuable information concerning segments and the entire organization, take care of long term strategic decisions, and ensure the efficiency of any entity.

The problems organizations face in decision making arise from lack of management accounting section in the organization, unqualified nature of the accounting personnel Most organizations are resolved in taking strategic decision without prior analysis using the techniques in management accounting. For proficiency and productivity in any establishment, management accounting department is highly recommended to enable adequate administration and control of cost to take place. Also, changing external business environment has resulted in further developments in the tools and techniques used for management accounting. There have been issues arising from decision making in organizations that is why the current techniques used by the management in making their decisions such as; make or buy, cost-volume-profit analysis, just-in-time, inventory management, budgeting, variance analysis, activity based costing, linear programming, relevant cost, incremental cost and opportunity cost are the techniques to be discussed during the cause of the project.

The chartered institute of management accounting (CIMA) defines management accounting as the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organizations. Also, 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 Management Accounting Practices Committee (MAPC) of the National Accounting Association (NAA) of the United States, defined Management Accounting as “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of financial information used by management to plan, evaluate, and control within an organization mad to ensure appropriate use of accountability for its resources. In summary, management accounting is the use of accounting information, financial and non-financial in the decision making of an organization to keep the values and also help put the organization in order.

Decision making may be simply defined as choosing a course of action from among many alternatives. If there are no alternatives, then no decision is required. A basis assumption is that the best decision is the one that involves the most revenue or the least amount of cost. The task of management with the help of management accountant is to find the best alternative. From the descriptive model of the basic features and assumptions of the management accounting perspective of business, it is easy to recognize that decision making (strategic, tactical, short-run or long-run) is the focal point of management accounting. There are a lot of management accounting techniques that can enhance organizational decision making and they are; cost-volume-profit-analysis, cash-flow analysis, marginal costing, differential-costing, activity-based costing, opportunity costing, target costing, just-in-time, incremental costing, linear programming, inventory management, variance analysis, etc. This study intends to focus on three techniques which are; cash flow analysis, activity based costing and target costing.

1.2 STATEMENT OF THE PROBLEM

Management accounting technique aims at providing information, which should help management to plan and control the resources of the organization. Companies lacking appropriate Management Accounting skills may be unable to make the right decision needed for the long run survival of the business. Most organizations are resolved in taking strategic decision without prior analysis using the techniques in management accounting. This study tends to give solutions to the problems affecting management accounting techniques and decision making in manufacturing companies. The following are the problems briefly considered;

I. In effectiveness of cash flow analysis as a tool for management decision making.

II. In ability of management to reach an effective decision making as a result of using marginal

III. costing technique, as a management accounting technique tool

Inconclusive decision reached as a result of using standard costing technique

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to determine the impact of management accounting technique on organizational decision making. There is the specific objective of the study which includes:

I. To examine the impact of cash flow analysis on organizational decision making.

II. To determine the impact of marginal costing on organizational decision making.

III To examine the impact of standard costing on organizational decision making.

1.4 RESEARCH QUESTIONS

Research questions are those interrogative statements that arise often from the course of study. Research questions are meant to generate possible answers to different aspects of the research problem and they should be clearly stated such that they act as guides in identification, collection and analysis of relevant data. In order to achieve the purpose of this research study, the study will attempt to provide answers to the following research questions in order to arrive at a reasonable conclusion

I. What impact does cash flow analysis have on organizational decision making?

II. How does marginal costing improve organizational decision making?

III. What impact does standard costing have on organizational decision making?

1.5 STATEMENT OF HYPOTHESES

In order to do justice to this research work, the following hypotheses are formulated to act as guides for my findings.

HYPOTHESIS ONE

H0: There is no significant relationship between cash flow analysis and organizational decision making.

H1: There is a significant relationship between cash flow analysis and organizational decision making.

HYPOTHESIS TWO

H0: There is no significant relationship between marginal costing and organizational decision making.

H1: There is a significant relationship between marginal costing and organizational decision making.

HYPOTHESIS THREE

H0: There is no significant relationship between standard costing and organizational decision making.

H1: There is a significant relationship between standard costing and organizational decision making.

1.6 SIGNIFICANCE OF THE STUDY

Over time research has shown that most organizations do not use management accounting technique as a base for decision making. This research intends to show the essence of management accounting technique and how it can improve the organization’s decision making if used in an organization. This research intends to bring to light by giving explicit definition on what management accounting technique is, how this technique can be imbibed in an organization and the need to create a department for it in an organization. The researcher strongly believes that evaluating some of the techniques used by the management of manufacturing company in the decision making process will be beneficial to both the management accountants and manufacturing companies in general.

1.7 SCOPE OF THE STUDY

The study concentrate on the impact of management accounting techniques on organizational decision making, (a Study of five (5) Manufacturing companies in Abeokuta, namely; Dangote cement, flour mills, CDK integrated industries, Cometstar manufacturing company ltd, Apex paint limited). Furthermore, this research will evaluate some of the techniques used by the management of manufacturing companies in their decisions making processes. Also, the research intends to study essential problems encountered by industries using management accounting techniques as their decision making tools. The study was limited to five manufacturing companies in Abeokuta Ogun state. This is due to constraints like degree of precision, cost and time involve.

1.8 OPERATIONALIZATION OF VARIABLES

Y= f(x)

Where:

Y= dependent variable

X= independent variable

Where

ODM= Organizational Decision Making

X is broken down into variables which include:

CFA= Cash Flow Analysis

MC= Marginal Costing

SC= Standard Costing

ODM= f(BC)………… equation 1

ODM= f(MC)………… equation 2

ODM= f(SC)…………… equation 3

Y(ODM)= α1+β1 (BC)+ μ……. hypothesis 1

Y(ODM)= α2+β2 (MC)+ μ……… hypothesis 2

Y(ODM)= α3+β3 (SC)+ μ………. hypothesis 3

Therefore,

ODM= α+ β1BC+β2MC+β3SC+ μ

Where

α= value of y where all the values of explanatory variables are zero intercept

β= average change in y that is associated with unit change in variable x

μ= error term

1.9 DEFINITION OF TERMS

This study intends to examine various concepts used in research work in order to make them understandable to those who are not in this field (Accounting/Finance)

MARGINAL COSTING: Marginal Costing is a technique where only the variable costs are considered while computing the cost of a product

DECISION-MAKING: Decision-making is not a separate function of management. In fact, decision-making is intertwined with the other functions, such as planning, coordinating, and controlling. These functions all require that decisions be made. For example, at the outset, management must make a critical decision as to which of several strategies would be followed. Such a decision is often called a strategic decision because of its long-term impact on the organization. Also; managers must make scores of lesser decisions, tactical and operational, all of which are important to the organization’s well-being.

CASH FLOW ANALYSIS: Cash flow analysis is the evaluation of a company’s cash inflows and outflows from operations, financing activities, and investing activities. In other words, this is an examination of how the company is generating its money, where it is coming from, and what it means about the value of the overall company.

STANDARD COSTING: Standard costing is preset per unit and then actual cost is compared and finally a variance is sought out and action is taken accordingly.

MANAGEMENT ACCOUNTING: Management accounting is the sourcing, analyzing, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organizations.

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