THE ADOPTION LEVEL OF MODERN MANAGEMENT ACCOUNTING TECHNIQUES BY SMALL AND MEDIUM SCALE ENTERPRISES (SMES) IN KWARA STATE

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 maximisation of profits. This may be achieved through increased sales and reduced cost of production. The optimisation of profits and minimisation 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 Lifecycle 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.

1.3 Objectives of the study

The main objective of this study assessed the adoption level of modern management accounting techniques by small and medium scale enterprises (SMEs) in Kwara state, Nigeria.

This was pursued through other specific objectives that:

1. assessed the awareness levels of Activity Based Costing technique among small and medium scale enterprises in Kwara state

2. determined the impact of Target Costing technique on the performance of small and medium scale enterprises

3. determined the benefit of adopting life cycle costing technique by small and medium scale enterprises

1.4 Research Questions

The following questions were asked with a view to providing answers to the questions asked during this research work:

1. What is the awareness level of Activity Based Costing technique by small and medium scale enterprises?

2. What is the impact of Target costing technique on the performance of small and medium scale enterprises?

3. How does the adoption of life cycle costing technique benefit small and medium scale enterprises?

1.5 Research Hypothesis

The following hypotheses in the null form were formulated to substantiate the study:

HO1: There is no significant level of awareness of Activity Based costing technique by small and medium scale enterprises.

HO2: Adoption of Target Costing technique by small and medium scale enterprises do not have an impact on their performance.

HO3: Adoption of life cycle costing technique by small and medium scale enterprises do not have an impact on their performance.

1.6 Justification for the study

Overtime, it has been seen that the level of adoption of modern management accounting techniques by small and medium scale enterprises is low and this has caused some problems for the growth and survival of small and medium scale enterprises.

Fowzia, (2011) wrote that since mid-1980’s there has been criticisms about the current state of management accounting techniques which were widely publicized in professional and academic literature. In the words of Kadel and Luther, (2006) traditional management accounting is ‘well and alive’ but there are indications of likely increased use of: information concerning the cost of quality; non-financial measures relating to employees and analyses of competitors’ strengths and weaknesses. There are evidence of a gap between current textbooks and actual practices and there are indications that management accounting techniques may have lost its relevance, hence there is a need to adopt management accounting techniques in small and medium scale enterprises in Kwara state. Furthermore, the study will try to breach the gap if any, which may exist between management accounting in theory and practice and also how government can help improve management accounting practice in Nigeria.

Adoption of modern management accounting techniques by small and medium scale enterprises is a fundamental issue that needs to be addressed in order to ensure small and medium scale enterprises long term success. This study will be of immense benefit to students, business owners and other stakeholders who are interested in the success of various small and medium scale enterprises. This study will analyze and shed more light on modern management accounting techniques, how it can be adopted and benefits derived from the adoption.

1.7 Scope of the study

This study was conducted by sampling the opinion of respondents from some selected small and medium scale enterprises in Ilorin, Kwara state. The small and medium scale enterprises selected was based on random sampling. The period covered was from October 2014 to December 2014. For the purpose of this study, the modern accounting techniques that were examined are: Activity based costing, Target costing, and Life cycle costing.

1.8 Plan of the study

The report of this study was organized into five (5) different chapters. Chapter one dealt with the introduction of the study; Chapter two discussed the Review of relevant literature to the study; Chapter three focused on the research methodology to be adopted; Chapter four of the study is dedicated to the Presentation and analysis of data; and finally, Chapter five presents the summary, conclusion, and recommendations.