Abstract

This study was about the effect of cost accounting on the performance of small and medium size enterprises in the Buea Municipality. The specific objectives of the study were to investigate the extent to which cost and management accounting practice were employed by SMEs, identify the roles played by cost and management accounting practice in SMEs, determine the factors that affects the extent of use of cost and management accounting practice among SMEs and establish the relationship between cost and management accounting practice on financial performance of SMEs in the Buea Municipality.

In order to achieved this objective, the study sample 100 respondents using structured-questionnaire by means of convenient simple random sampling techniques. Collected data from the field were analyzed descriptively and inferential statistics such as regression in SPSS (25.0). Findings on the nature of cost and management accounting practices of SMEs, revealed that 35.4% and 29.6% of the respondents occasionally and frequently respectively made use of job costing, batch costing, contract costing, process costing and absorption costing as the major costing practices.

The study revealed that the major role of cost and management accounting practices on SMEs was that it helps businesses to easily increase in size, minimise expenses, facilitate business assessment, increase the efficiency of the business, minimise fraud and embezzlement, and facilitates control of expenses in the business.

The factors which affect the choice of management accounting practices among the SMEs were the rising cost of production and labour, change in production methods and operating systems of the business, increase in competition from other businesses producing similar products, change in organisational structure and management of the business and the participation of the owners in using management accounting practices.

Regression analysis findings revealed that there is a significant effect of cost and management accounting practices on the performance of SMEs in the Buea Municipality. Based on the findings, it was recommended that SMEs should also endeavour to prepare financial statements regardless of how simple they may appear as financial statements can assist SME operators to assess their performances at all times and make necessary adjustments.

CHAPTER ONE

INTRODUCTION

1.1 Introduction

According to Mitchell and Reid (2010), part of the reason for stressing the importance of small firms or SMEs was that their flexibility makes them well suited to the niche opportunities which were so characteristic of the ‘New’ economy. This chapter was organized into five sections.

The first section describes briefly the background to small and medium sized enterprises (SMEs) and the role of cost and management accounting practices in the management of all organizations. Section two discusses the problem statement followed by the identification of research objectives, research questions, and hypotheses. Next the rationale and importance of this study was explained. The section ends with the development of a methodology and the specification of the organization of the thesis.

1.2 Background of the Study

The importance of cost and management accounting practices has increased more than ever. The reasons for this are the domestic and global competition getting severer by globalization, decreasing profit margins, increasing input prices due the tightening energy sources, economic crises etc. Therefore, companies operating in developing countries have also begun to implement cost and management accounting practices which were first adopted by companies operating in developed countries.

Parallel to these developments, research studies which have been conducted initially in developed countries are followed by the studies conducted in developing countries. However, Lin and Yu (2002) states that the application of management accounting in less developed countries remains unsatisfactory and studies on this area are rare in the literature. They add saying “this may be due to the relatively under-developed status of economic and business administration in less developed countries”.

Based on the economic developments, Turkish accounting profession has been in progress since the establishment of Turkish Republic Aysan, (2006). As a result of industrialization, the need for accounting profession emerged Aysan, (2006). For this reason, the business managers and management accountants needed in private companies were mostly transferred from State Economic Enterprises Aysan, (2006).

In the last decades, cost and management accounting has gained importance as private sector developed in almost all areas. Large industrial enterprises set up cost and management accounting segments in accounting departments. Furthermore, curricula of faculties of economics and administrative sciences included cost accounting and/or management accounting along with financial accounting.

Several researchers have claimed that there has been a proliferation of management and cost accounting tools have in the last few decades. The reason behind this increase is that global business needs these tools to enhance their positions in the market. The importance of the information which is generated from management and cost accounting plays a crucial role in enhancing profitability through continuous waste reduction and effective resource utilization Ahmad, (2012).

Changes in the global business environment have driven transformation in the direction of sustainability by focusing on cost efficiency. Management accounting literature continues to suggest that there are benefits in adopting management accounting practices in improving business sustainability. Such literature also proposes that management accounting practices provide various tools, techniques and valuable internal information, including details for budgeting, profit planning, and performance evaluation. It is also shaped by management accounting information system Azudin & Mansor, (2017).

Waweru, Houge, and Uliana (2005) state that the effect of the market economy, intensified competition, globalization, limited resources, change and complexity in the business environment, and accelerating technological changes drive organizations to realize the need to have objective information. These factors also make them aware of the need for more detailed cost information. Managers have the responsibility to continuously ensure that their organizations can compete nationally and internationally in order to remain sustainable in the market Sunarni, (2014). This is a statement supported by Kaplan (1994) who state:

With vigorous global competition, rapid progress in product and process technology, and wide fluctuations in currency exchange rates and raw material prices, an organization’s management accounting system must provide timely and accurate information to facilitate efforts to control costs, to measure and improve productivity, and to devise improved production processes Johnson & Kaplan, (1987).

The management accounting system must also report accurate product costs so that pricing decisions, introduction of new products, abandonment of obsolete products, and response to rival products can be made with the best possible information on product resource demands Johnson & Kaplan, (1987). In recent years most organisations have faced dramatic changes in their business environment.

Such changes like deregulation, increasing levels in global competition, and reductions in product life cycles arising from technological innovations have intensified the challenges for managers. Considerable changes have also taken place within the manufacturing environment with the emergence of advanced manufacturing technologies that have resulted in greater automation and changes in cost structure involving direct labour costs being replaced by overhead costs. New management practices have also emerged, such as the just-in-time management philosophy, lean production techniques, and total quality management practices Al-Omiri& Drury, (2007).

Towards the late 1980s, considerable publicity was given to the criticisms of management accounting, particularly with the publication in 1987 of Relevance Lost authored by Johnson and Kaplan (1987). The authors claimed that management accounting practices that were developed in the 1920s had remained unchanged and were still the dominant practices of the 1980s. They state: Given the radical changes in the competitive environment and rapid worldwide movement of technology and capital, it is unlikely that the cost accounting and management control systems devised for the 1925 environment can still be useful sixty years later Johnson and Kaplan, (1987). Johnson and Kaplan argue that a revolution in management accounting was required to match the revolution that has taken place in the manufacturing environment.

Based on criticisms from many other commentators besides Johnson and Kaplan’s (1987), the view that management accounting was in crisis started to emerge. As a result of the various criticisms, the Chartered Institute of Management Accountants commissioned an investigation to review the current state of management accounting and the various claims made about it. The findings were published in a report titled Management accounting: Evolution, not Revolution, authored by Bromwich and Bhimani (1989).

The evidence and argument advanced by advocates of wholesale changes in management accounting were not yet sufficient to justify the wholesale revision of management accounting. Evidence of the benefits of new accounting techniques and the continued benefits of some conventional techniques is only beginning to emerge. No general crisis has been identified within the management accounting profession vis-a-vis a changing manufacturing environment, and therefore, no radical reforms are recommended at this stage.

Five years later, Bromwich and Bhimani (1994) updated their report with a second report titled Management Accounting: Pathways to Progress. They reviewed the literature and research and focused on the broader array of opportunities facing the management accounting field. They concluded that, in the UK, no one school of opinion yet dominated the views on the nature of reforms which might be appropriate for management accounting. The case for wholesale reform has not been accepted in practice.

In response to the criticisms, considerable attention was given during the 1990s to modifying accounting techniques and implementing innovations that would enable management accounting to regain its relevance. In particular, changes have been made to provide managers with the information they need to compete in today’s changing business environment. Recognition of the changes have been acknowledged by Kaplan (1994), who states:

The business environment in Cameroon has become intensively dynamic and unpredictable in the recent decades and correspondingly managing companies has become so demanding. The SMEs sector has been recognized worldwide for its role the economic advancement through various ways like: employment creation, wealth generation, and poverty reduction (kitae, Gakure, &Munyao) (2012).

In the current global economy, SMEs are progressively being regarded as powerful engines for economic empowerment and development for most economies in the world (Islam, Khan, Obaidullah, Alam) (2011). Muraguri in (2010) argues that SMEs have been known to contribute greatly in the economic growth in both the developed and developing countries.

Amoako (2013) point out that accounting users in SMEs is on the increase and the quality of accounting information utilize within the SMEs has a positive relationship with an entity’s performance as well as survival. For a business to successfully manage it finances, and effective cost accounting is of vital requirement. Therefore, a poor accounting system or the absence of cost accounting system maybe the reason for a company’s lack of success and profits.

Cost accounting is therefore the process of collecting, analyzing, summarizing and evaluating various alternatives courses of action. It goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting also referred to as management accounting, it is use by managers to collect data in an effort to improve performance. All businesses whether service, manufacturing, trading requires cost accounting to track their activities. The limitation of financial accounting has make the managers to realize the importance of cost accounting.

The general role of the cost accounting can be seen in the following ways; cost accounting helps the period of trade depression and trade competition- in period of trade depression, the organization cannot afford to have losses which passed unchecked. The management must know the area where economies maybe sought, waste eliminated and efficiency increased. The organization has to wage a war not only for it survival but also continue growth. The management should know the actual cost for their products before embarking on any scheme of price fixation cost accounting helps in making Estimates-Adequate costing records provide a reliable basis for making estimates and quoting tenders.

Cost accounting eliminates wastages – as it is possible to know the cost of a product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc, are in the of machine equipment and material. Cost accounting makes comparison possible –proper maintenance of costing records provides various costing data for comparisons which in turn help the management in the future line of action.

Cost accounting provides data for periodical profit and loss account- adequate costing records provides the management with such data as many as necessary for preparation of profit and loss accounts and balance sheet as such intervals as many be desired by the management.

Cost accounting helps in determining and enhancing efficiency-losses due to wastage of materials idle time of workers, poor supervision, etc. will be disclosed if the various operations involve in the process of production are studied carefully Efficiency can be measured, cost controlled, and various steps can be taken to increase efficiency

Cost accounting helps in inventory control –cost accounting furnishes control which management requires in respect of stock of material, work-in-progress and finish good.

Investors, banks and other lending money institution have a stake in the success of the business concern and are, therefore benefited immensely by the installation of the efficient system of costing. They can base the judgment about the profitability and future prospects of the enterprise of the cost records.

Employees have a vital interest in their employer’s enterprise in which they are employed. They are benefited by a number of ways by the installations of an efficient system of costing. They are benefited through continues employment and higher remuneration by the way of incentives, bonus plans etc. they key issues affecting the SMEs can be grouped into four, that’s unfriendly business environment, poor funding, low management skill and lack of access to technology. Given the importance of SMEs in an economy; it becomes quite plausible to look at factors affecting or hindering their performance which is a major determinant of their survival and growth. For SMEs business to experience growth, cost accounting must be put in place and use appropriately. All business in general are more focus with the final result (profit or loss) rather than focusing on the element of cost which if well monitored and controlled will increase the probability of the business call for careful consideration in the design of accounting systems. They may lack the sophistication to apply the detailed accounting processes yet the value of accounting systems to these business is quite profound.

1.3 Statement of the Problem

The private sector which in the past in Cameroon was not so important is now being recognized as an engine to economic growth in the country. In most developing countries the private sector is mainly represented by the small and medium size enterprises (SMEs) and this is also the case in Cameroon.

Thus in Cameroon SMEs in the stimulating and alleviating poverty. It is widely knowledge that SMEs are an effective instrument for employment creation, income generation and economic growth, even in the developed countries like USA and Europe; SMEs significantly and highly contributed to the GDP.

Despite the effort of the government in order to improve the SMEs in Cameroon, the country still have a rigid business environment that hinders the growth of local small enterprises and entry opportunity for foreign investors. According to Maduekwe (2015) SMEs are perceived to be failing partly due to the lack of an ineffective use of management accounting practices such as budget, performance management tools and pricing tools. Ahmad (2012) argues that one of the reasons for business failure is poor management ability which includes accounting problem-solving.

The growth of large businesses with skillful professional accountants that can manage and coordinate the resource of the entity courses the researcher to know how cost accounting can be of great importance in the growth of small and medium size enterprises. In Cameroon, SMEs cover the entire range of economic activity within all sector and share a number of common problems that hinders them from effective performance as a result of low market access to credit, poor information flow, discrimination legislation, poor access to land, weak linkages among different sectors, weak operating capabilities in terms of skills, lack of knowledge and attitudes, lack of infrastructural facilities among others.

Another problems of SMEs failure is poor management ability which includes accounting problem-solving. The availability of infrastructural facilities is grossly inadequate in the area of access roads, electricity, water supply etc. and multiplicity of policies and regulatory measures such as removal of fuel subsidy, taxes, several charges on loans.

1.4 Research Questions

1. To what extent has cost and management accounting practice been employed by SMEs in the Buea Municipality?
2. What role is played by cost and management accounting practice in SMEs in the Buea Municipality?
3. What factors affect the extent of use of cost and management accounting practice among SMEs in the Buea Municipality?
4. What is the relationship between cost and management accounting practice on the performance of SMEs in the Buea Municipality?

Read: Accounting Project Topics and Materials