Assessment on the use of Management Accounting Information for

Decision Making and Management Control: A Case Study of Some

Selected Manufacturing Companies in City of Addis Ababa

By: Tewodros Tesfaye

June 2009

Advisor: Ulaganathan Subramanian (PhD)

A PROJECT PAPER
SUBMITTED TO THE SCHOOL OF GRADUATE STUDIES
OF
ADDIS ABABA UNIVERSITY

IN PARTIAL FULFILLMENTS OF THE REQUIREMENTS

FOR THE DEGREE OF MASTER OF SCIENCE
IN
ACCOUNTING AND FINANCE
 ADDIS ABABA UNIVERSITY
SCHOOOL OF GRADUATE STUDIES
Faculty of Business & Economics
Department of Accounting & Finance
Assessment on the use of Management Accounting Information for
Decision Making and Management Control: A Case Study of Some
Selected Manufacturing Companies in City of Addis Ababa

By: Tewodros Tesfaye

June 2009

Approved by Board of Examiners

Ulaganathan Subramanian (PhD) ___________________

Advisor Signature

Examiner ___________________
Signature

Examiner ___________________
Signature
Statement of Certification

This is to certify that Tewodros Tesfaye has carried out his project work on the topic

“Assessment on the use of Management Accounting Information for Decision Making

and Management Control: A Case Study of Some Selected Manufacturing Companies

in City of Addis Ababa ” under my supervision. In my opinion, this work qualifies for

submission in partial fulfillment of the requirements for the award of Degree of

Masters of Science in Accounting and Finance.

Signature________________

ULAGANATHAN SUBRAMANIAN (PH.D)

Project Advisor

I
Statement of Declaration

I declare that this project work is my original work. It has not been submitted for any

Degree/Diploma in any University. I have undertaken it independently with the advice

and suggestions of my advisor for the project, Ulaganathan Subramanian (PhD). In

carrying out of the project work I have different sources and materials, which have been

appropriately acknowledged.

Signature _________________________

Tewodros Tesfaye

II
 ACKNOWLEDGEMENTS

First and foremost I would like to thank the almighty God and his Mother St. Marry for

helping me in the successful accomplishment of this paper.

I would like to thank my advisor Dr. Ulagnathan Subramanian who has been helping me

throughout my project paper and without whom the project paper could not have been

materialized. Admittedly, his dedicated professional assistance has helped me to

complete the work within the specified time. My deepest gratitude goes to him for his

genuine and polite cooperation and assistance.

My gratitude also goes to W/ro Elizabeth Getahun, the owner and Deputy Managing

Director of Panafric Global PLC, for her full sponsorship without which I could not be

able to successfully complete my study. I would like to thank heartily all my colleagues

who have been helping me professionally and morally throughout my study and Ms.

Melat Mekonnen for her endless effort in typing and editing the paper.

Last but not least, I am deeply indebted to those who were very sincere and willing to

spend their precious time in filling the questionnaire.

Tewodros Tesfaye
June, 2009
Addis Ababa
Ethiopia

III
 Table of Contents

Page
Statement of Certification...............................................................................................I
Statement of Declaration................................................................................................II
Acknowledgement........................................................................................................III
Table of Contents......................................................................................................... IV
List of Tables...............................................................................................................XII
List of Figures............................................................................................................XIII
List of Appendix......................................................................................................... IX
Acronyms .....................................................................................................................X
Abstract .......................................................................................................................XI

CHAPTER ONE............................................................................................................1
1. INTRODUCTION.....................................................................................................1
1.1 Background of the Study......................................................................................... 1
1.2. Statement of the Problem ........................................................................................6
1.3. The Objective of the Study....................................................................... ………..8
1.3.1 General Objective.......................................................................................... 8
1.3.2 Specific Objectives........................................................................................ 8
1.4. Research Design......................................................................................................9
1.4.1 Research Strategy...........................................................................................9
1.4.2 Research Methodology...................................................................................9
1.5 Significance of the Study .......................................................................................11
1.6. Scope and Limitations............................................................................................12
1.7. Organization of the Paper.......................................................................................12
CHAPTER TWO ..........................................................................................................13

2. LITERARURE REVIEW…………………………………..……………………...13

2.1. Operational Definitions..........................................................................................13

2.2. Management Accounting- Role and Development....................................................14
2.3. Characteristics of useful Information.........................................................................17
2.4. Management Accounting and the Management Process…………………………....18
2.5. The Management Decision Making Process…………………………………….….20
2.5.1. Strategic and Tactical Decisions……………………………………………...21
2.5.2. Short run Versus Long run Decision Making……………………………..….22
2.6. Decision Making and Required Information………………………….………….…23
2.7. Management Control………………………………………………………….….…24
2.7.1. Characteristics of Control……………………………………………….…...24
2.7.2. Management Control System………………………………………….….….24
2.7.3. Evaluating Management Control System……………………………………26
2.7.4. The Role of Accounting Information in Management Control……..…….…27
2.8. Ethics in Managerial Accounting……………………………………….………….30
2.8.1. Standards of Ethical Conduct for Management Accountants…….…….……31
2.9. Role of Management Accountants within the Corporation…………….……….….33

CHAPTER THREE……………………………………………………………..……….35
3. DISCUSSION AND ANALYSIS…………………………………………………….35
3.1 Respondents Profile………………………………………………………….………35
3.1.1 Education……………………………………………………………………...35
3.1.2 Field of Study……………………………………………………………..…..36
3.1.3 Work Experience………………………………………………………….…..37
3.2 Empirical Results and Discussion…………………………………………….……..38
3.2.1 Types of decisions often made by managers and whether
they are provided with the information they require…………………………38
3.2.1.1 Types of decision made by Production managers and whether
they require management accounting information…………………...39
3.2.1.2 Type of decision made by marketing managers and whether
they require management accounting information……………………42
 3.2.1.3 Type of decision made by finance managers and whether
they require management accounting information……………………47
3.2.2 Areas which need management control and whether the
responsible managers use management accounting information………………49
3.2.3 The use of management accounting information by managers
in decision making and management control: Result drawn from
accountants and finance managers responses…………………………….……52
3.2.4The use of management accounting information in decision making
and management control by managers: Result drawn from marketing
managers, production managers and finance managers responses……………55
3.2.5 The types of management accounting reports provided for assisting
managers in decision making and management control………………………57
3.2.6 Whether accounting reports provided timely………………………………….62
3.2.7 Whether Accountants are sufficient…………………………………………...65
3.2.8 Whether managers alter accounting reports…………………………………...66
3.2.9 Whether management accounting information helps managers to
be effective in their decisions and control…………………………………….68
CHAPTER FOUR………………………………………………………………………73
4. CONCLUSION AND RECOMMENDATION……………………………………...73
4.1 Conclusion………………………………………………………………………...73
4.2 Recommendation……………………………………………………………….…76
BIBILOGRAPHY…………………………………………………………………
APPENDIX…………………………………………………………………….….
 LIST OF TABLES

Page

Table 1: Educational status of Respondents…………………………………………35

Table 2: Field of Study of Respondents……………………………………………..36

Table 3: Work Experience of Respondents……………………………………….....37

Table 4: Types of Decision often made by Production Managers…………………...40

Table 5: Types of Decision often made by Marketing Managers……………………43

Table 6: Types of Decision often made by and Finance Managers………………….47

Table 7: The use of Management Accounting information in Decision

Making and management control: Lesson from Accountants
and Finance Managers……………………………………………………..53

Table 8: The use of Management Accounting information in decision

making and management control: Lesson from Managers…….…………56

Table 9: Reasons for not using Management Accounting Information

by managers: Lesson from Managers…………………………………….56

Table 10: Reasons why the accounting department doesn’t

provide the reports timely…………………………………………………63

Table 11: Person providing management accounting Information………………….64

Table 12: Whether accountants are sufficient………………………………………..65

Table 13: Reasons for Insufficiency of accounting personnel……………………….66

Table 14: Whether management accounting information help

managers to be effective in their decision and control……………………69

Table 15: How management accounting information help managers to be

effective in their decisions and control……………………………………70

Table 16: Reasons for why management accounting information doesn’t

help managers to be effective in their decisions and control……………..71

XII
 LIST OF FIGURES

Page

Graph 1: Decision Items for which Managers Require MAI

and whether they are provided (Production Manager)……………….…….40

Graph 2: Decision Items for which Managers Require MAI

and whether they are provided (Marketing Manager)……………………...44

Graph 3: Reasons for not using Management Accounting Information

by managers: Lesson from Accountants and Finance Managers…………..54

Graph 4: Whether reports are provided timely……………………………………....62

Graph 5: How managers alter accounting reports……………………………………68

Chart 1: Whether there is Management accounting department…………………….64

Chart 2: Whether managers alter accounting reports………………………………...66

XIII
 ACRONYMS

MAI…………………………………..Management Accounting Information

MCS………………………………….Management Control System

CIMA………………………………...Chartered institute of Management Accountants

IMA…………………………………..Institute of Management Accountants

FM……………………………………Finance Manager

MM…………………………………...Marketing Manager

PM……………………………………Production Manager

ACCT………………………………...Accountant

ROI……………………………………Return on Investment

BOD…………………………………..Board of Directors

X
 Abstract

The study examines the use of management accounting information in decision making

and management control in the case of some selected manufacturing companies in the

city of Addis Ababa.

The objective is to identify the types of decisions that managers often make and areas

which need management control and assess whether managers use management

accounting information in decision making and control. It also assess whether

management accounting information help managers to be effective in their decisions and

control. The data used in this study was obtained through questionnaire and interview.

Questionnaire was prepared and distributed to finance managers, marketing managers,

production managers and accountants. Unstructured Interview is also made to collect

data.

The study finding shows that there is modest use of management accounting information

in manufacturing companies in city of Addis Ababa and it also shows managers that use

management accounting information are effective in their decision and control.

Key Words: Management Accounting, Decision Making, Management Control,

Accounting Information

XI
 ASSESSMENT ON THE USE OF MANAGEMENT ACCOUNTING INFORMATION

FOR DECISION MAKING AND MANAGEMENT CONTROL: CASE STUDY OF SOME

SELECTED MANUFACTURING COMPANIES IN CITY OF ADDIS ABABA

CHAPTER ONE

1. INTRODUCTION

1.1. BACKGROUND OF THE STUDY

All organizations have two things in common. First, every organization has a set of goals

or objectives. Second, in pursuing an organization’s goals, managers need information.

The information needs of management range across financial, production, marketing,

legal, and environmental issues (Ronald W.Hilton, 2001:4).

In pursuing an organization’s goals, managers engage in four basic activities: decision

making, planning, directing operations, and controlling. For all of these managerial

activities managers need information. The information comes from various sources,

including economists, financial experts, marketing and production personnel, and the

organizations’ managerial and cost accountants. There are also individuals and

institutions that need information about the organization like suppliers, banks, insurances,

customers, investors, taxing authorities, regulatory bodies, and so forth.

The accounting system is the principal and the most credible quantitative information

system in almost every organization. The accounting system provides information for

five broad purposes:

1
  In formulating overall strategies and long – run plans: this includes new

product development and investment in both tangible (equipment) and

intangible (brands, patent, and people) assets, and frequently involves

special purpose reports.

 For resource allocation decisions such as product and customer emphasis

and pricing: this frequently involves reports on the profitability of

products or services, brand categories, customers, distribution channels,

and so on.

 For cost planning and cost control of operations and activities: this

involves reports on revenues, costs, assets and liabilities of divisions,

plants and other areas of responsibility.

 For performance measurement and evaluation of people: this includes

comparison of actual results with planned results. It can be based on

financial or non financial measures.

 To meet external regulatory and legal reporting requirements: regulations

and statutes typically prescribe the accounting methods to be followed for

external reporting purpose, for example for tax purposes.

Each of the purpose stated above may require a different presentations and reporting

methods. An ideal data base for presentations and reports is very detail and cuts across

different business functions. Accountants, therefore, combine or adjust these data to

answer the questions from particular internal or external users.

2
Accounting, as an information system, can be divided into three: Financial accounting,

management accounting, and cost accounting. Financial accounting provides information

to external users. It focuses on external reporting that is guided by generally accepted

accounting principles. The information is primarily meant for external users such as

suppliers, banks, customers, investors, taxing authorities, regulatory bodies, and so forth.

Cost accounting reports financial and other information related to the organization’s

acquisition and consumption of resources. It deals with the identification, accumulation,

allocation, and control of costs. It provides the information for both management

accounting and financial accounting.

To manage an organization, systematic and comparative cost information as well as

analytical cost and profit data are needed. This cost information helps management set

the company’s profit goals, establish departmental targets which direct middle operating

management toward the achievement of the final goal, evaluate effectiveness of plans,

pinpoint successes or failure in terms of specific responsibilities, and analyze and decide

on adjustments and improvements to keep the entire organization moving forward, in

balance, toward the established goals.

Management’s efforts to achieve organizational objectives rest upon the twin functions of

planning and control. The planning function is essentially a decision – making process

dealing with the establishment of desired results, the deployment of resources, and the

creation of a communication system that permits the reporting and controlling of actual

results and the comparison of these results with plans. The control function is the

3
systematic effort by management to organize and marshal natural forces, human

behavior, and material objects into a coordinated unit in order to accomplish plans.

The connecting link between the originating planning function and the terminating

control function is the cost accounting information system, rightly termed the tool of

management. This system permits effective communication, continuous feedback, and

management flexibility. The processing and reporting of an organization’s historical and

projected economic data assist management in developing new potentials, improving

present opportunities, establishing more aggressive yet flexible control of operations, and

enhancing the management process through objective evaluation of the feedback data.

Although the information and underlying data required for the planning and control

functions are often quite different, the cost accounting system is expected to provide

answer and respond to the needs of both functions. This dual responsibility of the cost

accounting information system strongly influenced the decision making process of the

business community.

Management accounting, on the other hand, measures and reports financial information

as well as other types of information that assists managers in fulfilling the goals of the

organization. Managers rely on managerial accounting information to assists several

different organizational functions- operational control, product and customer costing,

management control and strategic control. The demand for management accounting

information differs depending on the level of the organization.

4
At the operator (front line) level where raw materials or purchased part are converted into

finished products and where services are performed for customers, information is needed

primarily to control and improve operations. The information is disaggregated and

frequent; it is more physical and operational than financial and economic.

As one moves to higher up in the organization, middle managers supervise work and

make decisions about financial and; physical resources, products services and customers.

These managers may receive management accounting information less frequently and the

information is more aggregate. They use it to receive warning signals about aspects of

operations that are different form expectations. Middle managers also use management

accounting information to help their manager better plans and decisions.

Executives at the highest organizational levels receive management accounting

information that summarizes transactions and events occurring at the individual operator,

customer and department levels; they use these information Support decisions that have

long – term consequence for the organization ( Anthony A. Atkinson, et.al,1997:11-12)

However, most manufacturing firms of Ethiopia don’t have management accounting

department and they are not enjoying the benefit from the information generated by the

system and hence they are slugging behind while other who have it and use the

accounting information generated thereof for their decision and control are out biting

them. This paper establishes whether these firms use management accounting

information in decision making and management control so that Ethiopian manufacturing

companies can adopt or continue their usage of the management accounting information.

5
1.2 STATEMENT OF THE PROBLEM

Management accounting information is one of the primary informational sources for

decision making and control in organizations. Management accounting information

system is also useful to make both short term and long – term business decisions.

Management accounting system produce information that help workers, managers and

executives make better decisions and improve their organization’s process and

performance (Ronald W.Hilton, 2001 :7).

Traditionally, management accounting information has been financial, that is, it has been

denominated in a currency. Recently however, management accounting information has

expended to encompass operational or physical (non financial) information, such as

quality and process times, as well as more subjective information such as measurements

of customer satisfaction, employee capabilities and new product performance. (Anthony

A. Atkinson, et.al, 1997)

The success of business depends primarily upon the skills and abilities of management –

which skills can vary widely among different managers. The business is not completely at

the mercy of market forces. Management can through its actions (decisions) influence

and control events within limits. A critical managerial function is decision – making.

Decisions which management must make may be classified as marketing, production, and

financial. A primary objective of decision – making is to achieve optimum utilization of

the business’s capital or resources.

6
Furthermore, a company could survive and prosper only if its costs, quality and product

capabilities were as good as those of the best companies. Therefore, management control

is another important item which managers must give due attention.

Effective management controls and decision making requires relevant information and

special analysis of data. The accounting department is a primary source of information

necessary in making decisions and controls and it is expected to provide information to

all levels of management. However, the situation in Ethiopian manufacturing industry

suggest there are no management accounting department and firms don’t properly staff

accounting department so that accountants are busy in performing routine accounting

activities let alone having sufficient time to make sound financial analysis and prepare

and provide management accounting information that managers can use in making

business decisions and management control.

This study therefore, attempts to investigate the situation by posing the following

research questions:

 What type of decisions managers often made?

 What are some of the areas which require management control?

 Do managers use management accounting information in decision making

and management control?

 What type of management accounting reports are prepared for decision

making and management control and are they provided at the time needed

by managers?

7
  Do management accounting information help managers to be effective in

their decision and control?

 Do managers alter accounting reports?

1.3 OBJECTIVE OF THE STUDY

1.3.1 General Objective

The general objective of this research paper is to assess the use of management

accounting information in decision making and management control in Ethiopian

manufacturing companies with a specific case study on some selected manufacturing

companies in Addis Ababa city.

1.3.2 Specific Objectives

The study is engaged in the main objectives of addressing the use of management

accounting information in decision making and management control with the following

specifics:

 To identify the types of decisions managers often made.

 To identify some of the areas those require management control.

 To assess the type of management accounting information that managers

use to make business decisions and management control.

 To assess whether managerial reports are provided timely.

 To assess the sufficiency of accounting personnel.

 To examine whether managers alter managerial accounting reports.

8
  To assess whether management accounting information help managers to

be effective in their decisions and control.

 To provide necessary information and findings so that corrective actions

may be taken.

1.4 RESEARCH DESIGN

1.4.1 RESEARCH STRATEGY

The main objective of this research is to assess the use of management accounting

information in decision making and management control in context of selected

manufacturing companies in city of Addis Ababa. To properly address such objective

with the available time and financial resources the survey method, with descriptive

techniques of analysis, is used for data collection and analysis. The survey method is

chosen because it enables the collection of considerable amount of data from a sizable

population in a highly economical way. In addition, the data collected, analyzed and

interpreted using tools of the survey method allow the researcher to get a standardized

data, which in turn provides authoritativeness for making conclusions. Depth interview

were also used to collect data from respondents.

1.4.2. RESEARCH METHODOLOGY

The data source include only primary data source. Among the primary data sources, the

researcher applies questionnaire and interview.

9
Sample Design

The sampling method used in the study in a convenience sampling which is based on the

researcher’s convenience. From the population sample frame, 22 companies are selected

based on their convenience for the researcher.

Research Design

The data collection method is questionnaire and interview. It include structured

questionnaire in which the respondents will be made full aware of the purpose. The data

collection tools that best suits the research strategy is self-administered questionnaire.

Questionnaire is chosen because it provides a standardized data allowing an easy

comparison. It is fairly reliable for gathering data from large, diverse, varied and

scattered study group. It is chosen because it enables to collect some qualitative data that

best meet the research objectives. The questionnaire is self administered because of the

technicality much of the research deals with. Four set of questionnaire is prepared and

filled by Accountants, Finance Managers, Marketing Managers and Production

Managers. A face to face interview was also made with ten accountants and managers.

Data Analysis

The data collected is analyzed using SPSS, tables, graphs, charts and wordings.

10
1.5. SIGNIFICANCE OF THE STUDY

The subject matter of this research and the resulting lessons drawn from the analysis are

likely to benefit different classes of people. This study will be significant for its

contribution to:

 Knowledge

The study sheds on the use of management accounting information for decision

making and management control in manufacturing companies in city of Addis

Ababa and it enriched the knowledge of readers on the role of management

accounting in decision making and management control.

 Managerial Decision Making

The studies finding and recommendations are highly important to management

of the companies under study because it draws their attention to some of the

point where corrective actions are necessary and enable them to make such

corrections.

 Literature and Reference

The research could be used to establish a framework for subsequent studies that

can work with more comprehensive data sets. Furthermore, it could stimulate

further research, thus keeping sustained in the area of management accounting

and their use in decision making and management control.

11
1.6. SCOPE AND LIMITATION OF THE STUDY

The finding of the research would be better if it were conducted by considering other

similar firms. However, due to time, Labor and money constraint it would be too

cumbersome and out of the reach of the researcher to include all firms. Therefore, the

study is limited to assess on the use of management accounting information in making

business decision and managerial control in some selected manufacturing companies in

city of Addis Ababa.

1.7. ORGANIZATION OF THE STUDY

The study paper organized into four chapters. The first chapter deals with the problem

and its approach. The second chapter concerned with presenting the review of related

literature. The third chapters treat the analysis of the data collected and the fourth chapter

brings to an end this study with conclusion and recommendation.

12
 CHAPTER TWO

2. LITERATURE REVIEW

2.1. Operational Definitions

 Management Accounting

Is the process of identification, measurement, accumulation, analysis, preparation,

interpretation and communication of information used by management to plan,

evaluate and control within an entity and to assure appropriate use of and

accountability for its Resource (economics) resources. 1

 Decision Making

Decision-making may be simply defined as choosing a course of action from

among alternatives. (Ibid)

 Management Control

Management Control can be defined as a systematic effort by business management

to compare performance to predetermined standards, plans, or objectives in order to

determine whether performance is in line with these standards and presumably in

order to take any remedial action required to see that human and other corporate

resources are being used in the most effective and efficient way possible in

achieving corporate objectives(Robert J. Mockler).

1
Chartered Institute of Management Accountants (CIMA).

13
2.2. Management Accounting – Role and Development2

Management accounting evolved during the industrial revolution as a tool for measuring

and managing resource consumption, output, and productivity at the operational level of a

company (Williams, 2004). The primary focus was on providing information for planning

and controlling the productivity and efficiency of internal processes. As a whole, the

information provided was directly relevant to the task of optimizing cost, time, and asset

utilization.

Thus, the simplest form of definition is that “management accounting is the process of

providing useful information to managers” (Bruns, William and McKinon, Sharon,

1993). Yet this simple definition does not express the multi functionality of this term. The

term “providing” implies not only communication and reporting functions as typical of

accounting. It means also a secondary function including control of the systems and

processes by which the information reaches the managers. The other issues incorporated

in this definition include the characteristics of the information that accountants claim as

their purview. Thus, we think management accounting should be described as a two-sided

function, including the managers’ and accountants’ standpoint.

Management accounting textbooks state that management accounting is a body of

knowledge whose understanding is necessary for the success of managers. For example

(Horngren et al., 2006; Drury, 1992; Kaplan et al., 2004), the focus on the managers’

standpoint is defined as follows: management accounting measures, analyses, and reports

financial and non-financial information that helps managers to make decisions to fulfill

2
The Usefulness of Management Accounting Information: Users Attitude, ISSN 1392-1258, EKONOMIKA 2006

14
the goals of an organization. Managers use management information to choose,

communicate, and implement strategy. They also use management accounting

information to coordinate product design, production, and marketing decisions.

Management accounting information enhances decision making, guides strategy

development and evaluates existing strategies, and focuses efforts related to improving

organizational performance and to evaluating the contribution and performance of

organizational units and members (Kaplan, 1998).

Many theoreticians (Atkinson et al., 1997) mention scorecard keeping as one of the

traditional roles of management accounting. This role evolved to support both the

standard engineering control paradigm and the organization control paradigm. The

engineering control paradigm consists of setting a target, undertaking a course of action,

measuring the result, comparing the result to the target, and responding to the variance

between the result and the target.

Thus, management accounting can be viewed as the information support system that best

facilitates communication, motivation and performance evaluation within a variety of

organizational structures. Internal, managerial or management accounting is responsible

for providing information and helps managers make decisions on the efficient and

effective use of enterprise resources ( Hendrickson, 2001).

From the accountant viewpoint, we follow the definition of the Institute of Management

Accountants (1997) “management accounting is a value-adding, continuous improvement

process of planning, designing, measuring, and operating non-financial and financial

information systems, that guides management action, motivates behavior, and supports

15
and creates the cultural values necessary to achieve an organization’s strategic, tactical

and operating objectives.”

Accounting researchers (Foster, Young, 1997; Shields, 1997; White, 2004) take a longer-

run perspective on the role of management accounting in an organization. From this

viewpoint, the definition actually focuses on the management accounting function in the

organization. White (2004) points out that management accountant have a unique focus

on the work inside organizations and on creating a sustainable operational value;

Hendrickson (2001) stresses the cost– benefit consideration of managerial accountants.

Management accounting has often been used as a synonym for cost accounting. The

phrase “management accounting” has long since superseded “cost accounting” as the

preferred label by professional associations (Foster and Young, 1997). A new set of

management accounting logic is emerging, directing attention toward a greater strategic

role for management accountants (Sharman, 2003).

Perhaps the most important attitude that recently accountants are recognizing is the shift

in management accounting. International Federation of Accountants (IFAC) revised its

1998 International Management Accounting Practice Statement, which now states:

“management accounting refers to that part of the management process which is focused

on organization resource use. Thus, it refers to managerial processes and technologies

that are focused on adding value to organizations by attaining the effective use of

resources in dynamic and competitive contexts”. In addition, Sarbanes-Oxley Act brings

a generous portion of tidings to the profession of management accounting in the USA. It

recognizes that the most important part of the accounting profession is the ethical

16
accountant working inside business, exercising effective and efficient decision support,

planning, and control over the organization’s value-creating operations. Shields (1997)

predicts that environmental and organizational changes imply that management

accounting will become what it is not and cease to be what it is. The definition, nature

and boundaries of management accounting will change. The term of management

accounting will increasingly become too limited a concept and will be replaced by

organizational accounting. This broader concept will enable to incorporate more types of

accounting and accountabilities in organizations, organizational subunits, and inter

organizational arrangements (Bourguignon, 2005).

2.3. Characteristics of Useful Information3

Reliable: Information is reliable if it is free from error or bias and accurately represents

the events or activities of the organization.

Complete: Information is complete if it doesn’t omit important aspects of the underlying

events or activities that it measures.

Timely: Information is timely if it is provided in time to enable decision makers to use it

to make decisions.

Understandable: Information is understandable if it is presented in a useful and

intelligible format.

Verifiable: If two knowledgeable people acting independently would each produce the

same information.

3
Accounting Information System, Marshall B. Romney and Paul John Steinbart, Prentice Hall Publishing, p-10, 2003

17
 4
2.4. Management Accounting and the Management Process

The purpose of management has been described as making people capable of joint

performance through common goals, common values, the right structure, and providing

the training and development they need to perform and to respond to change. The central

purpose, then, of the management process is to secure, as it faces change, the vitality and

endurance of an organization through the ongoing co-ordination of activities, efforts and

resources. Thus, the management process includes

 establishing organizational directions in terms of objectives and strategies;

 aligning organizational structures, processes and systems to support established

directions;

 securing the commitment at a requisite level of those contributing essential skills

and effort; and

 Instituting controls that will guide an organization's progress towards the

realization of its strategies and objectives.

The pursuit and realization of organizational objectives and strategies requires the

mobilization or development of requisite capabilities through the effective deployment of

resources. Resources are deployed in structures, "control" mechanisms, and securing-

commitments to create the capabilities necessary for organizational success. Without

effective resource deployments, requisite capabilities are unlikely to be developed; and

resources are likely to be wasted in ineffective structures, controls, and commitments.

4
IFAC, 1998

18
Management accounting refers to that part of the management process focused on the

effective use of resources in

 establishing strategy mixes that support organizational objectives;

 developing and maintaining the organizational capabilities necessary for strategy

realization; and

 Negotiating the strategy and capability change necessary to secure ongoing

organizational success and survival.

Management accounting is only one part of the management process of organizations. It

provides a focus and distinctive perspective on one key dimension of organizational

activity - identifying, obtaining and using resources. In addition it stands beside and

interacts with other parts of the management process which focus respectively on other

key dimensions of organizational activity: direction setting, structuring securing

commitment, control, and change.

The management of the management accounting function will likely involve establishing

objectives and strategies for the function, structuring the work of the function, building

the capability of the function, resourcing the function appropriately, responding

creatively to, or proactively addressing new challenges bearing on the work of the

function and assessing the ongoing efficiency and effectiveness of the function

(IFAC,1998).

19
2.5. The Management Decision Making Process5

In management accounting, decision-making may be simply defined as choosing a course

of action from among 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 the

management accountant is to find the best alternative.

The process of making decisions is generally considered to involve the following steps:

 Identify the various alternatives for a given type of decision.

 Obtain the necessary data necessary to evaluate the various alternatives.

 Analyze and determine the consequences of each alternative.

 Select the alternative that appears to best achieve the desired goals or objectives.

 Implement the chosen alternative.

 At an appropriate time, evaluate the results of the decisions against standards or

other desired results.

The concept of decision making is a complex subject with a vast amount of management

literature behind it. How businessmen make decisions has been intensively studied. In

management accounting, it is useful to classify decisions as: Strategic and tactical and

short run and long-run.

5
Ibid

20
2.5.1. Strategic and Tactical Decisions

In management accounting, the objective is not necessarily to make the best decision but

to make a good decision. Because of complex interacting relationships, it is very difficult,

even if possible, to determine the best decision. Management decision making is highly

subjective. Whether a decision is good or acceptable depends on the goals and objectives

of management. Consequently, a prerequisite to decision making is that management

have set the organization’s goals and objectives. For instance, management must decide

strategic objectives such as the company’s product line, pricing strategy, quality of

product, willingness to assume risk, and profit objective.

In setting goals and objectives, it is useful to distinguish between strategic and tactical

decisions. Strategic decisions are broad based, qualitative type of decisions which include

or reflect goals and objectives. Strategic decisions are non quantitative in nature.

Strategic decisions are based on the subjective thinking of management concerning goals

and objectives.

Tactical decisions are quantitative executable decisions which result directly from the

strategic decisions. The distinction between strategic and tactical is important in

management accounting because the techniques of management accounting pertain

primarily to tactical decisions. Management accounting does not typically provide

techniques for assisting in making strategic decisions.

Once a strategic decision has been made, then a specific management tool can be used to

aid in making the tactical decision. For example, if the strategic decision has been made

to avoid stock outs, then a safety stock model may be used to determine the desired level

21
of inventory. The classification of decisions as strategic and tactical logically results in

thinking about decisions as qualitative and quantitative. In management accounting, the

approach to decision making is basically quantitative. Management accounting deals with

those decisions that require quantitative data. In a technical sense, management

accounting consists of mathematical techniques or decision models that assist

management in making quantitative type decisions.

2.5.2. Short Run Versus Long Run Decision Making

The decision making process is complicated somewhat by the fact that the horizon for

making decisions may be for the short run or long run. The choice between the short run

and the long run is particularly critical concerning the setting of profitability objectives.

A fact of the real business world is that not all companies pursue the same measures of

success. Profitability objectives which management might choose to maximize include:

 Net income

 Sales

 Return on total assets

 Return on total equity

 Earnings per share

The decision making process is, consequently, affected by the profitability objective and

the choice of the long-run versus the short-run. If the objective is to maximize sales, then

the method of financing a new plant is not immediately important. However, if the

objective is to maximize short run net income, then management might decide to issue

stock rather than bonds to avoid interest expense. In the short run, profits might suffer

22
from expenditures for preventive maintenance or research and development. In the long

run, the company’s profit might be greater because of preventive maintenance or research

and development.

Although the interests of management and the organization may be presumed to coincide,

the possibility of making decisions for the short run may cause a conflict in interests. An

individual manager planning to make a career or job change might have a tendency to

make decisions that maximize profitability in the short run. The motivation for pursuing

short run profits may be to create a favorable resume.

The tools in management accounting such as C-V-P analysis, variance analysis,

budgeting, and incremental analysis are not designed to deal with long range objectives

and decision. Consequently, the results obtained from using management accounting

tools should be interpreted as benefits for the short run, and not necessarily the long-run.

Hopefully, decisions which clearly benefit the short run will also benefit the long run.

Nevertheless, it is important for the management accountant, as well as management, to

beware of possible conflicts between short run and long run planning and decision making.

2.6. Decision Making and Required Information

The assumption that management will use management accounting tools in making

decisions places a burden on the management accountant. Each tool requires special

information. The management accountant will be asked to provide the specialized

information needed. Management accounting texts have traditionally emphasized the

mechanics of techniques with little emphasis on how to obtain the necessary data. In

23
many cases, the inability to obtain the required information has rendered a particular

technique useless.

2.7. Management Control

Control is one of the managerial functions like planning, organizing, staffing and

directing. It is an important function because it helps to check the errors and to take the

corrective action so that deviation from standards are minimized and stated goals of the

organization are achieved in desired manner. According to modern concepts, control is a

foreseeing action whereas earlier concept of control was used only when errors were

detected. Control in management means setting standards, measuring actual performance

and taking corrective action. Thus, control comprises these three main activities.

2.7.1. Characteristics of Control

 Control is a continuous process

 Control is a management process

 Control is embedded in each level of organizational hierarchy

 Control is forward looking

 Control is closely linked with planning

 Controlling is tool for achieving organizational activities

2.7.2. Management Control Systems

A management control system is a means of gathering and using information to aid and

coordinate the planning and control decisions throughout an organization and to guide the

behavior of its managers and employees. Management control system (MCS) gathers and

reports information for management control at various levels:

24
 1- Total organizational level: - for example, stock price, net income, return on

investment, cash flow from operations, total employment, pollution control, and

contributions to the community.

2- Customer (market level):- for example, customer satisfaction, and time taken to

respond to customer requests for products and cost of competitors’ products.

3- Individual facility level :- for example, material costs, labor costs, absenteeism

rates and accidents in various divisions or business functions such as R & D,

production and distribution

4- Individual activity level:- for example, time taken and costs incurred for

receiving, storing and assembling , and dispatching goods in a warehouse, scrap

rates, defects and units reworked on a manufacturing , number of sales

transactions and revenue per sales person, and number of shipments per

employee and distribution centers.

Managerial control systems collect both financial information (for example, net income,

material costs and storage costs) and non financial information (for example, time taken

to respond to customer requests, absenteeism rates and accident). Some of the

information is obtained from within the company, such as net income and number of

shipments per employee. Other information is obtained from outside the company, such

as stock price and costs of competitors’ product. Some companies’ present financial and

non financial information in a single report called the balance score card.

The four levels management control systems indicate the different kinds of information

needed by managers performing different tasks. For instance, stock price information is

25
needed by upper management at the total company level to evaluate how much

shareholders value the company has created stock price is less important for the

managers, managing individual activities in a warehouse where the information they need

is time taken for receiving and stocking inventory and materials.

Management control system refers to formal and informal systems. The formal

management control system of a company includes those explicit rules, procedures,

performance measures, and incentive plans that guide the behavior of its managers and

employees. The formal control system itself consists of several systems. Other formal

control systems are human resource systems that provide information on recruiting,

training, absenteeism and accidents and quality systems that provide information on

scrap, defects, rework and late deliveries to customers.

The informal management control system (MCS) includes such aspects as shared values,

loyalties, and mutual commitments among members of the company, company culture,

and the unwritten norms about acceptance behavior for managers and employees.

2.7.3. Evaluating Management Control Systems

To be effective, management control systems should be closely aligned to the company’s

strategies and goals. Suppose management decides, wisely or unwisely, to maximize

short run income. The control system should provide managers with information such as

contribution marginal on individual products that will help them to make short run

decisions. The control system should also tie manager’s rewards to short run income.

Management control systems should be designed to fit the company’s structure and the

26
decision making responsibility of individual managers. The management control system

should provide information that helps the manager’s plan and control the operation better.

Efficient management control systems should also motivate managers and employees.

Motivation is the desire to attain a selected goal (the goal congruence aspect) combined

with the resulting pursuit of that goal (the effort aspect). Management control systems

motivate managers and employee to exert effort through a variety of rewards tied to the

achievement of those goals. These rewards can be monetary such as, shares of a company

stock, use of a company car or membership in a club or nonmonetary such as power or

pride in working for a successful company.

2.7.4. The Role of Accounting Information in Management Control6

Accounting information is an important control tool within the organization because it

provides out of the few quantitative, integrative mechanisms that are available. Although

accounting information in no way reflects the totality of activities that takes place within

the organization and in its interaction with the wider environment, it does provide

information on one dimension of such activity. Because the information is expressed in

common monetary terms, it can be aggregated across all organizational units and

combined in to successfully more aggregate measure of performance.

However, there is a danger inherent in its use. Because it is often the only quantitative

measures of the activities of a wide variety of disparate units, it can become treated as if

it represented the only important aspect of organizational activity. This tendency gap

often been reinforced by the dominant position of the owner, but it must be recognized
6
C. Emanuel, D. Otley and K. Merchant (1990), Accounting for Management Control. 2nd ed., Chapman and Hall.

27
that the other aspects of performance are equally of not more important and will indeed

ultimately affect the accounting measures adversely if not given appropriate attention.

A similar effect can often be rated at lower hierarchical levels in the organization.

Because accounting information is making and control its importance tends to be

exaggerated at minor levels, where alternative information may be available. For

example, although production cost may be an appropriate control variable for a manager

responsible for several different plants, physical production figures together with quality

control and reliability indices may be more appropriate at plant level.

It is also necessary to distinguish between the use of accounting information in financial

control and its use in organizational control. Financial control is concerned with the

regulation of the flow of money through the enterprise and in particular, with ensuring

that cash is always available to pay debts when they fall due. This is self-evidently vital

for the survival of the enterprise, but nevertheless finance represents only one function

amongst many others, such as production, Marketing and industrial relations.

Organizational control, on the other hand, is primarily concerned with the overall

integration of all functional activities in to a viable whole. Although organizational

control will require accounting information, the information required will be more

expensive than that used purely for financial control. Organizational control is a wider

concept than financial control and the information required to enable it to be effective is

correspondingly broader.

Analysis of managerial accounting specifically relating to accounting has been developed

by Antony (1965, 1988). He categorized managerial decision making and control

28
activities in to three major types, namely strategic planning, management control and

operational control and argued that most managers would be primarily concerned with

only one type of activity. As the nature of the control process is very different in each

case, it is important that a manager’s task is correctly identified. Strategic planning was

defined as being concerned with the setting and changing of overall corporate strategies

and objectives, management control involved monitoring activities and taking action to

assure that resources were being effectively and efficiently used in accomplishing

organizational objectives, operational control was concerned with carrying out specific

tasks on a day to day basis.

Management control is thus seen as the mediating activity between strategic planning (the

setting of objectives) and task control (the carrying out of specific tasks). It is integrative

because it involves the whole organization and is concerned with the effective

management of the interrelationships between disparate parts. Unlike the strategic

planning and operational control, management control is an essentially routine affair,

reporting on the performance of all aspects of an organization’s activity on a regular

basis, so that all areas are systematically reviewed. Defined in this way the major tool for

achieving management control is thus seem to be management accountants information.

Such information is collected in a standard manner from all parts of the organizations;

because it is in quantitative (monetary) form it can easily be aggregated on to summaries

for higher levels of management, it is routinely collected and disseminated.

29
There is no doubt that management accounting is an important tool of management

control, as more widely defined, perhaps taking Sizer’s (1979) definition as a starting

point, i.e.;

Control is concerned not with correcting past mistakes, but directing future

activities. Thus management control consists, input, of inducing people in an

organization to do certain things and to refrain from doing others.

The reality of management also gives a superficial justification for the idea that

accounting information is the basis of management control (Machin, 1983).

2.8. Ethics in Managerial Accounting7

Managerial accounting research has addressed various ethical issues. Rogerson (1992)

examined overhead allocated to contracts and demonstrated that firms have incentives to

engage in pure waste by padding direct labor usage on contracts with cost-based

revenues. Sayre, Rankin, and Fargher (1998) investigated the effects of promotion

incentives on the selection of investment projects by managers and found that the

managers’ investment decisions served their own self-interests at the expense of the

owners’ interests. A number of studies on budgeting have shown that when a

subordinate’s information is used as a basis for his performance evaluation, the

subordinate has incentives to misrepresent resource requirements or production

capabilities (e.g., Young, 1985; Waller, 1988; Chow, et al, 1988; Nouri, 1994; Stevens,

2002). Many studies have provided evidence on how managers manipulate earnings to

maximize their compensation or enhance their performance evaluation (e.g., Healy and

7
Ethical Decision Making on Various Managerial Accounting Issues Arnold Schneider JAMAR Vol. 2 · Number 2 · 2004

30
Whalen, 1999; Nelson, et al, 2003). While these manipulations usually involve

accounting choices, some involve managerial decisions such as the research and

development spending decisions examined by Dechow and Sloan (1991).

2.8.1. Standards of Ethical Conduct for Management Accountants8

Management accountants have an obligation to the organizations they serve, their

profession, the public, and themselves to maintain the highest standards of ethical

conduct. In recognition of this obligation, the institute of management accountants has

adopted the following standards of ethical conduct for management accountants.

Adherence to these standards is integral to achieving the objectives of management

accounting. Management accountants shall not commit acts contrary to these standards

nor shall they condone the commission of such acts by others within their organizations.

Competence

Management accountants have a responsibility to

 Maintain an appropriate level of professional competence by ongoing

development of their knowledge and skills.

 Perform their professional duties in accordance with relevant laws, regulations,

and technical standards.

 Prepare complete and clear reports and recommendations after appropriate

analysis of relevant and reliable information.

8
IMA, (1983) Standards of Ethical Conduct for Management Accountants,: Institute of Management Accountants, Montvale, NJ

31
Confidentiality

Management accountants have a responsibility to

 Refrain from disclosing confidential information acquired in the course of their

work except when authorized, unless legally obligated to do so.

 Inform subordinates an appropriate regarding the confidentiality of information

acquired in the course of their work and monitor their activities to assure the

maintenance of that confidentiality.

 Refrain from using or appearing to use confidential information acquired in the

course of their work for unethical or illegal advantage either personally or through

third parties.

Integrity

Management accountants have a responsibility to

 Avoid actual or apparent conflicts of interest and advise all appropriate parties of

any potential conflict.

 Refrain from engaging in any activity that would prejudice their ability to carry

out their duties ethically.

 Refuse any gift, favor, or hospitality that would influence or would appear to

influence their actions.

 Refrain from either actively or passively subverting the attainment of the

organization’s legitimate and ethical objectives.

32
  Recognize and communicate professional limitations or other constraints that

would preclude responsible as well as favorable information and professional

judgments or opinions.

 Refrain from engaging in or supporting any activity that would discredit the

profession.

Objectivity

Management accountants have a responsibility to

 Communicate information fairly and objectively

 Disclose fully all relevant information that could reasonably be expected to

influence an intended user’s understanding of the reports, comments, and

recommendations presented.

2.9. Role of Management Accountants within the Corporation9

Consistent with other roles in today's corporation, management accountants have a dual

reporting relationship. As a strategic partner and provider of decision based financial and

operational information, management accountants are responsible for managing the

business team and at the same time having to report relationships and responsibilities to

the corporation's finance organization.

The activities management accountants provide inclusive of forecasting and planning,

performing variance analysis, reviewing and monitoring costs inherent in the business are

ones that have dual accountability to both finance and the business team. Examples of
9
Wikipedia, the free encyclopedia

33
tasks where accountability may be more meaningful to the business management team vs.

the corporate finance department are the development of new product costing, operations

research, business driver metrics, sales management score carding, and client profitability

analysis. Conversely, the preparation of certain financial reports, reconciliations of the

financial data to source systems, risk and regulatory reporting will be more useful to the

corporate finance team as they are charged with aggregating certain financial information

from all segments of the corporation. One widely held view of the progression of the

accounting and finance career path is that financial accounting is a stepping stone to

management accounting. Consistent with the notion of value creation, management

accountants help drive the success of the business while strict financial accounting is

more of a compliance and historical endeavor.

34
 CHAPTER THREE

3. DISCUSSION AND ANALYSIS

The following presents the analysis of data collected. It has two parts. The first part

presents respondents profile including their educational status, field of specialization and

working experience. The second part presents information on company level based on the

questionnaire distributed and interview made with respondents.

3.1 RESPONDENT’S PROFILE

3.1.1 EDUCATION

Table 1: Educational Status

EDUCATIONAL STATUS
DIPLOMA DEGREE MASTERS Total
FINANCE MANAGER Number 2 10 4 16
Percent
12.5% 62.5% 25.0% 100.0%
MARKETING MANAGER Number 0 13 3 16
Percent .0% 81.3% 18.8% 100.0%
PRODUCTION MANAGER Number 0 11 5 16
Percent .0% 68.8% 31.3% 100.0%
ACCOUNTANT Number 4 12 0 16
Percent 25.0% 75.0% .0% 100.0%
Total Number 6 46 12 64
Percent 9.4% 71.9% 18.8% 100.0%

Table 1 above summarizes respondent’s educational status. About 25% of the

accountants are diploma holders and 75% of them are degree holders. None are at

master’s level. Similarly, none of the accountants are certificate holders. Most of the

finance managers i.e. 62.5% are degree holders. About 25% of them are at masters level.

35
The number of finance managers at diploma level counts 12.5%. Concerning educational

status of marketing managers, about 81.3% of them are degree holders. Only 18.7% have

masters. When look at production managers’ educational level, 68.8% of them are degree

holders and 31.3% have master degree. A more description of the educational status of

respondents is presented in table 1 above.

3.1.2 FIELD OF SPECIALIZATION

Table 2: Field of Study

FIELD OF STUDY
ACCOUN MARKETIN MECHANI
TING BUSINESS G CHEMICAL CAL
AND ADMINIST MANAGEM ENGINEE ENGINEE
FINANCE RATION ENT R R Total
FM Number 12 4 0 0 0 16
Percent 75.0% 25.0% .0% .0% .0% 100.0%
MM Number 0 3 13 0 0 16
Percent .0% 18.8% 81.3% .0% .0% 100.0%
PM Number 0 0 0 5 11 16
Percent .0% .0% .0% 31.3% 68.8% 100.0%
ACCT Number 0 0 16 0 0 16
Percent .0% .0% 100.0% .0% .0% 100.0%
Total Number 12 7 29 5 11 64
Percent 18.8% 10.9% 45.3% 7.8% 17.2% 100.0%

Regarding accountants’ field of study with no exception all studied in the accounting and

finance stream. Unlike to that of accountants, about 75% of finance managers have got

their degrees in accounting and finance while the remaining (25%) earn their degrees in

business administration. About 81.3% of marketing managers study in marketing

management and the rest (18.7%) in business administration. About 31.3% of production

managers study in chemical engineering while the remaining (68.8%) got their degrees in

mechanical engineering. Detail information is presented in table 2 above.

36
3.1.3 WORK EXPERIENCE

Table 3: Work Experience

WORK EXPERIENCE
BELOW ABOVE
2 2 TO 5 5 TO 8 8
YEARS YEARS YEARS YEARS Total
FINANCE MANAGER Number 0 3 5 8 16
Percent .0% 18.8% 31.3% 50.0% 100.0%
MARKETING MANAGER Number 0 3 6 7 16
Percent .0% 18.8% 37.5% 43.8% 100.0%
PRODUCTION Number 0 3 5 8 16
MANAGER Percent .0% 18.8% 31.3% 50.0% 100.0%
ACCOUNTANT Number 2 4 6 4 16
Percent 12.5% 25.0% 37.5% 25.0% 100.0%
Total Number 2 13 22 27 64
Percent 3.1% 20.3% 34.4% 42.2% 100.0%

Table 3 above gives summary of work experience of respondents. Most accountants

(37.5%) have 5 to 8 years of progressive work experience in the area and about 12.5% of

them have work experience below 2 years. 25% of the accountants have 2 to 5 year of

working experience. 25% of accountants have work experience of above 8 years.

About 31.3% of finance managers have work experience between 5 to 8 years and 50%

pointed out they have work experience of above 8 years. Only 18.8% of the respondents

have work experience between 2 to 5 years. No finance managers have work experience

below 2 years.

When we look at marketing managers work experience, about 18.8% of them have 2 to 5

five years and none of them have below 2 years. 37.5% and 43.8% of them have 5 to 8

and above 8 years experience respectively.

37
Most of production managers (50%) have work experience of above 8 years and 18.8%

of them have work experience of 2 to 5 years. About 31.3% of production managers have

5 to 8 years work experience.

3.2 EMPERICAL RESULTS AND DISCUSSION

3.2.1 TYPES OF DECISIONS OFTEN MADE BY MANAGERS AND WHETHER THEY

ARE PROVIDED WITH THE INFORMATION THEY REQUIRE

The basic goals or objectives of business enterprise may be multiple. For example, the

goal may be to maximize net income. Other goals could be to maximize sales, ROI, or

earnings per share. Management accounting does not require a specific type of goal.

Whatever form the goal takes, management will at all times try to achieve a satisfactory

level of profit. A less than satisfactory level of profit may portend a change in

management.

The success of the business depends primarily upon the skills and abilities of

management–which skills can vary widely among different managers. The business is not

completely at the mercy of market forces. Management can through its actions

(decisions) influence and control events within limits.

One of the critical managerial functions is decision making. Decisions which

management must make may be classified as marketing, production, and financial. A

primary objective of decision making is to achieve optimum utilization of the business’s

capital or resources. Effective decision making requires relevant information and special

analysis of data. The accounting department is a primary source of information necessary

in making decisions. Therefore, the accounting department is expected to provide

38
information to all levels of management and managers also consider the accounting

department capable of providing data useful in making marketing, production, and

financial decisions. This part delves to identify the types of decision managers often

made and assess whether the accounting department provide them the information they

need.

3.2.1.1 TYPES OF DECISIONS OFTEN MADE BY PRODUCTION MANAGERS AND

WHETHER THEY ARE PROVIDED WITH THE INFORMATION THEY REQUIRE

Table 4 below depicts the group items comprising the type of decision usually made by

production managers. Data in this respect show that 81% of the respondents engaged in

decision involving determination of factory workers’ wage and 93% pointed out they

spend sizeable time in issues related with raw material selection. About 93% of the

respondents’ state they usually encounter decisions concerning supplier selection. Still

88% of the respondents have said they usually face decision involving overtime and

second shift.

Among the different types of decisions production managers made, the decision on which

they spend a considerable time is “make or buy” decision. Similarly, 81% of the

respondents have said they engage in a “make or buy” decision.

Other decision items which production managers’ face include determining inventory

levels (56% of the respondents), determining order size (about 75% of the respondents)

and issues related with replacement of equipment (about 63% of the respondents).

39
Table 4: Types of Decisions often made by Production Manager

Frequency

Decisions Items
No. %

Determining Factory workers’ wages 13 81%

Overtime, second shift 14 88%
Replacement of equipment 10 63%
Determining inventory levels 9 56%
Buy or Make 13 81%
Determine Order Size 11 75%
Selection of Suppliers 15 93%
Raw material selection 15 93%
Decision Items for which Management Accounting Information is required and
whether they are provided

The graph below shows decisions which production managers often made, and the
number of respondents who require MAI and the number of times MAI have been
provided.

Graph 1: Decision Items for which Managers Require MAI and whether they are
provided

40
Where, A= Determining Factory workers’ wages E=Buy or Make
B= Overtime, second shift F=Determine Order Size
C= Replacement of equipment G=Selection of Suppliers
D=Determining inventory levels H=Raw material selection

A problem frequently confronting management is replacing equipment and acquiring new

one. Since the acquisition of plant and equipment often involve large capital outlay and

affect operation for a long period into the future, a careful prior analysis should be made

by the management to determine whether the expenditure is warranted. As can be seen in

graph 1 above, 9 out of 10 who made such decision i.e. 90% of the respondents need

management accounting information in order to make such decisions and to my surprise

all of them obtain the information.

Supplier selection is another decision item which production managers usually encounter.

While selecting the supplier to whom order is to be given for the purchase of materials,

usually information is needed on financial condition of the supplier, price quoted,

manufacturing capacity, reliability of the supplier, terms of payment, etc. As a result 80%

(12 out of 15 who made this decision) of the respondents need management accounting

information for making such decision. However, it is only 83% or 10 of them have got

the information needed (refer graph 1 above).

A decision often confronting production managers is whether to make or buy a particular

product. As easily seen in graph 1, about 85% of respondents ( 11 from 15 who made this

decision) need management accounting information to make “make or buy” decision. The

41
accounting department provides the information required for 10 respondents out of 11

who need the information.

About 56% of production managers (5 out of 9) require management information for

making decision concerning determination of inventory level and the accounting

department provides the information required only for 2 respondents out of 5 who require

it.

About 77%, 71% and 73% of production managers require management accounting

information for determining factory workers wage, deciding overtime and second shift

and determination of order size, respectively. However, it is only 87.5% of respondents

obtain the required information for determination of order size, followed by 80% for

deciding overtime and second shift and 70% for determining factory workers wage.

3.2.1.2 TYPES OF DECISION OFTEN MADE BY MARKETING MANAGERS AND

WHETHER THEY ARE PROVIDED WITH THE INFORMATION THEY REQUIRE

Table 5 depicts the group items comprising the type of decision usually made by

marketing managers. Data in this respect show that 89% of the respondents engaged in

accept or reject special sales order decision and 83% pointed out they spend considerable

time in issues related with determining the number of sales people. About 61% of the

respondents marked they usually face decisions concerning which product to emphasize

when there is resource constraint. 67% of the time marketing managers involve with

determination of sales price.

Other decision items which marketing managers face includes determination of the

number of products to be produced (about 56% of respondents), anticipation of market

42
opportunity (about 78% of respondents), setting credit limits(about 11% of respondents),

advertising(about 89% of respondents) and responding to competitors action(about 72%

of respondents). With no exception all marketing managers involve in sales forecasting.

Table 5: Types of Decisions often made by Marketing Manager

Decisions items Frequency

No. %
Accept or reject special sales order 14 89%
Determining sales prices 12 67%
Which product to emphasize when there is constraint 11 61%
Determining the number of sales people 13 83%
Determining number of products to be produced 10 56%
To anticipate market opportunity 14 78%
Advertising 16 89%
Credit 2 11%
Sales Forecast 16 100%
To respond to competitors action 13 72%

Decision Items for which Management Accounting Information is required and

whether they are provided

Marketing Managers engage in different types of decisions ranging from determining

sales price to anticipating market opportunity. In order to be effective in their decisions

managers usually need different information. As per Ronald W.Hilton, one sources of

information is the accounting department and they are expected to provide the

information managers need.

The graph 2 below shows the frequency of decisions made by marketing managers, those

who require MAI and whether MAI have been provided.

43
Graph 2: Decision Items for which Managers Require MAI and whether they are
provided

Where, A= Accept or Reject Special Sales order G= Advertising

B= Determining Sales price H= Credit

C= which product to emphasize when there is constraint I= Sales Forecast

D= Determining the number of sales people J= to respond to competitors action

E= Determining number of products to be produced

F= to anticipate market opportunity

A decision with which management often is conflicted with is whether or not to accept a

special order involving production of additional units beyond outstanding plans and

commitments. Therefore, managers usually depend on management accounting

information to see the probable effects of the additional order on fixed manufacturing

costs, selling and administrative cost, selling price and possible reduction in direct

material costs resulting from increased volume buying. Accordingly, as can be seen in

44
graph 2 above, about 86% (12 out of 14 who engage in that decision) of the respondents

require management accounting information for making such type of decision and

accounting department provides reports about 92% of the time (only 11 respondents get

the required information out of 12 respondents who require the information).

Another decision item which marketing mangers usually face include to which product

line to emphasize when there is resource constraint. Referring graph 2 above, about 73%

(8 out of 11who engage in this decision) of the respondent said they heavily depend on

the information provided by the accounting department. However, it is about 62.5% of

them (5 out of 8 who require MAI) has got the information they require.

Marketing managers also concerned with the issue of determining the number of products

to be produced. This decision has impact on the company’s performance and they are

expected the pass the best decision they could made. Consequently, as easily seen in

graph 2 above it is only 80% (8 out of 10) of the respondents profoundly need the help of

accounting information for making such type of decision. The accounting departments

provide the information needed for about 6 of the respondents out of 8 (75%) who require

the information (see graph 2 above).

Marketers usually spent considerable time in anticipating opportunities that exist in the

market. Taking opportunities that are in the market can help companies in many ways.

Among those, it may help them to launch new product line. Nonetheless, it is only 28.5%

of respondents (4 respondents out of 14 who made such decisions) need the help of

accounting information for making such decisions. However, it is only 25% of them

obtain the information they require.

45
Marketing managers also often make decision involving advertising. The sub decision

under advertising includes determining media type, frequency of advertising, selection of

advertising company, which product to advertise, etc. However, it is only 4 respondents

out of 16 respondents or 25% who require management accounting information for

making such decisions and it is only 75% of them (3out of 4 who require MAI) get the

information required.

Another decision item which marketing manager’s encounter includes determination of

the number of sales persons. Here, 85% of the respondents (11 out of 13 who made such

decisions) maintain position to use management accounting information for making such

decisions. They state the sales activity report obtained from accounts department helps

them to easily decide as to additional employee is needed or not. But it is only 82% or 9

out of 11 of them have got the information needed.

Sales forecasting is another decision item which marketing managers typically encounter.

Sales forecast is one of the inputs in the preparation of budgeted profit and loss statement

and marketing managers usually work in hand with finance department. It is also clearly

observed from respondents answer as all of them with no exception needs the help of

management accounting information. Surprisingly all the respondents get the information

they require from the accounting department.

46
3.2.1.3 TYPES OF DECISION OFTEN MADE BY FINANCE MANAGERS AND

WHETHER THEY ARE PROVIDED WITH THE INFORMATION THEY REQUIRE

Table 6: Types of Decisions often made by Finance Manager

Decision Items Frequency Require the use M AI have

of MA I
been provided
No. % No. % No. %
Bank loans 16 100% 16 100% 16 100%
Accounts payable payments 14 88% 13 93% 13 100%
Dividend 14 94% 12 86% 12 100%
Desired ending cash balance 12 75% 10 83% 9 90%
Determining the financing 15 94% 15 100% 12 80%
need of projects
Investment 12 75% 12 100% 11 92%

Table 6 depicts the group items comprising the type of decision usually made by the

finance managers. Data in this respect show that with no exception all the respondents

engaged in issues concerning bank loan and 94% pointed out they spend considerable

time in issues related with determining the financing need of different projects. About

75% of the time finance managers involve with investment decisions. About 88% and

75% of finance managers engage in accounts payable payment and determining desired

ending cash balance respectively.

Decision Items for which Management Accounting Information is required and

whether they are provided

Finance managers usually engaged in various decisions comprising investment, bank

loan, accounts payable payments, desired ending cash balance, direct costing and

absorption cost and dividend among others.

47
10
An investment is the current commitment of funds for a period of time to derive future

payments that will compensate the investor for the time funds are committed, the

expected rate of inflation and the uncertainty of future payments. In order for managers to

make investment decisions they usually need information from the accounts department.

Similarly, all respondents have responded as they need the help of accounting

information in order to make investment decision. Surprisingly, all the respondents

engaged in this decision get the information needed from the accounting department.

A decision which finance managers encounter is determining the financing need of

different projects. As one can easily seen in table 6 above, all the respondents need

management accounting information for making such decision and 80% of them have got

the information they need.

As can be seen in table 6 above, about 88% of finance managers engaged in accounts

payable settlement decision. Managers usually need information on cash position before

checks are prepared for payment. Similarly 13 out of 14 finance managers who made this

decision or 93% require management information in order to make such decisions and all

of them get the information from accountants.

Firms usually take a loan from banks for various reasons and most of the time it is the

finance manager who involve in this decision. As can be seen in the table 6 above all

finance managers faces this decision and all of them require management accounting

information for making such decision and all of them obtain the information they require.

10
Frank K. Reilly and Keith C. Brown, 1992, pp-6

48
Retaining of earning in the business or distributing among shareholders is one of decision

item which finance managers rarely encounter. The financial manager plays an important

role in advising management regarding the decision. Of course the power to take the

decision rest on Board of Directors. Still in some companies the finance managers

themselves may make such decisions. If the company has more favorable reinvestment

opportunity within it as compared to those outside, it would be more profitable for the

company to retain earnings than to pay out as dividends. In such cases the financial

manager assists BOD for decision making to address the question whether to pay a

dividend or to retain. As can easily be seen in table 6 above 94% of the finance managers

involve in dividend decision and majority of them take advisory role. About 86%

respondents who engage in this decision require management accounting information. To

my surprise all get the information they need.

3.2.2 AREAS WHICH NEED MANAGEMENT CONTROL AND WHETHER THE RESPONSIBLE
MANAGERS USE MANAGEMENT ACCOUNTING INFORMATION

In order for a firm to be competitive and remain in the market it has to control its cost in

general and production cost in particular. Therefore, managers usually pay due attention

how to control costs in their responsibility center. The following illustrates some of the

areas that need management control and whether managers are provided with the

information they require.

Control of Wastage, Scrap, Defect and Spoilage

Material is a very important factor of production. It includes physical commodities used

to manufacture the final end product. Proper control of material is necessary from the

49
time orders of purchase materials are placed used with supplier until they have been

consumed. The objective of material control is to attack material costs on all fronts so

that the cost of materials may be reduced.

Matz, Curry and Frank in their book “Cost Accounting” state “because material

constitute a significant part of product costs is controllable, proper planning, purchasing,

handling and accounting are of a great importance”.

Production managers usually held responsible for the proper use of materials at the

production floor. Therefore, they spent a considerable time to reduce material losses. Of

course material losses may take the form of wastage, scrap, defective and spoilage. They

are usually held responsible only for abnormal wastage which may arise due to theft,

careless handling, etc. Similarly they are accountable for defective scraps which may

arise due to bad workmanship or defective machine and defects that may arise due to

poor workmanship, bad supervision and careless inspection. Therefore, production

managers exert much of their effort to reduce the cost of production by exercising control

on wastage, scrap, defects and spoilage.

Accordingly, as per the interview made with the accountants, production managers

usually spent much of their time to prevent material loss. In order for controlling such

losses, production managers usually require information on input material used against

output produce, input sub material used against standard sub material, etc. This usually

came from management accounting reports provided by the accounting department.

50
Control over Labor Costs

Labor costs constitute a significant portion of the total cost of a product. Labor costs may

be excessive due to inefficiency of labor, more wastage of materials by labor due to lack

of proper supervision, higher labor turnover, idle time and unusual overtime work,

inclusion of bogus workers in the wage sheets and many others little factors. Therefore

the economic utilization of labor is a need of the present day industry to reduce the cost

of production of the products manufactured. Accordingly, production managers of the

manufacturing companies in city of Addis Ababa usually require management accounting

information for making such type of control.

Inventory Control

Lack of control over inventories can be a serious detriment to the successful management

of a business. An excessive inventory is expensive to carry. Studies made indicate that

the cost of carrying an inventory- insurance, warehousing, handlings inventory taking-

may be as high as 25% of its original production cost per year. On the other hand,

sufficient items and quantities must be stocked to provide customers with a good service.

Maintaining a proper balance so as to avoid both inventory shortage and inventory excess

requires organization and planning. Control plans must provide day-to-day comparison of

projected production with current sales volume. Most of the accounting department of

manufacturing companies in city of Addis Ababa provides the information required for

making such comparisons.

51
Cash Balance

Managers must make certain adequate cash funds are available at all times. Good

management requires that sufficient cash be available for bills to be paid in time to take

advantage of discounts and for payrolls and other costs and operating costs. An adequate

cash balance is also essential for the maintenance of good credit ratings. On the other

hand, cash balance beyond actual, particularly during inflationary period when cash

suffers a loss of purchasing power, are indication of ineffective management of cash.

Salesman Activity

Marketing managers usually require management accounting information on volume and

type of sales on daily, weekly, etc basis to evaluate the sales man success in meeting

quotas.

Customer Related

Marketing managers often require management accounting information on size and

distribution of customers so that they can easily identify where the company’s customer

concentrate and they can easily assess customer attitude on company’s product and can

take corrective action and ultimately they can keep their customer.

3.2.3THE USE OF MANAGEMENT ACCOUNTING INFORMATION BY MANAGERS IN

DECISION MAKING AND MANAGEMENT CONTROL: RESULT DRAWN FROM
ACCOUNTANTS AND FINANCE MANAGERS RESPONSES

In accomplishing organization goal and objective, managers engaged in different

activities including making business decision and management control and accounting is

52
one of the informational sources for managers that could help them to make better and

informed decision and control. 11

Table 7: Trend in use of MAI - Responses of Accountants and Finance Managers

TREND IN USE OF MANAGEMENT

ACCOUNTING INFORMATION
YES, THERE NO, THERE IS NO
IS TREND TREND Total
FINANCE MANAGER Number 9 7 16
Percent 56.3% 43.8% 100.0%
ACCOUNTANT Number 10 6 16
Percent 62.5% 37.5% 100.0%
Total Number 19 13 32
RCENT
Percent 59.4% 40.6% 100.0%

Table 7 above summarizes information on other department use of management

accounting information. About 62.5% of the accountants (10 out of 16 respondents) said

there is practice in the use of management accounting information by other departments

for making decisions and control. Even 56% (9 out of 16 respondents) of finance

managers share the accountant’s idea. On the other hand 38% of the accountants (6 out

of 16 respondents) state there are no any trend in the use of management accounting

information by other departments like marketing and/or production. 44% of finance

managers (7 out of 16 respondents) also stated other departments don’t show any interest

to use management accounting information for reasons described in graph 3.

11
Ronald W. Hilton, 2001:p-4

53
Reasons for not using Management Accounting Information by managers – Responses from

Accountants and Finance Managers on other department trend

Graph 3: Reasons for not using Management Accounting Information (MAI)

In summarizing accountants and finance managers opinion on “why other departments

don’t want to use Management Accounting Information”, 83% of the accountants ( 5 out

of 6) and 85% of finance managers’ (6 out of 7) state managers limited knowledge in

accounting as the primary reason.

Complexity of the report is the other reason forwarded to describe why other departments

don’t show interest to use management accounting information. Just 85% of finance

managers (6 out of 7) argue reports are not prepared in a way that is easily

understandable by managers (especially for those whose accounting knowledge is

limited) and they finally opt not to use the information provided. Even 67% of

accountants (4 out of 6) have the same stand like finance managers.

54
Furthermore, about 33% of the accountants (2 out of 6) and 71% of finance managers(5

out of 7) state report delay as one of the major bottleneck for marketing managers and/or

production managers to use the information provided. Neither accountants nor finance

managers have said shortage of time as a reason for managers for not using management

accounting reports.

3.2.4 THE USE OF MANAGEMENT ACCOUNTING INFORMATION IN DECISION MAKING AND

MANAGEMENT CONTROL BY MANAGERS: RESULT DRAWN FROM MARKETING

MANAGERS, PRODUCTION MANAGERS AND FINANCE MANAGERS RESPONSES

Summarizing manager’s view on their use of management accounting information, about

63% marketing managers of followed by production managers which account 56 % of the

respondents use management accounting information. As anyone expects, about 81% of

finance managers uses management accounting information.

About 44% of production managers, 37% of marketing managers and 19% of finance

managers don’t use management accounting information for one or other reason which is

briefly described in table 9.

55
 Table 8: Use of MAI by Managers
USE OF MANAGEMENT ACCOUNTING
INFORMATION BY MANAGER
YES,
SUBSTA
NTIAL YES, LITTLE NO Total
FINANCE MANAGER Number 10 3 3 16
Percent 62.5% 18.8% 18.8% 100.0%
MARKETING MANAGER Number 6 4 6 16
Percent 37.5% 25% 37.5% 100.0%
PRODUCTION Number 4 5 7 16
MANAGER Percent 25.0% 31.25% 43.75% 100.0%
Total Number 21 12 15 48
Percent 43.8% 25.0% 31.3% 100.0%

Reasons for not using Management Accounting Information by managers - Responses from

Marketing Manager, Production Manager and Finance Manager

Table 9: Reasons for not using management accounting information (MAI)

Description Marketing Production Finance

Managers Managers Managers
No. %age No. %age No. %age
Complexity of the report 9 90% 10 83% - -
Delay of the report 9 90% 11 92% 5 83%
Managers don’t have sufficient time - - - - - -
Managers Limited knowledge in accounting 7 70% 9 75% - -

12
Information is useful only when it is provided at the time needed by users. It would be a

waste of organizational resources if it is not provided on time. Likewise, 92% (11 out of

12) of production managers followed by marketing managers (90 %) and finance

managers (83%) claim report delay as a bottleneck for them to use the report provided.

12
Accounting Information System, Marshal B. Romney and Paul john Steinbart, Prentice Hall Publishing, 2003, pp-5

56
When suggesting their opinion, they said it may be the result of inadequacy of accounting

personnel.

Marshal B. Romney and Paul John Steinbart on their book “Accounting Information

System” state, information is useful only when it is understandable by users. Notably,

90% of marketing managers (9 out of 10 who said they don’t use MAI) and 83% of

production managers (10 out of 12) raises complexity of reports as major problem for

them. None of the finance managers have cited report complexity as a reason for them for

not using management accounting information. This of course may be due to their strong

accounting background.

Apart from reports are not provided in the way explicable by managers, 70% (7 out of

10) of marketing managers and 75% of production managers (9 out of 12) set their

inadequate acquaintance of accounting as limitation for them to use the information

provided.

3.2.5 TYPES OF MANAGEMENT ACCOUNTING REPORTS PROVIDED BY THE

ACCOUNTANT FOR ASSISTING MANAGERS IN DECISION MAKING AND
MANAGEMENT CONTROL

Accounting data and accounting reports are basic to decision making and control.

Accountants therefore, spent a considerable time to produce and provide managers the

information they need. Accordingly, accountants of manufacturing companies in city of

Addis Ababa usually produce the following reports.

57
Cost sheet or Statement of Cost

Cost sheet is a statement designed to show the output of a particular accounting period

along with breakup of costs. It contains information about the total cost of the current

period, per unit for the current period, total cost and per unit cost for a preceding period

and total and per unit cost for the budget period and so on.

It is prepared to help production managers to minimize the cost of production when there

is a cut throat competition, to guide the manufacturer in formulating a definite useful

production policy, to enable the manufacturer to keep a close watch and control over the

cost of production and finally it helps manufacturers to find out the causes of variations

in costs by providing a comparative study.

Product Profitability Report – Provide information on:

 Salesmen’s success in meeting quotas

These reports are designed to help marketing managers to evaluate salesmen’s

performance.

 Profit Summaries by product line, division, salesman and customers

It is basically generated to assist marketing managers to analyze product

profitability and help them to control marketing costs which are mainly related

with advertising. For instance it can help marketing managers to allocate a larger

sum of money to advertise a product whose sales volume is low while

maintaining the other. It also helps them to evaluate salesman performance.

58
 Moreover, it assists marketing managers to analyze where the company’s product

largely traded.

 Stock availability on the basis of accurate product inventory information:

These reports are mainly targeted for marketing and production department.

Marketing managers usually accept sales order only when there is sufficient stock.

If the accounting department doesn’t provide accurate information on the

availability of stock, they may accept an order above the stock balance. This may

bring customer compliance and can destroy the long term relationship maintained.

Thus the accounting department provides this reports regularly to avoid customer

compliance and marketing managers usually refer reports before accepting a sales

order. By reducing customer compliance they ultimately can build strong

relationship with customers.

Production managers also receive a report on availability of stock. This helps to

control overproduction of an item. Overproduction of an item may force the

company to rent a new warehouse, which ultimately result in additional expense

in the form of rent. Therefore, accounting department usually provide this reports

to avoid such costs.

 Report on product lines with slow sale and declining profit margin:

Obviously this helps production managers to stop production of items whose sales

volume and profit margin is declining. This ultimately prevents company from

maintaining an excessive stock and tying up of capital. Therefore, based on the

59
 information managers can shift resources to produce other products which have

demand in the market. Marketing managers also use this reports to find out “why

products demand fall in the market”.

Variance Analysis Report

Variance analysis report is one of report type produced by the accountant of

manufacturing companies in city of Addis Ababa. It includes material variance, labor

variance, and sales variance.

 Material Usage Variance Report

Material usage variance reports are prepared to help production managers to

compare the standard quantity that should have been used with the actual quantity

which has been used. Therefore, they can take correction action whenever there

are unfavorable variances.

 Labor Efficiency Variance Report

It represents the quantity variance for direct labor. The labor efficiency variance is

normally controllable by production foreman, and may be due to a variety of

reasons. For example, the use of inferior quality materials, different grades labor,

failure to maintain machinery proper condition, the introduction of new

equipment or tools and changes on the production process will all affect the

efficiency of labor. Therefore, these reports are prepared in the objective to alert

production managers to investigate the causes of variances in cost.

60
  Sales Variance

Sales variance reports are produced to assist marketing managers in analyzing the

performance of the sales function on broadly some other terms to those for

manufacturing costs.

Interim Reports

Interim reports are usually prepared when firms approach bank for loan, or for

rescheduling loans.

Raw Material consumption report

This report is prepared to help managers to control material losses which may take the

form of wastage, scrap, defective and spoilage.

Revolving Estimation

These reports are prepared to estimate remaining month performance.

Cash operating expense report

These reports are prepared for various departments to allow them know their expenses.

Cost Analysis Report

It includes cost of goods manufactured, analysis of cost of different departments and

projects. They are prepared for determination of selling price, to determine whether costs

are incurred in accordance with the budget, etc.

61
Budget Statement

Budget is financial plans prepared to direct employees. Budget statements are prepared

for quarterly, semiannually and annually.

Fixed Asset Report

This report is prepared to follow up capital asset expenditure against budget.

Monthly Management Report

This report is produced to show monthly operational status of the company.

3.2.6 WHETHER ACCOUNTING REPORTS ARE PROVIDED TIMELY

Graph 4: Whether accounting reports are provided timely

Summarizing manager’s response whether reports are provided timely or not, about 75%

of finance managers (62.5% substantially and 12.5% little), 67% of production managers

(50% substantially and17% little) and 78.8% marketing managers (43.8% substantially

62
and 25% little) have said they usually receive accounting reports timely. About 31.2% of

marketing and production managers and 25% of finance managers have said they don’t

receive reports timely. Detail information is presented in graph 12 above.

Reasons why accounting department doesn’t provide the reports timely

Table 10: Reasons why the accounting Department doesn’t provide reports

Description Marketing Production Finance

Managers Managers Manager
No. % No. % No. %
Accountants are busy in performing 8 89% 6 75% 10 91%
routine activities
The system doesn’t allow them to 7 78% 6 75% 9 82%
provide the required information

In order to produce and provide users with the information they need, the accounting

system plays an important role. If the accounting system is the art of the state, then it can

provide the required information in a reliable and user friendly way. It doesn’t require

being a knowledgeable person to imagine when the situation differs. As can be seen in

table 10 above, 78% of marketing managers (7 out of 9 who said the report are not

provided timely), 75% of production managers (6 out of 8) and 82% of finance managers

(9 out of 11) have criticized the accounting system and mentioned it as a major limitation

for accountants for not providing the required information in time.

About 91% of finance manager ( 10 out of 11) followed by 89% of marketing

managers(8 out of 9) and 75% of production managers’ (6 out of 8) state accountants are

busy in performing routine activities and they don’t have ample time to make sound

financial analysis and generate and provide managers with the information they need.

63
Whether there is Management Accounting Department

Pie chart 1 below show whether firms have mangement accounting department.

Surprisinly 87.5% of firms don’t have management accounting department. It is only

12.5% of the firms have management accounting department as a unit.

Who provide Management Accounting Information-Response of Accountants

Table 11: Person providing management accounting information

Particulars No. Percent

Management Accountant 2 13%
Cost Accountant 7 43%
Senior Accountant 5 31%
Finance Officer 2 13%

In about 43% of the firms it is the cost accountant which produces management

accounting information followed by senior accountants which accounts 31%.

Surprisingly it is only 13% of the firms have management accountants. About 13% of

Finance officers also involved in producing management accounting information.

64
3.2.7 WHETHER ACCOUNTANTS ARE SUFFICIENT

Table 12: Whether accountants are sufficient

Respondents YES, NOT

SUFFICIENT SUFFICIENT
NO. % NO. %
Accountant 5 31% 11 69%
Finance Manager 7 44% 9 56%
Marketing Manager 7 44% 9 56%
Production Manager 6 38% 10 62%

As can be seen in table 12 above, about 44% of finance and marketing managers

followed by 38% of production managers and 31% of accountants said the number of

accounting staffs are sufficient to prepare provide the information needed by managers.

However, about 69% of the accountant followed by 56% of marketing and finance

managers and 62% production managers claim the number of accounting staffs are not

sufficient to prepare and provide managers the information they require timely.

Reasons for Insufficiency of Accounting Personnel

Summarizing respondents view why firms improperly staff accounting departments, 89%

of finance managers, 80% of production managers, 77% of marketing managers and 73%

of accountants have said it is due to financial problem. Furthermore, about 55% of the

accountant followed by 22% of marketing managers and 10% of production managers

explain managers don’t give much attention for finance department. About 27% of

accountants and production managers and 22% of finance and marketing managers state

managers may not have information as to additional employee is needed. 91% of the

65
accountants, 78% of finance managers, 67% of marketing managers and 60% of

production managers said management don’t want to have more accountants.

Table 13: Reasons for insufficiency of Accounting Personnel

Description ACCT FM MM PM
No. % No. % No. % No. %
Finance Problem 8 73% 8 89% 7 77% 8 80%
Managers don’t consider accounting 6 55% - - 2 22% 1 10%

department important
Managers may not have as to additional 3 27% 2 22% 2 22% 3 27%

employee is needed
Not willing to have more accountants 10 91% 7 78% 6 67% 6 60%

3.2.8 WHETHER MANAGERS ALTER ACCOUNTING REPORTS

Chart 2: Whether managers alter accounting reports

Chart 2 above summarizes information on whether managers alter the report produced by

the accounting department. As can be seen in the table above, 44% of the respondents

state managers don’t alter accounting reports at source.

66
Surprisingly, 56% of accountants said managers alter (manipulate) reports. Managers

usually show this unethical act for various reasons. Low salary of managers is cited as the

main factor for their alteration of accounting figures. Others (84% of respondents)

suggest mangers alteration of reports emanate from their hidden interest of earning a

higher bonus. Still 62% of the respondents said recognition as one of the motives for

managers’ deceitful act. There are also trends to fire managers who don’t achieve the

performance expected of them and are forced to immediately cancel their term of

employment. They finally manipulate reports to sustain on their job.

How Managers Alter Accounting Reports

Summarizing accountants’ view on how managers alter reports, surprisingly all of the

respondents’ state in most of the cases managers doesn’t want to incorporate unfavorable

factors or negative aspects in management accounting reports. There are also

circumstances where managers attempt to produce a product whose demand in the market

is declining. Similarly, about 89% of the respondents maintain managers usually alter the

numbers to make a favored product though its sales volume declining. Altering the

numbers to make the favored line of business is another way for managers to alter the

reports produced (67% of accountants). There are also instances where managers alter the

numbers to make a favored customer (about 56% of accountants).

67
Graph 5: How managers alter accounting reports

3.2.9 WHETHER MANAGEMENT ACCOUNTING INFORMATION HELP MANAGERS

TO BE EFFECTIVE IN THEIR DECISIONS AND CONTROL

Summarizing respondents view on “whether management accounting information have

helped managers to be effective in their decisions and control”, about 81% of the finance

managers (56% substantially and 25% little) said it help them to make better and

informed decisions and control and ultimately they become effective in their decisions

and control. Notably 18.8% of the respondents from finance managers said the report

doesn’t help them at all for reasons described in table 16.

About 75% of marketing managers (38% substantially and 37% little) have respond the

information they obtain helped them to be successful in their decisions and control.

68
However there are also some marketing managers whom said the information doesn’t

help them at all. This accounts 25% of the total respondents. On the other hand, 75% of

production managers (44% substantially and 31% little) believe the information they

obtain from the accounting department help them to make valuable decision and control.

The number of production managers whom said the information doesn’t help them

accounts 25% of the total respondents.

About 69% of the accountants strongly agree with the information provided by them help

managers to be effective in their decision while 31% of them insist it help them little

because ones success depends not only with the quality of the information provided but

also on managers ability to interpret and use the information which largely depend on

managers knowledge of accounting.

Table 14: Whether MAI Help Managers to be Effective in their Decisions and Control
WHETHER MAI HELPS MANAGERS
TO BE EFFECTIVE IN THEIR
DECISIONS AND CONTROL
YES,
SUBSTA
NTIAL YES, LITTLE NO Total
FINANCE MANAGER Number 9 4 3 16
Percent 56.3% 25.0% 18.8% 100.0%
MARKETING MANGER Number 6 6 4 16
Percent 37.5% 37.5% 25.0% 100.0%
PRODUCTION MANAGER Number 7 5 4 16
Percent 43.8% 31.3% 25.0% 100.0%
ACCOUNTANT Number 11 5 0 16
Percent 68.8% 31.3% .0% 100.0%
Total Number 33 20 11 64
Percent 51.6% 31.3% 17.2% 100.0%

69
How Management Accounting Information help users to be effective in their decisions and
control

In management accounting, decision-making may be simply defined as choosing a course

performance in order to make sure that enterprise objective and the plans devised to attain

they are accomplished. Accounting is one of the informational sources for providing the

required information for managers which will assist them in making various types of

business decisions and control.

Table 15: How Management Accounting Information helps users to be effective in their decisions
and control

Particulars Finance Marketing Production

Manager Manager Manager
No. %age No. %age No. %age
The accounting department provides the reports on time 12 92% 11 92% 10 83%
The accounting department provides understandable 11 85% 10 83% 9 75%
The accounting department provides the required 12 92% 10 83% 11 92%
information on systematic and regular basis

As easily seen in table 15 above, about 92% of the finance managers said timely reports

provided by the accounting department help them to be effective in their decisions and

control. Even 92% of marketing managers pointed out timely reports obtained from the

accounting department as the main thing which help them to be effective in their

decisions and control. Still 83% of production managers expressed timely reports

provided by the accounting department help them greatly on their decisions and control.

About 83% of marketing managers, 75% of production managers and 85% of finance

managers said the accounting department provides understandable reports and this help

them to be effective in their decisions and control.

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While further explaining how management accounting help managers to make effective

decisions and control, 92% of the respondents from finance managers states the

accounting departments provide the information on systematic and regular basis. 92%

production managers and 83% of marketing managers share the idea of finance

managers, respectively.

Reasons for “why Management Accounting Information doesn’t help managers to be effective
in their decision and control”

Table 16: Reasons why Management Accounting Information doesn’t help managers to be
effective in their decision and control

Particulars Finance Marketing Production

Manager Manager Manager
No. %age No. %age No. %age
The reports are not provided at the time it is needed. 3 100% 2 50% 3 75%
The reports are complex - - 4 100% 4 100%
The reports are not comprehensive 2 67% 3 75% 3 75%
The reports are not prepared in a way managers need 100% 4 100% 3 75%

Even though accounting is one of the informational sources for managers to assist them

in decision making and managerial control, there are also instances where it may not

serve the target. This could arise from different reasons.

Information is valuable only when it is provided at the time needed. Accordingly, 100%

of the finance managers insist the information doesn’t help them to be effective in their

decisions and control because they are not provided at the time needed by them. 50% of

marketing managers and 75% of production managers also assert reports are not provided

in the time needed by them.

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Another important quality of information is understandability. If the reports provided are

not easily understandable by managers, it may not serve the intended purpose. All of

marketing managers’ state “complexity of report” as a major problem for them to use the

information provided. Similarly all production managers shares the same idea to that of

marketing managers. Unsurprisingly, none of the respondents from finance managers

says complexity of report as a primary reason for them while explaining why

management accounting information doesn’t help them to be effective in their decisions

and control. This may be due to their strong accounting background.

Still another important quality of information is completeness. If reports are not full or

complete, again they may not be used to serve for the intended purpose. Similarly, about

75% of production managers said reports are not comprehensive and at last doesn’t help

them. About 75% of marketing managers (from those who said the report doesn’t help

them to be effective) mentioned incomplete information as a reason for them while

explaining why management accounting information doesn’t help them to be effective in

their decision and control. Preparing and providing information based on user’s

requirement is another factor for information to be useful. All marketing managers and

75% of production managers have said reports are not prepared and provided in the way

they need to be.13

13
For the definition given on this page, Accounting Information System, Marshal B. Romney and Paul john steinbart,
Prentice Hall Publishing, 2003, pp-5

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 CHAPTER FOUR

4. CONCLUSION AND RECOMMENDATION

4.1 CONCLUSION

Management accounting is a value-adding, continuous improvement process of planning,

designing, measuring and operating financial and non-financial information system. This

process guides management action, motivates behavior and supports and creates the

cultural values necessary to achieve an organizations strategic, tactical and operating

objectives.

One of the critical managerial functions which managers usually engaged in pursuing an

organization’s goal is decision making. Decisions which management must make may be

classified as marketing, production, and financial. Finance managers usually made

decisions involving investment, financing, etc. Types of decisions often made by

production managers include determining units of equipment, supplier selection, raw

material selection, determination of inventory level, buy or make, determining inventory

level, determination of factory workers wage, decision on over time, second shift, and

replacement of equipment. Determining the number of sales people, accept or reject

special sales order, determining sales prices, which product to emphasize when there is

resource constraint, advertising, anticipating market opportunity, determining the number

of products to be produced, credit, advertizing and sales forecast are among the types of

decision often made by the marketing managers.

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Managers are also responsible for controlling the day-to-day activities of their

departments or responsibility center. Some of the areas which require management

control include raw material control which comprises control of wastage, scrap, defect

and spoilage, control over labor costs, inventory control and cash balances.

Effective decision making and control requires relevant information and special analysis

of data. The accounting department is a primary source of information necessary in

making decisions and control. The accounting department is expected to provide

information to all levels of management. The finding of the research work shows

accounting departments of manufacturing companies in the city of Addis Ababa provide

various types of report to assist managers in decision making and management control.

Product profitability report which includes salesmen’s success in meeting quotas, profit

summaries by product line, division, sales man, and customers, stocks availability,

product line with slow sale and declining profit margin, and information on customer

groups with declining purchasing power; variance analysis reports which includes

material usage variance, labor efficiency variance, and sales variance; cost sheet or

statement of cost, interim reports, revolving estimation and cash operating expense are

among the different types of reports produced by the accountants of manufacturing

companies in the city of Addis Ababa.

These reports are valuable only when they are provided at the time needed by managers,

understandable by users, prepared in the way users needed to be and complete. However,

the result of the research work shows reports are not always provided in the way it is

easily understandable by managers especially for marketing and production managers. It

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also shows the reports produced are complex especially for those whose accounting

knowledge is limited and are not prepared and provided in the way needed by managers.

Furthermore, the reports lack completeness.

The findings of the research work suggest finance managers extensively use management

accounting information. On top of that, there is an encouraging practice in the use of

management accounting information by marketing and production managers in decision

making and management control.

The research work shows mangers that use management accounting information become

effective in their decisions and control.

Finally, accountants are expected to show high ethical standard in preparing managerial

accounting reports. Management accountants have an obligation to the organizations they

serve, their profession, the public, and themselves to maintain the highest standards of

ethical conduct. However the situation in manufacturing companies in the city of Addis

Ababa suggest more than fifty percent of the accountants are forced to manipulate

managerial accounting reports for various reasons including earning large bonus, and

recognition. The forms of alteration include altering the numbers to make a favored

product line, favored customer, line of business and even not revealing unfavorable

factors or negative aspects in the managerial accounting reports.

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4.2 RECOMMENDATION

Based on the result of the study, the following points are forward as important

recommendation looking towards the future:

 Information is valuable only when it is provided at the time needed by managers

and easily understandable by them. Therefore the accounting department should

exert much effort to provide managers with the information they need in time. In

addition, accountants should also consider the accounting background of users

because report complexity is one of the major bottlenecks for managers for not

using management accounting information.

 In order to produce and provide users with the information they need, the

accounting information system plays an important role. If the accounting system

is the art of the state, then it can provide the required information in a reliable and

user friendly way. Even though implementing a modernized accounting

information system requires large out lay of capital, it is recommended for firms

to have it after making cost-benefit analysis.

 Most of the manufacturing firms don’t have separate management accounting

department. It is usually the cost accountant or finance officers who usually

prepare managerial reports and most of them are busy in performing the day to

day activity. Therefore, it is strongly recommended for large firms to establish

management accounting departments so that accountants can have sufficient time

and they can provide complete, understandable, and timely reports.

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 In order to make accountants become familiar with recent development in

accounting and finance and upgrading their knowledge, firms should have

employee training and development program.

 Manager’s limited knowledge of accounting (other than Finance managers) is one

of the impediments (barrier) for not using management accounting information.

So that firms should design trainings on accounting so as to enlarge manager’s

knowledge of accounting. This training could be in house training.

 Managers usually don’t give much attention for accounting department so that the

number of accounting personnel is not well-matched with the volume of activity.

Therefore firms should properly staff accounting departments.

 Accountants and managers should be ethical at all times.

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ANNEXES
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